Obligations and Contacts Santiago PDF

NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 2
OBLIGATIONS AND CONTRACTS ARTICLE 1108

Prescription, both acquisitive and extinctive runs against:
Civil Code (1) Minors and other incapacitated persons who have
Articles 1106-1126 parents, guardians or other legal representatives;
(2) Absentees who have administrators, either
TITLE V appointed by them before their disappearance, or
PRESCRIPTION appointed by the courts;
(3) Persons living abroad, who have managers or
CHAPTER 1 administrators;
GENERAL PROVISIONS (4) Juridical persons, except the State and its
subdivisions.
ARTICLE 1106
By prescription, one acquires ownership and other real Persons who are disqualified from administering their
rights through the lapse of time in the manner and under the property have a right to claim damages from their legal
conditions laid down by law. representatives whose negligence has been the cause of
prescription.
In the same way, rights and actions are lost by prescription.
Juridical Persons and Prescription
Prescription They are those endowed by law of the attributes of a natural
It is a mode of acquiring or losing ownership and other real person and hence can acquire and lose properties and rights.
rights through the lapse of time in the manner and under the The State and its subdivisions however, acting in the sovereign
conditions laid down by law. The possession should be: capacity, cannot be subject for prescription.
(a) In the concept of an owner
(b) Public NOTE: If the political subdivision is acting in its proprietary
(c) Peaceful character, prescription will lie against it. Especially when this
(d) Uninterrupted instrumentality does not act under a sovereign capacity.
(e) Adverse
ARTICLE 1109
Prescription does not run between husband and wife, even
It is an extraordinary mode of acquiring ownership thus the
though there be a separation of property agreed upon in the
period must be shown clearly. marriage settlements or by judicial decree.
Classification of Prescription Neither does prescription run between parents and children,
As to whether rights are acquired or lost during the minority or insanity of the latter, and between
1. Acquisitive prescription guardian and ward during the continuance of the
a. Ordinary prescription guardianship.
b. Extraordinary prescription
2. Extinctive prescription Prescription and Relationships
1. Husband and Wife
As to the object or subject matter Generally, prescription does not apply to husband and wife
1. Prescription of property unless the law otherwise provides like in the case of the Family
a. Real property Code where cases of legal separation can prescribe in 5 years.
b. Personal rights
2. Prescription of rights 2. Parent and Minor or Insane Child
The natural bond of filiation is the basis of this rule. Moreover,
Laches while the child is a minor, the parents are his natural guardians
It is the unreasonable delay in the bringing of a cause of action without the need of court appointment. Thus, when the child
before the courts of justice. Therefore, while an action has not reaches the age of majority and is not insane, prescription shall
yet prescribed, it may no longer be brought to the court run against him.
because of laches.
3. Guardian and Ward during Guardianship
It is the failure or neglect, for an unreasonable and unexplained Due to the fiduciary relationship between the guardian and the
length of time to do that which, by exercising due diligence, ward, prescription will not lie during the period of guardianship.
could or should have been done earlier.
ARTICLE 1110
Prescription, acquisitive and extinctive, runs in favor of, or
ARTICLE 1107
against a married woman.
Persons who are capable of acquiring property or rights by
other legal modes may acquire the same by means of
prescription. Prescription and the Married Woman
Whether married or unmarried, prescription runs in favor of or
Minors and other incapacitated persons may acquire against a married woman.
property or rights by prescription, either personally or
through their parents, guardians or legal representatives.
ARTICLE 1111 ARTICLE 1115

Prescription obtained by a co-proprietor or a co-owner shall The provisions of the present Title are understood to be
benefit the others. without prejudice to what in this Code or in special laws is
established with respect to specific cases of prescription.
Co-Ownership and Co-Proprietorship
There is co-ownership whenever the ownership of the Provisions on Prescription
undivided thing or right belongs to different persons. Other statutes and provisions provides for certain prescriptive
Prescription obtained by a co-proprietor or a co-owner shall periods. The more specific provision shall prevail.
benefit the others.
ARTICLE 1116
ARTICLE 1112 Prescription already running before the effectivity of this
Persons with capacity to alienate property may renounce Code shall be governed by laws previously in force; but if
prescription already obtained, but not the right to prescribe since the time this Code took effect the entire period herein
in the future. required for prescription should elapse, the present Code
shall be applicable, even though by the former laws a longer
Prescription is deemed to have been tacitly renounced when period might be required.
the renunciation results from acts which imply the
abandonment of the right acquired. Rules on Transitory Prescriptions
The Civil Code took effect on August 30, 1950, the rules are:
Renunciation of Prescription 1. If lapsed before effectivity, the old rule applies.
In the case of DBP v. Adil, when a debt is already barred by 2. If running from old law until the effectivity of the new
prescription, it cannot be enforced by the creditor. But a new law, but the NCC provides a different period for the
contract recognizing and assuming the prescribed debt would same situation, the NCC shall prevail provided that
be valid and enforceable. such period counted from the effectivity of the NCC
has already lapsed even thought it may not have yet
Therefore, when a party acknowledges the correctness of a debt lapsed under the old law.
and promises to pay It after the same has prescribed and with 3. If the prescriptive period under the old law is still
full knowledge of the prescription he thereby waives the benefit running under effectivity of the NCC and if the
of prescription. remaining balance of such period is shorter than
provided under the NCC, the old prescriptive period
ARTICLE 1113 shall apply.
All things which are within the commerce of man are
susceptible of prescription, unless otherwise provided. CHAPTER 2
Property of the State or any of its subdivisions not PRESCRIPTION OF OWNERSHIP AND OTHER REAL RIGHTS
patrimonial in character shall not be the object of
prescription. ARTICLE 1117
Acquisitive prescription of dominion and other real rights
Imprescriptible to Public Domain may be ordinary or extraordinary.
In DFA v. Fernandez, forest lands of the public domain cannot
be acquired by prescription, its possession however long Ordinary acquisitive prescription requires possession of
things in good faith and with just title for the time fixed by
cannot ripen into private ownership.
law.
Public lands become patrimonial property upon express

Acquisitive Prescription
government manifestation that the property is already
1. Ordinary Acquisitive Prescription
patrimonial and declaration that these are already alienable and
It requires uninterrupted possession for the required statutory
disposable. And only when the property has become
period of years in good faith with a just title.
patrimonial can the prescriptive period for the acquisition of
property of the public domain begin to run.
2. Extraordinary Acquisitive Prescription
Likewise requires an uninterrupted possession for the statutory
ARTICLE 1114
period of ears but without the need of just title and good faith
Creditors and all other persons interested n making the
prescription effective may avail themselves there of on the part of the possessor.
notwithstanding the express or tacit renunciation by the
debtor or proprietor. ARTICLE 1118
Possession has to be in the concept of an owner, public,
Creditors and Other Interested Party peaceful and uninterrupted.
In the event that the time within which to pay has already
prescribed but nevertheless the debtor waives prescription Possession
such that the creditor can still collect from him, and should the 1. In the concept of an owner
debtor again fail to pay, thereby prompting the debtor to The possessor asserts dominion on the property to the
demand payment from the guarantor, the guarantor can resist exclusion of all others. It must be an adverse possession. Thus, a
for he shall not be prejudiced by the act of waiving. lessee is not holding as an owner.
2. Public ARTICLE 1123

This means that there must be a notorious holding of the Civil interruption is produced by judicial summons to the
property known to the community. It must not be surreptitious possessor.
in character because it must be in the concept of an owner.
ARTICLE 1124
Judicial summons shall be deemed not to have been issued
3. Peaceful and shall nor give rise to interruption:
For the period of years required by law for acquisitive (1) If it should be void for lack of legal solemnities
prescription to apply, there must be no valid interference from (2) If the plaintiff should desist from the complaint or
others claiming or asserting their rights to the property. should allow the proceedings to lapse;
(3) If the possessor should be absolved from the
complaint.
4. Uninterrupted
In all these cases, the period of the interruption shall be
ARTICLE 1119 counted for the prescription.
Acts of possessory character executed in virtue of license or
by mere tolerance of the owner shall not be available for the
purposes of possession. Civil Interruptions
It is not the filing of the complaint in court which interrupts but
Possessory Character by License of Mere Tolerance the receipt of the possessor of the judicial summons.
The fact that the possessor holds the property by virtue of the
consent of the owner shows the such possessor acknowledges It is only such that time that jurisdiction is acquired by the court
that somebody else owns the property. of the person and it is at that time possession is uninterrupted.
Possession by tolerance therefore does not imply an assertion EXCEPTIONS: There are instances the judicial summons deemed
of ownership, and thus produces no effect with respect to to not have interrupted prescription.
possession or prescription.
1. Void for lack of legal solemnities
ARTICLE 1120 When the summons as well as the copy of the complaint have
Possession is interrupted for the purposes of prescription, been served by unauthorized person, it shall be deemed as not
naturally or civilly. to have been issued.
Possession must be uninterrupted. This means that there must 2. Plaintiff desists or allow proceedings to lapse
be continuity in the holding of the property. An uninterrupted Desistance from the complaint leads to dismissal. While
possession strengthens the adverse right of the possessor. allowing the proceeding to lapse shows lack of interest to
Possession can however be interrupted naturally or civilly. prosecute the case.
ARTICLE 1121 3. Possessor is absolved from the complaint

Possession is naturally interrupted when through any cause
Absolution means that the complaint has not been fully
it should cease for more than one year.
substantiated to support any adverse claim by the complainant
The old possession is not revived if a new possession should and therefore this should not prejudice the possessor who must
be exercised by the same adverse claimant. always be presumed in good faith.

If the natural interruption is for only one year or less, the Any express or tacit recognition which the possessor may
time elapsed shall be counted in favor the prescription. make of the owner’s right also interrupts possession.
Natural Interruptions Express or Tacit Recognition

While he may have possession of the property for a total period One cannot consider himself possessing a property adversely
of 11 years, it is interrupted. When he left the property for two in the concept of an owner if he recognizes somebody else as
years, his subsequent possession of seven years cannot be having a superior right as an owner.
added for purposes prescription. In effect, the material for
purposes of such is the subsequent seven years. ARTICLE 1126
Against a title recorded in the Registry of Property, ordinary
prescription of ownership or real rights shall not take place
Obviously the seven-year period have not yet complied with
to the prejudice of a third person, except in virtue of another
the 10-year period required by law for ordinary acquisitive title also recorded; and the time shall begin to run from the
prescription. recording of the latter.
EXCEPTION: If the interruption is only one year or less. As to lands registered under the Land Registration Act, the
Acquisitive prescriptive will have already set in, in favor of the provisions of the special law shall govern.
possessor because the clearly provides that if the natural
interruption is such period, the time elapsed shall be counted.
Registered Titles
Although prescription will not apply to registered property, the Bad Good Extraordinary Ordinary
doctrine of laches is applicable. Faith Faith
Real 3 1 30 10
The Supreme Court of Catholic Bishop of Balanga v. CA, rejected Property
the assertion of the imprescriptibility of registered property and Personal 2 1 8 4
decided against the petitioner that it was guilty of laches. Property
In this case, the petition filed its complaint in court only after Examples of Application of 1127 and 1128
49 years had lapsed since the donation. There is no explanation • Reliance of a deed of sale which he knew involved a
of the long delay and that inaction for an unreasonable amount different property (Negrete v. CFI)
of time constitutes laches. As such petitioner cannot claim
nullity of the donation as an excuse to avoid the consequences • Knowingly using a forged document to base one’s just
of laches. title is of bad faith (Reyes v. CA)

The good faith of the possessor consists in reasonable belief For purposes of prescription, there is just title when the
that the person from whom he received the thing was the adverse claimant came into possession of the property
owner thereof, and could transmit his ownership. through one of the modes recognized by law for the
acquisition of ownership and other real rights, but the
ARTICLE 1128 grantor was not the owner or could not transmit any right.
The conditions of good faith required for possession in
Articles 526, 527, 528 and 529 or his Code are likewise ARTICLE 1130
necessary for the determination of good faith in the The title for prescription must be true and valid.
prescription of ownership and other real rights.
ARTICLE 1131
Possession in Good Faith For the purposes of prescription, just title must be proved; it
Good faith in prescription simply means that the grantor is the is never presumed.
owner.
Just Title
The only defect of the acquisition that is cured by prescription Just title is an act which has for its purpose the transmission of
is that the grantor is not the owner, other than that there will ownership, and which would have transferred ownership if the
be no title and it is useless to determine good or bad faith granted had been the owner.
because there can be no ordinary prescription without just title
(1118). The vice or defect is the one cured by prescription. Like sale,
exchange, donation or succession.
To be in good faith, the possessor must believe that the title for
his acquisition is sufficient; it is not enough that the knows no True Title
defect in it. The belief must be well-founded. To be true, the title must exist, not merely in the mind of the
possessor. A legally non-existent title is without value. Thus, a
The good faith must exist not only at the beginning of the will cannot be a sufficient title if it has been revoked. So is a title
possession, but throughout the entire period required for that is absolutely simulated.
prescription.
• False title – does not exist but is believed to exists, it
Requisites of Good Faith may be based on error. If it refers to a third person, it
Article 526. He is unaware that there exists in his title a flaw is sufficient for prescription if from the possessor it is
which invalidates it. not sufficient.
Article 527. Good faith is always presumed, and upon him who • Revocable title- transferor has made a reservation by
alleges bad faith on the part of the possessor rests the burden which the rights of the possessor may disappear (sale
of proof. with right to repurchase).
Article 528. Possession acquired in good faith does not lose this Valid Title
character except in case and from the moment facts exist show The title for prescription must valid. A void title is insufficient,
that the possessor is not unaware that he possesses the thing but a voidable title, so long as it has not been annulled, can be
improperly or wrongfully. the basis of ordinary prescription.
Article 529. It is presumed that possession continues to be • If with suspensory condition – upon fulfilment
enjoyed in the same character in which it was acquired, until the
contrary is proven. • If with resolutory condition – at once

The ownership of movables prescribes through Ownership and other real right over immovables also
uninterrupted possession for four years, in good faith. prescribed through uninterrupted adverse possession
thereof for thirty years, without need of title or of good faith.
The ownership of personal property also prescribed through
uninterrupted possession for eight years, without need of ARTICLE 1138
any other condition. In the computation of time necessary for prescription the
following rules shall be observed:
With regard to the right of the owner to recover personal (1) The present possessor may complete the period
property lost or of which he has been illegally deprived, as necessary for prescription by tacking his possession
well as with respect to movables acquired in a public sale, to that of his grantor or predecessor in interest.
fair, or market, or from a merchant’s store the provisions of (2) It is presumed that the present possessor who was
articles 559 and 1505 of this Code shall be observed. also the possessor at a previous time, has continued
to be in possession during the intervening time,
Acquisitive Prescription for Movables unless there is proof to the contrary;
Four years with good faith, otherwise eight years. Possession (3) The first day shall be excluded and the last day
must likewise be in the concept of an owner, public, adverse included.
and uninterrupted.
First Rule of Computation: Tacking of Possession
It provides that the present possessor may complete the period
Article 559. Possession of movable property acquired in good
necessary for prescription by tacking his possession that of his
faith is equivalent to title, those unlawfully deprived cannot
grantor or predecessor in interest.
obtain its return without reimbursement.
• This connotes a transfer of property from one person
to another by manner of law.
ARTICLE 1133
Movables possessed through a crime can never be acquired • Thus, if A donated to B a property which was
through prescription by the offender. previously in possession of B for 8 years, A can make
use of the said 8 years for purposes of prescription.
Products and Effects of Crime Hence, if A already was in possession of the property
No one must benefit from an evil act. The offender cannot for three years, the period of his possession may be
acquire title to it even if the prescriptive period has already considered to have been 11 years already.
lapse and the owner did not demand for a return.
NOTE: Tacking is possible only when there is a succession of
ARTICLE 1134 rights between the predecessor and successor. A mere usurper
Ownership and other rights over immovable property are cannot invoke the possession of any previous possessor.
acquired by ordinary prescription through possession of ten
years.
Q. What if the predecessor was in good faith but the successor
is in bad faith?
NOTE: Ordinary prescription means 10 years for real property if
Where the predecessor was in good faith, and the successor is
in good faith.
in bad faith, the latter can assert only extraordinary prescription.
ARTICLE 1135 The period should be computed in proportion that the period
In case the adverse claimant possesses by mistake an area of extraordinary prescription bears to that of ordinary
greater or less, than that expressed in his title, prescription prescription (1 good faith year = 3 bad faith years).
shall be based on the possession.
Q. What if the predecessor was in bad faith and the successor
Constructive Possession in good faith?
The extent of property subject to the prescription shall be the
one possessed or held by the claimant regardless the size The present successive possessor can claim under ordinary
indicated or described in the title. prescription but the possession of the preceding possessor in
bad faith cannot be computed. One who succeeds by hereditary
ARTICLE 1136
title shall not suffer of the wrongful possession of the decedent.
Possession in wartime, when the civil courts are not open,
shall not be counted in favor of the adverse claimant.
Second Rule of Computation: Presumption of Continuance
Wartime It provides the presumption that the present possessor who
During wartime where the civil courts are closed, there is no was also the possessor at a previous time, have continued to be
way by which any person claiming title over a certain property in possession during the intervening time, unless there is proof
can file a case to recover the same from the person in adverse to the contrary. There must be showing of fact that the person
possession of the property. presently possessing the property was also the one in
possession in the intervening time.
Hence the possession of the adverse claimant during that time
shall not be counted. However, it must be observed that the Third Rule: Exclusion of the First Day
civil courts must be closed. First day shall be excluded and the last day shall be included.
CHAPTER 3 ARTICLE 1142

PRESCRIPTION OF ACTIONS A mortgage action prescribes after ten years.
Prescription of Actions Mortgage

It refers to the time within which an action may be brought, or A mortgage is an accessory contract. It is constituted to secure
some act done, to preserve a right. Prescription is a legal and a debt so that if the debtor fails to pay the principal obligation,
not a natural cause of the extinguishment of obligations. the creditor can foreclose on the mortgage by selling the same
in a public sale or bidding and the proceeds thereof are used
Statutes of limitation are acts limiting time which actions shall to pay off the principal debt and interest if any.
be brought. Statutes of limitation do not confer any right of • If there is still deficiency, the creditor can still go
action but enacted to restrict period within which right, against the principal debtor to collect such deficiency
otherwise unlimited be asserted. The purpose of these statutes
are to protect the diligent and vigilant and not those who sleep Prescription of Mortgaged Actions
on their rights. They are considered statutes or repose. The period begins from the day on which it could have been
brought.
Prescription and Laches
Laches is different from statute of limitations. Prescription is ARTICLE 1143
concerned with the fact of delay, while laches looks on effect of The following rights, among others specified elsewhere in
this Code, are not extinguished by prescription.
delay. Matter of time; inequity. Fixed time; equity.
Rights not Extinguished by Prescription
ARTICLE 1139
Actions prescribe by the mere lapse of time fixed by law. (1) To demand right of way under Article 649
a. Compulsory legal easement
Leap Year b. Public Policy - imprescriptibility
For computing the prescriptive period in a leap year, February (2) To bring an action to abate a public or private nuisance
28 and 29 are counted as separate days. (3) Others
a. Right to demand partition of a co-ownership
Effect of Lapse of Time b. Action to declaration marriage void
The lapse of the period of prescription provided by law has the c. Action to declare judgment/contract void
effect of extinguishing the action. No extinctive prescription d. Right to demand support
unless period expires. Prescription must be pleaded. e. Mandamus

Actions to recover movables shall prescribe eight years from The following actions must be brought within ten years from
the time the possession thereof is lost, unless the possessor the time the right of action accrues:
has acquired the ownership by prescription for a less period, (1) Upon a written contract;
according to Article 1132, and without prejudice to the (2) Upon an obligation created by law
provisions of Article 559, 1505, 1133. (3) Upon a judgment
Extraordinary Prescription of Movables Actions which must be Brought within Ten Years
A person can recover lost personal or movables property within 1. Upon a written contract
a period of eight years. However, if all the requisites of an • Cause of action when there is breach
ordinary acquisitive prescription of movable property are • Under 1391 it shall be four years
present, the possessor of the same becomes the owner of the • Ticket is a written contract
movable property after only four years uninterrupted • Payment of deficiency after foreclosure
possession in good faith.
2. Upon an obligation created by law
ARTICLE 1141 • Recovery from constructive or implied trust
Real actions over immovables prescribe after thirty years. • Winner to refund loser in gambling
• Obligation of lessor to indemnity the lessee
This provision is without prejudice to what is established for in good faith for improvements
the acquisition of ownership and other real rights by
prescription.
3. Upon a judgment
Extraordinary Prescription of Immovables • When only it is final and executory.
The action to recover immovables is within thirty years. • Judgment may be executed on motion within
However, if within the thirty-year period, all the requisites for five years from the date it becomes final and
ordinary acquisitive prescription are already present in favor of executory. After such lapse of time, and
the possessor, then the possessor shall be considered the before barred by statute of limitation, it may
owner of the property after 10 years of uninterrupted, adverse, be enforced by ordinary action within 10
public possession of the property in the concept of the owner years.
in just title and good faith.
Computation Periods of Action Not Fixed; Five Years

The computation starts form the date the cause of action The right of action or cause of action accrues from the moment
accrues or from the date of the right of the plaintiff is violated. of commission or omission of an act by a party in violation of
his duty to, or right of another.
ARTICLE 1145 (1) Right in favor of the person (obligee)
The following actions must be commenced within six years: (2) A correlative obligation on another (obligor)
(1) Upon an oral contract; (3) An act or omission in violation of such right
(2) Upon a quasi-contract.
Right to Collect Taxes
Actions which must be brought within Six Years
Limitation upon the right of the government to assess and
1. Oral contracts
collect taxes will not be presumed in the absence of clear
2. Quasi-contracts
legislation to the contrary, and where the government has not
It is a juridical relation characterized by certain lawful, voluntary
by express statutory provision provided a limitation upon its
and unilateral acts to the end that no one should be unjustly
right to assess unpaid taxes, such right is imprescriptible.
enriched at the expense of the other.
ARTICLE 1150
ARTICLE 1146 The time for prescription for all kinds of action, when there
The following actions must be instituted within four years: is no special provision which ordains otherwise, shall be
(1) Upon an injury to the rights of the plaintiff; counted from the day they may be brought.
(2) Upon a quasi-delict.
Starting Point for Computation when No Special Provision
Actions which must be brought within Four Years
One cannot be said to being sleeping on his rights if right have
1. Upon an injury to the rights of the plaintiff
not yet accrued. It is the legal possibility of bringing the action
a. Suit questioning the removal a secretary for
which determines the starting point for the computation.
unjustified separation from employment.
b. Action for recovery of damages for taking
Cause of Action
personal property or trespass.
It arises when that which should have been done is not done,
or that which should not have been done is done.
2. Quasi-delict
Article 2176. Whoever by act or omission caused
The moment a breach of right or duty occurs, then the right of
damage to another, there being fault or negligence, is
action accrues, and the action can be legally instituted; from
obliged to pay for the damage done. Such fault or
that moment, prescription of action begins to run.
negligence, if there is no pre-existing contractual
relation between the parties is called a quasi-delict.
ARTICLE 1151
The time for the prescription of action which have for their
ARTICLE 1147 object the enforcement of obligations to pay principal with
The following actions must be filed within one-year: interest or annuity runs from the last payment of the annuity
(1) Forcible entry and detainer; or of the interest.
(2) Defamation
Obligation with Interests
Actions which must be brought within One Year The period of prescription in obligations with interest runs only
1. Forcible entry and detainer from the last payment of interest, is applicable only to cases
a. Computed upon unlawful deprivation where the principal debt is already due.
2. Defamation • When the principal obligation is not yet due, payment

a. Computed when the offended party knows of interest at stipulated intervals does not cause the
of the libelous matter. running of prescription.

The limitations of action mentioned in Article 1140 to 1142, The period for prescription of actions to demand fulfillment
and 1144 to 1147 are without prejudice to those specified in of obligations declared by a judgment commences form the
other parts of this Code, in the Code of Commerce and in time the judgment became final.
special laws.
ARTICLE 1153
Suppletory Character The period for prescription of actions to demand accounting
The provisions of Title V on prescription have suppletory runs from the day the persons who should render the same
application to specific cases provided. cease in their functions.
ARTICLE 1149 The period for the action arising from the result of the
All other actions whose periods are not fixed in this Code or accounting runs from the date when said result was
in other laws must be brought within five years from the time recognized by agreement of the interested parties.
the right of action accrues.
Action to Compel Accounting

The period of prescription of an action to compel an accounting
by a joint account partner begins to run from the date of the
retirement of the members from whom accounting is
demanded or from the dissolution of a partnership.
ARTICLE 1154
The period during which the obligee was prevented by a
fortuitous event from enforcing his right is not reckoned
against him.
Fortuitous Event
Such relieves the obligor from liability that might otherwise
arise in the breach of an obligation or excuse and obligee from
his failure to exercise a right that might otherwise constitute a
waiver of said right. No suspension of prescription even during
war when the courts continue to function regularly.
ARTICLE 1155
The prescription of actions is interrupted when they are filed
before the court, when there is written extra0judicial
demand by the creditors, and when there is any written
acknowledgment of the debt by the debtor.
Interruption of Prescription of Action

1. They are filed before the court
• Date of filing and docketing
• Interrupts extinctive prescription
• Interruption lasts during pendency
• Desistance makes it abandoned as it has
never been instituted.
2. There is a written extrajudicial demand by the

creditors
• If addressed to a co-debtor, it will not
interrupt the prescription.
3. There is a written acknowledgment of the debt by the

debtor
• A written offer of payment works as a
renewal of the obligation.
NOTE: Interruption renews or starts a new period of

prescription. It is not a mere suspension. Whatever time has
elapsed is negated and rendered inefficacious.
OBLIGATIONS AND CONTRACTS With Respect to Object of Prescription

Articles 1106-1155 Court held that there must be an official declaration to that
effect before the property may be rendered susceptible to
JURISPRUDENCE NOTES
prescription.
Article 1113. Object of Prescription
Accordingly, there must be an express declaration by the State
that the public dominion property is no longer intended for
REPUBLIC v. ESPINOSA (2012)
public service or the development of the national wealth or that
the property has been converted into patrimonial.
Facts: On March 3, 1999, Domingo Espinosa filed an application
for land registration covering a parcel of land in Cebu. Espinosa
Without such express declaration, the property, even if classified
alleged that the property is (a) disposable, (b) purchased from
as alienable or disposable, remains property of the public
his mother on 1970 and the other heirs waived rights thereto
dominion, and thus incapable of acquisition by prescription.
and (c) he and his predecessor in interest has been in
possession of the property for more than 30 years.
It is only when such alienable and disposable lands are
• Presented Advanced Survey Plan
expressly declared by the State to be no longer intended for
• Two tax declarations under Isabel’s name.
public service or for the development of the national wealth
• Three tax declarations under his name.
that the period of acquisitive prescription can begin to run.
Republic opposed applicating claiming that:

Such declaration shall be in the form of a law duly enacted by
(a) CA 141 or Public Land Act has not been complied and
Congress or a Presidential Proclamation in cases where the
Espinosa’s predecessor-in-interest only possessed the
President is duly authorized by law.
property from June 12, 1945.
(b) The tax declarations do not prove that his possession
In the case: Thus, granting that Isabel and, later, Espinosa
and that of his predecessor-in-interest are in character
possessed and occupied the property for an aggregate period
for the length of time required b law.
of thirty (30) years, this does not operate to divest the State of
its ownership. The property, albeit allegedly alienable and
MTC granted basing the judgment of compliance under PD
disposable, is not patrimonial.
1529. Espinosa was able to establish ownership and possession
over the subject lot which was considered by DENR as alienable
To overcome this presumption, there must be incontrovertible
and disposable land of public domain.
evidence for such. At any rate, as petitioner correctly pointed
out, the notation on the survey plan does not constitute
CA dismissed petition and affirm the MRC decision on 2000.
incontrovertible evidence that would overcome the
The CA ruled that jurisprudence has consistently pronounced
presumption that the property belongs to the inalienable public
that “open, continuous and exclusive possession for at least 30
domain. A mere surveyor has no authority to reclassify the lands
years of alienable public land ipso jure converts the same into
of the public domain.
private property.”
Requirements for the Blueprint Survey
Did Espinosa prove sufficiently that he had ownership of the
The blueprint copy of the advanced survey plan may be
public alienable land by acquisitive prescription?
admitted as evidence of the identity and location of the subject
property if:
Held: Consequently, for one to invoke Section 48(b) and claim
(a) it was duly executed by a licensed geodetic engineer;
an imperfect title over an alienable and disposable land of the
(b) it proceeded officially from the Land Management
public domain based on a thirty (30)-year possession and
Services (LMS) of the DENR; and
occupation, it must be demonstrated that such possession and
(c) (c) it is accompanied by a technical description of the
occupation commenced on January 24, 1947 and the thirty
property which is certified as correct by the geodetic
(30)-year period was completed prior to the effectivity of P.D.
surveyor who conducted the survey and the LMS of
No. 1073.
the DENR.
The earliest tax declaration in Isabel’s name was for the year
Decision: Espinosa failed to prove that the property is
1965 indicating that as of January 25, 1977, only twelve (12)
patrimonial. As to whether Espinosa was able to prove that his
years had lapsed from the time she first came supposedly into
possession and occupation and that of Isabel were of the
possession.
character prescribed by law, the resolution of this issue has
been rendered unnecessary by the foregoing considerations.
It was incumbent upon Espinosa to prove, among other things,
that Isabel’s possession of the property dated back at least to
Application for registration denied. CA decision reversed and
June 12, 1945. That in view of the established fact that Isabel’s
MTC decision reversed and set aside.
alleged possession and occupation started much later, the
lower courts should have dismissed Espinosa’s application
outright.
Article 1126. Registration and Third Persons The Spouses Supapo enjoy the benefits under the Torrens
system for Section 47 of PD 1529 provides that registered land
SUPAPO v. DE JESUS (2015) not subject to prescription. For such is imprescriptible.
• Regardless of the length of that possession, the lawful
Facts: Spouses Supapo filed a complaint for accion publiciana owners have a right to demand the return of their
against Spouses De Jesus to compel respondents to vacate a property at any time if the possession was
piece of land in Quezon. The subject lot was registered and unauthorized or tolerated.
titled under the Spouses Supapo.
On Laches: It cannot be a valid ground to deny the petition. On
The Spouses Supapo did not reside on the subject lot. They also the contrary, for the facts show that:
did not employ an overseer but they sure to visit at least twice 1. Brought the action the Lupon
a year. During one of their visits in 1992, they saw two houses 2. Initiated criminal complaint
built on the subject lot, those were built without their 3. Filed for accion publiciana
knowledge and permission. They learned that the Spouses De The following negate the allegation of laches for the part of the
Jesus and Macario occupied such. Spouses Supapo in bringing their actions.
The Spouses Supapo demanded from respondents the No Res Judicata

immediate surrender of the subject lot by bringing dispute to There is no identity of the following:
the Lupon Tagapamayapa and failed to settle amicably. They (1) Parties. The criminal complaint was prosecuted by the
filed criminal case under the Anti-Squatting Law under PD 772. People of the Philippines and the accion publiciana is
But Congress enacted RA 8368 repealing PD 772 dismissing the by the Spouses themselves.
criminal action. (2) Subject Matter. Anti-squatting law and accion
publiciana are different issues.
Did the action already prescribe and is it barred by res judicata? (3) Causes of action. Criminal case to protect the interest
of the state, the civil case for the interest of the
Accion Publiciana spouses in such case.
It is an ordinary civil proceeding to determine the better right Thus, res judicata cannot be based on such absence of identity.
of possession of realty independent of title. It refers to an
ejectment suit filed after the expiration of one year of unlawful Held: As a final note, we stress that this ruling is limited only to
withholding of possession of realty. the issue of possession. This is not binding in a decision of
ownership, as such this is not a bar for the parties and even
Jurisdiction of the Property Issue third persons to file an action for the determination of the issue
In view of these amendments, the actions involving title to or of ownership.
possession of real property is now determined by its assessed
value. The MeTC acquired jurisdiction of case. Petition granted. Decision of the CA is reversed and set aside.
The Action Has Not Yet Prescribed LAUSA v. QUILATON (2015)

The respondents argue that the complaint for accion publiciana
is dismissible for filing out of time. One their part, the Spouses Facts: It involves Lot No. 557 in Cebu. The petitioners and the
Supapo admit that they filed the complaint for accion respondents are relatives residing in the same lot. Respondent
publiciana more than ten years after the certificate to file an Lopez acquired a portion of Lot No. 557 due to Rodrigo’s
action has prescribed. default on his loan.
The parcel of land is registered under the Torrens system. The Lot No. 557 was part of the Banilad Friar Estate Lands, which
Spouses Supapo acquired the TCT of the lot in 1979. had been bought by the government through Act No. 1120 for
Interestingly, the respondents do not challenge the existence, distribution of its occupants. Martin Antonio was the initial
authenticity and genuine of the TCT of the Spouses Supapo. beneficiary and assigned it to Alejandro Tugot which was the
grandfather of most of the respondents and petitioners.
Respondents rest their case on the fact they have been in actual,
public, peaceful and uninterrupted possession of the subject Alejandro possessed the lot until his death, thus his children
property in the concept of an owner since 1992. The contend and grandchildren continued to reside in the lot. The present
they built such in good faith and having possessed the lot for controversy arose when the respondents claiming to be its
more than 10 years. registered owners, attempted to eject the petitioners.
Lands covered by a title cannot be acquired by prescription In 1994, Mauricia donated Lot No. 557 to her four children thus
or adverse possession. Acquisitive prescription is baseless the TCT No. 571 was cancelled and was reissued as four TCT’s
when the land involved is a registered land because Article 1126 for the children. The children of Mauricia then performed
of the Civil Code provides such. several acts of ownership on the property.
Rodrigo: Mortgaged his TCT to Lopez as security loan but Issue 3: CA erred rely on fake title to deny prescription
defaulted leading to foreclosure and was sold to public auction Ca concluded that it cannot prescribe for it was under the
to Lopez issuing a new TCT. Torrens system. Still, the lot cannot be acquired through
prescription but for a different reason.
RTC’s Ruling:
1. TCT No. 571 was a forgery and declared it and all titles The Deed of Assignment between Antonio to Alejandro was
originating from it as void ab initio. cancelled three months after execution, thus it could have not
2. Mauricia’s previous acts show that she acknowledged vested Antonio’s rights over Lot No. 557. Thus, it reverted to its
Alejandro’s ownership over Lot No. 557. original status as a subject of conditional sale between
3. She exercised dull acts of ownership over Lot No. 557 Bureau of Lands and Antonio upon full payment.
only in 1994, after she had filed a petition for issuance • Under Act No. 1120 for the administration, temporary
of new owner’s duplicate. lease and sale of friar lands until full payment.
4. Failed to present evidence showing how she acquired
the title of Lot No. 557. And as Alejandro’s heirs both Three possible scenarios:
the petitioners and respondents are entitled to share. 1. Antonio completed payment and it would be
5. Lopez’ TCT is null and void and could not claim the registered under Antonio’s name. Land registered
defense of a purchaser in good faith. under the Torrens system cannot be acquired through
prescription.
CA’s Reversal of RTC Ruling 2. If he failed, the title remains with the government. And
TCT No 571 is valid as the existence of the copy in the Register as such, prescription will not run against the
of Deeds and was issued in a regular manner. Failed to disprove government (1107).
the presumption of regularity. There is no showing that indeed 3. Another person could have bought the rights.
the title was fraudulently issued. All these scenarios negate the possibility of prescription.
• The deed of assignment on the other hand was
canceled as shown in the DENR File thus the property Effects of the Nullity of TCT No. 571
remained with Antonio not Alejandro. Neither Mauricia nor Alejandro has title over Lot No. 557. A
• CA noted that the lot Alejandro appears to own was person only transmits rights that he possesses. When innocent
Lot No. 357 not 557 as shown by evidence. third persons, however purchase or acquire rights over the
• (1) Mauricia has in possession the property since 1946 property relying on correctness of the certificate of title, courts
and (2) it is a registered lot under the Torrens system. cannot disregard the rights they acquired and order the
cancellation of the certificate
Have the petitioners acquired ownership and possession of Lot
No. 557 by acquisitive prescription? Innocent purchasers in good faith may safely rely on the
correctness of the certificate of title issued therefor, and neither
Issue 1: CA erred that Alejandro Owned Lot 357 not 557 the law nor the courts can oblige them to go behind the
CA based its conclusion on several tax documents in the name certificate and investigate again the true condition of the
of Alejandro Tugot indicating such. It overlooked the evidences: property.
1. Testimony of the Assessor’s Office that he issued a • They are those who buy the property of another,
certification of correction from 357 to 557. without notice that some other person has a right or
2. The Lot 357 is covered by another address in the city’s interest in such property and pays a full price for the
base map by a certain Antonio Yap. same, at the time of such purchase or before has
3. The Deed of Donation recognizes Alejandro as the notice of the claims or interest of some other person
owner of Lot 557. in the property.
4. Court approved subdivision plan. • It covers innocent lessee, mortgagee or encumbrancer
for value but not donee.
Issue 2: CA erred on Failure to Prove Fabricated TCT
It overlooked the evidence that the petitioners presented the The TCT’s issued to Mauricia must be cancelled for there is no
fabricated title. The signatures where checked and all these ownership for such.
pieces of evidence by preponderance of such prove that TCT
No. 571 is a fabricated title. Lopez is not an innocent purchaser for value of Lot 557-A.
1. There are discrepancies and different area was As a rule, a person dealing with registered land has a right to
covered by the ‘originated’ title rely on the Torrens certificate and to dispense with the need for
2. 571 had discrepancies with 570 and 572, it used an old further inquiring over the status of the lot. But there are
form and was signed by a different Acting Register of exceptions:
Deeds. Differences in the signature. • When the purchaser has actual knowledge of the facts
The allegation that she brought from Antonio is negated by the and circumstances that would compel a reasonably
content of the ‘originate’ title, TCT 16534 which covered a cautious man to inquire to the status of the lot.
different property.
• The presence of anything that excites or arouse • Public are little favored. They should not be invoked
suspicion should them prompt the vendee to look except in rare and unusual circumstances.
beyond the certificate and investigate the title. • They must be applied with circumspection and should
• Without such inquiry, that buyer can hardly be be applied only in those special cases where the
regarded as a buyer in good faith. interests of justice clearly require it.
In the case: Lopez made the following admission that she did In the case: For nearly twenty years (starting from the issuance
an actual inspection and accordingly found that Rodrigo did of St. Judes titles in 1966 up to the filing of the Complaint in
not reside on Lot No. 557-A. The ejectment case was also filed 1985), petitioner failed to correct and recover the alleged
five months after the mortgage contract, she would have found increase in the land area of St. Jude.
Filadelfa residing in it not Rodrigo and such fact should have
prompted her to check the validity of the title. Its prolonged inaction strongly militates against its cause, as it
is tantamount to laches, which means the failure or neglect,
Held: No decision on ownership. They have resided since 1915 for an unreasonable and unexplained length of time, to do that
but it cannot be ignored that the evidence showing none of which by exercising due diligence could or should have been
them can rightfully own Lot 557 especially acquisitive done earlier; it is negligence or omission to assert a right within
prescription cannot operate for the and that the TCT they had a reasonable time, warranting a presumption party entitled
was fake. to assert it either has abandoned it or declined to assert it.
• Surveyors erred for such.
Direct investigation for the Land Management Bureau and to the • None of the neighboring owners ever complained.
Ombudsman on how the fake TCT ended up in the Register of • There was no actual damage to third persons.
Deeds for determination of Liability. TCTs are declared null and
claim for recognition of ownership is denied. Torrens Title and Good Faith
Where innocent third persons, relying on the correctness of the
Article 1135. Possession by Mistake of an Area Greater or certificate of title, acquire rights over the property, courts
Less than that Expressed in the Title cannot disregard such rights and order the cancellation of the
certificate. Such cancellation would impair public confidence in
REPUBLIC v. CA and SANTOS (1999) the certificate of title, for everyone dealing with property
registered under the Torrens system would have to inquire in
Facts: St. Jude’s enterprises is the registered owner of Lot 865- every instance whether the title has been regularly issued or
B-1 as part of Lot 865-B in Caloocan with an area of 40,623 not. This would be contrary to the very purpose of the law,
square meters. In 1966, it subdivided the lot and cancelled TCT which is to stabilize land titles.
No. 22660 for TCT no 23967-24068 all in the name of St. Judes
Enterprises. The subdivision of the lot was later found to have In the case: When private respondents-purchasers bought
expended from 40,623 to 42,044 square meters with an increase their lots from St. Jude, they did not have to go behind the titles
of 1,421 square meters. This expanse or increase in area was thereto to verify their contents or search for hidden defects or
confirmed by the Land Registration Commission. inchoate rights that could defeat their rights to said lots.
Although they were bound by liens and encumbrances
Some of the titles were cancelled for they were sold to the annotated on the titles, private respondents-purchasers could
different buyers. But the Solicitor general filed an action seeking not have had notice of defects that only an inquiry beyond the
the annulment and cancellation of Transfer Certificates face of the titles could have satisfied.
principally on the ground that the TCT were issued on the • No proof of bad faith.
strength of a null and void subdivision plan which expanded • The area measurement was not eve precise and the
the original area from 40,623 to 42,044 square meters. new size is more precise and more accurate.
• Contended that they are acquired in good faith.
• Enterprise argues that the government is now in Torrens system. We cannot, therefore, adhere to the
estoppel to question the approved subdivision plan petitioner’s submission that, in filing this suit, it seeks to
and the allegation of increase was without any basis in preserve the integrity of the Torrens system. To the contrary, it
fact and in law. is rather evident from our foregoing discussion that petitioners
action derogates the very integrity of the system.
RTC denied for there was no one to blame for the increase but
the plaintiff and allowed and approved subdivision plan. There Time and again, we have said that a Torrens certificate is
was absence of complaints from the owner who were allegedly evidence of an indefeasible title to property in favor of the
encroached. CA affirmed. person whose name appears thereon.
Estoppel Against the Government Held: Petition is denied, and Decision is Affirmed.
As a rule, the State cannot be put in estoppel by the mistake or
error of tis officials or agents.
Article 1137. Prescription of Ownership and Only lands of the public domain subsequently classified or
Other Real Rights declared as no longer intended for public use or for the
development of national wealth, or removed from the sphere of
ANDRES v. STA. LUCIA REALTY (2015) public dominion and are considered converted into patrimonial
lands or lands of private ownership, may be alienated or disposed
Facts: Petitioners and Liza filed a complain about easement or through any of the modes of acquiring ownership under the Civil
right of way against respondent before the RTC and alleged that Code.
they are co-owners and possessors for more than 50 years of
three parcels of three unregistered parcels of land in Rizal. And if the mode of acquisition is prescription, whether ordinary
or extraordinary, it must first be shown that the land has
The respondent acquired the lands surrounding the property already been converted to private ownership prior to the
developed into a rental subdivision and built a concrete requisite acquisitive prescriptive period. Otherwise, Article
perimeter fence around it such that petitioners and Liza were 1113 of the Civil Code, which provides that property of the State
denied access from the property to the nearest road and vice not patrimonial in character shall not be the subject of
versa. prescription, applies.
Petitioners preset stories of claiming the land and that they Property is an unregistered public agricultural land. In the
already reside in 1948 and that there were tax declarations and absence of such proof of declaration in this case, petitioners'
sought it to registered under DENR. Respondent present the claim of ownership over the subject property based on
Municipal Assessor and confirmed that there was denial of the prescription necessarily crumbles. Conversely, they cannot
application of Carlos for issuance of tax declaration. demand an easement of right-of-way from respondent for lack
of personality.
RTC: The 50-year possession was not denied and was impliedly
admitted and ratiocinated under Article 1137 of the Civil Code Article 1142. Mortgage Action
that they considered as owners of the subject property through
extraordinary prescription, having real right they can demand MAYBANK PHILIPPINES v. TARROSA (2015)
easement of right of way.
Facts: On December 15, 1980 the Spouses Tarrosa obtained
CA: Evidence was insufficient to show that petitioner are from the petitioner a loan of P91,000 and was secured by an
owners and possessors of the subject property. It held reverse REM over a 500 sq.m. parcel of land in San Carlos City.
the RTC and that they have no right to demand easement of
right of way from the respondent. She obtained another loan in the amount of P60,000 but failed
to settle the second loan upon maturity. In 1998, the Spouses
Are petitioners entitled to demand an easement of right-of-way received a final demand letter requiring them to settle their
from respondent? outstanding loan in aggregate of P564.579.91. They offered to
pay a lesser amount which the Maybank refused.
Easement of Right-of-Way
Article 649 of the Civil Code it can be demanded by the owner Spouses Tarrosa filed a complaint for declaration of foreclosure
of an immovable or by any person who by a real right may and of public auction sale for the following grounds:
cultivate or use the same. (a) Second loan was an unsecured loan
(b) After receiving demand, they tried to pay
Petitioners argue that they are entitled to demand such (c) Right to foreclosure has prescribed or is barred by
because they are the owners of the subject property and that laches.
they already acquired ownership by means of ordinary
acquisitive prescription. And since more than 10 years had Petitioner argued that the Spouses Tarrosa’s positive
lapsed form that time without the Blancos doing anything to acknowledgment of the admission of their indebtedness
contest such, they have acquired. controverts the defense of prescription.
Petitioners now assert alternatively that also through RTC: Maybank’s right to foreclose has already prescribed
extraordinary acquisitive prescription they have been: considering the lack of any timely action, extrajudicial demand
1. Open, continuous and peaceful possession of the or written acknowledgement by the debtor.
property for more than 50 years.
2. Property is alienable and disposable. CA: Affirmed for Maybank failed to present evidence of any
3. Carlos filed a claim of ownership to DENR. timely written extrajudicial demand or written acknowledgment
4. Carlos manifestation of willingness to declare property by the debtors of their debt that could have effectively
for taxation purposes. interrupted the running of the prescriptive period.
Held: Even if timely raised, such argument of petitioners both Whether the action for foreclosure has prescribed.
of ordinary and extraordinary acquisitive prescription fails.
Prescription of Mortgage Actions 8. An absolute deed of sale containing the above provisions and
An action to enforce a right arising from a mortgage should be standard warranties on conveyances of real property shall be executed
enforced within ten (10) years from the time the right of by the co-owners in favor of CRC or its assignee/s and the same
delivered to the latter together with the original certificate of title upon
action accrues. When the mortgagor defaults in the payment
payment of the purchase price less the advances made by CRC in
of his obligation to the mortgagee, otherwise it will be barred accordance with Paragraphs 2 and 3 above; provided, that payment
by prescription and the mortgagee will lose his right over the shall be made by CRC only upon presentation by the co-owners to CRC
mortgage. of certificate/s and/or clearances, with corresponding receipts, issued
by the appropriate government office/s or agency/ies to the effect that
Debtor is in Default When: capital gains tax, real estate taxes on the Property and local transfer tax
(a) The obligation be demandable and already liquidated; and other taxes, fees or charges due on the transaction and/or on the
(b) The debtor delays performance Property have been paid.
(c) The creditor requires the performance judicially or
Respondents asked for several cash advances which reached a
extrajudicially unless demand is not necessary.
total amount of P217,000 to be deducted from the purchase
price of P400,000. After paying the advances CRC constructed
Thus, it is only when demand to pay is unnecessary in case of
staff houses and improvements. The respondents executed an
the circumstances, or when required, such demand is made and
SPA to Hojila allowing him to perform step necessary to cause
subsequently refused that the mortgagor be consider in default
the land subject of Offer to Sell for the accomplishment.
and the mortgage obtains the right to file an action to collect
the debt or mortgage.
CRC stopped operation, the DBP took over and turned the
CRC’s equity Asset Privatization Trust and function is to take
In the case: Maybank reckoned from the maturity of the
title and possession of, provisionally mange and dispose of
second loan and that demand was unnecessary for the accrual
nonperforming asserts of government financial institutions.
of cause of action. The paragraph 5 in the REM merely
Thus, from CRC the party is the Republic of the Philippines.
articulated the bank’s right to elect foreclosure upon refusal.
• Respondent’s compained for the delivery of the title
and execution of the deed of absolute sale and of the
In no way did it affect the general parameters of default, the
full payment and mentioned three letters that were
need of prior demand under Article 1169. For there was no
sent to the respondent on 1991, 1999.
express demand. Hence, the CA erred in construing the
condition as one which dispended demand as a condition for
RTC: Written contract was executed on 7 December 1981, then
the accrual for demand of right to foreclose and mistakenly
the complaint that was filed more than eighteen (18) years since
reckoned from the maturity date of the second obligation.
the contract was executed was beyond the 10-year prescriptive
period. Within that 18-year period, there was no act on the part
In the absence of showing that demand is unnecessary for the
of petitioner, whether judicial or extrajudicial, to interrupt
loan obligation to become due and demandable. Maybank’s
prescription.
right to foreclose the REM accrued only after the lapse of the
period indicated in the final demand letter for Sps. Tarrosa
CA: The subject property is a patrimonial property of the State
to pay which is after the lapse of five (5) days from receipt.
when APT became the controlling stockholder of CRC,
prescription may run against the State. Thus, the reasonable
Held: Considering that the existence of the loan had been
period within which to register the property is three (3) years.
admitted, the default on the part of the debtors-mortgagors’
ad been duly established, and the foreclosure proceedings had
According to the Court of Appeals, the cause of action of
been intitated within the prescriptive period as aforediscussed,
petitioner accrued three (3) years from the time the
there is no more basis to nullify the extrajudicial foreclosure of
Contract was executed on 7 December 1981 or, to say the
the sale.
least, on 15 August 1984 when Hojilla sent the
acknowledgment letter dated 15 August 1984, at which
Article 1144. Actions that Prescribe Within Ten Years
time it became clear that respondents could no longer fulfill
their obligation.
REPUBLIC v. BAÑEZ (2015)
Whether or not the complaint for specific performance was filed

Facts: In 1976, Bañez and the respondents offered for sale a
beyond prescriptive period.
parcel of land with an area of 20,000 sq.m. in Abra to CRC. They
executed a letter irrevocably giving the CRC the option to
Petitioner: Argues interruption due to a written
purchase the subject property, which CRC accepted.
acknowledgment of the respondent’s obligation and demand
by petitioner.
2. The co-owners shall take all necessary steps to cause the CRC Portion
to be brought under the operation of Republic Act No. 496, as
amended, and to cause the issuance in their name of the corresponding The argument based on Article 1155 of the CC which it is
original certificate of title, all of the foregoing to be accomplished interrupted by a written extrajudicial demand by the creditors
within a reasonable time from date hereof. Xxx and when there is a written acknowledgment of the debtor.
Petitioner refer to the letter sent to Hojilla to the former dates Prescription of Written Contracts
15 August 1984 on 1991 and one 1991. In the first letter, An action based on a written contract must be brought within
respondents affirmed that they will cliam full payment of the ten (10) years from the time the right of action accrued.
property upon presentation of a clean title. Accordingly, a cause of action on a written contract accrues
only when an actual breach or violation thereof occurs.
Respondent: Article 1144 which provides that actions upon a
written contract must be brought within ten years from By the contract between the herein parties, the cause of action
execution. Because the complaint was filed beyond the 10-year accrued at the point when the reasonable time within which
prescriptive period, the action was already barred by the Statute to present the title lapsed. The parties did not determine the
of Limitations. Further, during such period, petitioner failed to act date when the respondents must present the title and other
either judicially or extrajudicially to effectively interrupt the documents to the petitioner. The parties only agreed that the
running of the prescriptive period. Thus, the complaint must be respondents must present the same within a "reasonable time."
dismissed for having been extinguished by the Statute of
Limitations. 10-year: The consequence is stated in Article 1155 of the Civil
Code. It states, "[t]he prescription of actions is interrupted when
Hojilla’s Letter of 1984 they are filed before the court, when there is a written
Hojilla updated petitioner of the status of the subject property’s extrajudicial demand by the creditors, and when there is any
title for it is now in the process of preparing for petition papers written acknowledgment of the debt by the debtor." Following
for such. There is no other logical conclusion that the letter is the law, the new ten-year period for the filing of a case by the
an acknowledgment of the respondents to the Contract. petitioner should be counted from 29 May 1991, ending on 29
• The letter served to update petitioner of the status of May 2001. The complaint at bar was filed on 10 April 2000, well
the title, an obligation agreed upon by the parties in within the required period.
the Contract.
• A written acknowledgment of debt or obligation of Held: To rule in favor of respondents despite their failure to
respondents. Which effectively interrupts the running perform their obligations is the height of injustice. Respondents
of the prescriptive period and set a new one. cannot benefit from their own inaction and failure to comply
with their obligations in the Contract and let the petitioner
1991 Letters suffer from respondents' own default.
Clearly, the 29 May 1991 and 24 October 1991 letters
demanded respondents to return the properties, discontinue Article 1146. Actions that Must Be Filed Within Four Years
the construction, repair, demolition and occupancy of several
staff houses, and unlock the gates, which is to enforce MONTERO v. TIMES TRANSPORATION (2015)
respondents' obligations pursuant to paragraph 7 of the
Contract. Facts: Employed under TTCI are the 21 petitioners. In 1995, they
formed a union TEU which was certified as sole and exclusive
Pursuant to Article 1155, they are demand letters to enforce bargaining unit of TTCI. In 1997 they went on a strike but was
respondents' obligation under the Contract, which is to cede given a return-to-work order and enjoined the parties from
possession to petitioner. The letters interrupted the running of committing any other act.
the prescriptive period which commenced to run anew.
TTCI adopted a company-wide retrenchment program of both
Hojilla’s SPA employees and equipment. The sale of 25 buses were approved
Hojilla is neither the proper party to execute the Contract nor and transferred to Mencorp by virtue of a Deed of Sale and the
the proper party to receive the demand letters on behalf of workers received notices of retrenchment.
respondents.
For a second time they declared another strike but was order
Also, one glaring fact that cannot escape us is Hojilla's to return to work. In December 4, 1997, Santiago served to the
representation and guarantee that petitioner's obligation will Department of Labor and Employment Regional Office I a
only arise upon presentation of a clean title and execution of a notice that TTCI would be closing its operations due to heavy
Deed of Sale signed by the respondents' heirs, which reads, business losses.
"[t]he Bañez heirs will only claim for the full payment of the
property upon presentation of a clean title and execution of a Four years later, several complaints for unfair labor practice,
Deed of Sale signed by the heirs. Clearly, the respondents are illegal dismissal with money claims, damages and attorney’s
estopped by the acts and representations of their agent. fees were filed against TTCI.
Assuming further that Hojilla exceeded his authority, the TTCI asserted that the petitioners’ cause of action had already
respondents are still solidarity liable because they allowed been barred by prescription because the complaints were filed
Hojilla to act as though he had full powers by impliedly ratifying only in June 2002 or after almost five years from the date of
Hojilia's actions—through action by omission. their dismissal.
Labor Arbiter: According to the LA, the complaints of these 10

petitioners were timely filed in June 2002 because the eight-
month period during which their cases were pending should be
excluded from the four-year prescriptive period.
NLRC: Dismissed by prescription. hose to be selective in

awarding relief to the 10 complainants by stating in his decision
that the period during which the labor cases were pending
should be deducted from the period of prescription.
CA: Dismissed by petition due to the four-year prescriptive

period has already elapsed.
Whether or not the petitioner’s complaint for illegal dismissal

have already prescribed.
Article 1146 on Injury on the Rights

Date of termination: October 26, 1997 and November 24, 1997.
Settled is the rule that when one is arbitrarily and unjustly
deprived of his job or means of livelihood, the action instituted
to contest the legality of one’s dismissal from employment
constitutes, in essence, an action predicated upon an injury to
the rights of the plaintiff, as contemplated under Article 114635
of the New Civil Code, which must be brought within four years.
Voluntary withdrawal effectively cancelled the tolling of the

prescriptive period within which to file their illegal dismissal
case, leaving them in exactly the same position as though no
labor case had been filed at all.
The running of the four-year prescriptive period not having

been interrupted by the filing of NLRC RAB-I-01-1007, the
petitioners’ cause of action had already prescribed in four years
after their cessation of employment on October 26, 1997 and
November 24, 1997. Consequently, when the petitioners filed
their complaint for illegal dismissal, separation pay, retirement
benefits, and damages in 2002, their claim, clearly, had already
been barred by prescription.
Held: Petitioners have no one but themselves to blame for their

own predicament. By their own allegations in their
respective complaints, they have barred their remedy and
extinguished their right of action.
Although the Constitution is committed to the policy of social

justice and the protection of the working class, it does not
necessary follow that every labor dispute will be automatically
decided in favor of labor. The management also has its own
rights. Out of concern for the less privileged in life, this Court,
has more often than not inclined, to uphold the cause of the
worker in his conflict with the employer.
Such leaning, however, does not blind the Court to the rule that
justice is in every case for the deserving, to be dispensed in the
light of the established facts and applicable law and doctrine.
OBLIGATIONS AND CONTRACTS 3. Object or Prestation

Civil Code The object is not a thing but a particular conduct of a
debtor. It is the subject matter of the obligation which
Articles 1156-1178
has an economic value or susceptible to pecuniary
TITLE I. – OBLIGATIONS substitution in case of non-compliance.
CHAPTER 1 4. Juridical Tie or Vinculum Juris

GENERAL PROVISIONS The vinculum by which the debtor is bound to in favor
of the creditor to perform the prestation. It is
ARTICLE 1156 determined by knowing the sources of obligation
An obligation is a juridical necessity to give, to do or not to
under Article 1157. This is also known as the efficient
do.
cause or the legal tie.
Obligation, Definition
A juridical relation between two persons, known as a creditor Kinds of Prestation
and debtor, whereby the former can demand from the latter the 1. “to give”
observance of a determinate conduct and in case of breach, Consists of the delivery of a movable or immovable
may obtain satisfaction from the assets of the latter. thing which is either determinate (specific) or
• Juridical necessity – connotes that in case of non- indeterminate (generic). This is in order to create a real
compliance, there will be legal sanctions. right, or for the use of the creditor, of for its simple
possession, or in order to return to the owner.
Characteristics of an Obligation
1. It represents an exclusively private interest. 2. “to do”
2. It creates ties that are by nature transitory. Involves all kinds of work or services, whether physical
3. It involves power to make the juridical tie effective in or mental, but in most cases the essence of the act
case of non-fulfillment through an economic man not be such, but merely the necessity of
equivalent obtained from the debtor’s patrimony. concluding a juridical operation, such as, when a
person promises to give a bond.
Types of Obligations
1. Civil Obligations 3. “not to do”
Those which derive their binding force from positive A negative obligation which consists of abstaining
law, and can be enforced by court action or the from some act it includes “not to give”.
coercive power of public authority.
Requisites of Prestation
2. Natural Obligations 1. It must be physically and juridically possible.
Refer to those which derive their binding force from 2. It must be determinate or at least determinable
equity and natural justice; and its fulfillment cannot be according to pre-established elements or criteria.
compelled by court action but depends exclusively 3. It must have a possible equivalent in money or
from the conscience of the debtor. pecuniary value.
3. Moral Obligations ARTICLE 1157

Obligations arise from:
Those which arise from moral law developed by the
(1) Law;
church and not enforceable in court. It deals with the (2) Contracts;
spiritual obligation of a person in relation to his God (3) Quasi-contracts;
and church. (4) Acts and omissions punished by law; and
(5) Quasi-delicts
ELEMENTS OF AN OBLIGATION
1. Active Subject Exclusive Enumeration
Known as the obligee or the creditor, he has the power No obligation exists if source is not one of those enumerated:
to demand the prestation. It is he who in his favor the • By law
obligation is constituted, established or created; it is • By bilateral acts – contracts
he who has the right to demand. • By unilateral acts – delicts and quasi-delicts
2. Passive Subject Unilateral Promise

Known as the obligor or the debtor, he is the one Unilateral agreements may give rise to obligations without
bound to perform the prestation. He is the passive need of acceptance. Here the one promising the reward or prize
subject because without demand, there will be no acquires an obligation to pay, but the offer is to public in
action. Has the juridical necessity of adjusting his general, no specific acceptance is possible.
conduct to the demand of the creditor pursuant to the
obligatory tie.
ARTICLE 1158 2. Solutio Indebiti

Obligations derived from law are not presumed. Only those Article 2154, for if something is received when there is no right
expressly determined in this Code or in special laws are to demand it, and it was unduly delivered through mistake, the
demandable, and shall be regulated by the precepts of the
obligation to return such arises.
law which establishes them; and as to what has not been
foreseen, by the provisions of this Book.
ARTICLE 1161
Civil obligations arising from criminal offenses shall be
Agreement Unnecessary
governed by penal laws, subject to the provisions of Article
When we say that law is an independent source of obligations,
2177, and of the pertinent provisions of Chapter 2,
it does not mean that law and human acts exclude each other Preliminary Title on Human Relations, and of Title XVIII of
completely. The law cannot exist as a source of obligations, this Book, regulating damages.
unless the acts to which its principles may be applied exist.
Civil Liability arising from Crimes
But once those acts or facts exist, the obligations arising Under Article 100 of the RPC, every person criminally liable is
therefrom by virtue of express provisions of the law are entirely also civilly liable. The plain inference from this provision is that
independent of the agreement of the parties. the civil liability springs out and is dependent upon facts which
would constitute a crime.
Obligation Not Presumed
Under the terms of this article, obligations derived from law are ARTICLE 1162
not to be presumed. Only those expressly provided for in this Obligations derived from quasi-delicts shall be governed by
Code or in special laws are enforceable. the provisions of Chapter 2, Title XVII of this Book, and by
special laws.
ARTICLE 1159
Concept of a Quasi-Delict
Obligations arising from contracts have the force of law
between the contracting parties and should be complied Article 2176 defines such that whoever by act or omission
with in good faith. causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence,
Principle of Autonomy of Will if there is no pre-existing contractual between the parties is
The parties can stipulate anything under their freedom as long called a quasi-delict.
as its terms are not contrary to law, public policy or public order.
Contracts are perfected by mere consent, and from that Basis for Liability
moment parties are bound not only to the fulfillment of the It is founded upon an undisputable principle of equity; namely,
stipulations but also to the consequences. that fault or negligence cannot prejudice anyone else besides it
author. In no cases should its consequences be borne by him,
NOTE: Attorney’s contracts are not entitled for the court can becomes the victim of the results.
ignore it and limit the recovery to reasonable compensation if
the court finds it to be unreasonable. Negligence
It is the failure to observe for the protection of the interests of
ARTICLE 1160 another person that degree of care, precaution, vigilance which
Obligations derived from quasi-contracts shall be subject to the circumstances demand. It is relative changing with the
the provisions of Chapter 1, Title XVII of this book. circumstances of the persons involved, time and place.
1. There is fault or negligence on the part of the
Concept of Quasi-Contract
defendant resulting to a wrongful act or omission.
It is a juridical relation which arise from certain lawful,
2. There is damage or injury suffered by another person.
voluntary, and unilateral acts, to the end that no one may be
3. There is a direct causal relationship between the fault
unjustly enriched or benefited at the expense of another.
and the injury.
• Lawful, distinguishing it from a delict.
• Voluntary, distinguishing it from a quasi-delict.
CHAPTER 2
• Unilateral, distinguishing it from a contract. NATURE AND EFFECT OF OBLIGATIONS
Examples of quasi-contracts and principles: ARTICLE 1163

Every person obliged to give something is also obliged to
1. Negotiorum Gestio or Inofficious Manager take care of it with the proper diligence of a good father of a
Juridical relation takes place when somebody takes charge of family, unless the law or the stipulation of the parties
requires another standard of care.
the agency or management of the business or property of
another without any power from the latter.
Delivery of Generic or Indeterminate Objects
A generic thing is one indicated only by its kinds, without being
The owner shall reimburse the gestor for the necessary and
designated and distinguished from others of the same kind. It
useful expenses incurred by the latter, and for the damages
is determinable and becomes determinate from the time the
suffered by him in the performance of his functions.
obligation has been fulfilled or performed.
Limited generic obligation is when the generic object is Kinds of Fruits

classified to a particular class. The class now then is considered 1. Natural - spontaneous products of the soil, the young
in itself a determinate object. Thus, an obligation to deliver one and other products of animals;
of my horses refers to a limited generic object, because the 2. Civil - Rent of buildings, price of leases of lands, etc.
thing is limited to the horses owned by the debtor. 3. Industrial - Those produced by lands of any kind
through cultivation and labor;
Delivery of a Determinate Thing
It is one that is individualized and can be identified or Classes of Delivery or Traditio
distinguished from others of its kind. In an obligation to deliver 1. Real or Actual Traditio
a determinate things there are three accessory obligations: This contemplates the actual delivery of the thing from the
1. Obligation to preserve the thing with due care. hand of the grantor to the hand of the grantee, it is a personal
2. Obligation to deliver the fruits. property. If it is a real property, it is manifested by certain
3. Obligation to deliver the accessions and accessories. possessory acts executed by the grantee with the consent of
the grantor such as by taking over the property; occupying the
Diligence Required property.
The law requires the debtor to exercise diligence of a good
father of a family as a legal standard. This is a duty to preserve 2. Constructive Traditio
the thing in a condition suitable for its enjoyment by the When the delivery of the thing is not actual but representative
creditor for the purpose contemplated. or symbolical in essence. But there must be intention to deliver
the ownership.
Breach, Effects
One can become liable for the damages for failing to exercise Kinds of Constructive Tradition
diligence over the delivery of an object unless the loss or 1. Traditio Symbolica – delivery of certain symbols or
damage is due to a fortuitous event. things representing the thing to be delivered such as
keys or titles.
ARTICLE 1164
The creditor has a right to the fruits of the thing the time the 2. Traditio Instrumental – consists in the delivery of the
obligation to deliver it arises. However, he shall acquire no instrument of conveyance to the grantee by the
real right over it until the same has been delivered to him.
grantor.
Right to the Fruits
3. Traditio Longa Manu – consists in the pointing to a
The creditor, in an obligation to deliver a determinate thing, is
movable property within sight by the grantor to the
entitled to the fruits from the time when the obligation to
grantee but which at the time of the transaction, the
deliver arises. The time of delivery differs to the type of
thing could not be placed yet in the possession of the
obligation and to the suspensory or resolutory conditions.
grantee.
The obligation to deliver arises usually when these are present:
4. Traditio Brevi Manu – consists in the grantee’s
1. Perfection of contract if there is no term or condition.
continuation of his possession over the thing
2. From the moment the term or condition arrives.
delivered but now under a title of ownership as in case
of a lessee who has purchased the property leased to
Real Right
him.
It is the power belonging to a person over a specific thing. It
gives to a person a direct and immediate juridical power over a
5. Traditio Constitutum Possessorium – consists in the
thing, which is exercised against the whole world.
owner’s continuous possession of the property he had
• Personal right refers to power belonging to one
sold to another person and his present possession
person to demand of another, as a definite passive
thereof is no longer that of the owner but that of a
subject, the fulfillment of a prestation to give, to do or
lessee.
not to do.
6. Traditio by operation of law – consists in the delivery

Need for Tradition or Delivery
of thing by operation of law such as intestate
Since the time the obligation to deliver a determinate thing
succession.
arises, the creditor only has a personal right. He can only
demand that the debtor deliver such thing and its fruits. The
7. Quasi-traditio – consists in the delivery of an
delivery or tradition of a thing is an essential requisite for the
incorporeal property.
purpose of acquiring ownership. The ownership of things is
transferred not by mere agreements but by delivery.
Remedy
When there is no delivery, he or she can file for a complain to
The creditor has a right to the fruits of thing from the time to
Specific Performance and Delivery because he is not yet the
deliver it arises. Fruits referred involve only determinate things.
owner.

When what is to be delivered is a determinate thing, the If a person obliged to do something fails to do it, the same
creditor, in addition to the right granted him by Article 1170, shall be executed at his cost.
may compel the debtor to make the delivery.
This same rule shall be observed if he does it in
If the thing is indeterminate or generic, he may ask that contravention of the tenor of the obligation. Furthermore, it
obligation to be complied with at the expense of the debtor. may be decreed that what has been poorly done be undone.
If the obligor delays, or has promised to deliver the same Coverage of the Article
thing to two or more persons who do not have the same 1. Obligor fails to do an obligation required.
interest, he shall be responsible for any fortuitous event 2. Fulfilled the obligation in contravention of agreement.
until he has effected the delivery.
3. Fulfillment was done but poor or inadequate.
If any of such happens, the creditor entitled to have the
Obligation to Deliver Remedy
prestation done in a proper manner by himself or by a third
Determinate or specific Creditor may compel debtor
person, is at the expense of the debtor.
to deliver
Indeterminate or generic Creditor may ask for the
NOTE: But if the obligation can only be done by the debtor
compliance at the expense
himself, the only recourse available is a claim for damages since
of the debtor
it is against the constitution to force the debtor to perform the
obligation under involuntary servitude.
Remedies of the Creditor when Debtor Fails to Comply
a. Demand for specific performance even if the thing to ARTICLE 1168
be delivered is indeterminate. When the obligation consists in not doing, and the obligor
b. Rescission of the obligation. does what has been forbidden him, it shall also be undone at
c. Resolution of the contract if reciprocal obligation. his expense.
d. Damages exclusively or in addition.
Doing Prohibited Thing, Remedy
GENERAL RULE: Obligation to deliver a specific thing is Aside from undoing what is done in violation to the obligation,
extinguished by fortuitous event but not generic. he can be held liable for damages. There are times that the
thing cannot be undone thus indemnification is the only
EXCEPTION: He shall still responsible despite fortuitous event: remedy left for the creditor.
1. If obligor delays or in default;
2. If obligor is guilty of bad faith. ARTICLE 1169
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially
ARTICLE 1166
demands from them the fulfillment of their obligation.
The obligation to give a determinate thing includes that of
delivering all its accessions and accessories, even though
However, the demand by the creditor shall not be necessary
they may not have been mentioned.
in order that delay may exist:
(1) When the obligation or the law expressly so declare;
What to Deliver
or
Everything that is attached, naturally or artificially, to the (2) When from the nature and the circumstances of the
principal thing, as well as that which serves to complete it, even obligation it appears that the designation of the
if not attached to it, must be delivered together with it. time when the thing is to be delivered or the service
is to be rendered was a controlling motive for the
Accessories establishment of the contract; or
Things which are united or attached as ornaments to the (3) When demand would be useless, as when the
obligor has rendered it beyond his power to
principal thing, or for the latter’s use or perfection. It is destined
perform.
for the embellishment, use, or preservation of another thing of
more importance like keys. In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper
Accession manner with what is incumbent upon him. From the moment
Everything produced by a thing, or which is incorporated or one of the parties fulfills his obligation, delay by the other
attached thereto, either naturally or artificially. It covers: begins.
• Accession discreta – right to the fruits
Concept and Nature of Delay
• Accession continua – which includes:
This is synonymous to default or mora which means delay in
o Accession natural – alluvion or deposits
the fulfillment of obligations. It is non-fulfillment with respect
o Accession industrial – building or planting.
to time. To be in default however, is different from mere delay
because it involves the beginning of a special condition which
Contrary Stipulation, Possible
has effects. Not applicable to negative obligations.
The parties may agree to exclude any accession or accessory of
the thing to be delivered.
Delay happens when there is non-fulfillment of the obligation b. Debtor is exempted from the risks of loss of the thing,
after a judicial or extra-judicial demand. It is different from which automatically pass to the creditor.
default because ordinary delay is the mere failure to perform c. All expenses incurred by the debtor for the
an obligation at an appointed time. There is a need for a preservation of the thing after the mora shall be
demand either judicial or extrajudicial. chargeable to the creditor.
d. The creditor may relieve himself from the obligation
Instances when Demand is not needed by consignation of the thing.
1. Express stipulation
2. The law provides Consignation is the act of depositing of thing due with the
3. Time or period is the controlling motive or the court ow with judicial authorities whenever the creditor cannot
principal inducement for the creation of the accept or refuses to accept payment.
obligation.
4. Demand would be useless COMPENSATIO MORAE
5. Obligor admits he is in delay Applies only in reciprocal obligation. Where the parties are both
guilty of mora or mutual default, the default of one
When the time for the fulfillment of the obligation is fixed, no compensates of another. Delay beings when one party fulfills his
further demand is necessary. In case of doubt, in favor of the obligation. When the other party does not fulfill his obligation
debtor. he releases the other from his obligation. Usually, the fulfillment
should be simultaneous, unless the contrary is provided.
Kinds of Delay
1. Mora solvendi – default on the part of the debtor Cessation of the Effects of Delay
which may either be ex re or ex persona. 1. Renunciation by the creditor which can be implied or
2. Mora accipiendi – default on the part of the creditor. expressed like grant of extension of time or novation.
3. Compensatio morae – default on the part of both 2. Prescription.
parties in reciprocal obligations.
ARTICLE 1170
MORA SOLVENDI Those who in the performance of their obligations are guilty
a. The obligation pertains to the debtor or obligor of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
b. Determinate or liquidate, due and demandable
c. Not performed on maturity date
Grounds for Liability
d. Demand was made by creditor for the fulfillment of
These grounds are only for the rescission or for damages not
the obligation
grounds to nullify the contract:
1. Fraud – deliberate or intentional evasion of the
NOTE: Not applicable to natural and negative obligations.
normal fulfillment of obligation. It is the fraud at the
EFFECTS: (1) liable for damages or interest; (2) equitable
performance of the obligation not in the contract. It
mitigation if the loss occurred even if no default.
implies bad faith.
MORA ACCIPIENDI
2. Negligence – also known as culpa contractual or
This is the delay in the performance of the obligation based on
omission of the diligence required by the nature of the
the omission by the creditor of the necessary cooperation,
obligation and commensurate with the demands of
especially in acceptance in his part.
the subsisting circumstances. The negligence should
be of proximate cause not remote.
It is necessary that it be lawful for the debtor to perform, and
that he can perform. The creditor incurs delay when the debtor
3. Delay or Default – every debtor who fails in the
tenders payment of performance but the creditor refuses to
performance of his obligation is bound to indemnify
accept it without just cause.
for the losses and damages caused thereby, generally.
Requisites for Mora Accipiendi

4. Violation – contravening the tenor or term or
1. An offer or performance by the debtor who has
conditions of the contract.
required capacity.
2. The offer must be to comply with the obligation as it ARTICLE 1171
should be performed. Responsibility arising from fraud is demandable in all
3. The creditor refuses the performance without just obligations. Any waiver of an action for future fraud is void.
cause.
Prohibited Renunciation
Consequences To permit such advance renunciations would practically leave
a. Responsibility of the debtor for the thing is reduced the obligation without effect. The fraud referred is that which is
and limited to fraud and gross negligence. in bad faith in the performance of the obligation not in the
contract itself.
ARTICLE 1172 Elements of Fortuitous Events

Responsibility arising from negligence in the performance of 1. The cause of the unforeseen and unexpected
every kind of obligation is also demandable, but such occurrence, or the failure of the debtor to comply with
liability may be regulated by the courts, according to the
his obligations must be independent of the human will
circumstances.
or the debtor’s will.
2. It must be impossible to foresee the event which
Kinds of Culpa
constitute the case caso fortuito, or if it can be
1. Culpa contractual – breach of contract
foreseen it was impossible to avoid.
2. Culpa aquiliana – civil negligence, tort or quasi-delict
3. Occurrence must be of such as to render it impossible
3. Culpa criminal – criminal negligence resulting to crime
for the debtor to fulfill the obligation in a normal
manner.
Culpa Culpa Culpa
4. The obligor must be free from any participation in, or
Contractual Aquiliana Criminal
aggravation of, the injury resulting to the creditr.
Negligence is Negligence is Negligence is
incidental direct, direct and
Additional Exceptions:
substantive and substantive
4. Obligor is already in delay
independent
5. Promised the same thing to two or more persons who
There is a pre- No pre-existing No pre-existing
do not have the same interest
existing obligation obligation except
6. Possessor is in bad faith
obligation not to harm
7. Obligor contributed to the loss of the thing
Preponderance of Preponderance of Guilty beyond
8. Guilty of fraud, negligence or delay or if he
evidence evidence reasonable doubt
contravened the tenor of the obligation.
Master-servant Defense of a Employer’s guilt –
rule good father civil liability
Doctrine of Created Risk
Existing contract Proof of Presumption of Assumption of risk is there when the nature of the obligation
negligence innocence so requires.

The fault or negligence of the obligor consists in the omission Usurious transactions shall be governed by special laws.
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 Usury is contracting for or receiving something in excess of the
bad faith, the provisions of Articles 1171 and 2201, amount allowed by law for the loan or forbearance of money,
paragraph 2, shall apply. goods or chattels. It is the taking of more interest for the use of
money, goods or chattels than the law allows.
If the law or contract does not state the diligence which is to
be observed in the performance, that which is expected of a ARTICLE 1176
good father of a family shall be required. The receipt of the principal by the creditor without
reservation with respect to the interest, shall give rise to the
Diligence Required presumption that said interest has been paid.
1. Agreed upon by the parties
2. Required by law The receipt of a later installment of a debt without
reservation as to prior installments, shall likewise raise the
3. Expected of a good father of the family
presumption that such installments have been paid.
ARTICLE 1174
ARTICLE 1177
Except in cases expressly specified by the law, or when it is
The creditors, after having pursued the property in
otherwise declared by stipulation, or when the nature of the
possession of the debtor to satisfy their claims, may exercise
obligation requires the assumption of risk, no person shall
all the rights and bring all the actions of the latter for the
be responsible for those events which could not be foreseen,
same purpose, save those which are inherent in his person;
or which, though foreseen, were inevitable.
they may also impugn the acts which the debtor may have
done to defraud them.
Fortuitous Event
As a general rule, fortuitous events absolve obligor from the Rights of Creditors
liability. Applicable only to determinate things in case of The following are what the creditors are able to exercise in cases
obligations ex re. In generic things, the obligor can just ask. when there is a problem with the obligation performance:
1. Exact payments
EXCEPTIONS to Article 1174: 2. Exhaust debtor’s properties generally by attachment;
1. When the law so provides 3. Subrogatory action
2. Expressly stipulated by the parties 4. Impugn or rescind acts or contracts done by debtor to
3. When the nature of the obligation requires the defraud them.
assumption of risk.
Courses of Action
1. Levy by execution or attachment.
2. Accion subrogatoria – here the creditor may go after
the debtors of the defendant-debtor. The creditor
merely steps into the position of the defendant debtor
to collect the valid and demandable credit.
3. Acction pauliana – rescission of contract in cases of
fraud by the debtor
ARTICLE 1178
Subject to the laws, all rights acquired in virtue of an
obligation are transmissible, if there has been no stipulation
to the contrary.
GENERAL RULE: All rights acquired in virtue of an obligation

are transmissible.
EXCEPTIONS:
1. If law provides otherwise;
2. If contract provides otherwise;
3. If obligation is purely personal
OBLIGATIONS AND CONTRACTS Although it may appear that the sale is merely verbal, and
Articles 1156-1178 payment therefore was to be made on instalment, it is a
partially consummated sale, with Badillas paying the initial
JURISPRUDENCE NOTES
purchase price and Ledesma surrendering possession.
• Ledesma delivered the owner’s duplicate of OCT.
Article 1164. – Right of Creditor to the Fruits;
Acquisition of Real Right
Delivery of the Property Transfers Ownership
The ownership of the things sold is transferred to the vendee
BADILLA v. BRAGAT (2015)
upon the actual or constructive delivery of the same. The thing is
understood to be delivered when it is placed in the control and
Facts: Spouses Pastrano were the original owners of Lot 19986
possession of the vendee.
in Cagayan de Oro City. Consisting of 1015 sq.m. the OCT for
• Payment of purchase price is not essential to the
the lo was issued in 1980. Allegedly, before the issuance of the
transfer of ownership as long as the property has been
OCT, in 1968 the Spouses sold the land to Ledesma by a Deed
delivered and such divests the vendor of title to the
of Definite Sale of Unregistered Coconut and Residential Land.
property which may not be regained unless the
contract is resolved or rescinded.
The Spouses Badilla claimed that in 1970 Ledesma sold to the
in an installment basis a portion of 200 sq.m. of the subject
The same is true even if sale is verbal. When a verbal contract
property. The sale was not reduced into writing, but the
has been completed, executed or partially consummated, its
possession of the portion sold was transferred to the Badillas,
enforceability will not be barred by Statute of Frauds.
designated as Lot 19986-B.
• Thus, when a party has performed his obligation, oral
evidence will be admitted proving the agreement.
In 1978, the Spouses Bragat brought 991 sq.m. of the property
• Where it was proven that one party had delivered the
from Ledesma and his wife via a Deed of Absolute Sale of a
thing sold to another, then the contract was partially
Residential Lot. Two tax declarations were allegedly issued as a
executed, and Statute of Frauds does not apply.
result of the sale.
In the case: The Spouses Badilla owning the 152 sq.m. since
In 1984, the Spouses Pastrano executed another Deed of
1970 shows that the TCT in favor of Bragat was wrongfully
Absolute Sale of Registered Land in favor of Fe Bragat. On the
issued. The deed of sale executed between Pastrano and Bragat
same date, Pastrano executed an Affidavit of Loss reporting of
is void for being simulated since both know that at the time of
the loss of the owner’s copy of the OCT.
execution the vendor’s lack of ownership.
• Bragat knew this, as they first bought the property
1987 – another deed of sale for Bragat, thus a TCT was now
from Ledesma through a deed of sale in 1978.
issued in favor of Bragat. In 1991, Bragat made a written
• Pastrano (wife) was already dead when it was
demand to vacate against the Spouses Badilla.
executed. Bragat cannot be in good faith
• Naturally the Badillas raise the earlier sale made by
• It is from this sale Fe Bragat derives title on the
Pastrano to Ledesma and by the latter to them.
property. Pastrano has no right to sell any. No one can
give what one does not have.
Bragat’s contentions: She claimed to have purchased the
• The property bought by Bragat from Ledesma does
property, first, from Ledesma but when she found out that
not include the 152 sq.m. bought by the Badillas.
Ledesma was unauthorized to sell, she made another purchase
from the Pastrano thus the issuance of the TCT.
Held: Fe Bragat is entitled to a new TCT but based on the Deed
of Sale with Ledesma on 1987, excluding the 152 sq.m. already
RTC. It found that Bragat’s title as valid as purchaser in good
bought by the Badillas. Petition granted. CA reversed. TCT void.
faith and for value. There was also lack of evidence from the
Spouses Badilla. The receipts were not absolute ownership. CA
Article 1169. – Principle of Delay
affirmed the decision.
LEAÑO v. COURT OF APPEALS (2001)

Who owns the subject property?
Facts: On 1985, Fernando as vendor and Leano as vendee,

Discussion: The error of the courts is in misapprehending the
executed a contract to sell involving Lot No. 876-B with an area
fact that ownership passed to the Spouses Badilla upon their
of 431 sq.m. in Bulacan. She bound herself to pay Fernando the
purchase of the subject property from Ledesma.
sum of P107,750 as the total purchase price of the lot with
downpayment and monthly amortization for ten years with an
It is not disputed that the spouses Pastrano has previously sold
interest of 18% per annum based on balances.
in November 1968 via deed of Definite Sale of Unregistered
Coconut and Residential Land to Eustaquio Ledesma. As early as
It provides grace period of one month to make the payment,
such date Pastranos no longer had ownership on property. In
and should it expire without installment the interest shall be
the 1970 sale by Ledesma, the Spouses Padilla immediately
charged on such unpaid installments.
took delivery and possession.
Should a period of 90 days elapse from the expiration of the The decision in the ejectment case operated as the notice of
grace period without the overdue and unpaid installment cancellation. As petitioner was not given the cash surrender
having been paid with the corresponding interests, the vendor value of the payments that she made, there was still no actual
is authorized to declare the contract cancelled. The payments cancellation of the contract.
shall be considered as rents paid for the use an occupation. • Should she wish to reinstate the contract she would
have to update her accounts with accordance to the
In 1991, Fernando filed for an ejectment case, and the MTC SOA which is P182,687.
granted such. Petitioner filed with RTC for injunction and
assailed the validity of the judgment for being violative of her On the Issue of Delay of Payment of Amortizations
right to due process. While the contract provided that the total purchase price was
• Trial court held that the contract was an absolute and payable within a ten-year period, the same contract specified
the delivery divested and awarded ownership thus she that the purchase price shall be paid in monthly installments for
cannot be evicted. which the corresponding penalty shall be imposed in case of
default. Petitioner cannot ignore the provision on monthly
Was the transaction an absolute sale? payment of amortizations.
Was the cancellation of such proper?
Was the petitioner in delay of payment of amortizations? Article 1169 of the Civil Code provides that in reciprocal
obligations, neither party incurs in delay if the other does not
Discussion: comply or is not ready to comply in a proper manner with what
Contract to Sell, Ownership and Possession is incumbent upon him. From the moment one of the parties
The transaction was a conditional sale the intention of the fulfills his obligation, delay by the other begins.
parties was the reserve the ownership of the land in the seller
until the buyer has paid the total purchase price. A contract to In the case: Fernando performed his part by allowing petitioner
sell is subject to conditions. to possess and use the property. Cleary, when she did not pay
the monthly amortization in accordance with the terms of the
What was transferred was possession not ownership. The contract, she was in delay and liable for damages.
possession is even limited by the following: • The court finds that interest and surcharges are
(1) Vendee may continue therewith if the vendee sufficient compensation for such.
complies with all the terms and conditions.
(2) Buyer may not sell, cede, assign, transfer or mortgage HEIRS OF BACUS v. COURT OF APPEALS (2001)
or in any way encumber any right, interest, or equity
that she may have or acquire over such land. Facts: On June 1, 1984, Bacus leased to private respondent
The registration shall be done complete payment of the total Duray a parcel of agricultural land in Cebu. The lease was for six
purchase price of the property with the stipulated interest. years. The contract contained an option to buy clause. Under
such, the lessee had the exclusive and irrevocable right to buy
In a contract to sell real property in installments, the full 2000 sq.m. of the property within five years priced a P200 per
payment of the purchase price is a positive suspensive square meter adjustable by US-Peso rate.
condition the failure of which is not considered a breach but
simply an event that prevented an obligation of the vendor to Close to the expiration of the contract Luis Bacs died in 1989.
convey title from acquiring any obligatory force. Upon full In 1990, the lessor Duray spouses were now willing and ready
payment ownership and title is transferred. to purchase the property under the option to buy clause. In
March of 1990, due to the refusal of petitioners to sell. In April
In the case: Petitioner’s nonpayment of the installment after 1990 he filed a complaint to the Lupon for specific performance
1989 prevented the obligation of Fernando to convey the of allowing him to purchase the lot under the option to buy
property from arising. It even brought into effect the provision clause. In turn, the petitioners then asked for full payment, the
of the contract on cancellation. respondents refused. RTC ruled in favor of Duray. CA affirmed.
RA 6552 provides the right of the seller to cancel the contract Can the petitioners not be compelled to sell the disputed
upon non-payment of an installment by the buyer, which could property by nonfulfillment of the obligation under the option
have only been an event which prevented the fulfillment of the contract of the respondents?
obligation. It reads:
“If the contract is cancelled, the seller shall refund to the buyer the cash Discussion:
surrender value of the payments on the property equivalent to fifty Obligations of Option to Buy are Reciprocal Obligations
percent of the total payments made and, after five years of installments, Private respondent’s bank certificate stating the arrangement
an additional five percent every year but no to exceed ninety percent of
were now being made by the bank cannot be considered as
the total payments made: Provided, That the actual cancellation of
legal tender that may substitute for delivery of payment to
contract shall take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of the contract petitioners not was it a consignation. As a reciprocal obligation,
by a notarial act and upon full payment of the cash surrender value to the performance of one obligation is conditioned on the
the buyer.” simultaneous fulfillment of the other obligation.
In an option to buy, the payment of the purchase price by the Megaworld attributed the delay to the 1997 Asian financial
creditor is contingent upon the execution and delivery of a crisis which was beyond its control, and argued that default had
deed of sale by the debtor. not set in, Tanseco not having made any judicial or extrajudicial
demand for delivery before receipt of the notice of turnover.
In this case: When private respondents opted to but the
property, their obligation was to advise petitioners of their HLURB Arbiter dismissed Tanseco’s complaint. Upon appeal to
decisions and their readiness to make actual payment. Only the HLURB-BOC, it sustained the decision. MR was denied.
upon petitioners’ actual execution and delivery of deed of sale Upon appeal to the OP her petition was still denied. Thus, the
where they required to pay. recourse to the Court of Appeals.
• Notice of creditor’s decision of his option to buy need
not be coupled with actual payment of the price, so long CA granted her appeal by rescinding the contract and ordering
as this is delivered to the owner of the property upon Megaworld to pay the amount and the damages. Using Article
performance of his party of the agreement. 1169 of the Civil Code, no demand is needed when the
obligation to demand is needed when the date is stated.
Consignation is the act of depositing the thing due with the
court whenever the creditor cannot accept or refuses to accept Contract to Buy and Sell; Reciprocal Obligations
payment and it general requires a prior tender of payment. The obligations are to complete and deliver the unit before
• The petitioner’s argument that the respondents failed October 31, 1998 or within the grace period, and for Tanseco
to comply to deliver the purchase price or consign it to pay the balance of the purchase price. Compliance by
has no legal basis to stand on. Megaworld with obligation is determinative of compliance by
Tanseco of payment of balance. Megaworld is liable therefor.
Delay in Reciprocal Obligations
Article 1169 provides that in reciprocal obligations neither party The notice of turnover preceded demand for refund did not
incurs delay if the other does not comply or is not ready to abate her cause. Demand would have been useless, the
comply in a proper manner with what is incumbent upon him. creditor failed in its obligation to deliver the unit on the
Only from the moment one of the parties fulfills is obligation, agreed date.
does delay by the other begin.
On Financial Crisis: The court cannot generalize the 1997
In the case: Respondents as early as March 1990 Asian financial crises to be unforeseeable and beyond the
communicated to the petitioners the intention to buy the control of a business corporation. A real estate enterprise
property and they were at that time undertaking to meet their engaged in the pre-selling of condominium units is concededly
obligation. However, petitioners refused to execute the deed of a master in projections on commodities and currency
sale and it was their demand that the respondent deliver first movements, as well as business risks. The fluctuating
the money before execution of the deed of sale. movement of the Philippine peso in the foreign exchange
market is an everyday occurrence, hence, not an instance of
On October 1990, the respondents issued a cashier’s check in caso fortuito. Megaworld excuse for its delay does not thus lie.
petitioners favor to bolster their claim that they were ready to
pay the purchase price. Accordingly, as there was no On Laches: It bears noting that Tanseco religiously paid all the
compliance yet to any of the parties’ delay has not set in even installments due up to January 1998, whereas Megaworld
after the expiration of contract. reneged on its obligation to deliver within the stipulated period.
A circumspect weighing of equitable considerations thus tilts
MEGAWORLD v. TANSECO (2009) the scale of justice in favor of Tanseco.
Facts: In 1995, Megaworld Inc. and Tanseco entered into a Held: Tanseco is entitled to be reimbursed the total amount
Contract of Buy and Sell of a 224 sq.m. condominium unit at she paid Megaworld. Finally, since Article 1191 does not apply
a pre-selling project, the Salcedo Park along Makati City. The to a contract to buy and sell, cancellation, not rescission, of the
purchase price was P16,802,037.32. contract is thus the correct remedy in the premises.
In the contract, the schedule provides that the unit shall be GENERAL MILLING CORP. v. RAMOS (2011)
completed and delivered not later than October 31, 1998 with
additional grace period of six months. Tanseco then paid all Facts: General Milling Corporation entered into a Growers
installment due up to January, 1998, leaving unpaid the balance Contract with spouses Ramos. GMC was to supply broiler
of P2,520,305.63 pending delivery of the unit. However, chickens for the spouses. To guarantee full compliance, the
Megaworld failed to deliver the unit within the stipulated Growers Contract was accompanied by a Deed of Real Estate
period even within the grace period. Mortgage over a piece of real property upon which their
conjugal home was built. The spouses further agreed to put up
Three years later, Tanseco was informed that the unit was ready a surety bond at the rate of PhP 20,000 per 1,000 chicks
for inspection and delivery. Tanseco replied that in view of delivered by GMC.
Megaworld’s failure to deliver on time, demanded return.
Spouses Ramos eventually were unable to settle their account Whether or not a Joint Affidavit of Undertaking is a contract
with GMC. They alleged that they suffered business losses that can be the basis of obligation to pay sum of money and
because of the negligence of GMC and its violation of the that there was no prior demand to the debtors.
Growers Contract. GMC notified of an institution of the
foreclosure proceedings on mortgaged property. Affidavit is in the Characteristic of a Contract
Contracts are obligatory no matter what their forms may be,
It was foreclosed for PhP 935,882,075, an amount representing whenever the essential requisites for their validity are present.
the losses on chicks and feeds exclusive of interest at 12% per The court looks beyond the title for it is not conclusive of the
annum and attorney’s fees. Spouses Ramos filed a Complaint nature of its contents.
for Annulment and/or Declaration of Nullity of the Extrajudicial • Intent of the parties is primordial and is to be pursued.
Foreclosure Sale with Damages. They contended that the If the terms are clear the literal meaning should
extrajudicial foreclosure sale on June 10, 1997 was null and control. If contrary to intention, the words shall not
void, since there was no compliance with the requirements of control over the contract.
posting and publication of notices.
In this case: A simple reading of the terms of the Joint Affidavit
Was there sufficient demand? of Undertaking readily discloses that it contains stipulations
characteristic of a contract. A stipulation where petitioners
Requisites of a Demand promised to replace the damaged car within 20 days of the
GMC asserts error on the part of the CA in finding that no same model and least of same quality. If they would not be able
demand was made on Spouses Ramos to pay their obligation. to replace, they would pay the cost in the total amount of
On the contrary, it claims that its March 31, 1997 letter is akin P350,000 subject to 12% per month for any delayed payment
to a demand. There are three requisites necessary for default: after the 20-day period on November 15, 1999. These are
1. Obligation is demandable and liquidated simple terms that the petitioners could understand.
2. Debtor delays performance
3. Creditor judicially or extrajudicially requires the On vitiated consent. An allegation of vitiated consent must be
debtor’s performance, unless contrary is agreed. proven by preponderance of evidence. Although the
undertaking appears to be onerous and lopsided, this does not
In the case: GMC did not make a demand on Spouses Ramos necessarily prove the vitiation of consent.
but merely requested them to go to GMCs office to discuss the • They in fact admitted the genuineness and due
settlement of their account. execution when they said they have signed such to
secure possession of the mini bus.
Held: There was no default yet, foreclosure is improperly based • They may have given it grudgingly, but it is not
upon such. Despite the lack of demand made on the spouses, indicative that is a ground for the annulment of the
however, GMC proceeded with the foreclosure proceedings. contract.
Neither was there any provision in the Deed of Real Estate
Mortgage allowing GMC to extrajudicially foreclose the Demand, Default and Interest Rate
mortgage without need of demand. GMC should have first In the absence of the demand prior to the filing of the
made a demand on the spouses before proceeding to complaint, the interest cannot be computed from November
foreclose the real estate mortgage. 15, 1999 until a demand has been made for the debtors would
not have been said to be in default. Default generally begins
CRUZ v. GRUSPE (2013) from the moment the creditor demands the performance of the
obligation.
Facts: Arose from an accident last October 1999 when the mini • Demand could be considered to have been made
bus owned and operated by Cruz driven by Davin collided with upon the filing of the complaint in November 19,
the Toyota Corolla car of Gruspe. The latter’s car was a total 1999 and it is from this date interest be computed.
wreck. Cruz went to Gruspe’s office and apologized and they
executed a Joint Affidavit of Undertaking promising jointly Article 1174. Doctrine of Fortuitous Event
and severally to replace the damaged car in 20 days or until
November 15, 1999 of the same model and least the same PHILIPPINE AIRLINES v. CA (1993)
quality or pay P350,000 with and interest of 12% per month for
any delayed payment. Cruz failed to fulfill the obligation. Facts: On November 1976, private respondent filed a complain
for damages for breach of contract of carriage against PAL. On
Cruz claimed that Gruspe. A lawyer, prepared such instrument August 2, 1976 he was among the 21 passenger of Flight 477
and forced them to affix their signatures thereon without that took off from Cebu for Ozamiz.
explaining or informing them of its contents. He only affixed his
signature to have his mini bus released as it was his only means While on flight about fifteen minutes before landing, the pilot
of income. Gruspe sold the wrecked car for P130,000. RTC ruled received a radio message that the airport was closed due to
in favor of Gruspe and CA affirmed the decision. Cruz and heavy rains and inclement weather and should proceed to
Leonardo failed to present evidence for vitiated consent. Cotabato instead.
Upon arrival in Cotabato City, PAL informed the passengers of On Inattention. The records are bereft of evidence to support
their options to return to Cebu on Flight 560 on the same day the same, thus the ruling of CA has no basis. The private
and to Ozamis on August 4, 1976 or take the next flight to Cebu respondent was attended by the PAL and by its Manager.
on 3 and arrive at Ozamis at 5. From Flight 560 there were only
six seats left and the priority is based on check-in sequence. Held: Moral damages reduced from P50,000 to P10,000 and
exemplary is reduced to P5,000. About actual damages, the
He was passenger No. 9. He insisted on being given priority but same is unwarranted it must be based on evidence and
refused for the predicament was due to force majeure not of competent proof.
PAL’s own doing. He tried to stop flight due to some packages
till on board. PAL issued a free ticket to Iligan which he received SOUTHEASTERN COLLEGES v. CA (1998)
under protest. He was left in the airport with no food and
accommodation for his stay in Cotabato. In Iligan City, private Facts: De Jesus are owners of a house at Pasay, while petitioner
respondent hired a car from the airport to Ozamis City and his owns a four-floor school building along the same College road.
personal effects were no longer recovered. On October 11, 1989 at 6:30AM typhoon Saling hit Manila.
Buffeted by strong winds, the roof of the petitioner’s building
PAL answered denying its unjust refusal to accommodate ripped and blown away lading on and destroying portions of
respondent. It argued that the first six passengers chose to take the roofing of the house of the private respondent.
Flight 560 and it was explained of the inability to transport all
of them back to Cebu and it was only the private respondent After an investigation, it was recommended that the school
who insisted on such. Runway was wet and a danger to life. RTC building was to be declared as a structural hazard duet to a
decided in favor of PAL and CA affirmed such. defective roofing structure and could have been avoided if the
construction was not faulty.
Does PAL’s indifference and inattention to his predicament a
basis for award or moral and actual damages due to In a complaint for culpa aquiliana, it was alleged that the
negligence? damage to their house render it inhabitable, forcing them to
stay in other houses. In their Answer, it stated that the school
Contract of Air Carriage did its best to have in good condition and that the typhoon is
Being imbued with public interest, the law requires common beyond human control thus absent negligence. RTC favored the
carriers to carry the passengers safely as far as human care and private respondents. CA affirmed but reduced the damages.
foresight can provide, using utmost diligence of very cautious
persons, with due regard for all circumstances (Article 1755). Whether the damage on the roof of the building of private
respondents resulting from the impact of the falling roof the
In the case: The diversion of flight was due to an inclement school building by Saling due to fortuitous event?
weather which was a fortuitous event. Such occurrence
nonetheless did not terminate PAL’s contract with its Fortuitous Event, Concept and Application
passengers. Being in the business of air carriage, PAL is It is defined as an event which takes place by accident and could
deemed equipped to deal with situations as this case. have not been foreseen or resisted. It is produced by two
• The relation of carrier and passenger continues until the general causes according to Tolentino:
latter has been landed at the port of destination and 1. By nature – earthquakes, storms, floods.
has left the carrier’s premises. 2. By act of man – armed invasion, bandits, robbery
PAL necessarily would still have to exercise extraordinary In order that a fortuitous even may exempt a person from
diligence in safeguarding the comfort, convenience and safety liability, it is necessary that he be free from any previous
of its stranded passengers until they have reached their negligence or misconduct by reason of which the loss may
destination. PAL grossly failed considering that there was an have been occasioned. An act of God cannot be invoked for
ongoing battle between rebels and government forces in the protection of a person who has been guilty of gross
Cotabato and respondent was a stranger. negligence in not trying to forestall its adverse consequence.
• When negligence concurs with an act of God
On Non-Accommodation. While PAL was remiss in its duty of producing damage or injury to another, such person
extending utmost care to private respondent while being is not exempt from liability by showing that the
stranded in Cotabato City there is no sufficient basis that PAL immediate or proximate cause was the event.
failed to inform him of the non-accommodation. • When the effect is found to be partly the result of the
• Insistence was unreasonable considering that participation of man, the whole occurrence is hereby
fortuitous event and that there was a sequence to be humanized, removed from the ambit of Acts of God.
observed in the booking. His intransigence was the
main cause for his having to stay at the airport for In the case: There is no question that a typhoon is a fortuitous
longer than was necessary. event which may be foreseen but is somehow unavoidable. The
person claiming negligence has the burden of proof proving
such by competent evidence not merely presumptions.
They merely relied on the report made by the team which made Globe answered that it was constrained to end the Agreement
an ocular inspection. As the term imparts, it is one by mean of due to the termination of the Senate of the Treaty which
actual sight or viewing. What is visual to the eye is not always allegedly constituted ‘force majeure’ under the Agreement and
reflection of the real cause behind. such exempted it from paying rentals.
Other than ocular inspection, there is no investigation Is the termination of the RP-US Agreement constitutive of force
conducted to determine the real cause of the partial unroofing majeure that would exempt obligation to perform payment?
and did not show that the building’s design was deficient, or
the construction was flawed. Petitioner obtained both building Force Majeure, Coverage and Application
permit and certificate of occupancy which are prima facie Article 1174 of the Civil Code exempts the obligor from liability
evidence of regular and proper construction. because fortuitous event or force majeure, which refers to
• Structurally defective finding – is of unqualified events that are unforeseeable, but also those which are
imprimatur for the city building official presumed to foreseeable but inevitable. Not being contrary to law, Section
have been regularly performed his duties allowed 8 of the Agreement has force of law between them.
repairs of such with the same design, implying no
structural defects. Requisites to exempt Globe from non-compliance:
• Annual maintenance inspection reports were (1) Event must be independent of human will
presented by the vice president for finance and (2) Occurrence must render it impossible for the debtor
administration. to fulfill the obligation in a normal manner
(3) That the obligor must be free of participation in or
Held: We find no clear and convincing evidence to affirm the aggravation of, the injury to the creditor.
judgment of CA. The petition has not been shown to be
negligent or a fault regarding the construction and In the case: The following are present in the instant case. Both
maintenance of tis school building. The claim for damages must parties do not have control over the non-renewal of the
fail more so because no bad faith or even willful act to cause agreement because the prerogative to ratify thereof belonged
damage was alleged and proven. to the Senate. Neither did they have control over withdrawal.
• The events made it impossible the continuation of the
PHILCOMSAT v. GLOBE (2004) five-year terms without fault on either party.
• It would be unjust for Globe to continue paying
Facts: For several years prior to 1991, Globe Telecom had been rentals.
engaged in the coordination of the provision of various
communication facilities for the military bases of US. They were On December 1992 Payment. Philcomsat could not have
configured for the exclusive use of US Defense removed or rendered ineffective said communication until after
Communications Agency. USDCA contracted with Globe for the December 31, 1992 because the Cubi Point was accessible only
use of communication facilities. Globe, on the other hand, to US naval personnel that time. Thus, payment is due.
contracted with local service providers such as PHILCOMSAT for
the provision of communication facilities. GAISANO CAGAYAN v. INSURANCE COMPANY (2006)
May 07, 1991 Philcomsat and Globe entered into Agreement Facts: IMC is the maker of Wrangler Blue Jeans. Levi Strauss
whereby Philcomsat obligated itself to establish, operate and Phils. (LSPI) is the local distributor of products bearing
provide and IBS Standard B Earth Station for exclusive use of trademarks owned by LCI, IMC. LSPI obtained from respondent
the USDCA. Term was for 60 months or five years. Globe fire insurance policies with book debt endorsements. Petitioner
promised to pay Philcomsat monthly rentals for each leased is a customer and dealer of the products of IMC and LSPI. On
circuit involved. February 25,1991 the Gaisano Superstore Complex in CDO was
consumed by fire. Included in the items lost were stocks of
At the time of agreement, both parties knew of the RP-US ready-made clothing materials by IMC and LSPI.
Military Bases Agreement that it was to expire also on 1991.
Subsequently, they installed and established the earth station. On February 1992, respondent filed for damages against
On September 16, 1991 the senate decided not to concur on petitioner. It alleges that IMC and LSPI filed with respondents
the Treaty of Friendship that was supposed to extend. their claims under their respective fire insurance policies and
• Shall terminate on December 31, 1992. that petitioner has unpaid accounts and by virtue of such
respondent was subrogated to their rights against petitioner,
On August 06, 1992, Globe notified Philcomsat of its intention that respondent made several demands but unheeded.
to discontinue the use of the earth station on November 06,
1992 in view of the withdrawal of US Military Personnel. Globe Petitioner contends that it could not be held liable because the
invoked Section 8 on Default of the Agreement stipulating property covered by the insurance policies were destroyed due
about force majeure. to force majeure, right of subrogation has no basis. There was
• Philcomsat however demanded payment of no breach of contract for that there was no way the fire could
outstanding obligations under the Agreement. have been prevented or foreseen.
RTC dismissed respondent’s complaint holding that fire was SICAM v. JORGE (2007)
purely accidental and that it was not attributable to the
negligence of the petitioner. CA set aside RTC, for the sales Facts: On October 19, 1987 two armed men entered the
invoice are proofs of sale and that the loss of the good in the pawnshop and took away whatever cash and jewelry were
fire must be borne by the petitioner for the thing lost by a found inside the vault. Petitioner Sicam sent Respondent Jorge
fortuitous event the risk is borne by the owner of thing by informing her of the loss of her jewelry due to the robbery
doctrine of res perit domino. incident in the pawnshop.
On the Insurance Policy. The questioned insurance policies Respondent Jorge then expressed her disbelief stating that
provide coverage for book debts about read-made clothing when the robbery happened, all jewelry pawned were
materials which have been sold or delivered to various deposited with Far East Bank near the pawnshop since it had
customers and dealers of the insured anywhere in the been the practice that before they would withdraw, advance
Philippines. Book debts is the unpaid account still appearing in notice must be given to the pawnshop, so it could withdraw the
the book account of the insured 45 days after the time of the jewelry from the bank. Thus, she requested withdrawal but
loss covered by the policy. Sicam failed to return such jewelry.
• Nowhere was it provided that the questioned
insurance policies that the subject of the insurance is RTC held that petitioner Sicam could not be made personally
the goods sold and delivered to the customers and liable for a claim arising out of a corporate transaction and that
dealers of the insured. the corporate debt or credit is not the debt or credit of a
• What were insured were the accounts of the IMC and stockholder. The loss was also due to an armed robbery which
LSPI with petitioner Gaisano which remained unpaid is considered as a fortuitous event.
45 days after the loss through fire and not the loss or
destruction of the goods delivered. CA reversed stating that the doctrine of piercing the veil of
corporate entity. Corresponding diligence required of a
On Risk of Loss. When the seller retains ownership only to pawnshop is that it should take steps to insure itself against the
ensure that the buyer will pay its debt, the risk of loss is borne loss of articles which are entrusted for custody. Sicam was
by the buyer. Petitioner bears the risk of the loss delivered. found also to be personally liable.
• In insurance, one’s interest is not determined by
concept of title but whether insured has substantial Piercing the Veil of Corporate Fiction
economic interest in the property. The rule is that the veil of corporate fiction may be pierce when
made as a shield to perpetrate fraud and/or confuse legitimate
Petitioner Bears the Loss of the Goods issues. The theory of corporate entity was not meant to
The argument that it is not liable due to force majeure is promote unfair objectives or otherwise shield them.
misplaced. It must be stressed that the insurance of this case
was not the loss of goods by fire but for the petitioner’s In the case: Respondent Lulu pawned her jewelry in a
account with IMC and LSPI that were remained unpaid 45 pawnshop owned by Sicam himself. All the receipts all bear the
days after the fire. The obligation is for payment of money. words Agencia de R.C. Sicam, notwithstanding its incorporation
• Where the obligation consists in the payment of money, on 1987. It was misleading that the pawnshop was owned solely
the failure of the debtor to make the payment even by by the petitioner Sicam and not by a corporation.
reason of fortuitous event shall not relieve liability.
• Fortuitous event only holds true when the obligation In view of the alleged incorporation of the pawnshop, the issue
consists in the delivery of a determinate thing. It does of whether petitioner Sicam is personally liable is inextricably
not apply when the obligation is pecuniary in nature, connected with the determination of the question whether the
doctrine should apply to the case.
Article 1263 in an obligation to deliver a generic thing, the loss
or destruction of such does not extinguish obligation. Genus of Are the petitioners exempted from liability since robbery is a
a thing can never perish. An obligation to pay money is generic, fortuitous event and they were not negligent?
therefore, it is not excused by force majeure.
• Where fire is force majeure or not are immaterial what Fortuitous Events and Requirement of Diligence
is relevant here is that whether petitioner has The burden of proving that the loss was due to a fortuitous
outstanding account to IMC and LSPI. event rests on him who invokes it. And, in order for a fortuitous
event to exempt one from liability, it is necessary that one has
On Subrogation. No proof of full settlement, no subrogation not committed negligence or misconduct that may have
receipt was offered in evidence. There is no evidence that occasioned the loss.
respondent has been subrogated to any right which LSPI may
have against petitioner. Subrogation occurs when an insurance An act of God cannot be invoked to protect a person who has
company which pays its insured client for injuries and losses failed to take steps to forestall the possible adverse
then sues the party which the injured person contends caused consequences of such a loss. One’s negligence may have
the damages to him/her. concurred and would not exempt liability.
In the case: Sicam had testified that there was a security guard
in their pawnshop at the time of the robbery. And testified that
he intended to have a separate fault. But they failed to show
that they were free from any negligence.
Robbery Per Se is not a Fortuitous Event

It does not foreclose the possibility of negligence. The fact that
a thing was unlawfully and forcefully taken from another’s
rightful possession does not automatically give rise to a
fortuitous event. To be considered as such, it must be proved
and established that the event was an act of God or was done
solely by third person and that neither the claimant nor the
person alleged to be negligent has any participation.
In the case: Petitioners merely presented the police report of

the police station which is not sufficient to prove robbery and
does not show that they were not at fault.
On Diligence. Article 2209 provides that the creditor shall take

care of the thing pledge with the diligence of a good father of
a family. This means that petitioners must take care o the pawns
the way a prudent person would as to his own property.
In the case: A review of the records clearly shows that

petitioners failed to exercise reasonable care and caution that
an ordinarily prudent person would have used in the same
situation. Sicam’s testimony reveals that the vault was partly
open, and the combination was off.
• This reveals that there were no security measures
adopted by petitioners in the operation of the
pawnshop.
• No sufficient precaution and vigilance were adopted
by petitioners to protect the pawnshop from unlawful
intrusion.
• There was no clear showing that there was any security
at all. Or if there was one, that he had sufficient
training in securing a pawnshop. He was unable to
notice that the robbers were armed with pistols.
• The security guards were not presented at all to
corroborate Sicam’s claim. Not one of the petitioner’s
employee was present during the robbery incident.
Held: Preponderance of evidence shows that petitioners failed

to exercise the diligence required under Article 1173. The
diligence with which the law requires the individual at all times
to govern his conduct varies with the nature of the situation in
which he is placed and the importance of the act which he is to
perform.
CHAPTER 3 Resolutory – its happening extinguishes the

DIFFERENT KINDS OF OBLIGATIONS obligation which is already existing or non-fulfillment
of the condition extinguishes existing obligation.
Classification of Obligations
The Civil Code classifies obligations primarily into: 2. Potestative – depends upon the will of the debtor
1. Pure Casual – depends on the chance/will of third person
2. Conditional Mixed – depends party on will and chance of the third
3. With a term person in the relation.
4. Alternative
5. Joint or mancommunada 3. Divisible – capable of partial fulfillment
6. Solidary or several or in solidum Indivisible – incapable of partial fulfillment
7. Divisible
8. Indivisible 4. Positive – an act is to be performed
9. With a Penal Clause Negative – something will be omitted
SECTION 1. – PURE AND CONDITIONAL OBLIGATIONS

5. Conjunctive – if all the conditions are performed
ARTICLE 1179 Alternative – if only a few of the conditions must be
Every obligation whose performance does not depend upon performed.
a future or uncertain event, or upon a past event unknown to
the parties, is demandable at once. ARTICLE 1180
When the debtor binds himself to pay when his means
Every obligation which contains a resolutory condition shall permit him to do so, the obligation shall be deemed to be one
also be demandable, without prejudice to the effects with a period, subject to the provisions of Article 1197.
happening the event.
Court to Fix Period
Pure Obligation This is when the payment does not depend on the will of the
It is an obligation which contains no term or condition whatever debtor for he binds himself to pay. The creditor should file an
upon which depends the fulfillment of the obligation action to enforce the obligation. The courts will fix the duration
contracted by the debtor, the obligation is a pure obligation. It of the period.
is immediately demandable and there is nothing to exempt the
debtor from compliance therewith. ARTICLE 1181
In conditional obligations, the acquisition of rights, as well as
Example. A promissory note stating that A promises to pay B on the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes
a certain date, is held to be a pure obligation. This is because it
the condition.
was held to contain no term or condition whatever upon which
the fulfillment of the obligation contracted by the debtors was
Suspensive and Resolutory Conditions
made to depend and that there existed no motive or reason
• Suspensive Condition – if this happens, the obligation
that exempted them from compliance therewith.
arises, if it does not happen, the obligation does not
come into existence.
Instances when Obligation is Demandable at Once
1. When it is pure
• Resolutory Condition – if this happens, it extinguishes
2. When it has a resolutory condition
rights and obligations already existing. Also known as
condition subsequent.
Conditional Obligations
It is one that is subject to conditions. It is dependent upon the
ARTICLE 1182
terms and conditions that would affect legal relation. When the fulfillment of the condition depends upon the sole
will of the debtor, the conditional obligation shall be void. If
• Conditions – has been defined as every future and it depends upon chance or upon the will of a third person, the
uncertain event upon which an obligation or provision obligation shall take effect in conformity with the provisions
is made to depend. It is an event upon which the of this Code.
acquisition or resolution of rights is made to depend
by those who execute the juridical acts. Definitions and Examples
Potestative Condition – depends upon the will of the
• Term – that which necessarily must come whether the contracting parties. It is one which is in the power of one of the
parties know when it will happen or not. parties to realize or prevent.
Kinds of Conditions • I promise to give you P1,000 if you build a house for
1. Suspensive – its fulfillment gives rise to the me in three months.
obligation, also known as condition precedent. Casual Condition – depends exclusively upon chance or other
factors and not upon the will of the contracting parties. A
condition dependent upon the will of a third party also falls in The condition not to do an impossible thing shall be considered
this class. as not having been agreed upon, this should be understood to
• I will give you my land if war breaks out next month. include all negative impossible conditions. In this case, the
• I will give you P500 if I win this case in the SC. condition is not imposed, and the obligation is considered as
a pure and simple one.
Mixed Condition – This depends upon the will of one of the • I will give you one hectare of land if the sun does not
contracting parties and other circumstances, including the will rise on the 600th day from today.
of the third person.
• I will give you a house, if you marry Nembrod. Effect of Impossible Conditions on Divisible Obligations
When the obligation is divisible that part which is not affected
Kinds of Potestative Condition by the impossible or unlawful condition is valid.
1. Simple Potestative Condition • X promises to pay to Y the sum of P1,000 if Y furnishes
It presupposes not only a manifestation of will but also the X with information as to the whereabout of Z, and
realization of an external act, ‘if you sell your car.’ The simple another sum of P2,000 if Y kills Z. In this case, the first
Potestative condition on the part of the debtor does not condition is valid while the second is void.
prevent the formation of a valid obligation.
• The condition obviously depends on one of the ARTICLE 1184
parties’ will but in consequence of external The condition that some event happen at a determinate time
circumstances which may arise like the need for shall extinguish the obligation as soon as the time expires, or
it has become indubitable that the event will not take place.
money or advantage of transfer (sale of house).
Effect if Period of Fulfillment is Not Fixed

2. Pure Potestative Condition
Instance. An obligation to pay a sum of money is subject to the
It depends solely and exclusively on the will such as statements
condition that a certain person shall arrive at a designated place
including ‘if I like it’ or ‘if I deem it proper.’ It destroys the efficacy
in one year. This obligation shall be extinguished if:
of the legal tie. It is obvious there is no seriousness in this
1. One year passes and he does not arrive at the place
undertaking. It renders the whole obligation void.
2. Such person dies before lapse or arrive
• It is only when the Potestative condition depends
exclusively upon the will of the debtor that the
The Court shall consider the intention of the parties and the
conditional obligation is void.
time shall be that which the parties may have probably
contemplated, considering the nature of obligation.
IN THIS ARTICLE: In cases falling under this article, it is not only
the condition that is void; the whole obligation is void. This
ARTICLE 1185
provision, however, is applicable only when the condition is The condition that some event will not happen at a
suspensive, it cannot apply to resolutory conditions which are determinate time shall render the obligation effective from
valid. Thus, a potestative resolutory condition is made to depend the moment the time indicated has elapsed, or if it has
upon the will of the obligor. The obligation in such case arises become evident that the event cannot occur.
immediately, but the party who has made the reservation may
resolve it when he wishes to. 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.
ARTICLE 1183
Impossible conditions, those contrary to good customs or
public policy and those prohibited by law shall annul the Application
obligation which depends upon them. If the obligation is An obligation to deliver a piece of land to X is subject to the
divisible, that part there of which is not affected by the condition that he shall not marry within two years. The
impossible or unlawful condition shall be valid. obligation shall become effective and the land should be
delivered to X if:
Impossible Conditions 1. Two years expire without X having married
The condition is physically impossible when it is contrary to the 2. X enters priesthood before the two years expire
laws of nature and it is juridically impossible when it is contrary
to law, morals, good customs and public policy. ARTICLE 1186
• Illicit conditions are determined by its effects upon one The condition shall be deemed fulfilled when the obligor
of the parties. The intention shall be considered. voluntarily prevents its fulfillment.
Application: Only to cases where the conditions was already Constructive Fulfillment
impossible from the time of the constitution of the obligation It refers to a condition which, although not exclusively within
and to positive suspensive conditions. Supervening events the will of the debtor, may in some way be prevented by the
which would render the obligation no longer impossible does debtor from happening. The mere intention of the debtor to
not affect of annulling the obligation. prevent its happening, or the mere placing of ineffective
Negative Impossible Conditions obstacles in not sufficient.
Requisites for Constructive Fulfillment
1. Intent of the obligor to prevent fulfillment of the The creditor may, before the fulfillment of the condition,
condition bring the appropriate actions for the preservation his right.
2. Actual prevention of compliance
The debtor may recover what during the same he has paid by
mistake in case of a suspensive condition.
Example: X promises to pay Y a certain sum if the latter, within
a certain time, makes dikes along sides of a canal through which
Preservation of the Creditor’s Rights
X conducts water to his land. When work is started by Y, X
Inasmuch as pending the happening of the suspensive
deviates the flow of the water to enable Y to make the dikes.
condition the creditor has only an expectancy and cannot
• But before Y has finished the work, X allows water to
compel the debtor to perform, acts or events that may take
run again through the canal, thus preventing Y from
place which might render his right illusory when the condition
finishing the work in time agreed upon.
happens. Hence, he is given remedies to preserve his rights.
• The condition shall be deemed as fulfilled in this case.
1. To prevent loss or deterioration of the things which
are the objects of the obligation by enjoining or
Exception to Constructive Fulfillment
restraining the alienation or destruction by the debtor
Where the act of the debtor, however, although voluntary, did
or by third persons.
not have for its purpose the prevention of fulfillment of the
2. Petition for the annotation of the creditor’s right if real
condition, will not fall under Article 1186.
property is involved.
3. Action to demand security in case debtor’s insolvent.
Example: A promised to pay B a certain amount if the latter
4. Action to set aside alienation made by the debtor in
constructs a wall for the former within a certain number of days.
fraud of the creditors.
Before the work is finished, A prosecutes B for a crime
committed against him, resulting to B’s imprisonment and non-
Payment Before Condition
fulfillment of the condition
Article 1188(2) permits the debtor who paid before the
happening of the condition to recover only when he paid by
Provoking Resolutory Condition
mistake and provided the action to recover is brought before
When the condition is resolutory and not dependent on the will
the action happens.
of the debtor, and debtor unjustifiably provokes or produces
• If the payment was of a determinate thing, and still in
the condition, it will be considered as not fulfilled.
the hands of the creditor, the accion reinvidicatoria will
lie, or else solutio indebiti.
ARTICLE 1187
The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the If not by mistake, recovery is possible or not:
constitution of the obligation. Nevertheless, when the 1. If condition is fulfilled, no recovery.
obligation imposes reciprocal prestations upon the parties, 2. If not fulfilled, there must be recovery unless it was
the fruits and interests during the pendency of the condition intended to be of pure donation.
shall be deemed to have been mutually compensated. If the
obligation is unilateral, the debtor shall appropriate the ARTICLE 1189
fruits and interests received, unless from the nature and When the conditions have been imposed with the intention
circumstances of the obligation it should be inferred that the of suspending the efficacy of an obligation to give, the
intention of the person constituting the same was different. following rules shall be observed in case of the improvement,
loss or deterioration of the thing during the pendency of the
In obligation to and not to do, the courts shall determine in condition:
each case, the retroactive effect of the condition that has (1) If the thing is lost without the fault of the debtor, the
been complied with. obligation shall be extinguished.
(2) If the thing is lost through the fault o the debtor, he
Retroactivity of the Condition shall be obliged to pay damages; it is understood
The application of the principle of retroactivity of conditional that the things is lost when it perishes, or goes out
obligations is not absolute. It is subject to certain limitations. of commerce, or disappears in such a way that its
existence is unknown, or it cannot be recovered;
(3) When the thing deteriorates without the fault of the
Conditional To give, once fulfilled shall retroact to the day
debtor, the impairment is to be borne by the
of the constitution of the obligation. creditor;
Reciprocal Fruits and interests, during the pendency shall (4) If it deteriorates through the fault of the debtor, the
considered as mutually compensated. creditor may choose between the rescission of the
Unilateral Debtor shall appropriate the fruits and obligation and its fulfillment, with indemnity for
interest received unless from the nature of damages in either case;
(5) If the thing is improved by its nature, or by time, the
the obligation it should be inferred that the
improvement shall inure to the benefit of the
intention was different. creditor;
Not/ To Do The court shall determine the retroactive (6) If it is improved at the expense of the debtor, shall
effect of the condition that has been have no other right than that granted to the
complied with. usufructuary.
ARTICLE 1188 Loss of the Thing
1. When it perishes The power to rescind obligations is implied in reciprocal

2. When it goes out of the commerce of man ones, in case one of the obligors should not comply with what
3. When it disappears in such a manner that its existence is incumbent upon him.
is unknown or cannot be recovered
The injured party may choose between the fulfillment and
If loss is due to the fault of the debtor, he becomes liable for the rescission of the obligation, with the payment of damages
damages to the creditor upon the fulfillment of the obligation. in either case. He may also seek rescission, even after he has
But if without fault, obligation is extinguished, unless there is a chosen fulfillment, if the latter should become impossible.
stipulation to the contrary.
The court shall decree the rescission claimed, unless there
Deterioration of the Thing be just cause authorizing the fixing of the period.
Deterioration is any reduction or impairment in the substance
This is understood to be without prejudice to the rights of
or value of a thing which does not amount to a loss. In other third persons who have acquired the thing, in accordance
words, the thing still exists at the time the condition is fulfilled, with Articles 1386 and 1388 and the Mortgage Law.
but it is no longer intact, or is less than what is was.
• If not imputable to the debtor, he is not liable for any Characteristics of Right to Rescind
damages and must accept in its impaired condition. 1. Exists only in reciprocal obligations. If there is a fixed
• If due to the debtor, then the creditor ay either period, no actions can be done before the expiration
demand for the thing or ask for rescission, with of the period.
damages in either case. 2. It can be demanded only if the plaintiff is ready, willing
and able to comply with his own obligation and the
Improvement of a Thing other is not
Anything added in, incorporated in, or attached to the thing 3. It is not absolute
due is considered an improvement. Slight breach is not sufficient. The right to rescind is
• If caused by nature or by time, such as alluvion, this not absolute and will not be granted if there has been
improvement shall be to the benefit of the creditor. substantial performance by partial payments (Tayag).
• If it was at the expense of the debtor, the law says he 4. It needs judicial approval in some cases
shall have the same rights as a usufructuary with If there is delivery, judicial approval is needed.
respect to the improvement. 5. The right to rescind is implied to exist
6. The right to rescind may be waived expressly or
Usufructuary rights – this means that the debtor without impliedly
damage to the hang due, may remove the same, but if the
removal cannot be made without injury to the thing due, then Reciprocal Obligations
the improvement must be delivered together with the thing to Article 1191 only applies when there are reciprocal obligations.
the creditor without the latter paying any indemnity. There must be reciprocity between them. Both relations must
arise from the same cause, such that one obligation is
ARTICLE 1190 correlative to the other. They must not be mutually obligated,
When the conditions have for their purpose the
but should have reciprocity which arises from identity of cause,
extinguishment of an obligation to give, the parties, upon
fulfillment of said conditions, shall return to each other what and two obligations created at the same time.
they have received.
Reciprocal obligations are those which arise from the same
In case of loss, deterioration or improvement of the thing, the cause, and in which each party is a debtor and a creditor of the
provisions which, with respect to the debtor, are laid down other, such tat the obligation of one is dependent upon the
in the preceding article shall be applied to the party who is obligation of the other. They are to be performed simultaneously
bound to return.
so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.
As for obligations to do and not to do, the provisions of the
second paragraph of Article 1187 shall be observed as to the
effect of the extinguishment of the obligation. Tacit Resolutory Condition
Article 1191 recognizes that there is an implied or tacit
Effect When Resolutory Conditions is Fulfilled resolutory condition in reciprocal obligations. It is a condition
In conditional obligations, the rights of the creditor are vested imposed by law.
but are always in the danger of being extinguished by • Delay in reciprocal obligations happen when one
happening of the resolutory condition. party has performed his part of the contract, the other
1. Obligation is extinguished party now is in delay, for it should be simultaneous.
2. Parties shall return what they have received, including • The party who has performed or is ready and willing
fruits sand interests. to perform may rescind the obligation if the other
3. Courts shall determine the retroactivity. does not perform or is not ready and willing to
4. In case of loss, deterioration, or improvement apply perform.
Article 1189.
ARTICLE 1191 Power to Rescind, Party Entitled
The power to rescind is given to the injured party. Where the Article 1181. – Acquisition and Extinguishment of Rights
plaintiff is the party who did not perform the undertaking which
he was bound to do is not entitled to insist upon the DEVELOPMENT BANK v. COURT OF APPEALS (1996)
performance of the contract because of his own breach.
• An action for specific performance is an equitable Facts: Private respondents were the original owners of a parcel
proceeding, and he who seeks to enforce it must also of agricultural land covered by TCT No. T-1432, situated in
come in equity. Barrio Capucao, Ozamis, City of 113,695 sq.m. On 30 May 1977,
private respondents mortgaged the said land to the petitioner,
Where one party fails to comply with his obligation under a and the latter foreclosed the mortgage on the land and emerged
contract, the other party has the right to either: as the sole bidder in the ensuing action sale (TCT T-10913).
(1) Demand performance
(2) Ask for the resolution of the contract April 6, 1984, they entered into a Deed of Conditional Sale
The choice remains with the injured party. The defendant wherein petitioner agreed to reconvey the foreclosed property
cannot set up the defense that his liability was satisfied by his to the private respondents, agreement are as follows:
having waived of the payment in an installment agreement.
Vendees offered to repurchase, and the Vendor agree to sell the
If both parties are in breach of obligation and it cannot be property for the sum of P73,700 with a down payment of P8,900 and
the balance shall be payable in six years on equal quarterly amortization
determined who was the first infractor, the contract shall be
plan at 18% interest per annum. The first quarterly amortization of
deemed extinguished and each shall bear his own damages.
P4,470.36 shall be payable three months from the date of the execution
of the documents. That upon completion of the payment herein
Damages for Breach of Lease Contract stipulated and agreed, the Vendor agrees to deliver to the Vendees a
If lessor demands rescission, he gets only the back rents and good and sufficient deed of conveyance covering the property, subject
ouster the lessee plus damages but not future events. Even if matter of this deed of condition sale.
there is no corresponding agreement between the parties the
law provides for such power to rescind. On April 6, 1990, upon completing the payment of the full
• This article does not apply when the parties made a repurchase price, they demanded from the petition the
stipulation providing for the automatic rescission of execution of the Deed of Conveyance in their favor. Petitioner
the contract in case of violation of terms thereof informed that the prestation to execute had become legally
without need of judicial intervention. impossible in view of the Comprehensive Agrarian Reform Law.
• Complained specific performance with damages.
Declaration of Rescission
The rescission may take place by the declaration of the inured Did the subject property become a legally impossible prestation
party, rescission is a power which does not require the previous due to the enactment of the CARL?
declaration by the courts.
Acquisition and Loss of Rights in Conditional Obligations
Extrajudicial rescission produces legal effects. Once one of the The acquisition as well as the extinguishment or loss of those
parties fails to comply with his obligation, the other is relieved already acquired shall depend upon the happening of the event
from complying his, and he may therefore by his own which constitutes the condition.
declaration elect to rescind by not performing his own
undertaking. IN THE CASE: The deed of conditional sale between petitioner
and private respondents was executed on April 6, 1984 and
When can there be extrajudicial or judicial rescission? that they paid religiously the agreed installments until they
When there has been no performance of the obligation or completed the payment on April 6, 1990. Petitioner in fact, had
whatsoever. If not performed yet, the extrajudicial rescission allowed them to fulfill the condition effecting full payment and
would suffice. However, if the injured party has already then invoked Section 6 of RA 6657 only after private
performed his obligation, he cannot by his own declaration respondents have fully paid the repurchase price.
rescind the contract. Hence, the court must declare rescission.
• He cannot by his own declaration rescind the contract On the contention that RA 6657 rendered prestation impossible:
and reacquire title to the property if the other party It will be noted that RA 6657 was enacted on June 10, 1988.
opposes the rescission. However, neither RA 6657 nor EO 407 was intended to impair
• Court to declare that the rescission has been properly the obligation of contract petition had much earlier concluded
made or give the debtor a period for him to perform. with the private respondents.
If the debtor impugns the declaration of rescission, it shall be • The last paragraph of Section 6 of RA 6657 provides
OBLIGATIONS AND
subject to judicial determination. that “any sale, lease or possession of private lands
executed by the original landowner.
CONTRACTS The original landowner in this case is not the bank but the
Articles 1179-1192 private respondents. Petitioner acquired the land through the
JURISPRUDENCE NOTES foreclosure proceedings but agreed reconveyance.
• Section 6 of RA 6657 deals with the retention limits • The donation had to be valid before the fulfillment of
allowed by law to small landowners. Since the the condition.
property is ten hectares, it is then within the • If there was no fulfillment or compliance with the
jurisdiction of the DAR to determine whether the condition, such as what happened in this case, the
property can be subjected to agrarian reform. donation may now be revoked and all rights which the
donee may have acquired under it shall be deemed to
The law did not intend to take away property without due be lost or extinguished.
process of law. Nor is it intended to impair the obligation of
contracts. EO 407 was also enacted two months after private No More Need to Fix the Duration of a Term
respondents fulfilled condition and these laws cannot have When Such Would Delay or Lead to Unnecessary Suits
retroactive effect unless express provision in them. On the defense of prescription. The condition imposed by the
donor depended upon the exclusive will of the donee when this
Held: The decision of the RTC to grant the petition of the condition shall be fulfilled. Since the time depended on such, it
private respondents on the delivery of obligation is affirmed. has been held that its absolute acceptance and the
acknowledgment of the obligation were sufficient to prevent
CENTRAL PHILIPPINES UNIVERSITY v. CA (1995) the statute of limitation from barring such agreement.
Facts: Sometime in 1939, the late Don Ramon Lopez, Sr., who As a rule, when the obligation does not fix a period but from its
was then a member of the Board of Trustees of the CPU nature and circumstances a period was intended then Article
executed a Deed of Donation in favor of the latter of a parcel 1197 provides that the Courts may fix the duration because the
of land issued in the name of the CPU with annotations: fulfillment of the obligation cannot be demanded.
1. The land described shall be utilized by the CPU exclusively
for the establishment and use of a medical college with all In this case: This general rule cannot be applied in this case.
its buildings as part of the curriculum. More than a reasonable period of fifty years has already been
2. The said college shall not sell, transfer, or convey to any third allowed petitioner to avail the opportunity to comply with the
party nor in any way encumber said land. condition even if it be burdensome, to make the donation in its
3. The said land shall be called Ramon Lopez Campus and the favor to be forever valid. It failed to do so.
said college shall be under obligation to erect a cornerstone
• There is no more need to fix the duration of a term of
bearing such name. Any net income shall be put into a fund
an obligation when such procedure would be a mere
knows as Ramon Lopez Campus fund to be used for the
improvements of said campus and erection of building. technicality of formality and would serve no purpose
than to delay or lead to an unnecessary and expensive
On May 31, 1989, the private respondents who are the heirs of multiplication of suits.
Don Ramon Lopez, Sr., filed an action for Annulment of the
Donation, Reconveyance and Damages against the CPU Article 1184. – Positive Condition
alleging that since 1939 up to the time the action was filed the
latter had not complied with the conditions of the donation. MEGAWORLD, INC. v. MAJESTIC FINANCE (2015)
Petitioners argue that the action had prescribed.
Facts: On September 23, 1994, Megaworld Properties
RTC. Held petitioner to have failed to comply with the (developer) entered into a Joint Venture Agreement (JVA)
conditions of the donation and declared it null and void. CA with Majestic Finance (owner) for the development of
ruled that the annotation was resolutory conditions that in case residential subdivision located in Cavite.
of breach it was considered to have terminated the rights and
remanded the case for determination of the period. According to the JVA, the development of the 215 hectares of
land belonging to the owner would be for the sole account of
Was there a breach on the conditions stipulated in the deed of the developer and upon completion of the development of the
donation committed by the CPU? subdivision, the owner would compensate the developer in the
form of saleable residential subdivision lots.
Onerous Donation and Resolutory Conditions • Developer would advance all costs for the relocation
It was a donation executed for a valuable consideration which and resettlement of the occupants in the joint venture
imposes a burden which requires the latter to comply. This is property subject to reimbursement of the owners.
applied in the Deed of Donation executed between Ramon •
Lopez Sr. and the Central Philippines University. • Developer would deposit the initial amount of P10M
to defray the expenses for the relocation and
Article 1181 of the Civil Code provides that on conditional settlement and the costs for obtaining Government
obligation, the acquisition of rights, as well as the permits and required clearances.
extinguishment as those acquired shall depend.
When a person donates land to another on the condition that the On September 24, 1994, the developer and owner agreed,
latter would build upon the land a school, the condition imposed through an addendum to the JVA to increase initial deposit of
was not a suspensive condition, it was resolutory. P10M to P60M.
soon as the time expires, or if it has become indubitable that

On October 27, 1994, the developer by Deed of Assignment the event will not take place.
transferred, conveyed and assigned to Empire East Land
Holdings (developer/assignee) all its rights and obligations In this case: The common cause of the parties in entering into
under the JVA including the addendum. the joint venture was the development of the joint venture
property into the residential subdivision as to eventually profit
On February 29, 2000, Majestic filed RTC for specific therefrom. Consequently, all of the obligations under the JVA
performance with damages against the developer, the were subject to the happening of the complete development of
developer/assignee and Andrew Tan. It was based on the failure the joint venture property, or if it would become indubitable that
of the petitioner to comply with their obligation under the JVA, the completion would not take place.
including the obligation to maintain a strong security force to • Should any of the obligations whether continuous or
safeguard the property from illegal entrants and occupants. activity be not performed, all other remaining
• There was an attempt to reach amicable settlement. obligations would not ripen into demandable
obligations while those already performed would
On September 16, 2002, Majestic filed again that petitioners be cease to take effect.
directed to provide round the clock security for the property to
defend and protect it from invasion of unauthorized persons. Delay in Reciprocal Obligations
Petitioners opposed alleging that (1) it was premature and that Being reciprocal in nature, their respective obligations as the
(2) under the principle of reciprocal obligations, the owner owner and the developer were dependent upon the
could not compel them to perform their obligations under the performance by the other of its obligations; hence, any claim of
JVA if owner does not honor its obligations. delay or nonperformance against the other could prosper only
if the complaining party had faithfully complied with its own
Can the owner can compel developer to comply with their correlative obligation.
obligation to provide security?
In the case: The record is bereft of the proof to support that
Joint Venture Agree is a Reciprocal Obligation Majestic had perform its obligation as to place itself in the
They are those that arise from the same cause and in which position to demand from the developer. There was also
each party is a debtor and creditor to each other at the same insufficient showing that the developer failed to provide
time such that the obligations of one are dependent upon the security for the protection of the property.
obligations of the other. They are to be performed
simultaneously so that the performance by one is conditioned Article 1186. – Constructive Fulfillment
upon the simultaneous fulfillment of the other.
TAYAG v. COURT OF APPEALS (1993)
The determination of default on the part of either of the parties
depends on the terms of the JVA categorized into two types: Facts: On May 28, 1975, Juan Galicia Sr., and Celerina Labuguin
1. Continuous Obligations – these are which to be executed a Deed of Conveyance involving an undivided one-
continuously performed from the execution of the JVA half portion of a piece of land situated at Nueva Ecija for P50K.
until the parties achieved the purpose of venture. This is the subject matter of the heirs of Galicia who assert
a. Developer would secure property from breach of the conditions as against private respondent’s claim
unauthorized occupants. anchored on full payment and compliance with stipulations.
b. Owner would allow developer to take • P9,707 was only tendered (P10K – ten-day agreement)
possession of the property. • P6,926 only of P10K assumption of the debt from bank
c. Owner would deliver documents necessary • Not a single centavo of remaining P27K was paid.
for the accomplishment of activities. RTC ordered the heirs to execute the Deed of Sale of the
property in favor of Albrigido Leyva.
2. Activity Obligations
a. Relocation Estoppel or Waiver by Acceptance of Delayed Payments
b. Completion of development plan Instead of immediately filing the case precisely to rescind the
c. Securing exemption and conversion permits instrument because of non-compliance, allowed private
d. Obtention of development permits respondent to effect numerous payments posterior to the grace
e. Development of the subject land periods provided in the contract. This apathy of petitioners who
f. Issuance of titles for the subdivided lots even permitted private respondent to take the initiative in filing
g. Selling of the subdivided lots the suit for specific performance against them, is akin to waiver
In each activity, the obligation of each party was dependent or abandonment of the right to rescind normally conferred by
upon the obligation of the other. The performance of an activity Article 1191 of the Civil Code.
obligation was still conditioned on the continuous.
Positive Condition on Unfixed Period of Fulfillment Indeed, the right to rescind is not absolute and will not be
According to Article 1184, the condition that some event granted where there has been substantial compliance by partial
happen at a determinate time shall extinguish the obligation as payment. By and large, petitioners' actuation is susceptible of
but one construction—that they are now estopped from he puts issue in his pleading, among others, its failure to
reneging from their commitment because acceptance of express the true intent and agreement of the parties thereto.
benefits arising from overdue accounts of private respondent.
• Consignation has the effect of payment in the case at Article 1191 on Resolution is Predicated on Breach of Faith
bar because the heirs claimed the same right to collect Rescission will not be permitted for a slight or casual breach of
such and they did not dispute such allegation. contract. Rescission may be had only for such breaches that are
substantial and fundamental as to defeat the object of the
Article 1191. – Resolution/Rescission parties in making the agreement. The question upon what is
substantial depends on the attending circumstances and not
CANNU v. GALANG (2005) merely on the percentage of the amount not paid.
Facts: A complaint for Specific Performance and Damages was In the case: The Court finds the petitioners failure to pay the
filed by petitioners-spouses Felipe and Leticia Cannu against balance of P45,000 to be substantial the percentage of 18% is
respondents-spouses Gil and Fernandina Galang and the still substantial taken together the fact that the last payment
National Home Mortgage Finance Corporation (NHMFC). was made on eighteen months before Galang (owner) herself
Respondents obtained a loan from Fortune Savings & Loan paid the remaining balance thus the intention of the petitioners
Association for P173,800.00 to purchase a house and lot located to renege on their obligation is utterly clear.
at Las Piñas, with an area of 150 square meters.
On the Allegation of Tender of Payment
To secure payment, a REM was constituted on the said house The fact that petitioners tendered a Manager’s Check to
and lot in favor of Fortune Savings and Loan and in 1990 the respondents-spouses Galang in the amount of P278,957.00
NHMFC purchased the mortgage loan for a price of P173,800. seven months after the filing of this case is of no moment.
Respondent Galang authorized her attorney-in-fact Timbang Tender of payment does not by itself produce legal payment,
to sell the house and lot. unless it is completed by consignation.
Petitioner Leticia Cannu agreed to buy the property for Petitioners did Not Religiously Pay
P120,000 and to assume the balance of the mortgage As admitted by them, in the span of three years from 1990 to
obligations with the NHMFC and CERF Realty. They have a 1993, their payments covered only thirty months. This, indeed,
balance of P45,000. A Deed of Sale with Assumption of constitutes another breach or violation. On top of this, there
Mortgage Obligation on August 20, 1990 was made and was no formal assumption of the mortgage obligation with
entered between spouses Galang and spouses Cannu. NHMFC because of the lack of approval by the NHMFC because
petitioners’ non-submission of requirements to be considered
Despite requests from Adelina R. Timbang and Galang to have as assignees/successors-in-interest over the property covered
them pay the balance of P45,000 or in alternative to vacate the by the mortgage obligation.
property in question, the petitioners refused to do so.
Demand was Made upon the Petitioners
In 1993, Cannu informed the Vice President of the NHMFC that There is sufficient evidence showing that demands were made
the property’s ownership rights have been transferred to her from petitioners to comply with their obligation. Adelina R.
per deed of sale with assumption mortgage and that they were Timbang, attorney-in-fact of respondents-spouses, per
obliged to assume the mortgage and pay the remaining unpaid instruction of respondent Fernandina Galang, made constant
loan balance, but the formal assumption was not approved. follow-ups after the last payment made on 28 November 1991,
but petitioners did not pay.
Because Cannu failed to fully comply with their obligations,
respondent Galang on May 21, 1993 paid P233,957 as full There is no waiver. The fact that respondents-spouses
payment of her remaining mortgage with the NHMFC. accepted, through their attorney-in-fact, payments in
• Petitioners oppose such release because the subject installments does not constitute waiver on their part to exercise
property has already been sold to them. their right to rescind. Adelina Timbang merely accepted the
• They filed a Complaint for Specific Performance asking installment payments as an accommodation to petitioners
that Cannu be declared the owners of the property since they kept on promising they would pay. It was only after
involved subject to reimbursements. petitioners stopped paying that respondents-spouses
• NHMFC answered that they have no cause of action moved to exercise their right of rescission.
because they failed to pay the consideration.
On Demandability of the Obligation
Discussion: What is clear is that the agreement of the Deed of Galang complied with their obligation when they gave the
Sale with Assumption of Mortgage is a consideration of P120K possession of the property in question to petitioners. Thus, they
plus the outstanding loan mortgage. have the right to ask for the rescission of the Deed of Sale with
Under the Rules of Court, a party may present evidence to Assumption of Mortgage.
modify, explain or add to the terms of the written agreement if Rescission under Article 1191 and 1381, Distinguished
As discussed by Justice Reyes in the case of Universal Food Corp (1) were old;
v. Court of Appeals Article 1191 is different from 1381: (2) did not have instruction manuals and warranty
certificates;
Article 1191 Article 1381 (3) contained indications of being reconditioned
It is predicated on the It is because of lesion or machines; and
breach of faith by the economic prejudice based (4) did not meet the IMO and CHED standards.
defendant that violates the on pecuniary injury. Northwestern demanded compliance with the agreement and
reciprocity between the suggested that GL Enterprises meet with the former’s
parties. representatives to iron out the situation.
It is a principal action based It is a subsidiary action.
on breach that violates the Instead of heeding such suggestion, GL Enterprises filed a
reciprocity. complaint for breach of contract and prayed for P1.97M
Only on reciprocal Applicable to unilateral representing how much it could have earned.
obligations. obligations. • Petitioner alleged that Northwestern breached the
Only among the parties, It can be invoked by a third contracts by ordering the work stoppage and thus
especially injured party. person. preventing the installation of the materials for the IBS.
In the case: The reciprocity between parties was violated when Was there substantial breach of the contracts that would
the petitioners failed to fully pay the P45,000 to the respondent warrant the application of Article 1191?
spouses and failure to update their amortizations.
Substantial Breaches of the Contracts
Held: Having found that petitioners seriously breached the The contracts require no less than substantial breach before
contract, therefore the Court declares the same as rescinded in they can be rescinded. As held in Cannu v. Galang, the question
favor of the Galang spouses. Because of the rescission, it is the of whether a breach of contract is substantial depends upon the
duty of the court to require the parties to surrender whatever attending circumstances.
they may have received from each other and that parties should
be restored to their original situation. In the case: The parties explicitly agreed that the materials to
be delivered must be compliant with the CHED and IMO
MAGLASANG v. NORTHWESTERN UNIVERSITY (2013) standards and must be complete with manuals.
Facts: On June 10, 2004 respondent Northwestern University Evidently, the materials delivered were less likely to pass the
engaged the services of GL Enterprises to install a new IBS in CHED standards, because the navigation system to be installed
Laoag City for it was required for training laboratory so that the might not accurately point to the true north; and the steering
school could offer maritime transportation programs. well was one from automobile rather than those from the ships.
GL Enterprises did not dispute the allegation their equipment
• Since its Integrated Bridge System was obsolete it being substandard.
required the petitioner to supply and install specific
components to perform standards required. On the Allegation that CHED must check Standards
Allegation not sustained. Respondent could not just “sit still and
They executed two contracts with the similar provisions: wait for such day that its accreditation may not be granted by
(1) The IBS and its components must be compliant with CHED due to the apparent substandard equipment installed in
IMO and CHED standards. the bridge system.” The appellate court correctly emphasized
(2) The contracts ay be terminated if one party commits a that, by that time, both parties would have incurred more costs
substantial breach of its undertaking. for nothing. The stoppage of the installation was justified.
(3) Any dispute under the agreement shall first be settled
mutually between the parties before court action. SWIRE REALTY DEVELOPMENT v. YU (2015)
Subsequently respondent Northwestern paid P1M as Facts: Respondent Jane Yu and Swire Realty entered into a
downpayment to the GL Enterprises. Two months after the Contract to Sell on July 25, 1995 covering one residential
execution of the contracts, GL Enterprises technicians delivered condominium unit at Makati City with an area of 137.30 sq.m.
various materials to the project site. for the contract price of P7,519,371 payable in equal monthly
• When they start installing the components installments until September 24, 1997. Respondent likewise
respondent halted the operations. purchased a parking slot in the same building for P600K.
Northwestern justified the work stoppage upon its finding that On September 24, 1997 (due date) she paid the full purchase
the delivered equipment was substandard. It explained further price for the unit while making a downpayment of P20K for the
that GL Enterprises violated the terms and conditions of the parking lot. Notwithstanding such, petitioner failed to complete
contracts. and deliver the subject unit on time.
The reasons constituting the allegation because equipment:
This prompted Yu to file a Complain for Rescission of Contract On June 13, 1996, Fong sent a letter to Duenas informing him
with Damages before the Housing and Land Use Regulatory of his decision to limit his total contribution from P32.5M to
Board (HLURB-NCR). In 2004, it dismissed the complaint for it P5M. Pertinent parts of the letters are as follows:
was of slight or casual breach and not substantial. Upon • Faced with personal factors which resulted to turning down
elevation to the HLURB-BOC it was ordered to be rescinded. of many business opportunities.
However, upon elevation to the Office of the President (OP), it • For us, it does not make sense anymore to go for a significant
shareholding when we cannot be hands on and participate
held that the breach was not substantial.
actively as originally planned. For your information, we will
probably be giving up our subway franchise too.
Is the breach substantial to warrant the application of the • Together with our business advisers and legal counsel, we
Article 1191 on the rescission of the obligation? came to a decision to hold our commitment (from advances to
investment) at P5 million only for now from the original plan
Right to Rescind Obligations under Article 1191 of P32.5 million, if this is acceptable to you.
Basic is the rule that the right of rescission of a party to an • We have put our money down in trust and good faith despite
obligation under Article 1191 is predicated on a breach of faith the much-delayed financials.
by the other party who violates the reciprocity between them.
Fong observed that despite his P5M contribution, Duenas still
The breach contemplate is the obligor’s failure to comply with
failed to give him the financial documents on the valuation of
an existing obligation. When obligor cannot comply, the
the Danton and Bakcom shares.
obligation may seek rescission.
• In addition, Duenas failed to have Alliance be
registered and incorporate with the SEC.
In the case: Even the extension granted, the unit was not yet
finished as the kitchen cabinets and fixtures were not yet
These circumstances convinced Fong that Dueñas would no
installed and the agreed amenities were not yet available upon
longer honor his obligations in their joint venture agreement.
inspection of the HLURB-NCR. It is evident that the report on
thus, on October 30, 1997, Fong wrote Dueñas informing him
the ocular inspection conducted on the subject condominium
of his decision to cancel the joint venture agreement.
project and subject unit shows that the amenities under the
• He also asked for the refund of the P5 Million that he
approved plan has not been provided as of May 3, 2002 and
advanced.
was not delivered to the respondent which is beyond the
• Dueñas admitted that he could not immediately
extended period of 1999.
return the money since he used it to defray the
business expenses of Danton and Bakcom.
Held: Incontrovertibly, petitioner had incurred delay in the
performance of its obligation amounting to breach of contract
On March 25, 1998, Fong wrote a final letter of demand
as it failed to finish and deliver the unit to respondent within
informing Dueñas that he would file a judicial action against
the stipulated period. The delay in the completion of the project
him should he still fail to pay after receipt of this written
as well as of the delay in the delivery of the unit are breaches
demand. Since Dueñas did not pay, Fong filed a complaint
of statutory and contractual obligations which entitle
against him for collection of a sum of money and damages on
respondent to rescind the contract, demand a refund and
April 24, 1998.
payment of damages.
RTC. Noted that failure to furnish the financial document and

FONG v. DUEÑAS (2015)
almost one-year delay in the incorporation of Alliance which
caused Fong to rescind the JVA.
Facts: Respondent is engaged in the bakery, food
manufacturing and retailing business which are all operated
CA. Reversed. Contrary to the trial court’s ruling, Dueñas
under his two companies D.C. DANTON Inc. (Danton) and
correctly invested Fong’s P5 Million contribution to Bakcom
Bakcom Food Industries (Bakcom). He was an old acquaintance
and Danton. This did not deviate from the parties’ original
of Fong as they were former schoolmates at DLSU.
agreement as eventually, the shares of these two companies
would form part of Alliance’s capital. Fong payment must be
Sometime in November 1996, they entered into a Verbal Joint
treated as share subscription to Alliance.
Venture Contract where they agreed to engage in the food
business and to incorporate a holding company under the
Was the any breach of obligations on the verbal joint venture
name of Alliance Holdings, Inc. (proposed corporation). With
agreement that would warrant rescission?
a capitalization of P65M to which contributes in equal.
• The parties agreed that Fong would contribute
Discussion: On the validity of the joint venture agreement
P32.5M while Duenas would contribute both Danton
which was verbal; the failure to reduce the agreement to writing
and Bakcom shares which he valued also at P32.5M.
does not affect its validity or enforceability as there is no law or
regulation which provides that an agreement to incorporate
Fong required Duenas to submit the financial documents
must be in writing. Thus the agreement to incorporate the
supporting the valuation of such shares. On November 25, 1996
shares of Bakcom, Danton and Boboli is valid under the eyes
Fong started remitting the tranches of his share in the capital
of the law.
while Duenas processed an international license.
The Body rather than Title of Complaint Fong is also in Breach of the Joint Venture Agreement
Determines the Nature of the Action In his letters, although these reasons appear to be valid, they
A well-settled rule in procedural law is that the allegations in do not erase the fact that Fong still reneged on his original
the body of the pleading or the complaint, and not its title, promise to contribute P32.5 Million. Hence, Fong’s
determine the nature of an action. diminution of his capital share to P5 Million also amounted to
a substantial breach of the joint venture agreement, which
IN THE CASE: An examination of Fong’s complaint shows that breach occurred before Fong decided to rescind his agreement
although it was labeled as an action for a sum of money and with Dueñas. Thus, Fong also contributed to the non-
damages, it was actually a complaint for rescission. incorporation of Alliance needed P65M as capital to operate.
• Fong’s allegations primarily pertained to his
cancellation of their verbal agreement because Article 1192 Application on Mutual Breach of Obligation
Dueñas failed to perform his obligations to provide The provision reads, in case both parties have committed a
verifiable documents on the valuation of the breach of the obligation, the liability of the first infractor shall
Danton’s and Bakcom’s shares, and to incorporate be equitably tempered by the courts. If it cannot be determined
the proposed corporation. which of the parties first violated the contract, the same shall
be deemed extinguished, and each shall bear his own damages.
Rescission under Article 1191 is Applicable
Reciprocal obligations are those which arise from the same In the case: The facts, however, show that both parties began
cause, in which each party is a debtor and a creditor of the performing their obligations after executing the joint venture
other, such that the obligation of one is dependent on the agreement. Fong started remitting his share while Dueñas
obligation of the other. started processing the Boboli international license for the
proposed corporation’s food business. The absence of a written
In the case: Fong and Dueñas’ execution of a joint venture contract renders the Court unsure as to whose obligation must
agreement created between them reciprocal obligations that be performed first.
must be performed to fully consummate the contract and • Despite these gray areas, the fact that both Fong and
achieve the purpose for which it was entered into. Dueñas substantially contributed to the non-
incorporation of Alliance and to the failure of their
On the Allegation that Payments are Treated as Subscription food business plans remains certain.
The parties never agreed that Fong would invest his money
in Danton and Bakcom. Contrary to the submission, Fong’s Held: The Court holds that the joint venture agreement
understanding was that his money would be applied to his between Fong and Dueñas is deemed extinguished through
shareholdings in Alliance. rescission under Article 1192 in relation with Article 1191
• According to the Corporation Code, there must be of the Civil Code. Dueñas must therefore return the P5 Million
the existence of 25% of the capital stock, to prove that Fong initially contributed since rescission requires
compliance with this requirement, the SEC requires mutual restitution. After rescission, the parties must go back
the incorporators to submit a treasurer’s affidavit and to their original status before they entered into the agreement.
a certificate of bank deposit, showing the existence of • No damages for each party shall bear own damages.
an amount compliant with the prescribed capital
subscription. ASCANO-CUPINO v. PACIFIC REHOUSE (2015)
This would lead to a conclusion that Fong’s cash contributions Facts: On October 1, 1994 Ascano-Cupino sisters entered a
play an indispensable part in Alliance’s incorporation. The Deed of Conditional Sale with Pacific Rehouse Corporation.
process necessarily requires the money not only to fund The latter obliged itself to purchase from the Ascanos a parcel
Alliance’s registration with the SEC but also its initial capital of land with an area 59,753 sq.m. in Cavite for P5,975,300.
subscription.
• Thus, Dueñas erred when he invested Fong’s Following the terms of the Deed of Conditional Sale, Pacific
contributions in his two companies. This money paid a downpayment of P1,792,590 leaving a balance of
should have been used in processing Alliance’s P4,182,710 to be paid upon the fulfillment of certain conditions:
registration. Its incorporation would not materialize if 1. Completion of all documents necessary for the
there would be no funds for its initial capital. transfer of the certificate of the title of the land.
2. The Ascanos shall guarantee the removal of tenants,
On the Valuation of the Danton and Bakcom squatters and other occupants on the land, with the
Dueñas also failed to deliver the valuation documents of the disturbance compensation be paid by Ascanos.
Danton and Bakcom shares to prove that the combined values 3. Submission by Ascanos to Pacific of the Affidavit of
of their capital contributions amounted to P32.5 Million. Non-Tenancy and the land operation transfer
documents.
These acts led to Dueñas’ delay in incorporating the planned In 1994 asked advance of P600,000 to be deducted from the
holding company, thus resulting in his breach of the purchase price and P1,000,000 in 1995 for the Deed of
contract. Conditional Sale processing.
On February 13, 1995 petitioners submitted to Pacific a Witness is not a party to the contract and is not automatically
Barangay Agrarian Reform Council Certification that the converted to a party simply because, under some other
property was untenanted. And informed Pacific that the other extraneous document or circumstance he was the corporations’
necessary documents were being processed and expected to authorized representative.
be completed next month. • Addendum did not alter the parties’ obligation under
the Original Deed of Sale.
The following month, the petitioners failed to submit the
necessary documents despite several demands from Pacific to Pacific is Entitled to Specific Performance, Article 1191
do such. Instead, they informed Pacific that they wanted to The injured party is the party who has faithfully fulfilled his
rescind the contract and refused to accept payments. obligation or is ready and willing to perform his obligation.”
• Pacific then discovered that petitioners were From the foregoing, Pacific is the injured party, entitled to
negotiating the sale of the property with other elect between rescinding of the contract and exacting
buyers allegedly for a higher consideration. fulfillment of the obligation. It has opted for the remedy of
• Petitioners continued to ignore the demands of Pacific specific performance, as embodied in its Amended Complaint.
prompting it to file for Cancellation of Contract, Sum • Allegation of Lower Price. Check vouchers issued by
of Money and Damages later amended to Specific Pacific for each of its payments, the consideration
Performance no more cancellation. under the contract was stated as P100 per square
meter. These check vouchers were acknowledged and
Petitioners’ Allegation signed by petitioners.
It was Pacific who defaulted in its payment. They maintained
that the real purchase price they agreed upon was P200/sq.m. Held: Specific Performance granted. Pacific, therefore, has a
or a total of P11,950,600 and that allegedly the much lower balance of P1,577,530 to be paid upon the fulfillment by
amount was stated under Pacific’s request to lower taxes. petitioners of their obligations under the Deed of Conditional
• Addendum: Pacific undertook the obligation to pay Sale. Thereafter, petitioners are to execute the Deed of Absolute
the tenants of the disturbance compensation Sale in favor of Pacific and deliver all the necessary documents
amounting to P792K but was never paid to the tenants to consummate the sale.
in violation the addendum to the stipulations.
NOLASCO v. CUERPO (2015)
Pacific’s Counterclaim
Pacific refused to acknowledge the Addendum because the Facts: On July 22, 2008, petitioner and respondent entered into
same was not signed by its authorized representative, Dee a Contract to Sell over a 165,775 sq.m. parcel of land in Rizal.
Hua T. Gatchalian, who was the signatory in the Deed of the The pertinent provision of the contracts are as follows:
Conditional Sale and denied that price agreed upon. (a) Consideration of the sale is P33,155,000 payable
through DP of P11,604,250 inclusive of P2M
RTC. Cancelled the contract and addendum. CA. Reversed and reservation fee and the remaining balance of
set aside the RTC decision for rescission was not warranted in P21,550,750 payable in 36-month installments each in
this case because the petitioners were the ones who failed the amount of P598,632 through postdate checks.
under the contract. Pacific is the injured party entitled to choose (b) In case any of the checks are dishonored, the amounts
between fulfillment or obligation. already paid shall be forfeited in petitioner’s favor and
the latter shall be entitled to cancel the subject
Obligations under the Deed of Conditional Sale contract without judicial recourse.
Pacific seeks for Specific Performance particularly for the (c) Respondents are not entitled to possess the subject
petitioner to execute a Deed of Absolute Sale and fulfill their land until full payment of the purchase price.
obligation under the Deed of Sale. In sum the obligations are: (d) Petitioners shall transfer the title over the subject land
• Pacific Rehouse obligations are: from a certain Santos to petitioners’ names, should
o pay downpayment P1,892,590 (performed) they fail to do so, respondents may cause the said
o pay balance upon completion of the transfer and costs against monthly amortizations.
pertinent documents necessary for transfer. (e) Upon full payment, petitioners shall transfer title.
• Ascanos’ obligations are:
o Furnish Pacific with all the pertinent However, in November 7, 2008 respondent sent petitioners a
documents to effect transfer of property. letter seeking to rescind the subject contract on the ground of
o Guarantee removal of tenants and shoulder financial difficulties in complying the same. They sought the
the full amount of disturbance compensation return the amount of P12,202,882 they had paid to the
o Furnish certificate of non-tenancy of land petitioners. The letter was unheeded, respondents filed for
and operation transfer document. rescission before the RTC.
• Petitioners countered that the act is unilateral
On the Validity of the Addendum. It cannot prevail the original cancellation of the subject contract as the former
deed for it was not signed, and Fortuno was just a mere witness did not consent to it. Financial difficulties are not
to such. among the ground for a valid rescission.
RTC. Contract is rescinded and that the petitioners failed to • The vendee shall finish the construction of its building
cause the completion of the transfer of registration of title of within four years from December 31, 1991.
the property. CA. It affirmed the RTC for the petitioners failed
to transfer the subject land from Santos to Nolasco within 90 On December 28, 1996, Amethyst assigned the subject
days from the execution of the said contract. property to its sole stockholder, the ASB Realty Corporation
under a Deed of Assignment in Liquidation in consideration
Was the rescission proper? of 100,000 shares of the outstanding capital stock, such was
transferred free from any liens or encumbrances.
Article 1191 and Reciprocal Obligations
In reciprocal obligations, either party may rescind or resolve the On July 7, 2000, Ortigas filed its Complaint for Specific
contract upon the other party’s substantial breach. The Performance against the petitioner, alleging violation of:
retaliatory remedy is given to the injured party. • While the lot may be used only for office and
residential purposes, defendant introduced
In the case: The RTC and CA bases the rescission of the contract construction on the property which are commercial in
on the violation of paragraph 7 of the agreement. The lower nature like restaurants and retails stores.
courts have misinterpreted such paragraph. It provides: • Commercial structures extend up to the boundary
lines of the lot in question.
[Petitioners] shall, within ninety (90) days from the signing of • Failed to submit the final plans and specifications of
[the subject contract], cause the completion of the transfer of its proposed building not later than 6 months from
registration of title of the property subject of [the subject June 29, 1994 and to complete construction of the
contract], from Edilberta N. Santos to their names, at
same within four years from December 31, 1991.
[petitioners’] own expense. Failure on the part of [petitioners]
to undertake the foregoing within the prescribed period
• It allowed putting up of commercial signs and
shall automatically authorize [respondents] to undertake advertisements over the area, which was prohibited.
the same in behalf of [petitioners] and charge the costs
incidental to the monthly amortizations upon due date. Ortigas prayed for the reconveyance of the subject property, or
alternatively, for the demolition of the structures and
A plain reading provides that petitioners failed to perform the improvements thereon plus penalties and costs.
transfer within the said period, but this does not constitute a
substantial breach. The paragraph provides a contractual RTC. Dismissed the complaint. Amethyst was supposed to
recourse in the event of nonperformance and that is to cause finish construction on December 31, 1995 but up to the time
such transfer in behalf and at the expense of petitioners. the property was transferred to ASB on December 28, 1996,
Ortigas never initiated any action against Amethyst to enforce
Theory of the Case, Principle said provision. Making him guilty of laches or negligence on
When a party deliberately adopts a certain theory and the case such action. CA. Affirmed RTC. Ortigas can no longer enforce
is decided upon that theory in the court, he will not be the said restrictions against ASB for the vendee was Amethyst.
permitted to change the same on appeal, because to permit
him to do so would be unfair to the adverse party. CA MR. It reversed its decision stating that it is not disputed
that Amethyst failed to finish construction within the
In the case: The court cannot grant the petitioners’ prayer in period stated the prescriptive period under a Deed of Sale is
the petition to order the cancellation of the contract and the ten years and they had until 31 December 2005 and that Ortigas
forfeiture of the payments because they neither prayer for this filed the present complaint on 07 July 2000 within such period.
specific relief nor argued that they were entitled to such
and did not provide such for defense. Whether or not Ortigas validly rescinded the Deed of Sale due
to the failure of Amethyst and its assignee, the petitioner ASB,
ASB REALTY v. ORTIGAS (2015) to fulfill the covenants of the Deed of Sale.
Facts: On June 29, 1994, respondent Ortigas entered a Deed of Ortigas’ Action for Rescission Could Not Prosper
Sale with Amethyst Pearl Corporation involving a parcel of land Ortigas never took to task such other buyers and Amethyst for
with an area of 1,012 sq.m. in Oranbo, Pasig City for the failing to construct the buildings within the periods
consideration of P2,024,000. Pertinent parts provide: contractually imposed. It maintains, therefore, that Ortigas
• Building constructed be reinforced concrete, cement slept on its rights because it did not take any action against
hollow blocks and shall be of the following height of Amethyst during the period prescribed in the Deed of Sale.
not more than 14 storeys plus one penthouse.
• Final plans and specifications of said building be Allegation on ASB as Amethyst’s Assignee
submitted to Ortigas for approval not later than six Petitioner Ortigas argues in its right to rescind that the
months from the date thereof. Should object, it shall petitioner was bound by the covenants of the Deed of Sale
notify and specify in writing the amendments required annotated in the name of the petitioner; and that the
to perform with its buildings and submit the amended petitioner’s privity to the Deed of Sale was by virtue of its
plans within 60 days from receipt of notice. being the successor-in-interest or assignee of Amethyst.
Examination of Agreement: The Deed of Assignment in There is still no express or implied indication that the petitioner
Liquidation executed between Amethyst and ASB expressly had assumed Amethyst’s obligations. In short, the burden to
stated that “the assignor hereby assigns, transfers and conveys perform the covenants under the Deed of Sale, or the liability
unto the assignee one parcel of property”. for the nonperformance thereof, remained with Amethyst.
• This indicates that the transfer was only the tangible
asset consisting the piece of land and by no means did Propriety of Rescission under Article 1191
Amethyst assign the right or duties it has assumed Based on the foregoing, Ortigas’ complaint predicated on
under the Deed of Sale. Article 1191 of the Civil Code. It is proper if one of the parties
• ASB Realty became vested with rights of ownership commits a substantial breach of its provisions. It abrogates the
free from any lien or encumbrance. contract from its inception and requires mutual restitution of
the benefits received.
Doctrine of Estoppel, Recognition of Transfer
On the Allegation the “No Transfer Stipulation”. Ortigas In the case: Ortigas did not have a cause of action against the
apparently recognized without any reservation the issuance petitioner for the rescission of the Deed of Sale. Under Section
of the new certificate of title and the subsequent transfer by 2, Rule 2 of the Rules of Court elements of cause of action:
assignment from Amethyst to ASB leading to a new certificate 1. Right in favor of the plaintiff
of title. As such, Ortigas was estopped from assailing the 2. Obligation of defendant not to violate such right
petitioner’s acquisition and ownership of the property. 3. An act or omission constituting a breach of such
The second and third elements were absent in this case. Simply
The application of estoppel was appropriate. The doctrine of because ASB Realty is not privy to the Deed of Sale because
estoppel was based on public policy, fair dealing, good faith it was not the party obliged thereon.
and justice, and its purpose is to forbid a party to speak against • Not having come under the duty not to violate any
his own act or omission, representation, or commitment to the covenant in the Deed of Sale when it purchased the
injury of another who relied thereon. subject property despite the annotation, its failure to
comply with the covenants did not constitute a breach
On the Performance Required from the Assignee of contract.
TCT No. PT-10597 bound the petitioner but not to the extent
that rendered the petitioner liable for the nonperformance of • It was Amethyst that defaulted on the covenants,
the covenants stipulated in the Deed of Sale. hence the action to enforce such provisions of the
• Section 39 of The Land Registration Act requires contract or to rescind the contract should be against
that every person receiving a certificate of title in Amethyst.
pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a Rescission could not anymore take place against the petitioner
certificate of title for value in good faith shall hold the once the subject property legally came into the juridical
same free of all encumbrances except as those noted possession of the petitioner who was a third party to the
on said certificate. Annotation are to charge the Deed of Sale.
purchaser or title holder with notice of such burdens.
Right not absolute. Rescission will not be permitted for a slight
In the case: By acquiring the parcel of land with notice of the or causal breach, it shall be only for substantial or fundamental
covenants in the Deed of Sale, ASB bound itself to acknowledge ones as to defeat the object of the parties in agreement.
and respect the encumbrance. But it did not step into the
shoes of Amethyst as a party in the Deed of Sale. Thus, the Limitations or Restrictions of Power to Rescind
annotation of the covenants contained in the Deed of Sale did 1. Due process must be observed.
not give rise to a liability on the part of ASB as the purchaser or 2. It is subordinated to the rights of third persons who
successor-in-interest without its express assumption of such acquired the thing in good faith.
duties or obligation. 3. Injured party must respect the power of the court to
fix period in lieu of rescission.
Burden to Perform Covenants of 4. Evidence is needed to justify rescission.
Deed of Sale Remained with Amethyst 5. Slight breach will not justify it should be substantial as
Contractual obligations, unlike rights or benefits are generally to defeat the object of parties in agreement.
not assignable. But there are recognized means by which
obligations may be transferred, like sub-contract or novation. Effects of Rescission
• Extinguishes Obligatory Relation
In the case: The following shows that the assignment is not a The exercise of the power to rescind under Article 1191 has the
novation to transfer such: (1) The substitution of the petitioner effect as if the obligatory relation has never existed having a
did not result in the novation for novation requires consent of retroactive effect. It has the effect of abrogating the contract in
the vendor. (2) Petitioner did not expressly assume obligations all parts and the parties will be brought back to status quo
of Amethyst. (3) The consent of the new obligor (ASB) which before they entered the contract. Hence the need for parties for
was essential to novation was not obtained. restitution.
• Obligation for Mutual Restitution

Hence the need for parties for restitution for it has been
contemplated that the relations shall be as if there was no
obligatory relation at all. However, it can be stipulated that
damages may be recovered in case of breach or if the parties
entered the agreement in bad faith.
Inapplicability of Article 1191

1. Obligations of sales of real property by installments
since RA 6552 of Maceda Law governs.
2. Sales of personal property by installment (RA 1484)
3. Contract of partnerships
4. Contract of Lease
When Judicial Approval is Not Required for Rescission

1. Express stipulation of automatic rescission.
2. When the debtor voluntarily returned the thing even
before judicial approval.
Waiver of the Right to Rescind under Article 1191

Contracting parties may waive the same. For example, when the
parties in a contract of sale subsequently execute a document
stipulating herein that the land sold to the vendee shall stand as
security for the payment of the balance of the purchase price, this
stipulation is incompatible with the idea of rescission of the
sale and therefore amount to a waiver of right.
• The vendor has already chosen the remedy of specific
performance or simple collection of a debt.
• Acceptance by the creditor of the delayed payment
amount to a waiver of the right of rescission.
ARTICLE 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
extinguished, and each shall bear his own damages.
NOTE: Where both parties are in default, their respective

liability for damages shall offset equitably.
OBLIGATIONS AND CONTRACTS 2. Legal – a period fixed by law

Civil Code Voluntary or Conventional – stipulated by the parties
Judicial – allowed by the court.
Articles 1193-1230
SECTION 2 – OBLIGATIONS WITH A PERIOD 3. Express – when specifically stated

Tacit – when the person undertakes to do some work
ARTICLE 1193 which can be done only in a season.
Obligations whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes. 4. Original – the stipulated period
Period of Grace – which is an extension fixed by the
Obligations with a resolutory period take effect at once but
parties themselves or by the court.
terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily 5. Definite – a fixed known date or time
come, although it may not be known when. Indefinite – an event which will necessarily happen
but the date of happening is unknown.
If the uncertainty consists in whether the day will come or
not, the obligation is conditional and it shall be regulated by On Uncertainty of Date
the rules of the preceding Section.
It does not convert the period into a condition, so long as there
is no uncertainty as whether it will happen or not.
Period or Term
• When the period is fixed at ‘on or about’ a given date,
It is a space of time which, exerting an influence on obligations
this means only a few days before or a few days after
because of a juridical act suspends their demandability or
the stated date, but not a remote date or one fixed by
determines their extinguishment.
the obligor.
Condition Period
Examples of Indefinite Period
As to their fulfillment
• Death of a person
Condition is an uncertain Term is an event that must
• Movable religious holidays like Holy Thursday
event necessarily come, whether
• Events in civil or political like age of majority or when
on a date known before
a person decides to become a qualified voter.
hand or at a time which
cannot be predetermined.
Effect of Period
As to their influence on the obligation
Obligations with a term are demandable only when the day
Condition gives rise to an A period has no effect upon fixed for their performance arrives. Thus, in action for the
obligation or extinguishes the existence of obligation, recovery od debts payable in installments, those not yet due
one already existing. but only the demandability and payable cannot be demanded from the complainant.
or performance. Unless • The right of action arises only when the date fixed has
specially agreed, it does not arrived, hence the period of prescription must also be
have any retroactive effect. counted only from such date of maturity and not from
As to time the date of obligation.
Condition may refer to a Period always refers to the • Once the stipulated date arrives, the obligation can be
past event unknown to the future. enforced, and the obligor who alleges an extension
parties. must show satisfactory evidence for such.
As to will of debtor
A condition which depends A period left to the debtor’s Action for Immediate Enforcement of Obligation
exclusively on the will of the will merely empowers the If the contract in which the terms imposed are:
debtor annuls the court to fix such period. a. cancelled by agreement of the parties, or;
obligation. b. when the non-fulfillment o the terms of the contract
resolves the period, and authorizes the creditor for
Different Kinds of Terms or Periods performance.
1. Suspensive or Ex Die – from a day certain, it is one The obligation is converted to a pure obligation.
that must lapse before the performance of the
obligation can be demanded. Performance of the ARTICLE 1194
obligations begins only from a day certain, upon In case of loss, deterioration or improvement of the thing
arrival of the period before the arrival of the day certain, the rules in Article 1189
shall be observed.
Resolutory or In Diem – to a day certain, it is the
Application of Article 1189
period after which the performance must terminate.
This provision provides that the rules on loss, deterioration and
Termination of the performance of obligation upon
improvements under conditional obligations applies under
the arrival of the said period.
obligations with a period.
ARTICLE 1195 In Contracts of Loan

Anything paid or delivered before the arrival of the period, If gratuitous or without interest, the term is for the exclusive
the obligor being unaware of the period or believing that the benefit of the debtor, who may pay in advance of the period.
obligation has become due and demandable, may be
• If interest is stipulated, the period is generally for the
recovered with the fruits and interests.
benefit of both parties, and the debtor cannot pay in
NOTE: Only applies to obligations to give. advance against the will of the creditor, unless he pays,
the full interest for the period agreed upon.
Effect of Arrival of Term
This allows recovery of the thing or money itself, plus the fruits Waiver by Creditor
and interests, which must be understood as those accruing The acceptance of the partial payment in the mortgage contract
from the moment of the payment to the date of recovery. where it was provided that the debtor cannot pay the principal
• If the action to recover, however, is not brought by the before the expiration of the period of two years therein
debtor before the date of maturity, then the right to stipulated, was not a novation of the contract, but a waiver of
recover the thing or money will cease the creditor of the term of two years.
• It was a relinquishment of his right to refuse any
Right to Interests and Fruits payment before the expiration of said term.
This allows the debtor to recover fruits and interests in all cases
ARTICLE 1197
where he paid under a mistake as to the period. This is akin to
If the obligation does not dix a period, but from its nature and
the concept of solutio indebiti or payment of what is not due.
the circumstances it can be inferred that a period was
intended, the courts may fix the duration thereof.
No Recovery of Interests and Fruits
1. Reciprocal obligations and premature performance of The courts shall also fix the duration of the period when it
both creditor and debtor. depends upon the will of the debtor.
2. When the obligation is a loan on which the debtor is
bound to pay interest. In every case, the courts shall determine such period as may
under the circumstances may have been probably
3. When the period is exclusively for the benefit of the
contemplated by the parties. Once fixed by the courts, the
creditor, because the debtor by paying in advance period cannot be changed by them.
loses nothing.
When the Court May Fix Period
Payment with Knowledge of the Term 1. When the duration depends on the will of the debtor
As a presumption, the debtor knows of the period and that 2. When although the obligation does not fix a period, it
obligation is not yet due, Thus, the debtor shall have the burden can be inferred that a period was intended.
of proof proving ignorance of such.
When the Court May Not Fix Period
If the payment was made voluntarily, with the knowledge of the 1. When no term was specified because no term was ever
period, the payment cannot be recovered. The debtor can be intended.
considered to have tacitly waived the benefit of the term. 2. When the obligation is payable on demand
Hence, he is not entitled to recover anything for then the 3. When specific periods are provided for in the law
obligations are considered matured. 4. When what appears to be a term is a condition
5. When period to ask the court to fix prescribe (10)
ARTICLE 1196
Whenever in an obligation a period is designated, it is ARTICLE 1198
presumed to have been established for the benefit of both The debtor shall lose every right to make use of the period:
creditor and debtor, unless from the tenor of the same or 1. When after the obligation has been contracted, he
other circumstance it should appear that the period has been becomes insolvent, unless he gives a guaranty or
established in favor of one of the other. security for the debt;
2. When he does not furnish to the creditor the
Benefit of Term guaranties or securities which he has promised;
As presumed, the term is for the benefit of the two parties and 3. When by his own acts he has impaired said
if such happens, the creditor cannot demand payment and the guaranties or securities after their establishment,
debtor cannot make an effective tender and consignation of and when through fortuitous event they disappear,
payment, before the period is stipulated. unless he immediately gives new ones equally
satisfactorily;
• If it is for the benefit of the creditor only, he may
4. When the debtor violates any undertaking, in
demand performance at any time, but the debtor consideration of which the creditor agreed to the
cannot compel him to accept payment before the period.
period expires. 5. When the debtor attempts to abscond.
• If for the benefit of the debtor, he may oppose a
premature demand for payment, but may validly pay NOTE: Insolvency referred does not require a judicial
any time before the period expires. declaration. It is sufficient for him to fin a hard time paying off
his obligations due to his financial reserves.
SECTION 3. – ALTERNATIVE OBLIGATIONS Creditor’s Consent

The law does not require the other party to consent to the
ARTICLE 1199 choice made by the party entitled to choose. A mere
A person alternatively bound by different prestations shall
declaration of choice, communicated to the other party, is
completely perform one of them.
sufficient. To require such would destroy the alternative
The creditor cannot be compelled to receive part of one and character of the obligation itself.
part of the other undertaking.
Requisites of Selection of Choice
Obligations with Several Objects 1. Made properly so that the creditor or agent know
An alternative obligation is one where out of the two or more 2. Made with full knowledge that selection is being made
prestations that may be given only one is due. 3. Made voluntarily and freely
1. Conjunctive 4. Made in due time and before maturity
2. Alternative 5. Made to all the proper persons
3. Facultative 6. Made without conditions unless agreed
7. May be waived
Alternative Facultative
The characteristics of Only one thing is due, but ARTICLE 1202
alternative obligations is the debtor has reserved the The debtor shall lose the right of choice when among the
that, several objects being right to substitute it with prestation whereby he is alternatively bound, only on is
practicable.
due, the fulfillment of one is another.
sufficient, determined by
Obligation Becomes Simple
the choice of the debtor
If all the prestation, except one, are impossible or unlawful, it
who generally has the right
follows that the debtor can choose and perform only that one.
of election
The obligation cases to be alternative, and is converted into a
Loss of one thing affects the Loss of that which may be simple obligation to perform the only feasible or practicable
obligation. given as substitute doe s prestation. The impossibility however, must not be due to the
not affect the obligation. creditor’s acts.
Election may be granted to Never granted to the
the creditor. creditor. ARTICLE 1203
Loss of one of the things in Loss of that which is due as If through the creditor’s act the debtor cannot make a choice
alternative obligations does the object of the obligation according to the terms of the obligation, the latter may
not extinguish the will extinguish such rescind the contract with damages.
obligation. obligation.
Impossibility Due to the Creditor
ARTICLE 1200 There is option to rescind the contract with damages, but he
The right of choice belongs to the debtor, unless it has been may also elect to perform that which remains or to elect those
expressly granted to the creditor. remaining. Rescission does not take place automatically.
The debtor shall have no right to choose those prestation ARTICLE 1204
which are impossible, unlawful or which could not have been The creditor shall have a right to indemnity for damages
the object of the obligation. when, through the fault of the debtor, all the things which are
alternatively the object of the obligation have been lost, or
Limits on Election the compliance of the obligation has become impossible.
The right to choose is indivisible. The debtor cannot choose
part of one prestation and part of another. The indemnity shall be fixed faking as a basis the value of the
• Unlawful last thing which disappeared, or that of the service which last
became impossible.
• Impossible
• Could not have been object of the obligation Damages other than the value of the last thing or service may
The judgment is termed in an alternative form demanding also be awarded.
either object A or object B, at the election of the debtor.
Loss by Fault of Debtor
ARTICLE 1201 This article applies to cases in which the debtor has the right to
The choice shall produce no effect except from the time it has choose. If only some of the prestation are rendered impossible,
been communicated.
the fault of the debtor does not make him liable for damages,
Means of Communication to the Other Party because he can still comply with the obligation by performing
1. Oral any of the prestation remaining.
2. Written
3. Implied He will become liable for damages under the terms of this
4. Express article only when all the prestations become impossible
through his fault.
Effect of Fortuitous Event ARTICLE 1206

If all the prestations become impossible due to fortuitous When only one prestation has been agreed upon, and the
event, the obligation is extinguished; the debtor is not liable for obligor may render another in substitution, the obligation is
called facultative.
damages.
The loss or deterioration of the thing intended as a
If more of prestations were lost by fault but the last remaining substitute, through the negligence of the obligor, does not
one by fortuitous event the debtor is liable under the present render him liable. But once the substitution has been made,
article, but the basis of damages will be the value of the last the obligor is liable for the loss of the substitute on account
prestation which become impossible through his fault. of his delay, negligence or fraud.
• The negligence or fault of the debtor has diminished
the possibility of the performance of the obligation, Distinction of Alternative from Facultative
and if he had exercised due diligence to the prestation Alternative Facultative
the obligation could have been complied with. As to contents of the obligation
There are various Only the principal prestation
ARTICLE 1205 prestations all of which constitutes the obligation,
When the choice has been expressly given to the creditor, the constitute parts of the accessory being only a
obligation shall cease to be alternative from the day when obligation. means to facilitate payment.
the selection has been communicated to the debtor.
Creditor must demand all Creditor can only demand
Until then the responsibility of the debtor shall be governed
by the following rules: the prestations in the the principal prestation.
(1) If one of the things is lost through a fortuitous event, alternative.
he shall perform the obligation by delivering that As to nullity
which the creditor should choose from among the The nullity of one does not The nullity of the principal
remainder, or that which remains if only one invalidate the obligation, prestation invalidates the
subsists; which is still in force. obligation and the creditor
(2) If the loss of one of the things occurs through the
cannot demand the
fault of the debtor, the creditor may claim any of
those subsisting, or the price of that which, through substitute even when valid.
the fault of the former, has disappeared, with a right As to choice
to damages; The right to choose may be Only the debtor can choose
(3) If all the things are lost through the fault of the given to the creditor. the substitute prestation.
debtor, the choice by the creditor shall fall upon the As to effect of loss
price of any one of them, also with indemnity for
Only the impossibility of all The impossibility of the
damages;
The same rules shall be applied to obligations to do or not to the prestations without fault principal obligation is
do in case one, some or all prestations should become of the debtor extinguishes sufficient to extinguish the
impossible. the obligation. obligation, even if the
substitute is possible.
Selection by Creditor
When the creditor has the right to choose, his selection takes Loss of Substitute
effect from the moment it is communicated to the debtor. The Before the substitute is effected, the substitute is not the
selection by the creditor may be made expressly or tacitly. prestation that is due, only the principal prestation is due and
• Tacit selection is when creditor accepts the prestation enforceable by the creditor at that time.
offered, or brings an action for the enforcement of one • Therefore, if the substitute prestation becomes
of the prestations. impossible due to the fault or negligence of the
debtor, the obligation is not affected, and he cannot
Effect of Creditor’s Delay be held for damages.
• He cannot hold the debtor in default for the latter
does not know what to deliver. Option to Perform
• Even if there is a definite period for fixed performance, The option to perform the substitute prestation is exclusively
there will only be default or delay on the part of the dependent on the will of the debtor, he cannot be compelled
obligor only when the obligation is now simple due to to perform it if the principal prestation becomes impossible.
the exercise of the selection by the creditor. • If the impossibility of the principal prestation is due to
• He may petition the court to compel the creditor to his fault, he may be held liable for damages, he cannot
accept the prestation offered to relieve him from the be compelled to perform the substitute prestation. It
obligation, with damages. is a matter of absolute choice on his part.
• If the creditor does not make selection in period fixed,
the debtor’s duty to perform does not arise because When Substitution Effective
the prestation to perform has not been determined. From the time the debtor communicates to the creditor that he
The creditor in such case shall be considered by his elects to perform the substitute prestation. From this, it is the
own inaction to have waived the period. only due. Also in fortuitous events it is now simple.
SECTION 4. – JOINT AND SOLIDARY OBLIGATIONS Effects of Joint Liability

The principal consequences of the joint character of the
ARTICLE 1207 obligation are as follows:
The concurrence of two or more creditors or of two or more
1. The demand by one creditor upon one debtor,
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 produces the effects of default only with respect to the
of the latter is bound to render, entire compliance with the creditor who demanded and the debtor whom the
prestation. There is a solidary liability only when the demand was made but not with respect to the others.
obligation expressly so states, or when the law or the nature 2. The interruption of prescription by the judicial
of the obligation requires solidarity. demand of one creditor upon a debtor, does not
benefit the other creditors nor interrupt the
ARTICLE 1208
prescription as to other debtors.
If from the law, or the nature or the wording of the
obligations to which the preceding article refers the contrary 3. The vices of each obligation arising from the personal
does not appear, the credit or debt shall be presumed to be defect of a particular debtor does not affect the
divided into as many equal shares as there are creditors or obligation or rights of the others.
debtors, the credits or debts being considered distinct from 4. Insolvency of a debtor does not increase the
one another, subject to the Rules of Court governing the responsibility of his co-debtors, nor does it authorize
multiplicity of suits. a creditor to demand anything form his co-creditors.
5. In joint divisible obligation, the defense of res judicata
Joint Obligation (mancommunada or pro rata) is not extended from one debtor to another.
It is on in which each of the debtors is liable only for a
proportionate part of the debt, and each creditor is entitled ARTICLE 1209
only to a proportionate part of the credit. Creditor can recover If the division is impossible, the right of the creditors may be
only his share of the obligation, and each debtor can be made prejudiced only be their collective acts, and the debt can be
to pay only his part. enforced only be proceeding against all debtors. If one of the
latter should be insolvent, the others shall not be liable for
Solidary Obligation (several or in solidum) his share.
It is one in which each debtor is liable for the entire obligation,
Joint Indivisible Obligations
and each creditor is entitled to demand the whole obligation.
When there are several debtors or creditors, but the prestation
Each creditor may enforce the entire obligation, and each
is indivisible like a house, the obligation is joint unless solidarity
debtor may be obliged to pay it in full.
is stipulated. Considered as midway of joint and solidary:
• No creditor can do an act prejudicial to others, and no
Example: “We promise to pay” without any express words
debtor can be made to answer for co-debtors.
signed by two is pro rata, a statement of “I promise to pay” with
• Fulfillment requires the concurrence of all the debtors
two signees is a solidary responsibility.
although each for his part.
Joint Character, Presumed
Plurality of Debtors
When two persons are liable under a contract, and no words
The indivisible can be performed by them only by acting
appear in the contract or the judgment to make each liable for
together. Hence all must be sued. If any of the debtors is not
the entire obligation, the presumption is that their obligation is
willing to perform, the prestation is converted to indemnity
joint or mancommunada, and each debtor is liable only for a
then it becomes divisible and creditors can sue the debtors
proportionate part of the obligation.
separately for their respective shares.
Exceptions to the Presumption
Plurality of Creditors
1. When there is a stipulation in the contract that the
If there are several creditors a delivery to one of them is
obligation is solidary.
prejudicial to other creditors unless authorized. If only or some
2. When the nature of the obligation requires liability to
of the creditors demand the prestation, the debtor may legally
be solidary.
refuse, or he can insist all the creditors to receive the thing and
3. When the law declares so.
that if some creditor refuses, the debtor may deposit the thing
in court by consignation.
Examples when Law Imposes Solidary Liability
• In non-performance by the debtor, obligation to pay
1. Obligations arising from Torts
damages arises then the prestation becomes divisible
2. Quasi-Contracts
and each creditor can recover separately.
3. Legal provisions on legatees and devisees
4. Liabilities of principals, accomplices and accessories in
ARTICLE 1210
a felony The indivisibility of an obligation does not necessarily give
5. Bailees in commodatum rise to solidarity. Nor does solidarity itself imply
indivisibility.
NOTE: There may plurality of creditors, or plurality of debtors.
There can also be plurality on both debtors and creditors. NOTE: Solidarity for parties, divisibility for subject matter.

Solidarity may exist although the creditors and debtors may The creditor may proceed against any one of the solidary
not be bound in the same manner and by the same periods debtors or some or all of them simultaneously. The demand
and conditions. made against one of them shall not be an obstacle to those
which may subsequently be directed against others, so long
Kinds of Solidarity as the debt has not been fully collected.
1. Active – on the part of creditors or obligees
2. Passive – on the part of the debtors or obligors Actions Based on Solidarity
3. Mixed – both The solidary debtors may be sued simultaneously in one suit or
4. Conventional – agreed by the parties successively in different actions. The provisions of this article
5. Legal – opposed by law. however, are not of public interest. The parties therefore, may
validly stipulate that the solidary debtors can only be sued
ARTICLE 1212 simultaneously, or provide an individual order.
Each one of the solidary creditors may do whatever may be
useful to the others but no anything which may be prejudicial Judgment as Regards to Creditors
to the latter. If the judgment is favorable to the creditor Article 1212
provides that this inures to the benefit of the co-creditors. But
ARTICLE 1213
if the judgment is adverse to a solidary creditor can be set-up
A solidary creditor cannot assign his rights without the
consent of the others. against the co-creditors in subsequent actions unless it is
founded on personal cause.
ARTICLE 1214
The debtor may pay any one of the solidary creditors; but if Judgment as Regards to Debtors
any demand, judicial or extrajudicial has been made by one If the judgment is favorable to the creditor but the debtor is
of them, payment should be made to him. insolvent, Article 1216 provides that the other debtors can still
be sued until the debt is fully paid. The judgment against one
Demand and Mutual Representation
debtor cannot be enforced, there must be a new action.
The solidary creditors are mutual representatives of each other
for demanding payment. The equality of rights of the solidary ARTICLE 1217
creditors by virtue of this mutual representation lasts only until Payment made by one of the solidary debtors extinguishes
one of them goes ahead and sues the debtor. the obligation. If two or more solidary debtors offer to pay,
• If there are several demands, the debtor should pay to the creditor may choose which offer to accept.
the one who first notified him, if together at the same
time the debtor can choose. 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
ARTICLE 1215
the debt is due, no interest for the intervening period may be
Novation, compensation, confusion or remission of the debt,
demanded.
made by any of the solidary creditors or with any of the
solidary debtors, shall extinguish the obligation, without
When one of the solidary debtors cannot, because of his
prejudice to the provisions of Article 1219.
insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors, in
The creditor who may have executed any of these acts, as
proportion to the debt of each.
well as he who collects the debt, shall be liable to the others
for the share in the obligation corresponding to them.
Payment by a Solidary Debtor
Definition of Concepts Payment by one of the solidary debtors releases all co-debtors
• Novation – modification of an obligation by changing from the creditor. In case of partial payments, he can recover
its object or principal conditions or by substituting the reimbursement from the co-debtors only in so far as his
person of the debtor like subrogation. payment exceeded his share of the obligation.
• Compensation – is that which takes place in their own
right, are creditors and debtors of each other Reimbursement
• Merger – Which takes place when the characters of When a solidary debtor pays the entire obligation, the resulting
creditor and debtor are merged in the same person. obligation of the co-debtors to reimburse him is joint. If one, by
• Remission or Waiver – The act of liberality whereby a insolvency cannot pay his share in the reimbursement, the
creditor condones the obligation of the debtor; that others shall bear such share proportionately.
where the creditor tells the debtor to “forget about the
ARTICLE 1218
whole thing.”
Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made
Effects of Article 1215 after the obligation has prescribed or become illegal.
Any of thee acts shall extinguish the obligation (no suit), except
for novation. Among co-creditors, the act of any of them does NOTE: It is no longer due, he can no longer recover under the
not prejudice the rights of other creditors to recovery. same contract but under quasi-contract rules.
ARTICLE 1219 • Non-performance of the suspensive condition or non-

The remission made by the creditor of the share which arrival of the suspensive period.
affects one of the solidary debtors does not release the latter • Payment or remission
from his responsibility towards the co-debtors, in case the
• All other means of defense.
debt had been totally paid by anyone of them before the
remission was effected.
Defenses Personal to the Defendant
Application This would include minority, insanity, fraud, violence or
This refers to a case where a co-debtor has already paid the intimidate. But if the personal defense takes the form of special
obligation in full when the remission was made. To exempt such terms or conditions affecting his part of the obligation, he may
would be fraud. In fact, the obligation is already extinguished utilize such only to his part.
by payment or performance thus remission is useless.
SECTION 5. – DIVISIBLE AND INDIVISBLE OBLIGATIONS
ARTICLE 1220
The remission of the whole obligation, obtained by one of the ARTICLE 1223
solidary debtors, does not entitle him to reimbursement The divisibility or indivisibility of the things that are the
from his co-debtors. object of obligations in which there is only one debtor and
only one creditor does not alter or modify the provisions of
ARTICLE 1221 Chapter 2 of this Title.
If the thing has been lost or if the prestation has become
impossible without the fault of the solidary debtors, the Divisibility of Things
obligation shall be extinguished. Juridically a thing is considered indivisible, when if divided the
value is diminished disproportionately. On the other hand, a
If there was fault on the part of any one of them, all shall be thing is divisible when each one of the parts into which it is
responsible to the creditor, for the price and the payment of divided forms a homogenous and analogous object to the
damages and interest, without prejudice to their action
other parts as well as to the thing itself.
against the guilty or negligent debtor.
(a) Qualitative
If through a fortuitous event, the thing is lost or the (b) Quantitate
performance has become impossible after one of the solidary (c) Ideal or moral
debtors has incurred in delay through the judicial or
extrajudicial demand upon him by the creditor, the Divisible Indivisible
provisions of the preceding paragraph shall apply. Susceptible of partial It cannot be validly
performance and that the performed by parts. It is not
Limited to Loss of Thing
debtor can legally perform capable of partial
It has a limited application, if the loss or impossibility is due to
the obligation by parts and fulfillment.
(1) Fault of any of the solidary debtors
the creditor cannot demand
(2) Fortuitous event after a debtor has incurred in delay
a single performance of an
The obligation is converted into an obligation to pay indemnity,
entire obligation.
consisting of the price, damages and interest.
ARTICLE 1224
ARTICLE 1222
A joint indivisible obligation gives rise to indemnity for
The solidary debtor may, in actions filed by the creditor,
damages from the time anyone of the debtors does not
avail himself of all defenses which are derived from the
comply with his undertaking. The debtors who may have
nature of the obligation and of those which are personal to been ready to fulfill their promises shall not contribute to the
him, or pertain to his own share. With respect to those which indemnity beyond the corresponding portion of the price of
personally belong to the others, he may avail himself thereof the thing or of value of the service in which the obligation
only as regards that part of the debt for which the latter are consists.
responsible.
Joint Indivisible Obligation
Defenses of the Solidary Debtor
In cases of non-performance of any of the creditors, the
1. Defenses inherent by the nature of obligation
obligation is converted into a liability for losses and damages
2. Defenses personal to the debtor-defendant
which is divisible. In this case, if one of the debtors is insolvent
3. Defenses personal to other solidary debtors
or fails to pay his share, the others will not be liable for his share.
• The debtors who are ready to perform their part do
Defenses Inherent in Obligation
not become liable for more than the portions
These are derived from the vinculum juris existing between:
respectively corresponding to them in the price of the
• Non-existence of obligation due to it being illicit or
subject matter of the obligation, the obligation is
being absolutely simulated.
transformed but not increased.
• Nullity due to the defect in capacity or consent of all
the debtors like mistake, fraud or violence.
Indivisible Solidary Obligations. Every debtor is liable for losses
• Unenforceability because of lack of proper proof
and damages, although those ready to perform can later
recover from the guilty one.
ARTICLE 1225 Condition Penalty

For the purposes of the preceding articles, obligations to give Not an obligation Obligation although an
definite things and those which are not susceptible of partial
accessory
performance shall be deemed to be indivisible.
Never demandable Demandable in default of
When the obligation has for its object the execution of a the unperformed principal
certain number of days of work, the accomplishment of work obligation and sometimes
by metrical units, or analogous things which by their nature jointly with it.
are susceptible of partial performance, it shall be divisible.
Example:
However, even though the object or service may be
A promised to construct the house of B within 80 days. In the
physically divisible, an obligation is indivisible if so provided
by law or intended by the parties. contract, there is a provision to the effect that for every day’s
delay after the stipulated 80 days, A would pay a fine or
In obligation not to do, divisibility or indivisibility shall be penalty of P10,000. If the house is constructed finally at the
determined by the character of the prestation in each end of 85 days, A would have to pay a penalty of P50,000.
particular case.
NOTE: The penal clause gives A motive to finish the
Indivisible Divisible construction on time and that instead of computing the legal
1. Obligations to give 1. When the object is the rate of interest of damages, the matter has become simplified
definite things execution of a certain by inserting the penal clause, which in this case now assumes
2. Not susceptible to partial number of days work. the part of liquidated damages.
performance 2. When the object is the
3. If so provided by law, accomplish of work by The penalty takes place of indemnity for damages and the
even if divisible metrical units. payment of interest.
4. If so intended by the 3. When the purpose of the
parties, even divisible. obligation is to pay Q. Can any penalty be demandable?
certain amount in No. The penalty may be enforced only when it is demandable
installment. in accordance with the provisions of the Civil Code, one of
4. Susceptible of partial which states that the penalty may be reduced when iniquitous.
performance
Example. Failure to pay subsequent installments would forfeit
SECTION 6. – OBLIGATIONS WITH A PENAL CLAUSE installments already made. In such, even if the purchaser paid
already 8% of the total price. The penal clause does away with
ARTICLE 1226
In obligations with a penal clause, the penalty shall the duty to prove existence and measure of damages by breach.
substitute the indemnity for damages and the payment of
interests in cases of noncompliance, if there is no stipulation Penal Clause Facultative Alternative
to the contrary. Nevertheless, damages shall be paid if the Gloria is obliged to Gloria is obliged to Gloria is obliged to
obligor refuses to pay the penalty or is guilty of fraud in the give me a diamond give me a particular give me either a
fulfillment of the obligation. ring. If she fails to diamond ring. particular diamond
do so, she must However, if she so ring or P700,000.
The penalty may be enforced only when it is demandable in give P700,000. desires, she may
accordance with the provisions of this Code. instead give me
P700,000.
Penal Clause Ordinarily, Gloria Gloria is clearly and The choice given to
It is a coercive means to obtain from debtor compliance. It is an cannot excuse expressly allowed to Gloria is absolute,
accessory undertaking to assumes greater liability in case of herself from the make a substitution. however, if the ring
breach. Attached to an obligation to assure performance. It duty of giving the If the ring is lost by is lost by a
ring by simply a fortuitous event, fortuitous event,
constitutes an obligation although an accessory. It may become
paying P700,000. she is excused from she is still obliged
demandable in default of the unperformed principal obligation.
This must be giving P700K for the to give the
1. Legal expressly stated. principal is gone. P700,000.
2. Conventional or Voluntary
3. Subsidiary ARTICLE 1227
4. Joint The debtor cannot exempt himself for the performance of the
obligation by paying the penalty, save in the case where this
Instances When Additional Damages May be Recovered right has been expressly reserved for him. Neither can the
1. When it is expressly stipulated by the parties creditor demand the fulfillment of the obligation and the
satisfaction the penalty at the same time, unless this right
2. When the debtor refuses to pay the penalty imposed
has been clearly granted him. However, if after the creditor
in the obligation.
has decided to require the fulfillment of the obligation, the
3. When debtor is guilty of fraud or dolo in the fulfillment performance thereof should become impossible without his
of the obligation. fault, the penalty may be enforced.
Right of Debtor amount of 100 because there has been partial or irregular
As a rule, the debtor cannot avoid performance of the principal performance and B has already benefited from such.
obligation by offering to pay the penalty. Therefore, the
penalty, the object of which is to secure compliance wit the ARTICLE 1230
obligation, cannot, as a general rule, serve as a defense for the The nullity of the penal clause does not carry with it that of
purpose of leaving the principal obligation unfulfilled. Unless the principal obligation.
this right is expressly reserved.
The nullity of the principal obligation carries with it that of
the penal clause.
Right of Creditor
The creditor cannot demand the principal obligation and the Effect of Nullity of a Penal Clause
penalty at the same time. But this can be done when the right If the principal obligation is null and void, the penal clause will
is clearly granted to him. have no more use for existence and is there ore also considered
null and void. On the other hand, just because the penal clause
Example. Diana promises to finish a piece of work within six is not valid, it does not mean that its nullity will also make the
months. The contract stipulates that in case she does not build principal obligation null and void. The principal obligation can
the house at all, he is supposed to forfeit the sum of P1M. stand alone, and the void penal clause be disregarded.
The contractor cannot just give the sum of P1M as substitute Example. A is obliged to construct a house for B within six
for the non-performance of his obligation. For the penal clause months. The contract provides for a penalty clause in case A is
is not supposed to substitute the performance of the principal not able to perform hiss obligation within the stipulated period.
obligation. He may, however, be expressly granted by the The penalty is “giving several boxes of shabu”. Here the penal
creditor the right to refrain from the execution of the contract clause is null and void for it is outside the commerce of man,
by a forfeiture of the penalty.
ARTICLE 1228
Proof of actual damages suffered by the creditor is not
necessary in order that the penalty may be demanded.
No Necessity of Proving Actual Damages

Penalty may be demanded without proving actual damages.
When a penal clause has been agreed upon in a contract more
as a punishment than a security, it is considered as a lawful
means for repairing losses and damages.
And upon evidence of the violation of the conditions stipulated,

the injured party is not obliged to prove losses and damages
suffered nor the extent of the same in order to demand the
enforcement of the penal clause agreed upon.
ARTICLE 1229
The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
When Penalty Can be Reduced

1. When the obligation has ben partly complied with by
the debtor or partial performance.
2. When the obligation has been irregularly complied
with by the debtor or irregular performance.
3. When the penalty is iniquitous or unconscionable
even if there has been no performance at all.
Instance. A promise to deliver B 100 bottles of wine on a certain

day when a banquet will be held. The contract states that failure
of A to do so on the day will result in a forfeiture of P100,000.
On that day, A was able to deliver on 90 of the 100 bottles
promised. It is unfair now for B to exact the payment of the full
OBLIGATIONS AND CONTRACTS INDUSTRIAL MANAGEMENT v. NLRC (2000)

Articles 1193-1230
JURISPRUDENCE NOTES Facts: On September 1984, private respondents filed a
complaint wit the DOLERAB in Cebu against Filipinas Carbon
1207-1222. Joint and Solidary Obligations Mining Corporation and petitioner Industrial Management
Development Corporation (INIMACO) for payment of
separation pay and unpaid wages.
PACIFIC BANKING v. IAC (1991)
The Labor Arbiter ruled in favor of the private respondents,

Facts: On October 24, 1975, defendant Regala applied for and
absent appeal it became final and executory. Upon issuance of
obtained from the bank the issuance and use of Pacificard
Writ of Execution, it was returned unsatisfied. On 1987, the
credit card which was under the Terms and Conditions
labor arbiter issued an Alias Writ of Execution which ordered to
governing the Issuance and Use of Pacificard a copy of which
produce the award for the private respondents.
was issued to and received by the said defendant on the date
of the application and agreed on such.
On September 3, 1987, petitioner filed a Motion to Quash
Alias Writ of Execution and Set Aside Decision alleging
On the same date, Robert Regala executed a Guarantor’s
among others was that the alias writ of execution altered and
Undertaking in favor of the bank, whereby the latter agreed to
changed the tenor of the decision by changing the liability of
be jointly and severally of Celia Regala to pay the bank upon
respondents from joint to solidary by the insertion of and/or
demand any and all indebtedness incurred by Celia with the use
between respondents.
of the Pacificard or renewals thereof.
Whether or not the petitioners’ liability pursuant to the decision

The defendant Celia Regala, had purchased goods and/or
of the Labor Arbiter is solidary or not.
services on credit under her Pacificard for which the bank
advanced the cost of P92,803 at the time of the filing of the
Discussion: Upon examination of the pleadings, the Court finds
complaint. Celia failed to settle her account for the purchases,
that the liability of the petitioner is not solidary but merely joint
received a demand, and was sent to Robert the Guarantor.
and NLRC acted in GADALEJ in upholding such solidarity.
A complaint was filed against Celia for failure to settle her
Joint and Solidary Obligations, Joint Presumption
obligation. Robert Regala on the other hand admitted his
Well-entrenched is the rule that solidary obligation cannot
understanding as guarantor but limited to P2,000 per month.
lightly be inferred. There is a solidary liability only when the
obligation expressly so states, when the law so provides or
RTC. They are condemned jointly and severally to pay the
when the nature of the obligation so requires.
amount with interest plus 15% of principal obligation for costs.
IAC. Regala was made to be liable to only P2000 a month and
In the case: In the dispositive portion of the Labor Arbiter, the
only to the effectivity of the card.
word “solidary” does not appear. The said fallo expressly states
the following respondents therein as liable. Nor can it be
What should be the liability of Robert Regala as guarantor?
inferred therefrom that the liability of the six (6) respondents in
the case below is solidary, thus their liability should merely be
Guarantor’s Undertaking was a Contract of Surety
joint. When it is not provided in a judgment that the defendants
As distinguished from a contract of guaranty where the
are liable to pay jointly and severally a certain sum of money,
guarantor binds himself to the creditor to fulfill the
none of them may be compelled to satisfy in full said judgment.
obligation of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the surety
When Decision is Final It Cannot be Amended or Altered
binds himself solidarily with the principal debtor.
It thereby becomes immutable and unalterable and any
amendment or alteration which substantially affects a final and
In the case: As a surety he bound himself jointly and severally
executory judgment is null and void for lack of jurisdiction,
with the debtor Celia Regala “to pay the Pacific Banking
including the entire proceedings held for that purpose. An
Corporation upon demand, any and all indebtedness,
order of execution which varies the tenor of the judgment or
obligations, charges or liabilities due and incurred by said Celia
exceeds the terms thereof is a nullity.
Syjuco Regala with the use of Pacificard or renewals thereof
issued in (her) favor by Pacific Banking Corporation.
In the case: None of the parties in the case before the Labor
Arbiter appealed the Decision dated March 10, 1987, hence the
Roberto, in fact, made his commitment as a surety a continuing
same became final and executory. Thus, the proceedings held
one, binding upon himself until all the liabilities of Celia Regala
for the purpose of amending or altering the dispositive portion
have been fully paid. All these were clear under the “Guarantor’s
of the said decision are null and void for lack of jurisdiction.
Undertaking” Roberto signed.
Alias Writ of Execution is void because it varied the tenor
• He was made aware of the terms and conditions and
of the final judgment against the petitioners making the
voluntarily agreed to be bound as surety.
liability solidary.
MARIVELES SHIPYARD v. CA (2003) Article 108. Solidary Liability. The provisions of existing laws
to the contrary notwithstanding, every employer or indirect
Facts: October 1993, petitioner Mariveles engaged the service employer shall be held responsible with his contractor or
of the Longest Force Security Agency to render security services subcontractor for any violation of any provision of this Code.
at its premises. Pursuant to their agreement, Longest Force
deployed its security guards, the private respondents at its In the case: Mariveles Shipyard is an Indirect Employer, by
shipyard in Mariveles, Bataan. virtue of Article 107 pursuant to Article 106 of the Labor Code,
when the agency as contractor failed to pay the guards, the
According to petitioner, it religiously complied with the terms corporation (Mariveles) becomes jointly and severally liable for
of the security contract with Longest Force, promptly paying its the guards’ wages. This is mandated by the Labor Code.
bills and the contract rates of the latter. However, it found the
services being rendered by the assigned guards unsatisfactory Petitioner cannot evade liability by alleging that it paid
and inadequate, causing it to terminate its contract with religiously the compensation of guards under the contract with
Longest Force on April 1995. the security agency. Labor laws are considered written in
• In turn, Longest Force terminated employment of the every contract, stipulations thereof are considered null.
security guards it deployed at petitioner’s shipyard. • Employers cannot hide behind their contracts to
evade liability for noncompliance with such laws.
September 2, 1996, private respondents filed a case for illegal
dismissal, underpayment of wages against both petitioner and Reimbursement, Application
Longest Force praying for full back wages and without loss. The solidary liability of petitioner with Longest Force does not
preclude the application of the Civil Code provision on the right
Longest Force filed a cross-claim against the petitioner. Longest of reimbursement from his co-debtor by the one who paid.
Force admitted that it employed private respondents and
assigned them to such rendering 12 hours duty per shift and The security agency may not seek exculpation by claiming that
likewise admitted liability as to non-payment of the alleged the principal’s payments to it were inadequate for the guards’
wage differential amounting to P2,618,025 but passed on the lawful compensation. As an employer, the security agency is
liability to petitioner for the latter paid so lower than the charged with knowledge of labor laws; and the adequacy of the
prescribed rate contrary to law. compensation that it demands for contractual services is its
principal concern and not any others.
Mariveles Shipyard denied any liability, stressing that no
employer-employee relationship existed between it and the On Overtime Pay. Despite the alleged lack of proof thereof,
security guards. It further pointed out that it would be the suffice it to state that such involves a determination and
height of injustice to make it liable again for monetary claims evaluation of facts which cannot be done in a petition for
which it had already paid. review. Well established is the rule that in an appeal via
certiorari, only questions of law may be reviewed.
Labor Arbiter (NCR). It declared respondents Longest Force
and Mariveles Shipyard jointly and severally liable to pay the Held: Petitioner and Longest Force are held liable jointly and
money claims of complainants representing underpayment of severally for underpayment of wages and overtime pay of the
wages and overtime pay in the total amount of P2,700,623.40 security guards, without prejudice to petitioner’s right of
based on the PADPAO rates. NLRC affirmed in toto. reimbursement from Longest Force.
Should Mariveles Shipyard be a solidary judgment debtor CONSTRUCTION DEVELOPMENT v. ESTRELLA (2006)
together with Longest Force in this case?
Facts: On December 29, 1978, respondents Rebecca G. Estrella
Discussion: Petitioner argues that it should not be held jointly and her granddaughter Rachel boarded in San Pablo City, a
and severally liable with Longest Force for underpayment of BLTB bus bound for Pasay City. However, they never reached
wages and overtime pay because it had been paying religiously their destination because their bus was rammed behind by a
the bills for the security services sent by Longest Force. tractor-truck of CDCP in the South Expressway.
Petitioner’s Liability is Solidary Pursuant to The strong impact pushed forward their seats and pinned their
Articles 106, 107 and 109 of the Labor Code knees to the seats in front of them. They regained
Article 106. In the event that the contractor or subcontractor consciousness only when rescuers created a hole in the bus and
fails to pay the wages of his employees, the employer shall be extricated their legs from under the seats. They were brought
jointly and severally liable with his contractor or subcontractor. to Makati Medical Center where the doctors diagnose their
injuries as shown in the Medical Certificate.
Article 107. The provisions of Article 106 apply to any person or
corporation, indirect employer, contracts with an independent Thereafter, respondents filed a Complaint for damages against,
contractor for the performance of any work. CDCP, BLTB, Payunan, Jr. and Datinguinoo before RTC Manila
alleging negligence, failure to exercise diligence.
RTC. CDCP and BLTB and their employees are found to be liable YULIM v. INTERNATIONAL EXCHANGE BANK (2015)
for damages, BLTB as a common carrier was bound to observe
extraordinary diligence in the vigilance of passenger safety. CA Facts: On June 2, 2000, iBank granted Yulim a credit facility in
affirmed but modified amount of damages. the form of an Omnibus Loan Line for P5M as evidenced by a
Credit Agreement which was secured by a Chattel Mortgage
Whether BTLB and its driver Datinguinoo are solely liable for over Yulim’s inventories in its merchandise warehouse. As
the damages of respondents. further guarantee, the partners namely James, Jonathan and
Almerick executed Continuing Surety Agreement.
Discussion: Petitioner contends that since it was made
solidarily liable with BTLB for actual damages and attorney’s There was a consolidated promissory note to mature on
fees in the decision, then it should no longer be held liable to February 28, 2002 but Yulim defaulted on the said note. On
pay the amount under paragraph 2. April 5, 2002, iBank sent demand letters but without success.
iBank filed for Complaint for Sum of Money with Replevin
Culpa Aquiliana, Employer’s Liability and Defenses against Yulim and its sureties. The items seized from the
The case filed by respondents is an action for culpa aquiliana or warehouse were worth only P140,000.
quasi-delict. In this regard Article 2180 provides that the
obligation imposed by Article 2176 is demandable for the act On October 2, 2002, the petitioners moved to dismiss the
or omission of those persons for whom one is responsible. complaint insisting that their loan had been fully paid after they
• An action based on quasi-delict may be instituted assigned to iBank their condominium unit in Quezon City.
against the employer for an employee’s act or Claiming that its market value has since risen to P5.5 Million.
omission.
• The liability for the negligent conduct of the RTC. The sureties are not liable and only Yulim alone to pay
subordinate is direct and primary but is subject to iBank and dismissed against the individual sureties for there
defense of due diligence and supervision of employee. was no evidence that the loan benefited their families.
In the case: The trial court found that petitioner failed to prove CA. Petitioners failed to prove that they have already paid the
that it exercised the diligence of a good father of a family in the loan. The records are bereft of such evidence showing payment.
selection and supervision of Payunan, Jr. The assignment was a mere temporary arrangement to provide
security for its loan but there was no showing to such which was
The RTC and CA found petitioner solidarily liable with BTLB for considered as a mortgage.
the actual damages suffered by respondents because of the
injuries they sustained. Payunan, Jr. (driver of CDCP) was Concerning the solidary liability of the sureties, is it proper that
discovered to be driving recklessly because of the skid marks as is should be first shown that the proceeds of the loan redounded
shown in the sketch. to the benefit of the family to make them liable?
As well settled in Fabre, Jr. v. Court of Appeals that the owner Discussion: The individual petitioners do not deny that they
of the other vehicle which collided with a common carrier is executed the Continuing Surety Agreement wherein they
solidarily liable to the injured passenger of the same. jointly and severally with the principal hereby guarantee
• Carrier and the driver were jointly and severally liable full and complete payment when due including fees and
because their separate and distinct acts concurred to interest.
produce the same injury.
Contract of Suretyship, Concept
Joint Tort Feasors are Not Liable Pro Rata In a contract of suretyship, one lends his credit by joining in the
They are jointly and severally liable for the tort which they principal debtor’s obligation to render himself directly and
commit. The persons injured may sue all of them and each is primarily responsible with him without reference to the
liable for the whole damages caused. The damages cannot be solvency of the principal. As provided in Article 2047, the
apportioned among them, except among themselves. provisions on Article 1207 shall apply.
Regarding Insurance Claim In the case: They bound themselves to be jointly and severally
The action has already prescribed. The law is clear and leaves with Yulim to unconditionally and irrevocably guarantee full
no room for interpretation. A written notice of claim must be and complete payment of all credit accommodations and
filed within six months from the date of the accident. Since warrant that their liability shall be direct, immediate and not
petitioner never made any claim within six months from the contingent upon the pursuit by the bank.
date of the accident, its claim has already prescribed.
Condominium Assignment, Security not Satisfaction
Held: The Decision of Court of Appeals is Affirmed with What the letter accepted was only the collaterals for the loans
modification and clarification that all of the parties shall be held as well as consolidation of promissory notes. Nowhere is such
jointly and severally liable to pay the actual damages, moral that the Deed of Assignment will extinguish the loan and
damages, exemplary damages, and attorney’s fees. expressed as interim security for the repayment.
The condominium unit then is a mere temporary security, not RTC Reinstatement. This time the RTC held that the spouses
a payment to settle their promissory notes. There was an Sinamban must, solidarily with the spouses Manalastas,
express stipulation that it is a plain and direct acknowledgment proportionately answer for the loan deficiency pertaining to the
that the parties really intended to merely constitute a real estate two PNs they cosigned, since the mortgage security provided
mortgage over the property. by the spouses Manalastas secured all three PNs and thus also
• iBank did not have the same appreciation it was benefited them as comakers.
construed as to be a collateral for the loan and that
there was no REM. But since they did not cosign PN No. OACL 634-95, the
deficiency judgment pertaining thereto will be the sole liability
The assignment being in its essence a mortgage, it was but a of the spouses Manalastas. CA affirmed such decision of the
security not a satisfaction. Nowhere in the Deed of Assignment RTC.
can it be remotely said that a sale of the condominium unit was
contemplated by the parties, the consideration for which would Are the Spouses Sinamban liable for the deficiency even though
consist of the amount of outstanding loan due to iBank from they only signed two PNs as comakers?
the petitioners.
Comaker of PN Binding Solidarily is Primarily Liable
SINAMBAN v. CHINA BANKING CORPORATION (2015) A comaker of a PN who binds himself with the maker “jointly
and severally” renders himself directly and primarily liable with
Facts: February 19, 1990, the spouses Danilo and Magdalena the maker on the debt, without reference to his solvency.
Manalastas executed a Real Estate Mortgage in favor China
Bank over two real estate properties in Pampanga to secure a Promissory Note is a solemn acknowledgement of a debt and
loan of P700K intended as working capital in their rice milling a formal commitment to repay it on the date under the
business. During the next few years they had amendment conditions agreed upon by the borrower and the lender.
increasing their credit to P2,450,000 on March 23, 1994.
A person who signs such an instrument is bound to honor it as
The spouses Manalastas executed several promissory notes in a legitimate obligation duly assumed by him through the
favor of China Bank. In the two PNs petitioner spouses signature he affixes thereto as a token of good faith. If he
Sinamban signed as comakers. In 1995, Chinabank filed a reneges on his promise without cause, the forfeits the sympathy
Complaint for Sum of Money against the parties. The complaint and assistance of this Court and deserves sharp repudiation.
alleged was that they reneged on their loan obligation under
the PNs executed on different dates. In the case: The three subject PNs uniformly describe the
solidary nature and extent of the obligation assumed by each
All the three promissory notes carried an acceleration clause of the defendants “I/We jointly and severally”.
stating that if the borrowers failed to pay any stipulated
interest, installment or loan amortization as they accrued, the In this case, the spouses Sinamban expressly bound themselves
notes shall, without notice be immediately due and to be jointly and severally, or solidarily, liable with the principal
demandable. makers of the PNs, the spouses Manalastas
On the basis on the SOA, Chinabank instituted extrajudicial Article 1216, Chinabank Opted to Proceed Against
foreclosure against the mortgage security. The foreclosure sale Co-Debtors Simultaneously on the Entire Amount
was held on May 18, 1998 with Chinabank as the highest bid Article 1216 provides that the creditor may proceed against any
but still with the auction there was still a loan deficiency of one of the solidary debtors or some or all of them
P1,758,427 and prayed to direct defendants to jointly and simultaneously. The demand made against one of them shall
severally settle the said deficiency. not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been
The Spouses Sinamban do not recall having executed fully collected.
promissory notes and had no participation in execution. They
however admitted that they signed some PN forms as comakers In the case: Each PN is simultaneously covered by the same
upon requests from relatives; although they insisted that they mortgage security, the foreclosure of which will also benefit
derived no money or other benefits from the loans. them proportionately. No PN enjoys any priority or preference
• They denied knowing about the mortgage security in payment over the others, with the only difference being that
provided the spouses Manalastas and default and that the spouses Sinamban are solidarily liable for the deficiency on
they did not receive notice of foreclosure. two of them.
• The Spouses Manalastas were declared in default.
Pursuant, then, to the order or manner of application of the
RTC. The defendants Manalastas and Sinamban are jointly and auction proceeds chosen by Chinabank, the solidary liability of
severally liable for the deficiency. MR. They are liable for the the defendants pertaining to each PN on the proportion of the
PNs that they had signed and it would be unfair to make them two signed PNs.
liable for the remaining amount of the deficiency.
LIGHT RAIL TRANSIT AUTHORITY v. MENDOZA (2015) LRTA Obligated Itself to Fund Operating Expenses
Trinidad stressed that as a consequence of the nonrenewal of
Facts: The LRTA is a GOCC under EO 603 was mandated to the O & M agreement by LRTA, METRO was compelled to close
entered into a ten-year operation and management agreement its business operations effective September 30, 2000. This
with the Meralco Transit Organization Inc. (MTOI) from June 8, created, Trinidad added, a legal obligation to pay the qualified
1984 to June 8, 1994 for an annual fee of P5M. Operating employees separation benefits under existing company policy
expenses included all salaries and fringe benefits and top and collective bargaining agreements. The METRO Board of
management compensation. Directors approved the payment of 50% of the employees’
separation pay because that was only what the Employees’
On June 9, 1989 the Manila Electric Company who owned Retirement Fund could accommodate.
499,990 of MTOI shares of stocks sold such to LRTA which made
it a wholly owned subsidiary of LRTA changing its corporate Evidence: LRTA anticipated and prepared for the non-renewal,
name as Metro Transit Organization, Inc. (MTERO). Renewed eventual cessation, involuntary loss of jobs. The clear language
the O&M agreement and extended on a month to month basis. of Resolution No. 00-44, to our mind, established the LRTA’s
obligation for the 50% unpaid balance of the respondents’
On July 25, 2000 the Pinag-isang Lakas ng Manggagawa sa separation pay.
METRO, INC., the rank-and-file union at METRO, staged an
illegal strike over a bargaining deadlock, paralyzing the LRTA is Solidarily Liable as an Indirect Employer
operations of the light rail transport system. In July 28, 2000 the This liability arises from the O & M agreement it had with
LRTA agree to shoulder METRO’s operating expenses for two METRO, which created a principal-job contractor relationship
moths and updated the Employee Retirement Fund. between them. Article 107 and 109 of the Labor Code
provides that an indirect employer is solidarily liable for the
Due to the strike, the LRTA no longer renewed the O&M violations of any provision of the Labor Code.
agreement when it expired on July 31, 2000 resulting to the • The agreement was terminated not on the fault of
cessation of METRO’s operation and the termination of the the METRO for they had no choice on the matter
employment of its workers which are the respondents. considering it was a mere subsidiary.
• On April 2001, the METRO-BOD authorized payment • There was involuntary loss of their employment.
of 50% of the dismissed employee’s separation pay to
be sourced from the retirement fund. Article 1223. Joint Indivisible Obligations
• On May 2001, the received such 50%, but demanded
for the 50% balance but rejected, prompting them to LAM v. KODAK PHILIPPINES (2016)
file a formal complaint to the labor arbiter.
Facts: Lam Spouses and Kodak Philippines entered into an
Labor Arbiter. Labor Arbiter (LA) Arthur L. Amansec pierced the agreement for the sale of three units of the Kodak Minilab
veil of METRO’s corporate fiction, invoked the law against System in the amount of P1,796,000 per unit.
labor-only contracting, and declared LRTA solidarity liable with 1. Total of 19% multiple order discount
METRO for the payment of the remaining 50% of respondents’ 2. Order discount be applied in the form of merchandise
separation pay. On appeal, NLRC affirmed thereby dismissing and delivered in advance immediately after signing.
the appeal. It also held that the case had not prescribed. LRTA 3. No downpayment.
moved for reconsideration, but the NLRC denied the motion in 4. Payable in 48 monthly installments at P35K.
its resolution of March 30, 2009. 5. Prevailing price of P1,796,000
6. Price is subject to change without prior notice.
CA. The CA affirmed the NLRC ruling that LRTA is solidarily
liable for the remaining 50% of respondents’ separation pay, On January 15, 1992, Kodak Philippines, Ltd. delivered one (1)
but not squarely on the same grounds. Unlike the NLRC, it unit of the Minilab Equipment in Tagum. stalled by Noritsu
considered inapplicable the doctrine of piercing the veil of representatives on March 9, 1992.10 The Lam Spouses issued
corporate fiction to justify LRTA’s solidary liability due to the postdated checks amounting to P35,000.00 each for 12 months
absence of fraud or wrongdoing on LRTA’s part in relation to as payment for the first delivered unit.
the nonpayment of the balance.
• It agreed with the NLRC finding that LRTA The Lam Spouses requested that Kodak Philippines, Ltd. not
provided METRO’s “operating expenses” which negotiate the check dated March 31, 1992 allegedly due to
included the employees’ wages and fringe insufficiency of funds. owever, both checks were negotiated by
benefits, and all other general and administrative Kodak Philippines, Ltd. and were honored by the depository
expenses relative to the operation of the light rail bank.
transit system.
The 10 other checks were subsequently dishonored after
Is the LRTA liable for the fifty percent unpaid balance of the the Lam Spouses ordered the depository bank to stop
separation pay of the dismissed workers? payment.
Kodak Philippines, Ltd. canceled the sale and demanded that Joint Indivisible Obligation, Not Only on Subject Matter
the Lam Spouses return the unit it delivered together with its The Letter Agreement contemplated a “package deal” involving
accessories. The Lam Spouses ignored the demand but also three (3) units of the Kodak Minilab System 22XL. The intention
rescinded the contract due to failure to deliver. of the parties is for there to be a single transaction covering
• Kodak filed a complaint for replevin and or recovery all three (3) units of the Minilab Equipment. Respondent’s
of sum of money. obligation was to deliver all products purchased under a
• Lam Spouses failed to appear during pretrial despite “package,” and, in turn, petitioners’ obligation was to pay
extensions and declared in default, Kodak ex parte. for the total purchase price, payable in installments.
RTC. Kodak Philippines, Ltd. was able to obtain a writ of seizure The intention of the parties to bind themselves to an indivisible
on December 16, 1992 for the Minilab Equipment installed at obligation can be further discerned through their direct acts
the Lam Spouses’ outlet in Tagum, Davao Province. The writ was in relation to the package deal.
enforced on December 21, 1992, and Kodak Philippines, Ltd. • There was only one agreement covering all three units
gained possession of the Minilab Equipment unit, accessories, of the Minilab Equipment and heir accessory.
and the generator set. • The Letter Agreement specified only one purpose for
• CA set aside orders and ordered remanded to RTC. the buyer, which was to obtain these units for three
different outlets.
RTC Remand. It found that Kodak Philippines, Ltd. defaulted in • The 19% Multiple Order Discount was applied to all
the performance of its obligation under its Letter Agreement three acquire units.
with the Lam Spouses. It held that Kodak Philippines, Ltd.’s
failure to deliver two (2) out of the three (3) units of the Minilab Tenor of the Letter Agreement Must Prevail, Article 1225
Equipment caused the Lam Spouses to stop paying for the rest Article 1225 of the Civil Code provides that even though the
of the installments. object or service may be physically divisible, an obligation is
• Also ruled when the Lam Spouses accepted delivery of indivisible if so provided by law or intended by the parties.
the first unit, they became liable for the fair value of
the goods received. In the case: There is no indication in the Letter Agreement that
• They were under obligation to pay for the amount of the units petitioners ordered were covered by three (3) separate
one unit, and the failure to deliver the remaining units transactions. The factors considered by the Court of Appeals are
did not give them the right to suspend payment for mere incidents of the execution of the obligation, which is to
the unit already delivered. deliver three units of the Minilab Equipment on the part of
Generator set was purchased it from Davao Ken Trading, not respondent and payment for all three on the part of petitioners.
from Kodak Philippines, Ltd. Thus, the generator set that Kodak
Philippines, Ltd. wrongfully took from the Lam Spouses should The intention to create an indivisible contract is apparent
be replaced. from the benefits that the Letter Agreement afforded to both
parties. Petitioners were given the 19% discount on account of
CA. Court of Appeals ruled that the Letter-Agreement executed a multiple order, with the discount being equally applicable to
by the parties showed that their obligations were susceptible of all units that they sought to acquire. The provision on “no
partial performance stating that: downpayment” was also applicable to all units. Respondent, in
• We found that the intention of the parties is to be turn, was entitled to payment of all three Minilab Equipment
bound separately for each Minilab Equipment to be units, payable by installments.
delivered as shown by the separate purchase price for
each of the item, by the acceptance of Sps. Lam of Propriety and Application of Rescission
separate deliveries for the first Minilab Equipment and The contract between the parties is one of sale, where one party
for those of the remaining two and the separate obligates himself or herself to transfer the ownership and
payment arrangements for each of the equipment. deliver a determinate thing, while the other pays a certain price
• the contract is one that is severable in character as in money or its equivalent.
demonstrated by the separate purchase price for each
of the minilab equipment. Effect of Rescission. Rescission creates the obligation to return
• Rescission led to mutual restitution. the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be
Is the Agreement between the Spouses Lam and Kodak obliged to restore.
Philippine severable, divisible and susceptible of partial
performance under Article 1225? To rescind is to declare a contract void at its inception and to
put an end to it as though it never was. It is not merely to
Discussion: Spouses Lam Petitioners assert that the obligations terminate it and release the parties from further obligations to
of the parties were not susceptible of partial performance since each other, but to abrogate it from the beginning and restore
the Letter Agreement was for a package deal consisting of the parties to their relative positions as if no contract has been
three (3) units for the delivery were obliged to pay 48 monthly made.
payments, the total of which constituted one debt.
In the case: Petitioners must relinquish possession of the partially complied their obligation in the promissory note by
delivered Minilab Equipment unit and accessories, while the reduction of the original amount from P120K to P114K, and
respondent must return the amount tendered by petitioners as in order that they will finally settle their obligation, it is of the
partial payment for the unit received. view of the CA that the penalty of 3% rather than 5% would
suffice.
On offsetting. Further, respondent cannot claim that the two (2)
monthly installments should be offset against the amount Penalty Clause, Application
awarded by the Court of Appeals to petitioners because the Although a court may not at liberty ignore the freedom of the
effect of rescission under Article 1191 is to bring the parties parties to agree on such terms and conditions as they see fit
back to their original positions before the contract was entered that contravene neither law or morals, a stipulated penalty,
into. nevertheless, may equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation as
On court intervention. Court intervention only becomes been party or irregularly complied with.
necessary when the party who allegedly failed to comply with
his or her obligation disputes the resolution of the contract. IN THE CASE:The CA exercising its good judgment in the instant
Since both parties in this case have exercised their right to case, has reduced the penalty interest from 5% a month to 3%
resolve under Article 1191, there is no need for a judicial decree a month which petitioner still disputes. Given the
before the resolution produces effects. circumstances, not to mention the repeated breach by
petitioners of their contractual obligation, the Court sees no
Damages in Case of Mutual Breach cogent ground to modify the ruling of the appellate court.
Furthermore, the actual damages amounting to P2,040,000.00
being sought by petitioners must be tempered on account of Held: The petition is denied. The CA’s determination of the 3%
their own failure to pay the rest of the installments for the penalty per month is affirmed by the court. So ordered.
delivered unit. This failure on their part is a breach of their
obligation, for which the liability of respondent, for its failure to
deliver the remaining units, shall be equitably tempered on PRYCE CORPORATION v. PAGCOR (2005)
account of Article 1192 of the New Civil Code.
• Since there was a first infractor, the other party’s Facts: Sometime in the first half of 1992, Pryce Properties
damage is equitably tempered. Corporation (PPC) made representations with PAGCOR on
possibility of setting up a casino in Pryce Plaza Hotel in CDO.
1226-1229. Obligations with a Penal Clause PAGCOR reps went to CDO to determine the pulse of the
people whether the presence of a casino would be welcomed
LIGUTAN v. COURT OF APPEALS (2002) by the residents. Some local government officials showed keen
interest in the casino operation and expressed the view the
Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana possible problems were surmountable.
obtained on May 11, 1981 a loan in the amount of P120,000
from Security Bank and Trust Company. Petitioners executed a On November 11, 1992, the parties executed a Contract of
promissory note binding themselves jointly and severally to Lease involving the ball of the Hotel for a period of three years
pay the sum borrowed with an interest of 15.189% per year and an addendum which included a lease of an additional 1000
upon maturity and to pay a penalty of 5% every month on the sq.m. of hotel grounds as living quarters and playground of the
outstanding principal and interest in case of default. In addition, casino personnel. PAGCOR advertised at the start of 1992.
they agreed to pay 10% of the total amount by way of
attorney’s fees. Way back in 1990, the SP of CDO passed Resolution No. 2295
declaring it a matter of policy to prohibit and/or not to allow
Despite several demands from the bank, petitioners failed to the establishment of a gambling casino in CDO. Another
settle the debt which amounted to P114K. On September 30, resolution was passed in1992, reiterating with vigor and
1982 the bank sent a final demand letter to petitioners vehemence the policy of the city banning casinos in CDO. And
informing them that they had five days within which to make on December 7, 1992, the SP enacted Ordinance 3353
full payment. Still they defaulted a complaint for recovery of prohibiting the issuance of business permits and canceling
sum of money was filed with RTC Makati. Petitioners failed to existing business permits to any establishment for using, or
present evidence and MR was denied. allowing to be used, its premises or any portion thereof for
the operation of a casino.
Upon appeal with the CA, they questioned their rejection by the
trial court of their motion to present evidence assailing the In the afternoon of December 18, 1992, just a few hours before
imposition of the 2% service charge, the 5% per month monthly the actual formal opening of casino operations, a public rally
penalty charge and 10% attorney’s fees. in front of the hotel was staged by some local officials,
residents, and religious leaders. Barricades were placed which
In its decision the CA affirmed the judgment of the trial court prevented personnel and hotel guests from entering and
except the service charge. Considering that defendants
exiting the Hotel. PAGCOR was restrained to suspend casino

operations because of the rally. An agreement ended rally. These stipulations are valid and are not contrary to law. Neither
is there anything objectionable about the inclusion of the
On January 4, 1993 another Ordinance was passed by the SP of provisions in the Contract. Being the primary law between the
CDO prohibiting the operation of casinos and providing penalty parties, it governs the adjudication of their rights and
for violation thereof. PPC filed a Prohibition with Preliminary obligations.
Injunction against CDO and Mayor Magtajas declaring its
unconstitutionality for being violative of the non-impairment of A court has no alternative but to enforce the contractual
contracts and equal protection clauses. The SC affirmed the stipulations in the manner they have been agreed upon and
decision of the CA finding the ordinance unconstitutional written. Courts have no power to make or modify contracts.
and void and the city was enjoined from enforcing. Neither can they save parties from disadvantageous
provisions.
In the meantime, PAGCOR resumed casino operation on July
15, 1993 however was indefinitely suspended due to incessant Termination or Rescission
demonstrations. Per verbal advice from the Office of the The term is rescission is found in the Civil Code in the following:
President of the Philippines, PAGCOR decided to stop its 1. Article 1191 on rescission of reciprocal obligations
casino operations in the hotel. 2. Article 1659 which authorizes rescission as an
alternative remedy insofar as the rights and
In two SOAs, PPC apprised PAGCOR of its outstanding account obligations of the lessor and the lessee in contracts of
for the lease as well as two letters including a decision to collect lease are concerned
the full rentals in case of pre-termination of the lease. 3. Article 1380 with regards of rescission of contracts.
PAGCOR sent PPC a letter stating that it was not amenable to Rescission is defined as the unmaking of a contract, or its
the payment of the full rentals citing as reasons unforeseen undoing from the beginning and not merely its termination. On
legal and other circumstances which prevented it from the other hand, termination refers to an end in time or
complying with its obligations. existence, a close, a cessation or conclusion.
PAGCOR argued that it had not other alternative but to pre- In rescission, there is mutual restitution. Meanwhile in
terminate the lease agreement due to the relentless and termination they are not restored to their original situation,
vehement opposition to their casino operations. In turn, neither is the contract treated as it never existed. Prior to its
PAGCOR asked for reimbursement of the improvement of the termination, the parties are obliged to comply with the
hotel’s parking lot from PPC amount to P1.437M. Both parties contractual obligations. Only after the contract has been
filed a complaint for recovery of sum of money. cancelled will they be released from their obligations.
CA Ruling IN THE CASE:Actions and pleadings of Pryce show that it never

CA ruled that PAGCOR’s pretermination of the Contract of intended to rescind the Lease Contract. It was evidence that it
Lease was unjustified. The rallies were not considered as demanded the enforcement and payment of rentals before
fortuitous events that would exempt the gaming corporation termination.
from complying with its contract obligations.
Future rentals cannot be claimed as compensation for the use
Issue: or enjoyment of another’s property after the termination of the
Did the CA commit grave and reversible error by holding that contract. By abrogating the Contract in the present case, PPC
Pryce was not entitled to future rentals or lease payments for released PAGCOR from the latter’s future obligations, which
the unexpired period of the Contract of Lease? included the payment of rentals, to grant such would be unjust
enrichment on the part of PPC.
On Collection of Remaining Rentals
PPC anchors its right to collect future rentals on the provisions Article in the Contract is a Penalty Clause
of the Contracts and that termination is different from In obligations with a penal clause, the general rule is that the
rescission under Article 1659. PAGCOR argued that 1659 penalty serves as a substitute for indemnity for damages and
governs thus PPC is no longer entitled for such future rentals the payment of interests. But there are exceptions when the
because it chose to rescind the contract. obligee can recover both penalty and damages:
1. When there is a stipulation to the contrary
Article 1159: Contract Provision has Effect of Law 2. When the obligor is sued for refusal to pay the agreed
In their Contract of Lease, the parties agreed that: penalty
1. To give PPC the right to terminate and cancel the 3. When the obligor is guilty of fraud
Contract in the event of a default or breach by the
lessee IN THE CASE:The first exception applies because Article XX(c) of
2. To make PAGCOR fully liable for rentals for the the contract provides that aside from the payment of the rentals
remaining term of the lease despite the exercise of corresponding to the remaining term of the lease, the lessee
such right to terminate. shall be liable for all damages, actual or inconsequential
resulting form the termination of the contract. PAGCOR must took possession of the store space in SM and confiscated the
be held bound to its obligations. equipment and personal belongings of the petitioner found
therein after the expiration of the lease contract.
Reduction of Penalty
The question of whether a penalty is unconscionable or Petitioner demanded the release of the equipment’s and return
reasonable is addressed to the sound discretion of the courts. of security deposits but was not heeded. This prompted the
To be considered in fixing the amount are the type, extent, petitioner to file for Specific Performance, Sum of Money and
purpose of the penalty; the nature of the obligation; the mode Damages against Supervalue, Inc.
of the breach and its consequences; the supervening realities;
standing relationship of the parties; and the like. Respondent countered that petitioner committed several
violations of the terms by not opening, introducing new variety
IN THE CASE: PAGCOR’s breach was occasioned by events, and that also frequently closing earlier than agreed closing
although not fortuitous in law, were in fact real and pressing. hours. Respondent averred that petitioner is liable for P106K
We find that PAGCOR conducted a series of negotiations and representing the penalty for selling a new variety of
consultations before entering into the Contract not only with empanada, electricity and water bills, rental adjustments.
PPC but also with local officials who assured that the problem
was surmountable. PAGCOR even took pains to contest the RTC rendered a judgment in favor of Florentino and found that
ordinances which was indeed declared unconstitutional. And the physical takeover was illegal. CA modified and found that
was advised by the OP to stop their operations. They also Supervalue was justified in forfeiting the security deposits
suspended their operations led to tremendous loss of revenues and was not liable to reimburse the petitioner of the value
and only fully operated under the Contract for a limited time. of the improvements introduced. Supervalue has no
obligation to reimburse Florentino for the amount.
HELD: We consider the claim for future rentals as penalty
amounting to P7,037,835.40 to be highly iniquitous. The CA maintained RTC order for respondent to return properties
amount is reduced to the advanced deposits in the sum of after she has settled here obligations to the respondent. CA
P687,289.50 should be sufficient for the breach. denied petitioner’s MR.
FLORENTINO v. SUPERVALUE, INC. (2007) Issue:

Whether or not the respondent is liable to return the security
Facts: Petitioner is doing business under the business name deposits to the petitioners.
“Empanada Royale” a sole proprietorship engaged in the retail
of empanada. Respondents is a domestic corporation engaged Penalty Clause on the Contract of Lease
in the business of lending stalls and commercial store spaces Since it was already established that petitioner was guilty of
located inside SM Malls all throughout the country. committing several breaches, the CA decreed that she cannot
rightfully demand the return of the security deposits for the
In March 1999, petitioner and respondent executed three same are deemed forfeited because of evident contractual
Contracts of Lease containing similar terms and conditions obligations. The provision is in a nature of a penal clause to
over cart-type stalls at SM North Edsa, SM Southmall and a ensure faithful compliance with the terms and compliance. The
store space at SM Megamall. The term of each contract is for a contractual provision reads:
period of four months and renewable upon agreement. Before
expiration of said contracts, petitioner received two letters from “SECTION 18. Termination. – Any breach, non-perofrmance or non-
Supervalue with the following: observance of the terms and conditions herein provided shall constitute
default which shall be sufficient ground to terminate this lease, its
1. Petitioner was charged with violation Section 8 of the
extension or renewal. In which event, the LESSOR shall demand that
Contract of Lease by not opening on December 16,
LESSEE immediately vacate the premises and LESSOR shall forfeit in
1999 and December 26, 1999. Respondent was also its favor the deposit tendered without prejudice to any such other
charged with selling a new variety of empanada appropriate action as may be legally authorized.”
called the mini-embutido and of increasing the price
of her merchandise from P20 to P22 without the prior Reduction of Penalty
approval of the respondent. And was frequently GENERAL RULE: Courts are not at a liberty to ignore the freedoms
closing earlier than the usual mall hours due to non- of the parties to agree on such terms and conditions as they
delivery or delay in the delivery of stocks. see fit if they are not contrary to law.
2. In second letter, respondent informed the petitioner
that it will no longer renew the Contracts of Lease for EXCEPTION: Nevertheless, the courts may equitably reduce a
the three outlets. stipulated penalty in the contracts in two instances:
1. If the principal obligation has been partly or irregularly
Petitioner explained that the mini-embutido is not a new complied with.
variety of empanada but had similar filing, only its size was 2. Even if there has been no compliance, if the penalty is
reduced in order to make it more affordable. But still the iniquitous or unconscionable.
respondent still refused to renew its contract. Respondents
IN THE CASE:The forfeiture of the entire amount of security Indemnity Agreement including serval employees of DBC
deposits in the sum of P192,000 was excessive and consenting to their joint and several liabilities to Country
unconscionable considering that the gravity of the breaches Bankers in case the surety bond be executed upon.
committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable On April 23, 1992 the Country Bankers received a Motion for
to reduce the penalty of the petitioner to 50% of the total Execution of the surety bond filed by Borja with RTC Caloocan
amount of the security deposits. The respondent is then for Rogelio’s alleged violation of the Compromise Agreement.
under the obligation to return the 50% of the P192,000. Despite the question on the status of the Omnibus Motion filed
by Rogelio, the Sheriff arrived at the Country Bankers office thus
On Reimbursement of the Improvements restraining it was constrained to pay the amount of the surety
To be entitled to reimbursement for improvements introduced bond in this case. The Motion was denied. Country Bankers
to the property, the petitioner must be considered a builder in demanded from the petitioners the reimbursement.
good faith. A builder in good faith is one who is unaware of
any flaw in his title to the land at the time which he builds on it. Petitioner wrote Country Bankers stating that the voluntary
payment of the surety bond done by the surety prevented them
IN THE CASE:The petitioner cannot claim that she was not aware from contesting the validity of the issuance of the Writ of
of any flaw in her title or was under the belief that she is the Execution (due to the fait accomplis of the case). This prompted
owner thereof. Being mere lessees, they knew that their Country Bankers to file for recovery of sum of money.
occupation of the premises would continue only for the life of
the lease. Plainly, they cannot be considered possessors nor CA reversed RTC ruling on dismissing Country Bankers’
builders in good faith. petitioner. The appellate court expressed that what Country
Bankers paid was an obligation legally due and demandable. It
HELD: The instant petition is partly granted. The CA decision is acted on compulsion of the writ of execution, which appears to
affirmed with the modification that the respondent may forfeit have been regularly, and validly issued, and, by its very nature,
only 50% of the total amount of the security deposits in the sum is immediately enforceable.
of P192,000, and must return the remaining 50% to the
petitioner. No costs. Issue:
Whether petitioners should indemnify Country Bankers of bond.
DIAMOND BUILDERS v. COUNTRY BANKERS (2007) Discussion: The court denies the appeal and affirm the ruling
of the Court of Appeals.
Facts: The controversy originated form a civil case in RTC
Caloocan filed by Marceliano Borja against Rogelio S. Acidre Nature of a Compromise Judgment
for the latter’s breach of his obligation to construct a residential A compromise judgment is a decision rendered by the court
and commercial building. Rogelio is the sole proprietor of the sanctioning the agreement between the parties concerning the
petitioner Diamond Builders Conglomeration. determination of the controversy at hand. It is stamped with
judicial imprimatur, and done by two parties putting an end to
To put an end to the foregoing litigation, the parties entered a lawsuit, adjusting their difficulties by mutual consent in the
into a Compromise Agreement which reads in part: manner which they agree on. Upon court approval, it transcends
its identity as a mere contract as it becomes a judgment. As a
e. Rogelio should pay the amount of P570,000 as follows: rule, compromise judgments are non-appealable.
1. P370,000 from 5th day of approval of Compromise
Agreement signaling the start of 75 days to complete If a party fails or refuse to abide by the compromise agreement,
construction of the building. the other party may either enforce the compromise or regard it
2. xxx as rescinding and insist upon original demand.
3. Must be fully finished pursuant to the agreement
within 75 days counted from the receipt of payment. IN THE CASE:The Compromise Agreement between Borja and
4. Upon receipt of the amount, Rogelio shall submit in Rogelio explicitly provided that in case of the failure to
favor of the plaintiff a performance or surety bond complete construction in 75 days, the full implementation of
to answer or indemnify plaintiff in the event the the surety bound as be made as penalty to the default, as an
building is not finished on the 75th day. award of damages to Borja. Therefore, the payment made by
5. If completed in 75 days, plaintiff shall pay P200,000 Country Bankers to Borja was proper.
and P90,000 as bonus. If failed to complete on the 75th
day, Rogelio shall not be entitled to any further When RTC Manila ruled that the payment was “voluntary” by
payments and the performance or surety bond shall be Country Bankers, it disregarded the non-appealable nature of a
fully implemented by way of penalizing and/or as compromise agreement. And the Petition was done 12 days
award for damages in favor of plaintiff. after the payment was made, thus the Court is perplexed
why the petitioners are banking on a reconsideration that
In compliance, Rogelio obtained a Surety Bond from Country has already been issued and satisfied.
Bankers in favor of the Spouses Borja. They also signed an
Solidary Liability towards Country Bankers

The Indemnity Agreement signed by Rogelio and other
petitioners explicitly provided for an incontestability clause
which reads in part:
Any payment or disbursement made by Country Bankers xxx

either in the belief that it was obligated to make such payment
or in the belief that payment was necessary to avoid greater
loss shall be final and shall not be disputed by the undersigned,
who thereby jointly and severally bind themselves.
RULE:Petitioners are obligated to reimburse Country Bankers

the amount of P370,000 jointly and severally as agreed.
Suretyship Does Not Bind Surety to Creditor

CONTENTION: Petitioners desperately attempt to impute to
Country Bankers lack of initiative for it to intervene in the
execution proceedings before the RTC.
This contention, as with the rest of the petitioner’s arguments

deserves scant consideration. It is only a surety as a co-debtor
in the penal clause but no a solidary debtor of Rogelio. The
suretyship does not bind the surety to the creditor. The
moment the surety is fulfilled, the surety may ask from
reimbursement from the principal debtor for the amount paid.
HELD: The petition is denied. The decision of the Court of

Appeals is affirmed. Costs against petitioner.
PRESCRIPTION AND OBLIGATIONS ARTICLE 1164. Obligations to Deliver a Thing

Q1. X obtained a loan from the bank, secured by a real estate
Review Notes under Atty. Galas
mortgage over a parcel of land. X did not pay the loan, the bank
foreclosed the mortgage. There was now redemption, title is
ARTICLE 1129. Just Title and Transmission of Rights
consolidated in the name of the bank. Subsequently Y filed a
Q1. Can the debtor dispose, encumber, alienate a property;
case against X, claiming that the Deed of Sale presented by X
a. Prior to the happening of a resolutory condition?
to the Register of Deeds was a forgery and this was proven that
b. Prior to the happening of a suspensive condition?
indeed Y’s signature to such is a forgery. The court declared the
nullity of the deed of sale. Title was reconveyed to Y. The Court
A. Yes, the possessor has just title, but he cannot transmit
said, the bank is mortgagee in good faith, and as such the
any right over it because there is that condition like in
mortgage annotation is carried over to the title on X.
suspensive or resolutory condition. In a resolutory
condition, there is mutual restoration, while in a
The bone of contention is that, the property has a building but
suspensive condition, such condition is required
is producing fruits in the form of rentals. Who has better right
before obligations arises.
over the rentals or the fruits?
Q2. In dation in payment, the debtor in lieu of the obligation

A. The rentals should belong to Y. The property that was
consisting of a sum of money, the debtor offers a thing and the
mortgaged was only the parcel of land, it excluded the
creditor accepts. If the creditor accepts it, does he have a right
accession, so it belongs to Y. Moreover, the deed of
over it?
sale was void making all the products (real estate
mortgage and foreclosure) also void. That is without
A. Yes, he has just title over however this title is defective,
prejudice to the part Y to annul the entire transaction.
so he cannot transmit any right over because this is
But in terms of the fruits, it belongs to Y because the
governed by the law on sales. Thus, for it to have its
property of the mortgage is only the land, what is not
title perfected, there must be a subsequent deed of
included is deemed excluded, and the only subject
sale. He was not yet the owner due to the absence of
matter was only the land, thus the accessions are not
the deed of sale.
included.
• In relation to Article 1130. The evidence of just title can

ARTICLE 1174. Fortuitous Events
be the agreement of dation in payment itself, but it is
Q1. What are the exceptions towards the general rule that “no
not a proof of ownership for it still requires a deed of
one shall be responsible to events that cannot be foreseen, and
sale.
if it can be foreseen, it is inevitable?”
ARTICLE 1138. Tacking of the Period

A. The following are considered exceptions to the non-
Q1. Suppose the possessor was in bad faith, while the
responsibility in cases of fortuitous events:
subsequent possessor is in good faith. It must be a successor-
1. Law
in-interest (if it was a stranger, it is not allowed). So, what if it
2. Stipulation by the parties
there is possession in bad faith for eighteen (18) years, and the
3. Doctrine of created risk
subsequent possessor is in good faith? (Property in question is
4. Object is generic or indeterminate
immovable).
5. Obligor is in delay
6. Arises from the crime
A. Ordinary prescription, in good faith and with just title
7. Degree of diligence required
is ten (10) years (1134). While extraordinary
8. Delivery to two persons not of the same interest
prescription, in bad faith, is thirty (30) years (1137). The
9. Coupled with the negligence of the debtor
subsequent possessor in good faith must complete
four (4) more years before he has acquired the
NOTE: Tire blow-out and defective breaks are not considered as
property through prescription.
fortuitous events.
Rationale: In prescription of ownership and other real

ARTICLE 1180. When Court is to Fix Period
rights over immovables, one year of possession in
• When my means permit me to do so
good faith, is equivalent to three years of possession
• When I can afford it
in bad faith. That is why in this question, the preceding
• I will pay you little by little
eighteen (18) years of possession in bad faith by the
• When he is able
first possessor is equivalent to six (6) years in good
• As soon as I will have the financial capacity
faith, that is why the subsequent possessor, in good
There is no specific term or period when the debtor should
faith, has only to tack 4 years of possession in good
perform, thus any demand by the creditor towards the debtor
faith to acquire the property by prescription.
shall be premature. The recourse is to go court and let the court
fix the period pursuant to Article 1197.
Unless the fixing of the period is now unnecessary for it would but was made impossible by supervening event, it will not affect
serve no purpose but to further delay the performance of the the validity of the obligation.
obligation, because it has been outstanding, then there is no
more need to fix the period (Central Philippines University v. ARTICLE 1188. Preservation of the Creditor’s Rights
Court of Appeals, 1995). Q1. May the debtor prior to the happening of the suspensive
condition commit an act that would prejudice the creditor, with
ARTICLE 1182. Potestative Conditions the debtor whom has only a right which is inchoate or mere
Not only the condition is void, but the entire conditional expectancy because he still must wait for the happening of the
obligation because it is based on the sole will of the debtor suspensive condition.
which is based on a pure potestative condition. The obligation
becomes due and demandable, which makes the debtor A. It depends on the object of the obligation. There is no
immediately liable. problem if the object is generic or indeterminate
because it can be performed by delivery of another in
Examples of Pure Potestative Conditions the same class or specie. But not if determinate or
Trillana v. Quezon College (1953). The stipulation in this case specific.
what that the debtor would pay the full value of a subscription
for shares in the Quezon College “after she had harvested the ARTICLE 1191. Rescission/Resolution of Obligations
fish” which shows that it is dependent upon her sole will which
makes the conditional obligation void. Notable Distinctions between 1191 and 1381
1191 1381
Osmeña v. Rama (14 Phil. 99). The defendant executed a Only applicable to May also apply to unilateral
promissory note stating that “I promise that if the house where reciprocal obligations obligations
I live is sold, I will pay my indebtedness” is an example of a Based on breach of faith Based on pecuniary injury
potestative condition dependent upon the exclusive will of the Principal action Subsidiary action
debtor, and is therefore, void. Only available to the injured Available even to third
party persons
Example of Mixed Potestative Condition (Valid)
Hermosa v. Longara (1953). The condition of the obligation NOTE: Article 1191 is resolution and restored to their status as
involved in this case was that payment was to be made as soon if there was no obligation, this is cancellation not termination,
as debtor receives funds derived from the sale of his property back to status quo ante.
in Spain. The will to sell is present. The condition does not
depend exclusively on his own sole will because there are other Exceptions on the Applicability of Article 1191
factors to be considered like the presence of a buyer and price 1. If there is an express stipulation.
which is beyond his power or control. 2. Contracts of lease
• This condition implies that the obligor had already 3. Recto Law, sale on installment of movables
decided to sell his house and that all that is left to do 4. Maceda Law, sale of realty through installment
is to consummate the sale and the price thereof to be a. Before one can rescind, there must be a
remitted to him. notarial notice of rescission. Without such,
• If the condition were, “if he decides to sell his house” or there can be no rescission on the part of the
“if he likes to pay the sums advanced” or “If I will sell injured party absent such requirement.
my house” implying that the debtor alone would
payment depend, the condition would be purely Principles under Assigned Cases on Rescission
potestative dependent upon his will or discretion Cannu v. Galang (2015)
which is void if such happens. Rescission under Article 1191 can be availed only when there is
a substantial breach, however, when there is only a slight
NOTE: Potestative resolutory condition on the part of the breach, it would not warrant rescission but only fixing of the
debtor is valid because the immediate performance of the period.
obligation. Pure potestative on the part of the creditor is valid.
Swire Realty Development v. Yu (2015)
ARTICLE 1183. Impossible Conditions This is a Contract to Sell, and as a general rule, Article 1191 does
• It will only annul the obligation if fulfillment of the not apply to contracts to sell because there is no existing
obligation depends upon impossible condition. contract yet due to the non-happening of the suspensive
• If it is severable, then the obligation shall subsist, the condition.
condition deemed to not have been agreed.
But in this case, the court allowed such because there is already
NOTE: The impossibility must exist at the time of the full payment of the purchase price, yet the debtor still did not
constitution of the obligation even if because of a supervening deliver. There was now application because upon full payment,
it becomes impossible. The impossibility must be present at the the obligation to transfer ownership had arisen.
time of the creation. If it was possible at the time of creation
Fong v. Duenas (2015) Kinds of Terms or Periods

In relation to 1192. Both parties are in mutual breach of their Ex Die (Suspensive) In Diem (Resolutory)
obligations under the verbal joint venture agreement (Duenas, Arrival of period or Arrival of period or lapse
non-incorporation of alliance, usage of funds; Fong, P32.5M to lapse shall make the shall terminate the
P5M contribution). But due to the nature of the verbal contract, performance of the performance of
the Court is unsure as to whom was the first infractor, and such obligation demandable obligation
the second sentence of 1192 applies, wherein they cannot “From a day certain” “To a day certain”
recover damages from each other because each shall bear his “Until a day certain”
own damages.
ARTICLE 1196. Benefit of the Period
Ascano-Cupino v. Pacific Rehouse (2015) GENERAL RULE: Whenever a period is designated, it is presumed
They failed to present the necessary documents, thus they are to have been for the benefit of both the creditor and the
not the injured party and cannot ask for the rescission. Pacific debtor in such obligations.
Rehouse is the injured party and entitled to choose between EXCEPTION: Unless from the tenor of the same it appears that it
rescission or fulfillment with damages in either cases. Pacific favors one of the other.
elected specific performance for the fulfillment of the
obligation. Benefit Examples Debtor’s Creditor’s
Actions Actions
Nolasco v. Cuerpo (2015) Benefit “within the 10th Debtor He may
Rescission was not proper because there was an express for the year” cannot demand the
stipulation for a contractual recourse in case of failure of Creditor pretermination compel him performance
Nolasco to cause the transfer of the subject land to his name, fee to accept at any time
stating that it would be done by Cuerpo at the expense of payment before the
Nolasco, thus rescission was not available as remedy. before the period
period expires.
ASB Realty v. Ortigas (2015) expires.
Even though ASB Realty performed acts in contravention with
the tenor of the Deed of Sale between its assignor Amethyst Debtor
and Ortigas by building commercial spaces when it expressly cannot
stipulated against such, Ortigas cannot hold ASB a party in a refuse the
rescission on such document because there is absence of privity performance
between ASB Realty and Ortigas. of the
demand or
Even though there was this annotation on the title of the else he will
obligations which was carried over by ASB Realty from be in mora
Amethyst upon the Deed of Assignment, the Deed of solvendi.
Assignment did not state that ASB shall step into the shoes of Benefit “on or before Can deliver Cannot
Amethyst as a party in the Deed of Sale. Thus, the annotation for the May 9” or perform compel nor
in the covenants in the deed of sale did not give rise to the Debtor “within five obligation demand the
liability on the party of ASB without its expression assumption to years” within the debtor to
such duties or obligations. period deliver
provided but before the
ARTICLE 1193. Suspensive and Resolutory Periods cannot be arrival of the
compelled to date.
Notable Distinctions between Condition or Term pay before
Condition Term the said Cannot
Future and uncertain Future and certain date. refuse to
Gives rise or extinguishes Does not affect existence of accept the
obligations obligation but only the He may performance
demandability oppose a during such
May be from past event Always refers to the future premature period
unknown to parties demand, but provided or
A condition on the sole A period on the sole will of may validly else he will
will of debtor makes the the debtor empowers the pay anytime be in mora
obligation void. court to fix period. before the accepiendi.
expiration of
the period.
ARTICLE 1198. Grounds when Debtor Shall Lose Benefit of Suppose this is the debtor’s choice. If the debtor chosen the
The Period parcel of land, he informs the creditor of such. But prior to
In relation to 1198 (3) on Fortuitous Event. A car was partially delivery such was expropriated by the state which is considered
destroyed by lightning it does not mean that the obligor now a fortuitous event for he cannot prevent the State. The creditor
loses the benefit of the period, because the law requires, in can still choose between the remaining.
order to lose the benefit of the period by fortuitous event, it
must be totally damaged or has totally disappeared. One that Suppose the car was destroyed through the debtor’s fault, and
is not without that the fault of the obligor. this was the last and was lost through a fortuitous event. The
• If there is fault on the obligor, even if the impairment liability of the debtor shall be damages based on the last thing
is partial unless he gives new ones immediately and lost. If all together was lost, the value of the last thing that
satisfactorily. disappeared. If creditor’s choice, he can choose any of the value
• If the car, even if was totally destroyed, but was of those lost through fault of the debtor, so he cannot choose
insured against fire or lightning, then the debtor shall the parcel of land, its either value of car or Omega Watch.
not lose the benefit of the period because he can claim
benefits from the insurance policy. ARTICLE 1206. Facultative Obligations
NOTE: 1198(5) mere attempts to abscond is sufficient enough Alternative Facultative

for the debtor to lose the benefit of the period thus making the As to contents of the obligation
obligation immediately due and demandable. There are various prestations all Only the principal prestation
of which constitute parts of constitutes the obligation, the
obligation. accessory being only a means
ARTICLE 1200-1205. Rules on Loss of Object of Prestations
to facilitate payment.
Dependent on Person to Choose Creditor must demand all the
prestations in the alternative. Creditor can only demand the
Choice by Debtor Choice by Creditor principal prestation.
General rule and default Must be expressly granted to
right of choice is given to the creditor to have right of As to nullity
the debtor (1200). choice (1200). The nullity of one does not The nullity of the principal
invalidate the obligation, which prestation invalidates the
The debtor shall lose the If through fortuitous event
is still in force. obligation and the creditor
right of choice when 1. If two remains,
cannot demand the substitute
among the prestation, only creditor chooses. even when valid.
one is left practicable 2. If one remains, such As to choice
(1202). is delivered. The right to choose may be Only the debtor can choose the
given to the creditor. substitute prestation.
If through fault of debtor As to effect of loss
1. Loss of one, creditor Only the impossibility of all the The impossibility of the
can choose those prestations without fault of the principal obligation is sufficient
left or the price debtor extinguishes the to extinguish the obligation,
obligation. even if the substitute is
which was lost by
possible.
fault of the debtor
with a right to
VALID FACULTATIVE INVALID “FACULTATIVE”
damages (1205).
I will deliver the P500,000 I will deliver P500,000 on
If all are lost by debtor 2. If all are lost by the
on December 05, 2017 December 05, 2017 but if I
through his fault, creditor debtor through his
and if I am unable, I will cannot deliver it, you will
shall be entitled to fault, creditor can
execute a Deed of Sale become the owner of my car.
damages. choose from the
over my car.
• The basis of price of any of them,
indemnity is the also with indemnity
Valid facultative Void obligation.
value of the last for damages (1205).
obligation. Constitutes pactum
thing disappeared
The principal obligations commissorium, the immediate
or service became
are the money, but the transfer of ownership without
impossible (1204).
debtor can render the any execution of deed of sale.
execution of a deed of If there is automatic transfer,
sale over the car in this is void. Which is different
For the discussion of alternative obligations, please refer to the
substitution. from dation in payment, the
prestations below:
offers a thing in lieu of the
a. 150 sq.m. parcel of land (expropriated)
monetary obligation, and
b. Car (destroyed with debtor’s fault)
subsequently executes a deed
c. Omega Watch (theft)
of sale.
JOINT AND SOLIDARY OBLIGATIONS demand was made, and

that performance was
ARTICLE 1207 and 1208. Notable Distinctions on Joint and not fulfilled.
Solidary Obligations “Mancommunada” “In solidum”
“Pro rata” “Solidarily liable”
Joint Obligation Solidary Obligation “We promise to pay” and “I promise to pay” and
When there are as many Each debtor is liable to there are two or more there are two or more
debtors as there are comply with the entire signatories. signatories.
debts and as many obligor obligation, and “Individually and
creditors as there are each creditor is entitled collectively”
credits to receive the entire “Jointly and severally”
credit.
The performance of one They are bound by NOTE: When payment is done by one of the solidary debtors,
does not affect the mutual representation he only has a right of reimbursement, he does not become a
liability others because or agency which is solidary creditor, he cannot demand from any of his co-debtors
each are liable for their characterized by trust the entire obligations less his share because he can only
own shares in debts. and confidence. demand from them their respective share in the obligation.
• He does not become a solidary creditor against his co-
When demand is made debtors
to a solidary debtor, he • Only right of reimbursement from each of them only
must render to their own respective shares in the debt.
compliance with the
entire obligation. Exceptions to the Presumption of Joint Obligations
1. Express stipulation by the parties
If a debtor pays only a 2. By the nature of the obligations
portion of the debt and 3. By law
is received by a a. Provisions in the human relations (Ardiente
solidary creditor, v. Pastorfide)
because of the mutual b. Participants in the crime
representation, c. Suretyship
regardless of the d. Failure to fully satisfy by the absolute
amount that was community of conjugal partnership, the
delivered which was husband and the wife’s exclusive property
only partial (even if are solidarily liable for those obligations
insufficient to cover that redounded to the benefit the family.
even his own share), 4. By judgment of the court which specifies solidary
the solidary creditor liability even if the original obligations specified a
who accepted such joint obligation.
payment must share
such with the other ARTICLE 1209. Joint Indivisible Obligations
creditors. How shall it be performed? All debtors must perform, non-
If one of the joint If one of the solidary performance by one means non-performance by the others.
debtors is insolvent, it debtors is insolvent, it
will not increase the will increase It is now converted for the payment of damages, whereby each
liability of other joint proportionately the of the joint indivisible debtor will be liable only for his share in
debtors. burden of the other the value plus damages, not the entire obligation because they
solidary debtors. are bound jointly and not solidarily.
Demand made a creditor Demand upon one
made to a joint debtor shall stop the running ARTICLE 1211. Solidarity may exist although the creditors and
will only stop the running of the prescriptive, debtors may not be bound in the same manner and by the
of the prescriptive period even if only one of the same periods and conditions.
with respect to the solidary creditors
debtor to whom demand would make a demand Stipulation: A, B, C solidarily bound themselves to deliver
was made. It will not upon any of the P600,000 to D, E, F.
interrupt as to other solidary debtors. • A’s share shall be performed upon the return of D’s
debtors. wife from United States.
• B’s share shall be delivered if X will not separate from
Delay is incurred only by his wife W.
the debtor to whom the
• C’s share shall be due and demandable within

December 25, 2017. Modified situation: Suppose the creditors are the ones who
agreed to be jointly bound among themselves, if D makes a
Analysis: The following are the effects of such stipulation. demand upon A, the latter must deliver the entire obligation.
• A’s share is dependent on a suspensive condition, • Suppose A was able to deliver only his share only in
because it is uncertain whether D’s wife will go return the obligation which is equal to the share of each
or not. creditor, can D now be compelled to share the
• B’s share is dependent on a resolutory condition received payment to E & F?
because it shall not be delivered when the condition o No, because they are jointly bound among
of separation happens. themselves.
• C’s share is dependent on a suspensive period which • The creditors among themselves agreed to be jointly
is for the benefit of the creditor. bound, he is not under the obligation to share it with
other creditors.
If D makes a demand upon A, can A be made liable?
• Yes, because they are solidarily bound. He shall deliver ADVANTAGE: It will stop the running of the prescriptive period
to D P600,000 less his share, because his share is to all other creditors. The mutual representation will not exist
subject to a suspensive condition on the return of D’s anymore between themselves but towards the debtors.
wife.
ARTICLE 1213. A solidary creditor cannot assign his rights
Is B’s share immediately due and demandable? without the consent of the others.
• Yes, because it is of a resolutory condition as provided • They can remit and novate, except assignment unless
under Article 1179. there be consent.
• If one of the solidary creditors would die, the heir
would not step into the shoes, the trust and
Is C’s share demandable? confidence is only between the solidary creditors and
• Yes, because the period is for the benefit of the does not extend to the heir.
debtor. • The can demand for the payment but not succeeding
o Suppose the period is changed into “within into the shoes of the deceased solidary creditor.
five years”, it becomes for the benefit of the • If there is assignment, even with an SPA authorizing
debtor, thus D now cannot compel C to an agent to collect, it will not bind the other creditors
deliver before the arrival of the period, but C if there is no consent. If debtor pays through this third
can choose to deliver it and D cannot refuse person, there is no extinguishment of obligation, and
to accept. it still subsists. It is a wrongful payment.
ARTICLE 1214. Demand to any of the Solidary Debtors
If D makes a demand to A, A should pay to D, and A cannot
Modified situation: The solidary debtors are now jointly liable choose to pay either E or F because the mutual agency that
among themselves, but still solidarily liable towards the solidary existed is terminated when that demand is made. The authority
creditors. and the power to demand obligations is now concentrated.
However, this is only between them.
Suppose A will deliver only his share, and was accepted by the • If B pays to D, there is extinguishment.
solidary creditor, can he demand reimbursement from B and • Any of the debtors (whom demand was not made) can
C? Suppose he only delivered only P100,000. pay to any of the debtors (including the one who
• He cannot demand reimbursement because they are made demand), if accepted then would extinguish the
joint among themselves, and if B is insolvent, that will obligation.
not increase the liability of A and C because they are • Who is only prohibited to pay another solidarity
jointly bound to each other. creditor, is the debtor whom the demand was made,
in which he must pay to the one who made the
[NOTE: Usually when solidary debtors do not stipulate demand.
that they are joint between themselves, even if the
solidary debtor delivers a share even if not sufficient ARTICLE 1221. In Case of Loss and Fortuitous Event
to cover his share, he can still demand proportionate Situation. A, B and C were to deliver to D, E and F a car with
reimbursement from the other co-debtors less his Chassis No. 123456. D made a demand to C, but C did not
share, but in this modified situation, they expressly comply with the obligation despite demand, and thus he has
agreed to be bound in a different manner amongst incurred in delay, D made a demand to B now, but before B can
themselves.] fulfill the delivery, the car was damaged leading to an
impairment or deterioration and creditor refuses to accept.
They are not bound in the same manner, they are bound • This has now been converted to a payment of:
together towards the creditors as solidary debtors but among o Price and value of the car
themselves they are jointly bound. o Damages
o Interest Yulim v. International Exchange Bank (2015)

They bound themselves to be jointly and severally liable with
Action: Because A and B were ready to comply of the Yulim by executing a Continuing Surety Agreement making
obligation, but the reason of the delay was due to C and their liability be direct, immediate and not contingent upon the
because of his delay the car had been impaired, when B would pursuit of the bank. The deed of assignment executed upon the
make a demand upon A in his share in the obligation, A and B condominium not satisfaction of the obligation for it was a
are only liable for his share in the price for he is not responsible mere interim security of the payment.
for the damages and the interest for he is ready for the
fulfillment of the obligation. Sinamban v. China Banking Corporation (2015)
• C is liable for the share in the price, and solely liable As comakers of the promissory notes being “jointly and
for damages and interest. severally” liable they make themselves directly and primarily
liable with the maker of the debt without reference to his
In summary: If there is impairment is by reason of fault of one solvency. The bank opted to institute the action against all the
of the solidary debtors and is in delay, the others shall be promissory notes, which these PNs does not enjoy any priority
liable for their share but not for the payment of damages and or preference in payment over the others for none of them is
interests, it is solely shouldered by the one who caused the more onerous.
fault or incurred in delay.
Light Rail Transit Authority v. Mendoza (2015)
Situation. Suppose, this was carried over by flood leading to a For METRO to pay the full separation benefits, LRTA should
loss. There was a delay on the part of C and D made a demand provide the necessary funding to completely satisfy these
upon A. benefits. LRTA, by obligating itself to fund the operating
expenses has a legal obligation. The cause of the non-renewal
Action: When it comes to reimbursement, they have no liability of the agreement was not on the fault of METRO. Articles 106,
whatsoever, it is only C who is responsible who is at fault and 107 and 107 of the Labor Code also applies as indirect
incurred in delay, who shall shoulder price, damages and employer.
interest.
Lam v. Kodak Philippines (2016)
In summary: If the object of the prestation was lost by fault of The intention of the parties is for there to be a single transaction
one of the solidary debtors then the other solidary debtors can covering the three units and was to deliver all under a package
perform the obligation upon demand. deal which was also signified in the benefits of no
downpayment, multiple order discount and encapsulated only
The paying solidary debtor can demand reimburse for the in one agreement. Thus, there was breach on the part of Kodak
entire value, price, interest and damages from the solidary for not delivering the “indivisible” obligation as it is, while the
debtor who was responsible for the loss and incurred in delay. Lam spouses also committed breach by not paying the required
monthly payments through checks thus Article 1192 applies on
the tempering of the damages on the part of the Lam Spouses
for Kodak being the first infractor in this case.
Pacific Banking v. Intermediate Appellate Court (1991) ARTICLE 1112. Waiver of Prescription
Guarantor’s undertaking was a contract of surety, stipulation
over the title. Caltex (Philippines), Inc. v. Singzon-Aguirre (2016)
Industrial Management v. NLRC (2000) Introduction: Caltex waived here the defense of prescription, the
The original NLRC decision was joint, thus the writ of execution Court said that it has already prescribed on 13 years. But they
stating that the liability of the respondents as solidary is void. waived the defense of prescription, the Court for another
reason, dismissed the case.
Mariveles Shipyard v. Court of Appeals (2003)
The petitioner Mariveles is solidarily as an indirect employer Facts: MV Dona Paz was an inter-island passenger vessel
under Articles 106, 107 and 109 of the Labor Code. This is owned and operated by Sulpicio Lines, Inc. (Sulpicio) traversing
without prejudice for Mariveles to ask for reimbursement from its Leyte to Manila route on the night of December 20, 1987,
the co-debtor Longest Force. when it collided with MT Vector, a commercial tanker owner
and operated by Vector Shipping Corporation, Inc. (Vector). On
Construction Development v. Estrella (2006) that the particular voyage, MT Vector was charted by Caltex to
The defense that there was a breach of contract of common transport petroleum products. The collision brought forth an
carriage between BLTB and the respondents will not exempt inferno at sea with an estimate of about 4,000 casualties
CDCP from liability because they are joint tort feasors meaning and was described as the world’s worst peace time maritime
that the carrier and the driver were jointly and severally liable disaster.
because their distinct and separate acts concurred to the
production of the same injury. In December 1988, the heirs of victims of the tragedy, instituted
a class action with the Civil District Court for the Parish of
Orleans, State of Louisiana, United States of America. On Petitioners, who were the defendants in the antecedent cases
November 30, 2000, the Louisiana Court entered a conditional before the RTCs of Catbalogan and Manila, are most adamant
judgment dismissing the said case on the ground of forum non- in invoking their waiver of the defense of prescription while the
conveniens.5 This led the respondents, composed of 1,689 respondents, to whom the cause of action belong, have
claimants, to file on March 6, 2001 a civil action for damages for acceded to the dismissal of their complaint. Article 1112
breach of contract of carriage and quasi-delict with the provides that persons with capacity to alienate property may
Regional Trial Court (RTC) of Catbalogan, Samar, Branch 28 renounce prescription already obtained, but not the right to
(RTC of Catbalogan), against the herein petitioners, Sulpicio, prescribe in the future. Prescription is deemed to have been
Vector Shipping, and Steamship Mutual Underwriting tacitly renounced when the renunciation results from acts which
Association, Bermuda Limited (Steamship). imply the abandonment of the right acquired.
On March 28, 2001, RTC of Catbalogan motu proprio dismissed In the case: In the instant case, not only once did the
the complaint as the respondents’ cause of action had already petitioners expressly renounce their defense of prescription.
prescribed. In an unusual turn of events however, the Nonetheless, the Court cannot consider such waiver as basis in
petitioners as defendants therein, who were not served with order to reverse the rulings of the courts below as the dismissal
summons, filed a motion for reconsideration, alleging that of the complaint had become final and binding on both the
they are waiving their defense of prescription. The RTC of petitioners and the respondents.
Catbalogan, however, merely noted the petitioners’ motion.
• The CA concurred with the RTC of Manila that the The Effect of the Finality of Judgment: A Bar to the
finality of the Order dated March 28, 2001 issued by Prosecution of the Case
the RTC of Catbalogan has the effect of res judicata, Previous to the petitioners’ filing of their motion for
which barred the respondents’ motion to intervene reconsideration, the RTC of Catbalogan issued an Entry of Final
and complaint-in-intervention with the RTC of Manila Judgment stating that its Order dated March 28, 2001 became
final and executory on April 13, 2001. The petitioners claimed
Issue: Whether or not res judicata applies and should the waiver that for this reason, they could not have submitted themselves
of prescription by disregarded due to such. to the jurisdiction of the RTC of Catbalogan by filing such a
belated motion.
Discussion: Petition lacks merit. The petitioners cannot be
permitted to assert their right to waive the defense of But the petitioners cannot capitalize on the supposed finality of
prescription when they had foregone the same through their the Order dated March 28, 2001 to repudiate their submission
own omission. to the jurisdiction of the RTC of Catbalogan. It must be
emphasized that before the filing of their motion for
On Extinctive Prescription reconsideration, the petitioners were not under the RTC of
This case involves the latter type of prescription, the purpose of Catbalogan’s jurisdiction. Thus, although the order was already
which is to protect the diligent and vigilant, not the person who final and executory with regard to the respondents; it was not
sleeps on his rights, forgetting them and taking no trouble of yet, on the part of the petitioners.
exercising them one way or another to show that he truly has
such rights. The rationale behind the prescription of actions is Consequently, it was only after the petitioners’ failure to appeal
to suppress fraudulent and stale claims from springing up at or seek any other legal remedy to challenge the subsequent
great distances of time when all the proper vouchers and Order dated September 4, 2001, that the dismissal became final
evidence are lost, or the facts have become obscure from the on their part. It was from the date of the petitioners’ receipt of
lapse of time or defective memory or death or removal of this particular order that the reglementary period under the
witnesses. Rules of Court to assail it commenced to run for the petitioners.
In the case: There is no dispute that the respondents’ cause of But neither the petitioners nor the respondents resorted to any
action against the petitioners has prescribed under the Civil action to overturn the orders of the RTC of Catbalogan, which
Code. In fact, the same is evident on the complaint itself. The ultimately led to their finality. While the RTC of Catbalogan
respondents brought their claim before a Philippine court only merely noted the motion for reconsideration in its Order dated
on March 6, 2001, more than 13 years after the collision September 4, 2001, the effect is the same as a denial thereof,
occurred.43 Article 1139 of the Civil Code states that actions for the intended purpose of the motion, which is to have the
prescribe by the mere lapse of time fixed by law. complaint reinstated, was not realized. This should have
Accordingly, the RTC of Catbalogan cannot be faulted for the prompted the petitioners to explore and pursue other legal
motu proprio dismissal of the complaint filed before it. It is measures to have the dismissal reversed. Instead, nothing more
settled that prescription may be considered by the courts motu was heard from the parties until a motion for intervention was
proprio if the facts supporting the ground are apparent from filed by the respondents before the RTC of Manila, in
the pleadings or the evidence on record. conformity with the order of the Louisiana Court.
On Waiver of Rights under Article 1112: Not The Main The RTC of Manila denied the respondents’ motion for
Reason of Dismissal intervention on the ground of the finality of the order of the
RTC of Catbalogan, there being no appeal or any other legal the concept of an owner, since 1944. Feliciano’s claim of sole
remedy perfected in due time by either the petitioners or the possession in his application for free patent did not therefore
respondents. Since the dismissal of the complaint was already extinguish the fact of co-ownership as claimed by the children
final and executory, the RTC of Manila can no longer entertain of Hermogenes.
a similar action from the same parties. The bone of contention
is not regarding the petitioners’ execution of waivers of the Issue: Whether or not the CA erred in (1) recognizing co-
defense of prescription, but the effect of finality of an order ownership between the heirs and whether the order and (2)
or judgment on both parties. ordering the partition of the property for it was a collateral
Heirs of Feliciano Yambao v. Heirs of Hermogenes attack to the validity of the title.
Yambao (2016)
Introduction: This involves co-owners of a property which are related. As a rule, Discussion: Petition is denied. As pointed out by the CA, the
there can be no prescription between co-owner. But a co-owner may repudiate RTC overlooked the fact that the subject property is co-owned
the co-ownership with requisition provided that the requisites should be
by the parties herein, having inherited the same from
complied. But beside the express repudiation of the co-ownership, but the Courts
said, there is no application of that repudiation because one of the positive acts Hermogenes. Feliciano’s free patent application indicated that
of co-ownership, is the issuance of a new title of ownership. The Court still said he merely tacked his possession of the subject property from
that there is still no repudiation. Hermogenes, his father, who held the property in peaceful,
open, continuous, and adverse manner in the concept of an
Facts: The subject of this case is a parcel of land located in owner since 1944.
Zambales, originally possessed by Macaria de Ocampo.
Macaria’s nephew, Hermogenes Yambao (Hermogenes), has This is an implicit recognition of the fact that Feliciano
eight children. After Hermogenes died, it was claimed that all merely co-owns the subject property with the other heirs of
of his heirs were free to pick and harvest from the fruit bearing Hermogenes. Indeed, the heirs of Feliciano have not presented
plants. Eleanor Yambao, the daughter of Hermogenes’ son any evidence that would show that Hermogenes bequeathed
Ulpiano, even constructed a house in the subject property. the subject property solely to Feliciano.
However in 2005, the communal and mutual use of the property
ceased when the heirs of Feliciano, herein petitioners, Co-Ownership and Prescription
prohibited them entering the property and ejected them. A co-ownership is a form of trust, with each owner being a
trustee for each other. Mere actual possession by one will not
This prompted the heirs of Hermogenes to file to RTC a give rise to the inference that the possession was adverse
complaint for partition, declaration of nullity of title/documents because a co-owner is, after all, entitled to possession of the
and damages against the heirs of Feliciano. property. Thus, as a rule, prescription does not run in favor
of a coheir or co-owner as long as he expressly or impliedly
• The heirs of Hermogenes alleged that they and the recognizes the co-ownership; and he cannot acquire by
heirs of Feliciano are co-owners of the subject prescription the share of the other co-owners, absent a clear
property, having inherited the right thereto from repudiation of the co-ownership. An action to demand
Hermogenes. partition among co-owners is imprescriptible, and each co-
• The heirs of Feliciano denied the allegations of the owner may demand at any time the partition of the
heirs of Hermogenes and claimed that their father, common property.
Feliciano, was in possession of the subject property in
the concept of owner since time immemorial. Adverse Possession of a Co-Owner to Run Prescription;
Accordingly, Feliciano was awarded a free patent Requisites
thereon for which Original Certificate of Title (OCT) Prescription may nevertheless run against a co-owner if there is
No. P-10737 was issued. adverse, open, continuous and exclusive possession of the co-
owned property by the other co-owner/s. In order that a co-
RTC dismissed the complaint filed by the heirs of Hermogenes. owner’s possession may be deemed adverse to the cestui que
For they failed to show that the subject property is owned by trust or other co-owners, the following requisites must concur:
Macaria and that the tax declarations and receipts are not 1. That he has performed unequivocal acts of
conclusive evidence of ownership and failed to show that repudiation amounting to an ouster of the cestui que
Hermogenes succeeded from Macaria. trust or other co-owners.
2. That such positive acts of repudiation have been made
On appeal to the CA, he CA, considering that the parties are co- known to the cestui que trust or other co-owners.
owners of the subject property, ruled that the RTC should have 3. That the evidence thereon must be clear and
conducted the appropriate proceedings for partition. convincing.
CA findings: [A] review of the records of the case shows that in On the Prescription of an Action for Partition: The issuance
Feliciano’s application for free patent, he acknowledged that of the certificate of title would constitute an open and clear
the source of his claim of possession over the subject property repudiation of any trust. In such a case, an action to demand
was Hermogenes’s possession of the real property in peaceful, partition among co-owners prescribes in 10 years, the point of
open, continuous, and adverse manner and more importantly, in reference being the date of the issuance of certificate of title
over the property. But this rule applies only when the plaintiff is 1227. Debtor cannot offer to pay penalty instead of damages,
not in possession of the property, since if a person claiming to unless the right is expressly reserved.
be the owner thereof is in actual possession of the property, the
right to demand partition does not prescribe. Creditor cannot ask for payment of both fulfillment of the
obligation and payment of penalty, unless this has been clearly
In the case: Although OCT No. P-10737 was registered in the granted him. The grant may be implied or tacit which can be
name of Feliciano on November 29, 1989, the prescriptive claimed from contemporaneous or circumstances of parties.
period within which to demand partition of the subject
property, contrary to the claim of the heirs of Feliciano, did not 1228. No need to prove the actual damages, only that he runs
begin to run. At that time, the heirs of Hermogenes were still in the risk to be paid less amount he actually suffered, because
possession of the property. It was only in 2005 that the heirs of the penalty is already fixed based on agreement.
Feliciano expressly prohibited the heirs of Hermogenes from
entering the property. Thus, as aptly ruled by the CA, the right 1229. Equitable reduction of penalty:
of the heirs of Hermogenes to demand the partition of the 1. There has been partial performance.
property had not yet prescribed 2. There has been irregular performance.
3. Even if no performance, but the penalty agreed is
There is likewise no merit to the claim that the action for iniquitous or unconscionable.
partition filed by the heirs of Hermogenes amounted to a
collateral attack on the validity of OCT No. P-10737. The 1230. The nullity of the penal clause does not carry with the
complaint for partition filed by the heirs of Hermogenes seeks nullity of the principal obligation, but the latter’s nullity nullifies
first, a declaration that they are a co-owner of the subject the penal clause.
property, and second, the conveyance of their lawful shares.
The heirs of Hermogenes do not attack the title of Feliciano; PRYCE CORPORATION v. PAGCOR
they alleged no fraud, mistake, or any other irregularity that Was there a penal clause in this case? What did it consist?
would justify a review of the registration decree in their favor.
On the premise that they are co-owners, they can validly seek FLORENTINO v. SUPERVALUE
the partition of the property in coownership and the Was there a penal clause in the lease contract? Was it proper
conveyance to them of their respective shares. for Supervalue for retaining the equipment?
A Trustee Who Obtains a Torrens Title over a Property DIAMOND BUILDERS v. COUNTRY BANKERS
Held in Trust Cannot Repudiate What did the penal clause constitute?
Feliciano registered the subject property in his name, to the
exclusion of the other heirs of Hermogenes, an implied trust
was created by force of law and he was considered a trustee of
the undivided shares of the other heirs of Hermogenes in the
property. As trustees, the heirs of Feliciano cannot be permitted
to repudiate the trust by relying on the registration. “A trustee
who obtains a Torrens title over a property held in trust for
him by another cannot repudiate the trust by relying on the
registration.”
OBLIGATIONS WITH A PENAL CLAUSE (1226-1230)
The penal clause is an accessory undertaking to strengthen the

coercive force by imposing greater responsibility upon non-
fulfillment. The penalty might come in the form of:
1. Money
2. Performance of an act
3. Forfeiture
Diamond Builders – the agreement between Acidre and Borja

is actually one of penalty in the form of forfeiture.
1226. As a general rule, the creditor is not entitled to both

penalty and the principal undertaking, subject to the following:
1. When the debtor refuses to pay penalty
2. Guilty of fraud in the fulfillment of the obligation
3. By express stipulation.
OBLIGATIONS AND CONTRACTS 2. Other causes mentioned under Article 1231 but
Civil Code governed under other Chapters of the code
a. Annulment
Articles 1231-1251
b. Rescission
CHAPTER 4 c. Fulfillment of a resolutory condition
EXTINGUISHMENT OF OBLIGATION d. Prescription
3. Still other causes
ARTICLE 1231 a. Death of a party in case the obligation is a
Obligations are extinguished; personal one (singer under contract)
(1) By payment or performance; b. Resolutory term
(2) By loss of the thing due;
c. Change of civil status
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of the d. Compromises
creditor and debtor; e. Mutual dissent
(5) By compensation; f. Impossibility of fulfillment
(6) By novation. g. Fortuitous event
Other causes of extinguishment of obligations, such as Case: Stronghold Insurance v. Republic Asahi (2006)
annulment, rescission, fulfillment of a resolutory condition,
Facts: Republic Asahi Glass contracts with JDS for the
and prescription, are governed elsewhere in this Code.
construction of roadways and systems for the former’s
Classification by Causes of Extinguishment of Obligations compound. Stronghold acted as surety. JDS falling behind
Voluntary Causes schedule, Republic Asahi sough to rescind the contract and
a. Performance demand the compliance bond. The owner of JDS died, and
a. Payment or performance JDS disappeared. Stronghold as surety refused to pay and
b. Consignation contends that the death of Santos, the bond principal is
b. Substitution of Performance exintguished including the surety.
a. Compensation
b. Novation Rule: Santos’s death did not extinguish the obligation. As a
c. Dacion en pago (datio in solutum) general rule, the death of either creditor or debtor does not
c. Agreement to release extinguish the obligation. Obligations are transmissible to
a. Subsequent to obligation heirs, except when prevented by law, stipulation or nature of
i. Unilateral waiver the obligations. Only personal obligations are extinguished
ii. Natural waiver by the death of party.
iii. Remission
iv. Mutual dissent Whatever Santos had under his contracts were passed onto
v. Compromise his estate. Death is not a defense that he or his estate can
b. Simultaneous with creation of obligation set up to wipe out the obligations under the performance
i. Resolutory term or extinctive period bond. Consequently, Stronghold as surety cannot use his
ii. Resolutory condition or subsequent death to escape the monetary obligation under bond.
Involuntary Causes SECTION 1. – PAYMENT OR PERFORMANCE

a. By failure to bring an action (e.g. prescription)
ARTICLE 1232
b. Resolutory condition or condition subsequent Payment means not only the delivery of money but also the
a. Merger or confusion performance, in any other manner, of an obligation.
b. Personal obligations (death or insanity)
c. Change of civil status (marriage or widow) Payment, Concept
c. By reason of the object Payment is the fulfillment of the prestation due, a fulfillment
a. Impossibility of the performance that extinguishes the obligation by the realization of the
b. Loss of the thing due purposes which it was constituted. It is a juridical act which is
voluntary, licit, and made with the intent to extinguish an
Classification under the Civil Code obligation. Payment and fulfillment are identical.
1. Ordinarily by a. Delivery of money
a. Payment or performance b. Performance in any other manner of an obligation
b. Loss of the thing due
c. Condonation or remission Requisites of Payment
d. Confusion or merger 1. The person who pays
e. Compensation 2. The person to whom payment was made
f. Novation 3. The thing to be paid in full
4. Propriety of manner, time and place of payment
5. Acceptance of payment by the creditor
Kinds of Payment NOTE: This article usually applies when rescission is not possible
1. Normal or voluntary when the obligor or debtor for there was only a slight or casual breach, leaving only the
voluntarily performs the prestation stipulated. fulfillment of obligation subject to damages.
2. Abnormal or involuntary when the creditor institutes
an action to collect payment. ARTICLE 1235
When the obligee accepts the performance, knowing its
ARTICLE 1233 incompleteness or irregularity, and without expressing any
A debt shall not be understood to have been paid unless the protest or objection, the obligation is deemed fully complied
thing or service in which the obligation consists has been with.
completely delivered or rendered as the case may be.
Estoppel on the Creditor’s Qualified Acceptance
Requisites of a Valid or Complete Payment There is the presence of waiver and estoppel. There must be
The article states two requisites for payment: qualified acceptance of incomplete or irregular payment. A
1. The very thing or the service due must be delivered or mere receipt for payment does not constitute such
released or paid (Identity of the Prestation) acquiescence to such irregularity.
2. Fulfillment must be complete (Integrity of Prestation)
This usually happens when the creditor accepts the
How Payment is Made performance despite having knowledge of the incompleteness
Monetary Obligation Delivery of money, full or irregularity of such performance or payment. He is deemed
payment unless otherwise to have waived the irregularity, because the law requires that
stipulated in agreement. the must know such and accept without protest or objection.
Delivery of things Delivery of such thing,
unless partial delivery is ARTICLE 1236
The creditor is not bound to accept payment or performance
agreed upon by parties.
by a third person who has no interest in the fulfillment of the
Personal Undertaking Performance of the obligation, unless there is a stipulation to the contrary.
undertaking
Obligation of not to do Refraining from doing the Whoever pays for another may demand from the debtor
action what he has paid, except that if he paid without knowledge
or against the will of the debtor, he can only recover only
Proof of Payment insofar as the payment has been beneficial to the debtor.
The burden of proving that it has been extinguished by
Creditor’s Right to Refuse Payment by Third Person
payment devolves upon the debtor who offers such defense to
The creditor can refuse payment from a third person, or a
the claim of the plaintiff creditor. The issuance of receipt is a
stranger. With this the creditor cannot be compelled to accept
consequence in good faith which must be observed.
the performance by a person not bound under the obligation.
There are however exceptions:
Acceptance of Partial Payments, Waiver of 1233
1. If there is a stipulation allowing this;
A debtor cannot compel the creditor to accept partial payment.
2. If said third person has an interest in the fulfillment of
But he can accept partial payment. If he voluntarily accepts the
the obligation (co-debtor, joint debtor, guarantor).
partial payment, he is deemed to have waived the requirements
under Article 1233 that the performance be complete.
Right of the Third Person
• Exceptions under 1234 and 1235.
The person who pays the account of another may recover form
the debtor the sum so paid. This is when the debtor knows that
ARTICLE 1234
If the obligation has been substantially performed in good another has paid his obligation and does not object. If debtor
faith, the obligor may recover as though there had been a has no knowledge or expresses opposition, the law limits his
strict and complete fulfillment, less damages suffered by the recovery by which the debtor has been benefited.
obligee.
To reiterate, the third person may pay:
Substantial Performance a. With the knowledge and consent of the debtor which
In this article, must be substantial performance of an obligation the payor is entitled to reimbursement and
done in good faith. If there is such on the part of the obligor, subrogation to such rights.
then the obligor can recover as though there had been a strict b. Without the knowledge of the debtor or against his
and complete fulfillment less the damages suffered by creditor. will, where the payor is not entitled and only allowed
for beneficial reimbursement.
The omission must be slight and unimportant meaning that it
must not be material so as to frustrate the accomplishment of Illustration. If Matt pays for Jade’s transportation fare, without
the intended work or obligation. There must be no willful or Jade’s knowledge or against his will, and later discovers that
intentional deviation from the contract or prestation by the Jade was entitled to a 50% discount on the fare. Is it correct to
debtor, and the omission or defect must not be material, say that X can only recover the half fare even if he had paid the
otherwise the performance is not considered as substantial. full fare when X is at fault in this situation?
No. This is not solutio indebiti because the 50% non-discounted Illustrative Problem: Right of Mortgage
fare was really due. Thus, X’s right against Y is for such. But the Olivia borrowed P1,000,000 from Clara. The loan was secured
discounted fare was not even due and is an undue payment or by a mortgage of Olivia’s land in favor of Clara. Without the
solutio indebiti which can be properly recovered. knowledge of Olivia, Christine paid to Clara the sum of
P1,000,000 for Olivia’s debt to which such payment she
Instances When Recovery Can be From the Creditor clearly has benefited from.
a. When the debt has prescribed
b. When the debt has been remitted Q1. May Christine claim reimbursement from Olivia? If yes, how
c. When the debt has already been paid much? If no, why?
d. When legal compensation took place
A1. Yes, she can claim reimbursement from Olivia inasmuch as
Illustration of Beneficial Reimbursement she had paid, because the facts show that she benefited on the
June owes July P1M. Later, June paid P700K leaving a balance whole payment, which is covered under beneficial
of P300K. August, a classmate of June, intending to surprise reimbursement even without the knowledge of Olivia.
him, paid the sum of P1M thinking that June still owed B that
amount. He did this without the knowledge of June. Q2. If Olivia cannot pay Christine, can Christine foreclose the
mortgage secured by Olivia’s land?
A: August can only recover only P300,000 from June, because
it is only up to this amount June has benefited. August however, A2. No. Christine cannot foreclose the mortgage on Olivia’s
can recover the remaining P700,000 from July, for she should land. It is true that the original creditor was Clara, and she
not have accepted the full payment for it was already partially clearly had the right to foreclose in case of non-payment.
paid by June. If it was found that July was in bad faith, she will
be liable not only for the P700K but also for damages. But in this case, the new creditor Christine has not been
subrogated of the right of Clara even if she had paid for the
Effect on Prescription Due to Partial Payment of Third Party whole loan.
Orange owes Blue a sum of money. And without Orange’s
knowledge, Yellow paid a part of Orange’s debt. So, there is still The only right she has is reimbursement but not subrogation.
a remainder. The facts show that she performed the payment as a third party
without the knowledge (or against the will) of Olivia.
The payment of Yellow of the part of Orange’s debt does not
prevent the running of the prescriptive period because there is in Article 1237 clearly words out that “whoever pays without the
no may Orange could have had acknowledged the existence of knowledge or the will of the debtor cannot compel the creditor to
such debt [Agoncillo v. Javier]. subrogate to him in his rights, such as those in mortgage.”
ARTICLE 1237 Illustrative Problem: Guarantor

Whoever pays on behalf of the debtor without the knowledge Allen owes Bea the sum of P1,000,000. Chris is a guarantor
or against the will of the latter, cannot compel the creditor to of Allen. Allen was able to pay P400,000. Therefore, P600,000
subrogate him in his rights, such as those arising from
remains as balance. Diana, Allen’s girlfriend, thinking that
mortgage, guaranty, or penalty.
Allen still owes P1,000,000 paid the whole amount to Bea,
Subrogation against the will of Allen.
Subrogation is defined as the act of putting somebody into the
shoes of the creditor, enabling the former to exercise all the Q1. May Diana recover from Allen? If so how much?
rights and actions that could have been exercised by the latter. A1. Yes. Diana may recover from Allen. Diana can only recover
P600,000 because it was done against his will, thus she can only
It transfers to the person subrogated the credit with all the right have beneficial reimbursement and such amount was such
thereto appertaining, either against the debtor or against third Allen benefited for.
persons, be guarantors, possessor of mortgages (Art. 1307).
However, Diana can recover from Bea the P400,000 because
In cases where subrogation takes place by virtue of the Bea already received such and it would be tantamount to unjust
payment of the credit, the payor actually steps into the shoes enrichment.
of the creditor and becomes entitled, not only to recover what
he has paid, but also to exercise all rights which the creditor Q2. If Allen cannot pay Diana, can Diana proceed against the
could have exercised. In this, there is no extinguishment of guarantor Chris in such case?
obligation but a change in the active subject.
A2. No. Diana cannot ordinarily proceed against guarantor
Rights that Person Subrogated Can Exercise Chris because Diana paid the obligation of Allen against the will
a. A mortgage of Allen which makes her not entitled to subrogation of Bea’s
b. A guaranty rights towards the guarantor.
c. A penalty or penal clause
Subrogation from Reimbursement EXCEPTION: Article 1247 of the Civil Code which provides that:
Subrogation Reimbursement When a minor who has entered into a contract without the
Recourse can be had to the There is no such recourse. consent of the parents or guardian, voluntarily pays a sum of
mortgage, guaranty or money or delivers a fungible thing in fulfillment of an
pledge. obligation, there shall be no right to recover the same from the
Debt is exintguished in one The new creditor has obligee who has spent or consumed it in good faith.
sense, for there is a new different rights, so it is as if
creditor but with the exactly there has been an Example. Junjun entered in a contract with Dave which obliged
same rights as the old one. extinguishment of the former to pay P1 Million. Dave did not know of Junjun’s
obligation on the old minority. After payment, Dave spent P800K. Later, Junjun’s
creditor. parents knew of such. The parents can only recover the
There is something more Limited only to the personal remaining P200K for it was done in good faith.
than personal recovery. action to recover amount.
ARTICLE 1240
ARTICLE 1238 Payment shall be made to the person in whose favor the
Payment made by a third person who does not intend to be obligation has been constituted, or his successor in interest,
reimbursed by the debtor is deemed to be a donation, which or any person authorized to receive it.
requires the debtor’s consent. But the payment is in any case
valid as to the creditor who has accepted it. To Whom Payment Must be Made
1. To the person who favor the obligation has been
No Intention to be Reimbursed, Requires Debtor’s Consent constituted or the creditor.
No one should be compelled to accept the generosity of 2. To the successor-in-interest (like the heirs)
another. If the creditor accepts then the payment and against 3. To any person authorized (by agreement or by law)
the will or absent the knowledge, Articles 1236 shall apply.
NOTE: If the payment made by the third person without NOTE: Culaba case, transmission of right to receive cannot be
intention to be reimbursed exceed P5,000, where the law carried over by the wife in the second marriage.
requires that payment must be in writing to be considered as a
valid donation, payment is still valid. Case: PNB v. Court of Appeals and Tan (1996)
Facts: On 1978, after an expropriation proceeding, PNB was
Illustration: Payment by Stranger Deemed as Donation required by the trial court to pay Tan the amount of P32.4K.
Alvin owes Beth P1 Million. Crystal, in behalf of Alvin, pays PNB through its Assistant Manager Tagamolila, without
Beth P1 Million against the consent of Alvin, although Crystal Tan’s knowledge nor consent, delivered the check to one
already told that she did not intend to be reimbursed. Beth Sonia Gonzaga, which the latter deposited such in her
however, accepted Crystal’s payment. account and withdrew such amount.
Q1. Is Alvin’s obligation towards Beth extinguished? Upon demand by Tan, PNB argued that it already paid to
A1. Yes. Alvin’s obligation to Beth is extinguished even if Alvin Gonzaga on the strength of the SPA executed by him in favor
did not consent to the donation. The law says that the payment of her.
is in any case valid as to the creditor who accepted such.
Held: PNB did not perform payment. As required by Article
Q2. May Crystal recover from Alvin, because of the fact that 1233, a debt shall not be understood to have been paid
Alvin did not consent to what the law defines as donation on unless the obligation is completely delivered. The burden of
the part of Crystal in favor of Alvin? proof rests on PNB alleging full payment. In this case, neither
A2. Yes. As held again, to make Article 1238 operable, it the SPA nor the check was ever presented in court.
requires the debtor’s consent. Given this, there is no real
donation whatsoever. It is to be remembered however, Article ARTICLE 1241
1236 provides that when such payment is against the will of the Payment to a person who is incapacitated to administer his
property shall be valid if he has kept the thing delivered, or
debtor, then Beth can recover under beneficial reimbursement.
insofar as the payment has been beneficial to him.
ARTICLE 1239 Payment made to a third person shall also be valid insofar as
In obligations to give, payment made by one who does not it has redounded to the benefit of the creditor. Such benefit
have free disposal of the thing due and capacity to alienate it to the creditor need not be proved in the following cases:
shall not be valid, without prejudice to the provision of (1) If after the payment, the creditor acquires the
Article 1427 under the Title on “Natural Obligations.” creditor’s rights;
(2) If the creditor ratifies the payment to the third
Payment BY an Incapacitated Person person;
GENERAL RULE: If a person paying has no capacity to give then: (3) If by the creditor’s conduct, the debtor has been led
a. Payment is not valid – if accepted. to believe that the third person had authority to
b. Creditor cannot even be compelled to accept it. receive the payment.
c. The remedy of consignation will not be proper.
I. Payment TO Incapacitated Persons Case: NPC v. Ibrahim (2015)

Such payment is valid only when: Rule: In an expropriations case, the Court finds
(1) if the incapacitated person kept the thing delivered Magondadato the ‘possessor of credit’ with respect to the
(2) insofar the payment has been beneficial to hi, rental fees and expropriation indemnity adjudged to the
subject land. If the Ibrahims and Maruhoms turn out to be
Illustrative Problem: Payment to Incapacitated Person the real owners it can still validly extinguish the obligation
Anton owes Bell P1,000,000. When Anton paid Belle, the for such was done in good faith to a person in possession of
latter was already insane. However, the money was never the credi which releases the debtor.
spent and still in her possession.
ARTICLE 1243
Q1. Is the obligation of Anton extinguished? Payment made to the creditor by the debtor after the latter
has been judicially ordered to retain the debt shall not be
valid.
A1. Yes. Anton’s obligation is already extinguished by virtue of
his payment to Belle.
Garnishment, Defined
It is the proceeding in which a debtor’s creditor is subjected to
True, she may have been incapacitated by insanity to administer
the payment of his own debt to another. It consists in the
her property, but she kept the thing delivered. Hence, payment
citation of some stranger to the litigation, who is the debtor of
is valid.
one of the parties to the action. Such debtor-stranger becomes
a forced intervenor, and the court, such citation for him to pay
Q2. Supposes that a swindler had asked Belle for P1,000,000 in
his debt, not to his former creditor, but to the new creditor, who
exchange of P500,000. Does Anton’s payment remain valid?
is the creditor in the main litigation. This is such what is called
garnishment.
A2. Valid only until P500,000 which is the amount which Belle
Example. A owes B P1,000,000. In turn, B owes C P100,000. C
has benefited from. A good example of beneficial payment is
brings an action against B who claims insolvency but admits the
when the money has been used for proper hospital or
credit he has over A. Before A pays B, A is summoned into the
psychiatric expenses.
proceedings, and asked to retain the debt in the meantime.
Thus, the debt here is garnished.
II. Payment TO a Third Party Not Duly Authorized
• A should not pay B and instead he should pay C, if C
The payment is valid only to the extent of benefit, which can be
shall be adjudged as the creditor of B. Any payment
financial, moral or intellectual to the creditor. It is not presumed
made by A to B in the meantime is considered void.
except under the tree instances under Article 1241.
Interpleader, Defined
1. If after the payment, the third person acquires the
It is an action in which a certain person in possession of a
creditor’s rights.
certain property wants claimants to litigate among themselves
2. If the creditor ratifies the payment to the third person.
for the same.
3. If by the creditor’s conduct, the debtor has been led
to make the payment.
Example. Arnold has in his possession some merchandise, to be
delivered to the person who presents the proper receipt. Bea
Other Instances
and Chris, each armed with a receipt, ask Arnold to turn over
• When there is a new creditor, but the old creditor
the property to one of them. After an examination of the
failed to inform the debtor and the performance was
receipts it shows that they are identical. Arnold then does not
made to him.
know to whom property should be delivered. Thus, filing an
action to which Bea and Chris settle conflicting rights.
• Article 1242, when the payment is made to a third
• Courts then must issue and order prohibiting payment
person in possession of the credit. (Possession of
to either Bea or Chris in the meantime.
check v. identity in the Promissory Note)
Injunction, Defined
ARTICLE 1242
It is a judicial process by which a person is generally ordered to
Payment made in good faith to any person in possession of
the credit shall release the debtor. refrain from doing something. It is called a preliminary
injunction if the prohibition is during the pendency of the
Requisites of Article 1242 proceedings.
1. Payment by payor must be in good faith.
2. Payee must be in possession of the credit itself not ARTICLE 1244
merely the document evidencing the credit. 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.
Example. A promissory note is not a possession of credit itself
but possession of the evidence of the credit. In obligations to do or not to do, an act of forbearance cannot
be substituted by another act or forbearance against the
obligee’s will.
Debtor Cannot Compel Creditor to Accept New Object Greater freedom in Less freedom in determining
• Even if it is same value or more valuable. determination of price. price.
• Cannot be substituted by another act Giving of the price may The giving of the object in
generally end the obligation lieu of the credit may
Exceptions where 1244 Does Not Apply of the buyer. completely or partially
a. In case of facultative obligations extinguish the obligation.
b. In case there is another agreement resulting in either
a. Dation in payment (1245) Dation in Payment from Assignment
b. Novation (1291) Assignment under 1255 is similar to 1245 because both
c. In case of waiver by the creditor involves substitute performance of an obligation. However,
unlike assignment which is for the benefit of the creditors,
ARTICLE 1243 dation in payment does not concern itself with such, and it does
Dation in payment, whereby property is alienated to the not suppose a situation of financial difficulty because it can be
creditor in satisfaction of a debt in money, shall be governed
done even when the debtor is not insolvent. It merely involves
by the law of sales.
a change of the object of the obligation of the parties and at
Dation in Payment, Defined the same time fulfilling the same voluntarily.
It is the mode of extinguishing obligation whereby debtor
alienates in favor of the creditor, property for satisfaction of Dation in Payment from Pledge
monetary debt. It is the delivery and transmission of ownership There is a presumption in favor of pledge, which involves lesser
of a thing as an accepted equivalence of the obligation. It is also transmission of rights. In case where personal property is
known as datio in solutum or adjudicacion en pago. delivered to the creditor, the transaction is a pledge. When
there is delivery, the presumption is that the money is merely a
Application: It usually happens when at the time of the pledge not to secure a debt.
ARTICLE 1246
constitution of the obligation what is due is money, but at the
When the obligation consists in the delivery of an
time of the fulfillment, the debtor could no longer deliver the
indeterminate or generic thing, whose quality and
money. So instead of offering the money, he will deliver another circumstances have not been stated, the creditor cannot
ting in lieu of the money. If the creditor accepts, then the demand a thing of superior quality. Neither can the debtor
obligations is extinguished, depending on the agreement. deliver a thing of inferior quality. The purpose of the
obligation and other circumstances shall be taken into
If it extinguishes the whole obligation, then there is full consideration.
extinguishment, but if it only based on the value of the thing
delivered, and if it is not sufficient, then there is partial Determination of Quality
fulfillment in such situation. If there is disagreement between the quality of the thing
delivered in the obligation to deliver generic things, the court
Requisites for a Valid Dation in Payment shall decide to take into consideration the purpose and other
1. If creditor consents circumstances.
2. If dation in payment will not prejudice other creditors
3. If debtor is not judicially declared insolvent Waiver
If the contract does not specify the quality
Dation in Payment and Sale • Creditor cannot demand a thing of superior quality
In 1245, this is so because such partakes the nature of a sale, (but may demand and accept one of inferior)
for the creditor is really buying some property of the debtor, • Debtor cannot deliver a thing of inferior quality (he
payment for which is to be charged against the debtor’s debt. may deliver one of superior quality)
It can be also called a novation. Sale and novation both requires
common consent. NOTE: When the kind and quantity and not only quality cannot
be determined new agreement, the contract shall be void.
Sale Dation in Payment
ARTICLE 1247
There is no pre-existing There is a pre-existing credit. Unless it is otherwise stipulated, the extrajudicial expenses
credit. required by the payment shall be for the account of the
This gives rise to This extinguishes debtor. With regards to judicial costs, the Rules of Court shall
obligations. obligations. govern.
The cause or consideration: The cause of consideration:
Viewpoint of the seller Viewpoint of the debtor GENERAL RULE: The debtor must pay for the extrajudicial
Price Extinguishment of debt expenses incurred during the payment. Because of law, it is the
debtor who benefits primarily, since his obligation is thus
Viewpoint of the buyer Viewpoint of the creditor extinguished.
Object Acquisition of object offered
in credit. EXCEPTION: When there is a stipulation to the contrary. With
regards to the judicial costs, Rules of Court shall govern.
ARTICLE 1248 NOTE: This article only applies when there is a contract or
Unless there is an express stipulation to the effect, the agreement involved. This does not apply when it arises from
creditor cannot be compelled to partially to receive the law or independent from contracts like quasi-delicts, quasi-
prestations in which the obligation consists. Neither may the
contracts.
debtor be required to make partial payments.
However, when the debt is in part liquidated, and in part ARTICLE 1251
unliquidated, the creditor may demand, and the debtor may Payment shall be made in the place designated in the
effect the payment of the former without waiting for the obligation.
liquidation of the latter.
There being no express stipulation and if the undertaking is
to deliver a determinate thing, the payment shall be made
GENERAL RULE: Performance should be generally complete.
wherever the thing might be at the moment the obligation
was constituted.
EXCEPTIONS: Partial performance is allowed when:
1. When there is a stipulation to his effect. In any other case the place of payment shall be the domicile
2. When the different prestations are under different of the debtor.
conditions or different terms (installments)
3. Part liquidated, part unliquidated. (sum and damages) If the debtor changes his domicile in bad faith or after he has
4. Joint debtor pays his share, or joint creditor demands. incurred delay, the additional expenses shall be borne by
5. When solidary debtor pays only the part demandable him.
due to other debtor’s subject to different conditions.
The provisions are without the prejudice to venue under the
6. Compensation, larger debt than other – balance. Rules of Court.
7. When work is to be done by parts. Where Payment Must be Made
ARTICLE 1249 1. If there is a stipulation – to the place designated.
The payment of debts in money shall be made in the currency
2. If there is no stipulation:
stipulated, and if its not possible to deliver such currency,
then in the currency which is legal tender in the Philippines. a. If it is an obligation to deliver a determinate
specific thing then in the place where the
The delivery of promissory notes payable to order, or bills of thing might be usually or habitually at the
exchange or other mercantile documents shall produce the time obligation was constituted. (If
effect of payment only when they have been cashed, or when temporarily there, or under shipping, then
through the fault of the creditor they have been impaired. the domicile of the debtor).
b. If the obligation is any other thing (generic,
In the meantime, the action derived from the original
obligation shall be held in abeyance. money or personal), delivery must be made
at the domicile of the debtor.
Legal Tender
It is that which a debtor may compel a creditor to accept in Expenses: The creditor shall bear expenses. Unless the debtor
payment of the debt. It means such currency which in a given in bad faith or has incurred in delay changes domicile, then the
jurisdiction can be used for the payment of debts, public and expenses shall be borne by him.
private, and which cannot be refused by the creditor.
Q. What if the payment was done through couriers (e.g. LBC)
Stipulation in Another Currency and the debtor sent the money through a courier but was taken
This provision has been amended by RA 4100. Before the away. Who shall bear the loss?
effectivity of RA 4100, RA 529 generally prohibited payment in
foreign currency, including dollars, it must be converted. A. It depends. If the creditor requested such mode of payment,
then he shall bear the loss, and then he can run after the courier
Delivery of Commercial Instruments for payment. However, if it is the debtor who initiated such
Check is not a legal tender. Therefore, the creditor cannot be mode of payment, the law clearly provides that in the absence
compelled to accept payment through this means, even by of stipulation, the payment of generic thing should be made in
consignation in court. Even a bank manager’s check is not legal the domicile of the debtor.
tender. The following are considered as legal tender:
• When creditor in estoppel or promised accept check.
• When the check has lost value due to the fault of the
creditor (delayed presentation or encashment)
• When payment by conventional redemption.
ARTICLE 1250
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the
currency at the time of establishment of the obligation shall
be the basis of the payment, unless there is an agreement to
the contrary
OBLIGATIONS AND CONTRACTS An issue is factual when the doubt or difference arises as to the
Articles 1231-1251 truth or falsehood of alleged facts, or when the query invites
calibration of the whole evidence, considering mainly the
JURISPRUDENCE NOTES
credibility of witnesses, existence and relevancy of specific
surrounding circumstances, their relation to each other and to
1231 -1232. Payment or Performance
the whole, and the probabilities of the situation. Time and
again, we stress that this Court is not a trier of facts and
AGNER v. BPI FAMILY SAVINGS BANK (2013)
generally does not weigh anew evidence which lower courts
have passed upon.
Facts: On February 15, 2001, petitioners Sps. Deo Agner and
Maricon Agner executed a Promissory Note with Chattel Second Issue: Both verbal and written demands were made
Mortgage in favor of Citimotors, Inc. The contract provides prior to the institution of the case against petitioners.
that: for receiving P834,768 petitioners shall pay P17,391 every
15th day of each succeeding month until fully paid. The loan is Even if there was no demand letter, there is really no need for
secured by a 2001 Mitsubishi Adventure Super Sport, and an it because the petitioners legally waived the necessity of notice
interest of 6% per month shall be imposed for failure to pay or demand in the Promissory Note with Chattel Mortgage
each install on or before the stated due date. which provides that:
In case of my/our failure to pay when due and payable, any
Citimotors, Inc. assigned all its rights, title and interests in the sum which I/We are obliged to pay under this note and/or
any other obligation which I/We or any of us may now or in
PN with Chattel Mortgage to ABN AMRO Savings Bank which
the future owe to the holder of this note or to any other
on May 31, 2002, likewise assigned the same to respondent BPI party whether as principal or guarantor x x x then the entire
Family Saving Bank, Inc. sum outstanding under this note shall, without prior
notice or demand, immediately become due and
For failure to pay four successive installments from May 15, payable.
2002 to August 15, 2002, respondent, through counsel, sent a
demand letter on August 29, 2002 declaring the entire Even though Article 1169 requires demand to put debtor in
obligation due and demandable requiring to pay P576,664.04 delay. However, the law expressly provides that demand is not
or surrender the mortgaged vehicle immediately upon necessary under certain circumstances, and one of these
receiving the latter. As the demand was left unheeded, circumstances is when the parties expressly waive demand.
respondent filed an action for Replevin and Damages before Hence, since the co-signors expressly waived demand in the
the Manila RTC. A writ of replevin was issued, but the subject promissory notes, demand was unnecessary for them to be in
default.
vehicle was not seized. Trial on the merits ensued.
RTC ruled for the respondent and ordered petitioners to jointly CONTENTION: They have not received a demand letter.
and severally pay the outstanding amount plus interest rate of REASONING: Completely inconsequential, because the mere act
72% per year from August 20, 2002 until fully paid. CA affirmed. of sending it would suffice, as stated in the Promissory Note
with Chattel Mortgage.
Issues The mere act of sending any correspondence by mail or by
personal delivery to the said address shall be valid and
(1) Respondent has no cause of action, because the Deed
effective notice to the mortgagor for all legal purposes and
of Assignment executed in its favor did not specifically
the fact that any communication is not actually received by
mention ABN AMRO’s account receivable from the MORTGAGOR or that it has been returned unclaimed to
petitioners. the MORTGAGEE or that no person was found at the address
(2) Petitioners cannot be considered to have defaulted in given, or that the address is fictitious or cannot be located
payment for lack of competent proof that they received shall not excuse or relieve the MORTGAGOR from the effects
the demand letter. of such notice.
(3) Respondent’s remedy of resorting to both actions of
replevin and collection of sum is contrary to Article In addition, they did not change address from the time they
1484 of the Civil Code and the Elisco Tool ruling. executed the Promissory Note with Chattel Mortgage up to the
time the case was filed against them.
Discussion: The contentions are untenable.
EVIDENCE: Petitioners did not take advantage of all the
First Issue: Matter is settled, SC not a trier of facts. opportunities to present their evidence. They miserably failed
With respect to the first issue, it would be sufficient to state that to produce the original cash deposit slips proving payment of
the matter surrounding the Deed of Assignment had already the monthly amortizations in question. Not even a photocopy
been considered by the trial court and the CA. Likewise, it is an of the alleged proof of payment was appended. Neither have
issue of fact that is not a proper subject of a petition for review they demonstrated any written requests to respondent to
under Rule 45. furnish them with official receipts of SOA.
One Who Pleads Payment has the Burden of Proving It In his Answer, Martinez alleged that he had already paid his
Jurisprudence abounds that, in civil cases, one who pleads loan through deductions made from his compensation/salaries,
payment has the burden of proving it; the burden rests on the bonuses and commission. During trial, respondent presented a
defendant to prove payment, rather than on the plaintiff to certification dated September 10, 1996 issued by the
prove non-payment. When the creditor is in possession of the petitioner’s president Helen Dy, stating that respondent
document of credit, proof of non-payment is not needed for it already paid the amount of P337,650 as of the said date. He
is presumed. alleges that a simple accounting would show he has paid it off
for it was payable within four years from 1994.
IN THE CASE: Respondent’s possession of the PN with CM
strongly buttresses its claim that the obligation has not been RTC. It ruled in favor of the petitioner Multi-International,
exintguished. The creditor’s possession of the evidence of ordering defendant to pay pointing out that respondent failed
debt is proof that the debt has not been discharged by to present evidence to prove payment. He was not able to
payment. A promissory note in the hands of the creditor is establish the due execution and authenticity of the certification.
a proof of indebtedness rather than proof of payment. It is
prima facie evidence that the promissory note had not been CA. Reversed RTC ruling and ruled in favor of the respondent.
paid (citing BPI v. Spouses Royeca). The CA found credence on the (1) certification, (2) deduction
and (3) petitioners’ admission of respondent installment
Indeed, when the existence of a debt is fully established by the payments made in the amount of P230,275.22. Dy never denied
evidence contained in the record, the burden of proving it has nor confirmed in open court the authenticity of signature. It
been extinguished devolves upon the debtor who offers dismissed the complaint for lack of merit.
such defense to the claim of the creditor. The debtor has
the burden of showing with legal certainty that the Issues:
obligation has been discharged by payment. 1. Whether respondent has fulfilled his obligation with
petitioner; and
HELD: WHEREFORE, the petition is DENIED and the Court 2. Whether the certification dated September 10, 1996
AFFIRMS WITH MODIFICATION the April 30, 2007 Decision and should be basis for respondent’s payment of his loan
May 19, 2008 Resolution of the Court of Appeals in CA-G.R. CV with petitioner.
No. 86021. Petitioners spouses Deo Agner and Maricon Agner
are ORDERED to pay, jointly and severally, respondent BPI Discussion: The petition is partly meritorious.
Family Savings Bank, Inc. (1) the remaining outstanding balance
of their auto loan obligation as of May 15, 2002 with interest at Conflicting Factual Findings of Lower Courts
one percent (1 o/o) per month from May 16, 2002 until fully Trial court found that no deductions were made from the salary
paid; and (2) costs of suit. while the CA found otherwise. Thus, the conflicting factual
findings of the trial court and CA compel us to re-evaluate the
MULTI-INTERNATIONAL BUSINESS v. MARTINEZ (2015) facts of this case, an exception to the rule that only questions
of law may be dealt with in a petitioner for certiorari.
Facts: Respondent Ruel Martinez was the Operations Manager
of petitioner from last quarter of 1990 to January 22, 1999. Admissibility of the Certification
Sometime in June 1994, respondent Martinez applied for and Dated September 10, 1996
was granted a car loan amount to P648,288. Both parties Respondent relies on the certification to bolster his defense
agreed that the loan was payable through deductions from that he already fully paid his car loan to petitioner. We affirm
respondent’s bonuses or commissions, if any. the findings of the CA that the certification is admissible in
evidence.
Further, if respondent would be terminated for any cause
before the end of the term of the loan obligation, the unpaid The rules allowed court to compare the handwriting in issue with
balance would be immediately due and demandable without writings admitted or treated as genuine whom the evidence is
the need of demand. offered or proved to be genuine to the satisfaction of the judge.
• November 11, 1998 letter on outstanding balance
after deductions stand at P418,012.78. EVIDENCE: The documents containing the signature of Dy:
• January 22, 1999 Martinez received termination 1. Letter of November 11, 1998
effectively immediately and demanded that 2. Termination letter of January 22, 1999
respondent pay his outstanding loan of P418,012.78. 3. Promissory Note dated June 17, 1994
Despite this, respondent failed to pay the outstanding balance. 4. Chattel Mortgage signed on June 27, 1994
On June 23, 1999, the petitioner demanded again to pay his Examining and analyzing the signatures in these documents
loan within tree days from receipts. But still failed to pay. Thus with Dy’s signature in the certification, we find no substantial
on July 12, 1999, RTC Makati petitioner filed a complaint against reason to doubt the latter’s authenticity. In fact, the testimonies
Martinez for the payment of the outstanding balance. of Dy herself and Valle support our finding.
Dy never testified that any forgery or fraud attended the HELD: Having only proven payment to the extent of P337,650
certification. She did not deny the authenticity and even respondent is obligated to pay petitioner of the balance of
admitted that her signature looks like hers. Valle, as witness also P310,638 with interest.
noticed the similarity and positively identified.
Wherefore, the instant petitioner is partially granted. CA
Insufficient Evidence to Prove decision is set aside and respondent is order to pay petitioner
Full Payment of Loan the amount with 6% interest per annum and the trial court
decisions is affirmed in other respects.
One Who Pleads Payment Has the Burden of Proving It
Even where the creditor alleges non-payment, the general rule CINCO v. COURT OF APPEALS (2009)
is that the debtor has the burden to prove payment, rather than
the creditor. The debtor has the burden of showing with legal Facts: In December 1987, petitioner Manuel Cinco obtained a
certainty that the obligation has been discharged by payment. commercial loan in the amount of P700,000 from respondent
Where the debtor introduces some evidence of payment, the Maasin Traders Lending Corporation. The loan was evidenced
burden of going forward with the evidence—as distinct from by a promissory note dated December 11, 1987 and secured
the general burden of proof—shifts to the creditor, who is then by a real estate mortgage over the Cincos land and 4-storey
under a duty of producing some evidence to show non- building in Maasin, Southern Leyte.
payment.
Under the terms of the PN, the P700K loan was subject to a
IN THE CASE: Nevertheless, it has been established that monthly interest rate of 3&% or 36% per annum, payable within
respondent obtained a car loan amounting to P648,288.00 from 6 months, renewable for another 6 months. As of July 1989, the
petitioner. Thus, the burden is now on respondent to prove that outstanding obligations amounted to P1,071,256 which
the obligation has already been extinguished by payment. included principal, interest and penalties.
Although not exclusive a receipt of payment is the best To be able to pay the loan in favor of MTLC, the spouses Go
evidence of the fact of payment. We held that the fact of Cinco applied for a loan with PNB and offered as collateral the
payment may be established not only by (1) documentary same properties they previously mortgaged to MTLC. The
evidence but aslo by (2) parol evidence. PNB approved the P1.3M loan, however the release of the
amount was conditioned on the cancellation of mortgage in
Except for respondent’s bare allegations that he has fully paid favor of MTLC.
the P648,288.00 car loan, there is nothing in the records
which shows that full payment has indeed been made. Manuel went to the house of respondent Ester Servacio, MTLC’s
Respondent did not present any receipt other than the President to inform her that there was money with the PNB for
certification dated September 10, 1996 which only proves that the payment of his loan with MTLC. Ester then proceeded to the
respondent has already paid P337,650.00 of the car loan. A PNB to verify the information, but the banks officers informed
balance of P310,638.00 remained. her that there was no pending loan with them. Manuel
assured her that there was money with the PNB and promised
Even respondent’s testimony lacks credence. He alleged that to execute a document that would allowed her to collect the
the amortization of the car loan was deducted from his salaries, proceeds from the PNB loan.
bonuses and commissions. However, he could not even answer
nor give an estimate of how much bonuses and commissions he Manuel executed an SPA authorizing Ester to collect the
receives from petitioner. proceeds of his PNB loan. Ester again went to the banks, this
time the banks confirmed the existence of the loan, but they
His pay slips do not reflect such deductions, because there required Ester to first sign a deed of release/cancellation of
is no such car loan field in the accounting program for the mortgage before they could release the proceeds to her.
payroll. He admitted that he only presumed. • Outraged that the spouses Go used the same
• He must have shown the difference if indeed there was properties mortgaged to MTLC as collateral for the
deductions, but here merely made calculation on what PNB loan, Ester refused to sign the did and did not
he presumed he already paid. collect the P1. 3M proceeds.
• He could have presented testimonies of other
persons. As the MTLC loan was already due, Ester instituted foreclosure
• In fact, the November 28, 1998 Letter showed that proceedings against the spouses Go Cinco on July 24, 1989.
the respondent was aware that he had outstanding The Spouses Go allege that the foreclosure of the mortgage
obligations with petitioner. was no longer proper as there had already been settlement of
Manuel’s obligation in favor of MTLC. They claimed that the
It was questionable on why would he agree on a setup without assignment of the proceeds of the PNB loan amount to the
any written acknowledgment of his payments or of his loan, he payment of the MTLC loan. And the Ester’s refusal were
should have insisted since he was the only employee give a unjustified and entitled them to the payment of damages.
car loan, it would be inconvenient for petitioner.
Ester countered these allegations by claiming that she had not There is nothing legally objectionable in a mortgagor’s act
been informed that the spouses Go plan to obtain a loan of taking a second or subsequent mortgage on a property
from the PNB and to use such to settle the MTLC loan. She already mortgage. A subsequent mortgage is recognized as
claimed that she had no explicit agreement with Manuel valid by law and by commercial practice, subject to the prior
authorizing her to apply the proceeds of the PNB loan with the rights of previous mortgages.
MTLC, the SPA merely authorized her to collect. For it was
unfair for her to release the mortgage when no actual VOID ACTION: Under Article 2130, a stipulation forbidding the
payment has been made. owner from alienating the immovable mortgaged is considered
void. If the mortgagor-owner is allowed to convey the entirety
RTC. In favor of the spouse Go Cinco. found that the evidence of his interests in the mortgaged property, reason dictates that
sufficiently established the existence of the PNB loan whose the lesser right to encumber his property with other liens must
proceeds were available to satisfy Manuel’s obligation with also be recognized.
MTLC, and that Ester unjustifiably refused to collect the amount.
Creditors, it ruled, cannot unreasonably prevent payment or RULE: Ester, therefore, could not validly require the spouses Go
performance of obligation to the damage and prejudice of Cinco to first obtain her consent to the PNB loan and mortgage.
debtors who may stand liable for payment of higher interest Besides, with the payment of the MTLC loan using the proceeds
rates. of the PNB loan, the mortgage in favor of the MTLC would have
naturally been cancelled.
CA. Reversal of the RTC decision, the appellate court found that
there was no explicit agreement between Ester and the In addition, Manuel had already expressed intent to fully
spouses Go Cinco for the cancellation of the MTLC settle the MTLC loan and of paying through the PNB loan
mortgage in favor of PNB. he would secure, which he did. Thus the SPA cannot be
counted as simply to collect, but this is to collect the proceeds
Issues as payment of the obligation.
Whether or not the loan due the MTLC had been extinguished.
Unjust Refusal Cannot be Equated to Payment
Payment as Mode of Extinguishing Obligations While Esters refusal was unjustified and unreasonable, we
Obligations are extinguished by payment or performance. e. cannot agree with Manuel’s position that this refusal had the
Under Article 1232 of the Civil Code, payment means not only effect of payment that extinguished his obligation to MTLC.
the delivery of money but also the performance, in any other Article 1256 is clear and unequivocal.
manner, of an obligation. Article 1233 of the Civil Code states • A refusal without just cause is not equivalent to
that a debt shall not be understood to have been paid unless payment; to have the effect of payment and the
consequent extinguishment of the obligation to pay,
the thing or service in which the obligation consists has been
the law requires the companion acts of tender of
completely delivered or rendered.
payment and consignation.
In contracts of loan, the debtor is expected to deliver the sum
IN THE CASE: Asad twist in this case for Manuel was that he could
of money due the creditor. These provisions must be read in
relation with the other rules on payment under the Civil Code, not avail of consignation to extinguish his obligation to MTLC,
which rules impliedly require acceptance by the creditor of the as PNB would not release the proceeds of the loan unless and
payment to extinguish an obligation. until Ester had signed the deed of release/cancellation of
mortgage, which she unjustly refused to do. Hence, to compel
IN THE CASE:Manuel sought to pay Ester by authorizing her Ester to accept the loan proceeds and to prevent their
through an SPA, to collect the proceeds of the PNB loan an act mortgaged properties from being foreclosed, the spouses Go
that would have led to the payment if Ester had collected the Cinco found it necessary to institute the present case for
loan proceeds as authorized. specific performance and damages.
Admittedly, the delivery of the SPA was not, strictly speaking, a Effects of the Unjust Refusal
delivery of the sum of money due to MTLC, and Ester could not Even though there was no tender of payment coupled with
be compelled to accept it as payment. But she refused to sign consignation, the spouses Go Cinco duly established that
which would have extinguished obligations and allowed the they have legitimately secured a means of paying off their
cancellation of the mortgage. loan with MTLC; they were only prevented from doing so by
the unjust refusal of Ester to accept the proceeds of the PNB
Ester Had Unjust Refusal to Accept Payment loan through her refusal to execute the release of the
She refused to accept the payment because the bank required mortgage on the properties mortgaged to MTLC.
her to first sign a deed of release. She alleges that a prior • Since payment was available and was unjustifiably
mortgagee the spouses Cinco should have obtained her refused, justice and equity demand that the spouses
consent before offering the properties already mortgaged to Go Cinco be freed from the obligation to pay
her as security for the PNB loan. interest on the outstanding amount from the time
the unjust refusal took place
Under Article 19 of the Civil Code,

ARTICLE 19, CIVIL CODE APPLIED: On July 30, 2003, PNB sent letters to Anna Marie to inform her
they should likewise be entitled to damages, as the unjust that PNB refused to honor its obligation under the two
refusal was effectively an abusive act contrary to the duty to act FXCTDs and that they withheld the release of the balance.
with honesty and good faith in the exercise of rights and the According to the PNB, Anna Marie has pre-terminated,
fulfillment of duty. withdrew and or debited suns against her deposits. Thus,
promoted Anna Marie to filed before the RTC a complaint for
Esters act of refusing payment was motivated by bad faith as a sum of money and damages against PNB and Fernandez.
evidenced by the utter lack of substantial reasons to support it.
Her unjust refusal, in her behalf and for the MTLC which she Anna Marie’s Contention
represents, amounted to an abuse of rights; they acted in an As to the two FXCTDs, Anna Marie contended that the PNB’s
refusal to pay her time deposits is contrary to law. The PNB
oppressive manner and, thus, are liable for moral and
cannot claim that the bank deposits have been paid since the
exemplary damages.
certificates of the time deposits were still with her.
HELD: The petition is granted, CA decision reversed and
respondents are directed to accept the proceeds of the As to the consolidated savings account, Anna Marie stated that
spouses Go Cincos from PNB if still available, and to the PNB had already acknowledged the balance in the Deed of
consent to the release of the mortgage. Waiver and Quitclaim amounting to P2.734M. PNB presented
no concrete proof that the remaining balance of P250,741 had
been withdrawn.
GUMABON v. PNB (2016)
She prayed that the PNB and Fernandez be held solidarily liable
Facts: On August 12, 2004, Anna Marie filed a complaint for for actual, moral, and exemplary damages as well as fees and
recovery of sum of money and damages before theRTC against costs for PNB’s refusal to honor its obligations.
PNB and PNB Delta Branch Manager Silverio Fernandez. The
case stemmed from the PNB’s refusal to release Anna Marie’s PNB’s Answer
money in a consolidated savings account and in two foreign (1) Anna Marie is not entitled to the balance of the
exchange time deposits, evidenced by Foreign Exchange consolidated savings account based on solutio
Certificates of Time Deposit (FXCTD). indebiti.
It was shown that Anna withdrew a total of P251,246 from the
In 2001, Anna Marie together with her mother Angeles and her two of the eight savings accounts and used this amount to
siblings Anna Elena and Santiago (Gumabons) deposited with purchase manager’s check hence it should be deducted from
the PNB Delta Branch $10,945.28 and $16,830.91 for which they the Deed of Waiver and Quitclaim, offered evidence of
were issued two FXCTD. They also maintained eight saving photocopies of PNB’s miscellaneous ticket and manager’s
accounts in the same bank. Anna Marie decided to consolidate check as evidence to prove the withdrawals, also argued for
the sight savings accounts to withdraw P2.72M from the unjust enrichment.
consolidated savings account to help her sister’s finances.
(2) PNB already paid the amount covered by the first
Anna Marie called the PNB employee handling her account, FXCTD.
Salvoro to facilitate the consolidation of the savings account It wa shown that she is not entitled to received such amount for
and the withdrawal. When she went to the bank on April 14, she pre-terminated the FXCTD on 2002 and used such
2003, she was informed that she could not withdraw from the deposited together with another deposited (part of FXCTD 2)
savings accounts since her bank records were missing and to purchase a foreign demand draft payable to Anna
Salvoro could not be contacted. Rose/Angeles Gumabon. The PNB presented a facsimile copy
of Anna’s Rose SOA to prove such payment.
On April 15, 2003 she presented her two FXCTDs but was also
unable to withdraw against them. Fernandez informed her (3) PNB is only liable for the remaining $10,718 of the
that the bank would still verify and investigate before allowing second FXCTD rather than $17,235.41 (full amount)
the withdrawal since Salvoro had not reported for work. She (4) Anna Marie is guilty of contributory negligence.
sent two demands letters.
REPLY: Anna Marie argued that the best evidence of her
After a month, PNB finally consolidated the savings account withdrawals is the withdrawal slips duly sign by her and the
and issued a passbook, and confirmed the deposits which passbooks pertaining to the accounts. PNB failed to show
amounted to P2.734M. Anna Marie, her mother and PNB any of the withdrawal slips and failed to show sufficient
executed a Deed of Waiver and Quitclaim on May 23, 2003 to evidence of the used of accounts’ funds.
settle all questions regarding the consolidation of the savings
accounts. After withdrawals, balance is P250,741.82. RTC ruled in favor of Anna Marie. Mainly based on insufficient
evidence (photocopy, failure to present withdrawals, failed to
satisfy the best evidence rule).
CA reversed ruling noting the suspicious and excusive dealings depositors with meticulous care, always having in mind the
with Salvoro by making unauthorized and unrecorded fiduciary nature of the relationship. Every single transaction,
withdrawals no entries in the passbook. down to the last centavo and as promptly as possible.
Issue: Thus, the CA should not have admitted the subject document
Whether or not Anna Marie is entitled to the amounts of the even if the PNB tendered the excluded evidence. Notably, PNB
two FXCTDs and the remaining balance of the consolidated admitted in the Deed of Waiver and Quitclaim that it owed
savings account and damages? Anna Marie P2.73 and that after many transaction, the deposit
became P250,741. The inevitable conclusion is that PNB’s
Discussion: The Court grants the petition of Anna Marie and obligation to pay subsists.
reverses the CA ruling.
On Payment of the Amount Covered by FXCTD 993902
PNB Failed to Establish the Fact of Payment to Anna Marie PNB presented foreign demand draft which Anna Marie
on the Two FXCTDs and Consolidated Savings Account allegedly purchased with the funds of the first FXCTD. It also
presented Anna Rose’s SOA to show that there was a fund
One Who Alleges Payment has the Burden of Proving It transfer involving the contested amount. In addition, they also
The burden of proving that the debt had been discharged by presented the Affidavit of PNB New York’s Branch Officer
payment rests upon the debtor once the debt’s existence has about the fund transfer.
been fully established by the evidence on record. When the
debtor introduces some evidence of payment, the burden of Anna Rose’s SOA – inadmissible
going forward with the evidence, as distinct from the burden of Because it fails to qualify as relevant evidence. The SOA does
proof, shift to the creditor. Consequently, the creditor has a duty not show which of the amount stated therein came from the
to produce evidence of non-payment. FXCTD 993902.
IN THE CASE:Both the CA and RTC declared that PNB has the Affidavit of PNB New York’s Branch Officer – inadmissible
burden of proving the payment. However, they differed in It was not formally offered. Formal Offer means that the
resolving the sufficiency of evidence of payment to shift the offeror shall inform the court of the purpose of introducing its
burden of evidence to Anna Marie. exhibits into evidence. Without a formal offer, the courts cannot
• RTC found PNB failed to do so after excluding PNB’s take notice even if marked and identified.
evidence. • It was not formally offered to corroborate the SOA of
• CA considered the excluded evidence and found Anna Rosa. It remains inadmissible for being hearsay.
sufficient proof of payment. • An affidavit is merely hearsay evidence when its affiant
or maker did not take the witness stand.
On Payment of the Amount Covered by Consolidated SA • Fernandez was not the proper party to identify the
PNB alleges that it had already paid the P250,741. As it affidavit for he is not the affiant.
presented the manager’s check to prove that Anna Marie RULE: Thus, PNB failed to present sufficient and admissible
purchased the check using the amount covered by two savings evidence to prove payment of FXCTD 1 amounting to $10,058.
account which were later part of the consolidated SA. The PNB
also presented the miscellaneous ticket to prove Anna Marie’s On Payment of the Amount Covered by FXCTD 993992
withdrawal from savings account. PNB presented manager’s checks as well as miscellaneous
tickets which were held inadmissible. PNB cannot rely on the
Rules on Evidence, Admissibility miscellaneous tickets alone. These tickets were neither
Evidence to be admissible must comply with two qualifications posted at the back of the FXCTD, nor on her ledger to show
it has (a) relevance and (b) competence. Evidence is relevant if that several withdrawals had been made. There are no
it has a relation to the fact in issue as to induce belief in its irregularities in the certificates to justify the PNB’s refusal to pay
existence of non-existence. While competence if it is not the stated amounts in the certificated when it was presented
excluded by the law or the Rules of Court. for payment.
Competence is also determined by the best evidence rule. RULE: PNB is liable for Anna Marie’s claims since it failed to prove
Rule 130, Section 3 provides that the original copy of the that it had already been discharged from its obligation.
document must be presented whenever the content of the
document is under inquiry. PNB is Liable for Actual, Moral and Exemplary Damages as
well as Attorney’s Fes for its Negligent Acts as a Banking
IN THE CASE: The PNB cannot simply substitute the mere Institution
photocopies of the subject documents for the original copies
without showing the court that any of the exceptions under Rule PNB was negligent for its failure to update and properly handle
130, Section 3 applies. The failure of the PNB to give a justifiable Anna Marie’s accounts. This is patents from the letter that
reason for the absence of the original documents shows the admitting error and unauthorized withdrawals from her
PNB’s dismal failure to fulfill its fiduciary duty to Anna accounts. Furthermore, she was made to believe that she her
Marie. The Court expects the PNB to treat the account of its amounts remaining for they executed a Deed of Waiver and
Quitclaim. PNB still liable even if employee (Article 2180). was sent again eiterating its demand for payment under the
Salvoro’s disappearance further shows negligence of PNB’s aforementioned bond. Both letters allegedly went unheeded.
supervision of employees.
On Contributory Negligence Asahi filed a complaint against JDS and SICI sough from JDS
PNB failed to substantiate its allegation that she was guilty of payment of P3,256M representing additional expenses incurred
contributory negligence. She cannot be made liable for by Asahi for the completion of the project using another
entrusting her account with Salvoro, who was the bank’s time contractor and from JDS and SICI jointly and severally, payment
deposit specialist. She cannot be faulted if she engaged with of P750,000.00 as damages in accordance with the performance
her transaction to him. bond. Jose D. Santos, Jr. died the previous year (1990), and
tat JDS Construction was no longer at its address.
HELD: The petition is granted; the CA decision is reversed and
RTC decisions is reinstated with modifications. PNB is ordered On July 10, 1991, SICI filed its answer, alleging that the money
to pay Anna Marie Gumabon of the outstanding balances and claims have been extinguished by the death of Jose D. Santos, Jr.
damages and attorney’s fees and cost. Even if this were not the case, SICI had been released from its
liability under the performance bond because there was no
Effect of Death liquidation, with the active participation and/or involvement,
pursuant to procedural due process, of herein surety and
STRONGHOLD INSURANCE v. REPUBLIC-ASAHI (2006) contractor Jose D. Santos, Jr., hence, there was no ascertainment
of the corresponding liabilities of Santos and SICI under the
Facts: On May 24, 1989, Republic-Asahi Glass Corporation performance bond. Liquidation was impossible due to the
entered into a contract with Jose D. Santos, proprietor of the death of Santos.
JDS Construction, for the construction of roadways and a
drainage system in Republic-Asahi’s compound in Barrio RTC. Dismissed the complaint of respondent against JDS and
Pinagbuhatan, Pasig City, where [respondent] was to pay x x x SICI on the grounds that the claim against JDS did not survive
JDS five million three hundred thousand pesos (P5,300,000.00) the death of its sole proprietor, Jose D. Santos, Jr.
inclusive of value added tax for said construction, which was
supposed to be completed within a period of two hundred CA. SICI’s obligation under the surety agreement was not
forty (240) days beginning May 8, 1989. extinguished by the death of Jose D. Santos, Jr. Consequently,
Republic-Asahi could still go after SICI for the bond.
In order ‘to guarantee the faithful and satisfactory performance
of its undertakings’ JDS, shall post a performance bond of Issue
seven hundred ninety-five thousand pesos (P795,000.00). JDS Whether petitioner’s liability under the performance bond was
executed, jointly and severally with Stronghold Insurance automatically extinguished by the death of Santos, principal.
Co., Inc. (SICI) Performance Bond No. SICI-25849/g(13)9769.
Discussion: The petition has no merit. A surety company’s
On May 23, 1989, [respondent] paid JDS seven hundred ninety- liability under the performance bond it issues is solidary. The
five thousand pesos (P795,000.00) by way of downpayment. death of the principal obligor does not, as a rule, extinguish
Two progress billings were done. the obligation and the solidary nature of that liability.
Several times prior to November of 1989, Republic-Asahi’s Effect of Death on Surety’s Liability
engineers called the attention of JDS to the alleged As a general rule, the death of either the creditor or the debtor
alarmingly slow pace of the construction, which resulted in does not extinguish the obligation. Obligations are transmissible
the fear that the construction will not be finished within the to the heirs, except when the transmission is prevented by the
stipulated 240-day period. However, said reminders went law, the stipulations of the parties, or the nature of the
unheeded by JDS. obligation. Only obligations that are personal or are identified
with the persons themselves are extinguished by death.
November 24, 1989, dissatisfied with the progress of the • Section 5, Rule 86, expressly allows prosecution of
work undertaken by JDS, Republic-Asahi extrajudicially money claims arising from a contract against the
rescinded the contract pursuant to Article XIII of said contract, estate of a deceased debtor.
and wrote a letter to JDS informing the latter of such rescission.
Such rescission, according to Article XV of the contract shall IN THIS CASE: Whatever monetary liabilities or obligations Santos
not be construed as a waiver of [respondent’s] right to had under his contracts with respondent were not
recover damages from JDS and the latter’s sureties. intransmissible by their nature, by stipulation, or by provision
of law. Hence, his death did not result in the extinguishment of
JDS’s failure to comply with the provisions of the contract, those obligations or liabilities, which merely passed on to his
which resulted in the said contract’s rescission, it had to hire estate.
another contractor to finish the project, for which it incurred an
additional expense of P3.256M. Asahi sent a letter of SICI, filing Death is not a defense that he or his estate can set up to wipe
its claim under the bond for not less than P795,000 a letter out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to same to him. Article 1233, debt has not been paid unless the
escape its monetary obligation under its performance bond. things or service is delivered or rendered as the case may be.
As a surety, petitioner is solidarily liable with Santos in The Burden of Proof of Such Payment Lies with the Debtor
accordance with the Civil Code. Under the law and In the instant case, neither the SPA nor the check issued by
jurisprudence, respondent may sue, separately or together, the petitioner was ever presented in court.
principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The testimonies of petitioner’s own witnesses regarding the
check were conflicting. Tagamolila testified that the check was
The death of the principal debtor will not work to convert, issued to the order of Sonia Gonzaga as attorney-in-fact of
decrease or nullify the substantive right of the solidary creditor. Loreto Tan, while Elvira Tibor, assistant cashier of PNB (Bacolod
Evidently, despite the death of the principal debtor, Branch), stated that the check was issued to the order of Loreto
respondent may still sue petitioner alone, in accordance with Tan.
the solidary nature of the latter’s liability under the
performance bond. Furthermore, contrary to petitioner’s contention that all that is
needed to be proved is the existence of the SPA, it is also
1240. – To Whom Payment Shall be Made necessary for evidence to be presented regarding the nature
and extent of the alleged powers and authority granted to
PNB v. COURT OF APPEALS (1996) Sonia Gonzaga; more specifically, to determine whether the
document indeed authorized her to receive payment intended
Facts: Private respondent Loreto Tan (Tan) is the owner of a for private respondent. However, no such evidence was ever
parcel of land abutting the national highway in Mandalagan, presented.
Bacolod City. Expropriation proceedings were instituted by the
government against private respondent Tan and other property Considering that the contents of the SPA is in issue, the best
owners before CFI Negros. evidence rule applies. Hence, only the original document
(which has not been presented at all) is the best evidence of the
Tan filed a motion dated May 10, 1978, requesting issuance of fact as to whether or not private respondent indeed authorized
an order for the release to him of expropriation price of Sonia Gonzaga to receive the check from petitioner. In the
P32,458. PNB Bacolod was required by the trial court to release absence of such document, petitioner’s arguments
to him the amount of P32,480 deposited with it by the regarding due payment must fail.
government. PNB through its Asst. Manager Juan Tagamolila,
issued a manager’s check worth P32,480 and delivered the HELD: In the case at bench, while there is a clear breach of
same to one Sonia Gonzaga without Tan’s knowledge, petitioner’s obligation to pay private respondents, there is no
consent or authority. She deposited it in her account with evidence that it acted in a fraudulent, wanton, reckless or
FEBTC and withdrew the said amount. oppressive manner.
Private respondent Tan subsequently demanded payment in CULABA v. COURT OF APPEALS (2004)
the amount of P32,480.00 from petitioner, but the same was
refused on the ground that petitioner had already paid and Facts: Spouses Francisco and Demetria Culaba were the owners
delivered the amount to Sonia Gonzaga on the strength of a and proprietors of the Culaba Store and were engaged in the
Special Power of Attorney (SPA) allegedly executed in her sale and distribution of SMC beer products.
favor by Tan.
• Third party complaint was dismissed due to failure of SMC sold beer products on credit to the Culaba spouses in the
petitioner to have the summons serve to Sonia and amount of P28,650.00, as evidenced by Temporary Credit
Nilo Gonzaga. Invoice No. 42943. Thereafter, the Culaba spouses made a
partial payment of P3,740.00, leaving an unpaid balance of
RTC ordered ordering petitioner and Tagamolila to pay private P24,910.00. As they failed to pay despite repeated demands,
respondent jointly and severally the amount of P32,480.00 with SMC filed an action for collection of a sum of money against
legal interest, damages and attorney’s fees. CA affirmed. them before the RTC of Makati, Branch 138.
Issue: The defendant-spouses denied any liability, claiming that they

Whether or not SPA ever existed. had already paid the plaintiff in full on four separate
occasions. To substantiate this claim, the defendants presented
Discussion: The court finds the petition unmeritorious. four (4) Temporary Charge Sales (TCS) Liquidation Receipts.
There is no question that no payment had ever been made to Defendant Francisco Culaba testified that he made the
private respondent as the check was never delivered to him. foregoing payments to an SMC supervisor who came in an SMC
When the court ordered petitioner to pay private respondent van. He was then showed a list of customers’ accountabilities
the amount of P32,480.00, it had the obligation to deliver the which included his account. The defendant, in good faith, then
paid to the said supervisor, and he was, in turn, issued genuine RULE: We find no reason to reverse the said findings.
SMC liquidation receipts. SMC affidavit of notice of loss of the
entire booklet of TCSL receipts including such. Payment to the Proper Party
RTC the trial court rendered judgment in favor of SMC, and Article 1240 of the Civil Code provides that payment shall be
held the Culaba spouses liable on the balance of its obligation. made to the person in whose favor the obligation has been
the trial court rendered judgment in favor of SMC, and held the constituted, or his successor-in-interest, or any person
Culaba spouses liable on the balance of its obligation showing authorized to receive it.
that they were spurious.
IN THE CASE:In this case, the payments were purportedly made
CA affirmed the decision of the trial court, according to to a "supervisor" of the private respondent, who was clad in an
appellant Francisco, he could not be faulted for paying the SMC SMC uniform and drove an SMC van. He appeared to be
collector who came in a van and was in uniform, and that any authorized to accept payments as he showed a list of customers’
regular customer would, without any apprehension, transact accountabilities and even issued SMC liquidation receipts
with such an SMC employee. Furthermore, the respective which looked genuine.
receipts issued to him at the time he paid on the four occasions
mentioned had not yet then been declared lost. Unfortunately for petitioner Francisco Culaba, he did not
• Thus, the subsequent publication in a daily newspaper ascertain the identity and authority of the said supervisor, nor did
declaring the booklets lost did not affect the validity he ask to be shown any identification to prove that the latter was,
and legality of the payments made. indeed, an SMC supervisor. The petitioners relied solely on the
man’s representation that he was collecting payments for
It was incumbent upon the defendants-appellants to exercise SMC. Thus, the payments the petitioners claimed they made
ordinary prudence and reasonable diligence to verify and were not the payments that discharged their obligation to the
identify the extent of the alleged agent’s authority. It was private respondent.
their burden to establish the true identity of the assumed agent,
and this could not be established by mere representation, The Basis of Agency is Representation
rumor or general reputation. As they utterly failed in this regard, A person dealing with an agent is put upon inquiry and must
the appellants must suffer the consequences. discover upon his peril the authority of the agent.
Issue IN THE CASE: The petitioners’ loss could have been avoided if they
Whether or not the respondent timely notified petitioner of the had simply exercised due diligence in ascertaining the identity
lost booklet of receipts and that petitioner was remiss in the of the person to whom they allegedly made the payments. The
payment of his accounts to its agent. fact that they were parting with valuable consideration should
have made them more circumspect in handling their business
Discussion. The petition is dismissed. The petitioners question transactions.
the findings of the Court of Appeals as to whether the payment
of the petitioners’ obligation to the private respondent was Persons dealing with an assumed agent are bound at their peril
properly made, thus, extinguishing the same. This is clearly a to ascertain not only the fact of agency but also the nature
factual issue, and beyond the purview of the Court to delve into. and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it.
Review of the Facts:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were The petitioners in this case failed to discharge this burden,
included in the private respondent’s lost booklet, which considering that the private respondent vehemently denied
loss was duly advertised in a newspaper of general that the payments were accepted by it and were made to its
circulation; thus, the private respondent could not have officially authorized representative.
issued them to the petitioners to cover the alleged payments on
the dates appearing thereon. In the case at bar, the most prudent thing the petitioners should
have done was to ascertain the identity and authority of the
Second. There was something amiss in the way the receipts person who collected their payments. Failing this, the
were issued to the petitioners, as one receipt bearing a higher petitioners cannot claim that they acted in good faith when
serial number was issued ahead of another receipt bearing a they made such payments.
lower serial number, supposedly covering a later payment. The
petitioners failed to explain the apparent mix-up in these Their claim therefor is negated by their negligence, and they
receipts, and no attempt was made in this regard. are bound by its consequences. Being negligent in this regard,
the petitioners cannot seek relief on the basis of a supposed
Third. The fact that the salesman’s name was invariably left agency.
blank in the four receipts and that the petitioners could not
even remember the name of the supposed impostor who HELD: WHEREFORE, the instant petition is hereby DENIED. The
received the said payments strongly argue against the veracity of assailed Decision dated April 16, 1996, and the Resolution
the petitioners’ claim.
dated July 19, 1996 of the Court of Appeals are AFFIRMED.

Costs against the petitioners. On December 9, 1983, Lim Sio Wan deposited with Allied a
second money market placement to mature on January 9, 1984.
ALLIED BANKING CORP. v. LIM SIO WAN (2008) On December 14, 1983, upon the maturity date of the first
money market placement, Lim Sio Wan went to Allied to
Facts: On November 14, 1983, respondent Lim Sio Wan withdraw it. She was then informed that the placement had
deposited with petitioner Allied Banking Corporation (Allied) at been pre-terminated upon her instructions. She denied giving
its Quintin Paredes Branch in Manila a money market any instructions and receiving the proceeds thereof. She
placement of P 1,152,597.35 for a term of 31 days to mature on desisted from further complaints when she was assured by the
December 15, 1983, as evidenced by Provisional Receipt No. bank’s manager that her money would be recovered.
1356 dated November 14, 1983.
On January 24, 1984, Lim Sio Wan, realizing that the promise
On December 5, 1983, a person claiming to be Lim Sio Wan that her money would be recovered would not materialize, sent
called up Cristina So, an officer of Allied, and instructed the a demand letter to Allied asking for the payment of the first
latter to pre-terminate Lim Sio Wan’s money market placement, placement. Allied refused to pay Lim Sio Wan, claiming that
to issue a manager’s check representing the proceeds of the the latter had authorized the pre-termination of the
placement, and to give the check to one Deborah Dee Santos placement and its subsequent release to Santos.
who would pick up the check. Lim Sio Wan described the RTC ordered Allied Bank to pay plaintiff P1,158,648, moral,
appearance of Santos so that So could easily identify her.
attorney’s fees and costs of suit.
Santos arrived at the bank and signed the application form for CA modified decision. Allied Banking to pay 60% and
a manager’s check to be issued. The bank issued Manager’s Metrobank for P40% of the amount so as to the moral, AF and
Check No. 035669 for P1,158,648.49, representing the proceeds costs of suit.
of Lim Sio Wan’s money market placement in the name of Lim
Sio Wan, as payee. The check was cross-checked "For Payee’s Issues:
Account Only" and given to Santos. Whether or not CA erred in holding the Lim Sio Wan did not
authorize to pre-terminate initial placement and to deliver the
Thereafter, the manager’s check was deposited in the check to Deborah Santos.
account of Filipinas Cement Corporation (FCC) at
respondent Metropolitan Bank and Trust Co. (Metrobank), Question of Fact
with the forged signature of Lim Sio Wan as indorser. Allied questions the finding of both the trial and appellate
courts that Allied was not authorized to release the proceeds of
Earlier, on September 21, 1983, FCC had deposited a money Lim Sio Wan’s money market placement to Santos. Allied clearly
market placement for PhP 2 million with respondent Producers raises a question of fact. When the CA affirms the findings of
Bank. Santos was the money market trader assigned to handle fact of the RTC, the factual findings of both courts are binding
FCC’s account. Such deposit is evidenced by Official Receipt No. on this Court.
31756813 and a Letter dated September 21, 1983 of Santos
addressed to Angie Lazo of FCC, acknowledging receipt of the Liability of the Parties
placement. As to the liability of the parties, we find that Allied is liable to
Lim Sio Wan. Fundamental and familiar is the doctrine that the
The placement matured on October 25, 1983 and was rolled- relationship between a bank and a client is one of debtor-
over until December 5, 1983 as evidenced by a Letter dated creditor. Bank deposits is in the nature of a simple loan.
October 25, 1983. When the placement matured, FCC
demanded the payment of the proceeds of the placement. Money Market, Defined
On December 5, 1983, the same date that So received the [A] money market is a market dealing in standardized short-
phone call instructing her to pre-terminate Lim Sio Wan’s term credit instruments (involving large amounts) where
placement, the manager’s check in the name of Lim Sio lenders and borrowers do not deal directly with each other but
Wan was deposited in the account of FCC, purportedly through a middle man or dealer in open market. In a money
representing the proceeds of FCC’s money market placement market transaction, the investor is a lender who loans his money
with Producers Bank. In other words, the Allied check was to a borrower through a middleman or dealer.
deposited with Metrobank in the account of FCC as Producers
Bank’s payment of its obligation to FCC. IN THE CASE: The money market was in the nature of a loan. Lim
Sio Wan, as creditor of the bank for her money market
The check was sent to Allied through the PCHC. Upon the placement, is entitled to payment upon her request, or upon
presentment of the check, Allied funded the check even maturity of the placement, or until the bank is released from its
without checking the authenticity of Lim Sio Wan’s obligation as debtor. Until any such event, the obligation of
purported indorsement. Thus, the amount on the face of the Allied to Lim Sio Wan remains unextinguished.
check was credited to the account of FCC.
Lim Sio Wan did not authorize the release of her money market The liability of Allied, however, is concurrent with that of
placement to Santos and the bank had been negligent in so Metrobank as the last indorser of the check. When
doing, there is no question that the obligation of Allied to pay Metrobank indorsed the check in compliance with the PCHC
Lim Sio Wan had not been extinguished. Rules and Regulations without verifying the authenticity of Lim
Payment Made to a Wrong Party Sio Wan’s indorsement and when it accepted the check despite
Payment made by the debtor to a wrong party does not the fact that it was cross-checked payable to payee’s account
extinguish the obligation as to the creditor, if there is no fault only, its negligent and cavalier indorsement contributed to the
or negligence which can be imputed to the latter. easier release of Lim Sio Wan’s money and perpetuation of
the fraud. Given the relative participation of Allied and
Even when the debtor acted in utmost good faith and by Metrobank to the instant case, both banks cannot be adjudged
mistake as to the person of his creditor, or through error as equally liable. Hence, the 60:40 ratio of the liabilities of Allied
induced by the fraud of a third person, the payment to one who and Metrobank, as ruled by the CA, must be upheld.
is not in fact his creditor, or authorized to receive such payment,
is void, except as provided in Article 1241. Such payment does Lim Sio Wan’s money market placement in Allied Bank was pre-
not prejudice the creditor, and accrual of interest is not terminated and withdrawn without her consent. Moreover, the
suspended by it. proceeds of the placement were deposited in Producers
Bank’s account in Metrobank without any justification.
IN THE CASE: Since there was no effective payment of Lim Sio
Wan’s money market placement, the bank still has an obligation In other words, there is no reason that the proceeds of Lim Sio
to pay her at six percent (6%) interest from March 16, 1984 until Wans’ placement should be deposited in FCC’s account
the payment thereof. purportedly as payment for FCC’s money market placement
and interest in Producers Bank.
On Liability of Allied
Allied claims that Metrobank is the proximate cause of the loss With such payment, Producers Bank’s indebtedness to FCC was
of Lim Sio Wan’s money. It points out that Metrobank extinguished, thereby benefitting the former. Clearly, Producers
guaranteed all prior indorsements inscribed on the manager’s Bank was unjustly enriched at the expense of Lim Sio Wan.
check, and without Metrobank’s guarantee, the present Based on the facts and circumstances of the case, Producers
controversy would never have occurred. Bank should reimburse Allied and Metrobank for the amounts
the two latter banks are ordered to pay Lim Sio Wan.
Proximate cause is "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, HELD: Clearly, Producers Bank must be held liable to Allied and
produces the injury and without which the result would not Metrobank for the amount of the check plus 12% interest per
have occurred." Thus, there is an efficient supervening event if annum, moral damages, attorney’s fees, and costs of suit which
the event breaks the sequence leading from the cause to the Allied and Metrobank are adjudged to pay Lim Sio Wan based
ultimate result. To determine the proximate cause of a on a proportion of 60:40.
controversy, the question that needs to be asked is: If the event
did not happen, would the injury have resulted? If the DELA CRUZ v. CONCEPCION (2012)
answer is NO, then the event is the proximate cause.
On March 25, 1996, petitioners (as vendors) entered into a
IN THE CASE:Allied avers that even if it had not issued the check Contract to Sell with respondent (as vendee) involving a house
payment, the money represented by the check would still be and lot in Cypress St., Phase I, Town and Country Executive
lost because of Metrobank’s negligence in indorsing the check Village, Antipolo City for a consideration of P2,000,000.00
without verifying the genuineness of the indorsement thereon. subject to the following terms and conditions:
a. An earnest money of P100,000 shall be paid immediately
The trial court correctly found Allied negligent in issuing the b. That a full DP of P400K on 02-29-96
manager’s check and in transmitting it to Santos without c. That P500K shall be paid before 05-05-96
d. Balance of P1M shall be paid on installment with interest of
even a written authorization. In fact, Allied did not even ask
18% per annum.
for the certificate evidencing the money market placement or call
e. Monthly amortization is P50,000 principal and interest
up Lim Sio Wan at her residence or office to confirm her included, must be paid to the vendors without need of prior
instructions. Both actions could have prevented the whole demand and every month after. Failure to pay a penalty of
fraudulent transaction from unfolding. Allied’s negligence must 5% of the amount due until account is updated.
be considered as the proximate cause of the resulting loss. f. After receipt of full payment, the Vendors hall execute the
Necessary Absolute Deed of Sale covering the house and lot
To reiterate, had Allied exercised the diligence due from a mentioned above.
financial institution, the check would not have been issued
and no loss of funds would have resulted. In fact, there would Before respondent issued the P500,000.00 replacement check,
have been no issuance of indorsement had there been no check she told petitioners that based on the computation of her
in the first place. accountant as of July 6, 1997, her unpaid obligation which
includes interests and penalties was only P200,000.00.
Petitioners agreed with respondent and said “if P200,000.00 is Petitioners also manifested their conformity to the statement of
the correct balance, it is okay with us.” The title of the property account prepared by respondent. With factual antecedents,
was transferred to the respondent, and reminded to pay petitioners cannot be permitted to assert a different
P209,000 within three months. computation of the correct amount of respondent’s liability.
Despite repeated demands, petitioners failed to collect the
amounts they claimed from respondent. Hence, the Complaint Effect of Failure of Respondent to
for Sum of Money with Damages was filed with RTC Antipolo. Plead Payment of Obligation; Non-Objection
Nowhere in her Answer did she allege the defense of payment.
Answer: Respondent claimed that her unpaid obligation to However, during the presentation of her evidence, respondent
petitioners is only P200,000.00 as earlier confirmed by submitted a receipt to prove that she had already paid the
petitioners and not P487,384.15 as later alleged in the remaining balance.
complaint. Respondent thus prayed for the dismissal of the
complaint. By way of counterclaim, respondent prayed for the Both the RTC and the CA concluded that respondent had
payment of moral damages and attorney’s fees. already paid the remaining balance of P200,000.00. Petitioners
assail this as they should have maintained the judicial
During the presentation of the parties’ evidence, in addition to admission of respondent in her answer recognizing her
documents showing the statement of her paid obligations, balance of P200K.
respondent presented a receipt purportedly indicating payment
of the remaining balance of P200,000.00 to Adoracion Losloso Thus, while respondent judicially admitted in her Answer that
(Losloso) who allegedly received the same on behalf of she only paid P2 million and that she still owed petitioners
petitioners. P200,000.00, respondent claimed later and, in fact,
submitted an evidence to show that she already paid the
RTC. In favor of the respondent Concepcion. RTC noted that whole amount of her unpaid obligation. It is noteworthy
the evidence formally offered by petitioners have not actually that when respondent presented the evidence of payment,
been marked as none of the markings were recorded. Thus, it petitioners did not object thereto.
found no basis to grant their claims, especially since the amount
claimed in the complaint is different from that testified to. The When the receipt was formally offered as evidence, petitioners
court, on the other hand, granted respondent’s counterclaim. did not manifest their objection to the admissibility of said
document on the ground that payment was not an issue.
CA affirmed. This amount, however, had already been paid by Apparently, petitioners only denied receipt of said payment and
respondent and received by petitioners’ representative. assailed the authority of Losloso to receive payment.
Issue: Since there was an implied consent on the part of petitioners

Whether or not defendant full paid the claims of plaintiffs based to try the issue of payment, even if no motion was filed and no
on the alleged receipt of the payment by Adoracion Losloso amendment of the pleading has been ordered, the RTC cannot
from Ana Marie Concepcion. be faulted for admitting respondent’s testimonial and
Discussion: The petition is without merit. Petitioners also documentary evidence to prove payment.
claim that the RTC and the CA erred in giving credence to the
receipt presented by respondent to show that her unpaid Payment Must be Made to the Proper Party
obligation had already been paid having been allegedly given Admittedly, payment of the remaining balance of P200,000.00
to a person who was not armed with authority to receive was not made to the creditors themselves. Rather, it was
payment. allegedly made to a certain Losloso. Respondent claims that
Losloso was the authorized agent of petitioners, but the latter
APPLICATION OF CONTRACT: It is undisputed that the parties dispute it.
entered into a contract to sell a house and lot for a total
consideration of P2 million. Considering that the property was Losloso’s authority to receive payment was embodied in
payable in installment, they likewise agreed on the payment of petitioners’ letter addressed to respondent, dated August 7,
interest as well as penalty in case of default. 1997, where they informed respondent of the amounts they
advanced for the payment of the 1997 real estate taxes.
It is likewise settled that respondent was able to pay the total
purchase price of P2 million ahead of the agreed term. After In said letter, petitioners reminded respondent of her remaining
which, they agreed on the remaining balance by way of balance, together with the amount of taxes paid. Taking into
interest and penalties which is P200,000.00. Considering consideration the busy schedule of respondent, petitioners
that the term of payment was not strictly followed, and the advised the latter to leave the payment to a certain “Dori”
purchase price had already been fully paid by respondent, the who admittedly is Losloso, or to her trusted helper. This is
latter presented to petitioners her computation of her liabilities an express authority given to Losloso to receive payment.
for interests and penalties which was agreed to by petitioners.
RULE:Thus, as shown in the receipt signed by petitioners’ agent The Ibrahims and Maruhoms asseverate that they are the real
and pursuant to the authority granted by petitioners to Losloso, owners of the lands; they being the lawful heirs of the late Datu
payment made to the latter is payment to petitioners. Magayo-ong Maruhom, who was the original proprietor.
HELD: The petition is denied and for lack of merit. The Court of They also claimed that Mangondato actually holds no claim or
Appeals decision is affirmed. right over the lands covered by TCT No. 378-A except that of a
trustee who merely holds the said lands in trust for them.
1242. Payment Made in Good Faith in Possession of Credit RTC Marawi granted the prayer for the issuance of the TRO as
well as the writ of preliminary injunction for the payments. Trial
NAT’L POWER CORPORATION v. IBRAHIM (2015) then ensued/
Facts: In 1978, petitioner took possession of a 21,995 sq.m. G.R. No. 113194 was decided on allowing payment of the
parcel of land in Marawi City, for the purpose of building just compensation. Mangondato filed a motion for execution of
thereon a hydroelectric power plant pursuant Agus 1 project. the decision in Civil Case No. 605-92 and Civil Case No. 610-
92.24 Against this motion, however, petitioner filed an
The subject land, while in truth a portion of a private estate opposition. Petitioner, in sum, posits that such writ of
registered under TCT No. 378-A4 in the name of herein preliminary injunction constitutes a legal impediment that
respondent Macapanton K. Mangondato (Mangondato), was effectively bars any meaningful execution of the decision in Civil
occupied by petitioner under the mistaken belief that such land Case No. 605-92 and Civil Case No. 610-92.
is part of the vast tract of public land reserved for its use by the • However, RTC Marawi found no merit in such
government under Proclamation No. 1354. opposition and rendered the issuance of writ of
execution for the amount of P21,801,951. A notice of
Mangondato first discovered petitioner’s occupation of the garnishment was served upon PNB.
subject land in 1979—the year that petitioner started its
construction of the Agus 1 plant. Shortly after such discovery, Decision in the Ownership Case
Mangondato began demanding compensation for the subject RTC Marawi decided that:
land from petitioner. • The Ibrahims and Maruhoms—not Mangondato—are
the true owners of the lands covered by TCT No. 378-
In support of his demand for compensation, Mangondato sent A, which includes the subject land.
to petitioner a letter dated 28 September 1981 wherein the • The subject land, however, could no longer be
former detailed the origins of his ownership over the lands reconveyed to the Ibrahims and Maruhoms since the
covered by TCT No. 378-A, including the subject land. same was already expropriated and paid for by the
petitioner under Civil Case No. 605-92 and Civil Case
But, after more than a decade, petitioner finally acquiesced to No. 610-92.
the fact that the subject land is private land covered by TCT No. • Be that as it may, the Ibrahims and Maruhoms, as true
378-A and consequently acknowledged Mangondato’s right, as owners of the subject land, are the rightful recipients of
registered owner, to receive compensation therefor. whatever rental fees and indemnity that may be due for
the subject land as a result of its expropriation.
Ultimately, however, the communications failed to yield a
genuine consensus between petitioner and Mangondato as to the Mangondato and the petitioner were found to be solidarily
fair market value of the subject land. liable to the Ibrahims and Maruhoms for the rental fees and
expropriation indemnity as well as attorney’s fees. Garnishment
Civil Cases of Magondato’s money in the possession of SSS of P2.7M and
Mangondato filed a complaint for reconveyance against was decided to be deducted from the amount payable in the
petitioner before the RTC of Marawi City in July 1992. In his ownership case.
complaint, Mangondato asked for, among others, the recovery
of the subject land and the payment by petitioner of a monthly Issue:
rental from 1978 until the return of such land. And an Whether or not the court was correct to hold petitioner liable in
expropriation proceeding. favor of the Ibrahims and Maruhoms for the rental fees and
expropriation indemnity.
RTC Marawi upheld petitioner’s right to expropriate the subject
land: it denied Mangondato’s claim for reconveyance and Discussion: The two tribunals postulated that, notwithstanding
decreed the subject land condemned in favor of the petitioner, petitioner’s previous payment to Mangondato of the rental fees
effective July of 1992, subject to payment by the latter of just and expropriation indemnity as a consequence of the execution
compensation in the amount of P21,995,000.00. of the decision in Civil Case No. 605-92 and 610-92, petitioner
may still be held liable to the Ibrahims and Maruhoms for such
Respondents Ibrahim and Maruhoms fees and indemnity because its previous payment to
Ibrahims and Maruhoms disputed Mangondato’s ownership of Mangondato was tainted with “bad faith.”
the lands covered by TCT No. 378-A, including the subject land.
• Petitioner “allowed” payment to Mangondato despite

its prior knowledge, which dates back as early as 28 Since petitioner was only acting under the lawful orders of
September 1981, by virtue of Mangondato’s letter of a court in paying Mangondato, we find that no bad faith can
even date, that the subject land was owned by a be taken against it, even assuming that petitioner may have had
certain Datu Magayo-ong Maruhom and not by prior knowledge about the claims of the Ibrahims and
Mangondato; and Maruhoms upon the subject land and the TRO issued in Civil
• Allowed payment despite issuance of a TRO and a writ Case No. 967-93.
of preliminary injunction.
Petitioner argue however that, submits that a finding of bad Petitioner Cannot be Held Liable to the
faith against it would have no basis in fact and law, given that Ibrahims and Maruhoms
it merely complied with the final and executory decision in Civil
Case No. 605-92 and Civil Case No. 610-92 when it paid the Without the existence of bad faith, the ruling of the RTC and of
rental fees and expropriation indemnity due the subject to the Court of Appeals apropos petitioner’s remaining liability to
Mangondato. the Ibrahims and Maruhoms becomes devoid of legal basis.
• Petitioner thus insists that it should be absolved from
any liability to pay the rental fees and expropriation Two scenarios can happen:
indemnity to the Ibrahims and Maruhoms and prays If Mangondato was the real owner, then the obligation by
for the dismissal of Civil Case No. 967-93 against it. petitioner to pay for the rental fees and expropriation
indemnity due the subject land is already deemed extinguished
The court agrees with the petitioner grants the appeal. by the latter’s previous payment under the final judgment in
Civil Case No. 605-92 and Civil Case No. 610-92.
No Bad Faith on the Part of Petitioner
Petitioner is correct. No “bad faith” may be taken against it in If Ibrahims and Maruhoms, petitioner’s previous payment to
paying Mangondato the rental fees and expropriation Mangondato pursuant to Civil Case No. 605-92 and Civil Case
indemnity due the subject land. No. 610-92—given the absence of bad faith on petitioner’s part
as previously discussed—may nonetheless be considered as akin
Verily, the clear denominator in all of the foregoing judicial to a payment made in “good faith” to a person in
pronouncements is that the essence of bad faith consists in the “possession of credit” per Article 1242 of the Civil Code that,
deliberate commission of a wrong. just the same, extinguishes its obligation to pay for the rental
fees and expropriation indemnity due for the subject land.
Indeed, the concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere Application of Article 1242 on Good Faith
unintentional wrongs resulting from mere simple negligence or Article 1242 of the Civil Code is an exception to the rule that a
oversight. valid payment of an obligation can only be made to the person
to whom such obligation is rightfully owed.
ELEMENTS OF BAD FAITH
1. That the actor knew or should have known that a It contemplates a situation where a debtor pays a “possessor
particular course of action is wrong or illegal. of credit” i.e., someone who is not the real creditor but appears,
2. Despite such actual or imputable knowledge, the under the circumstances, to be the real creditor. In such
actor, voluntarily, consciously and out of his own free scenario, the law considers the payment to the “possessor of
will, proceeds with such course of action. credit” as valid even as against the real creditor considering the
good faith of the debtor.
IN THE CASE: That petitioner’s payment to Mangondato of the
rental fees and expropriation indemnity adjudged due for the IN THE CASE: We find that Mangondato—being the judgment
subject land in Civil Case No. 605-92 and Civil Case No. 610-92, creditor in Civil Case No. 605-92 and Civil Case No. 610-92 as
was required by the final and executory decision in the said well as the registered owner of the subject land at the time —
two cases and was compelled thru a writ of garnishment may be considered as a “possessor of credit” with respect to
issued by the court that rendered such decision. the rental fees and expropriation indemnity adjudged due for the
subject land in the two cases, if the Ibrahims and Maruhoms turn
In other words, the payment to Mangondato was not a product out to be the real owners of the subject land.
of a deliberate choice on the part of the petitioner but was
made only in compliance to the lawful orders of a court with Hence, petitioner’s payment to Mangondato of the fees and
jurisdiction. indemnity due for the subject land as a consequence of the
execution of Civil Case No. 605-92 and Civil Case No. 610-92
The more accurate rumination would be that it was the trial could still validly extinguish its obligation to pay for the same
court in Civil Case No. 605-92 and Civil Case No. 610-92 that even as against the Ibrahims and Maruhoms.
ordered or allowed the payment to Mangondato and that
petitioner merely complied with the order or allowance by the Effect of Extinguishment of Petitioner’s Obligation
trial court.
(1) If Mangondato turns out to be the real owner, and wheel loader which are covered under the second deed
Ibrahims and Maruhoms would not be entitled to of chattel mortgage.
recover anything from anyone for the subject land.
SSS garnishment would be returned. Petitioners sought to dismiss the amended complaint. They
(2) they may only recover the rental fees and alleged that their previous payments on loan amortizations,
expropriation indemnity due the subject land the execution of the deed of assignment on August 16, 2000,
against Mangondato but only up to whatever and respondent’s acceptance of the three units of heavy
payments the latter had previously received from
equipment, had the effect of full payment or satisfaction of
petitioner pursuant to Civil Case No. 605-92 and
Civil Case No. 610-92. their total outstanding obligation which is a bar on respondent
1245. Dation in Payment bank from recovering any more amounts from them.
RTC. Dismissed for lack of merit, held that the deed of
ESTANISLAO v. EAST WEST BANKING (2008) assignment and the petitioner’s delivery of the heavy
equipment effectively extinguished petitioners total loan
Facts: On July 24, 1997, petitioners obtained a loan from the obligation. It also held that respondent was estopped from
respondent in the amount of P3,925,000.00 evidenced by a further collecting from the petitioners when it accepted,
promissory note and secured by two deeds of chattel without any protest, delivery of the three units of heavy
mortgage dated July 10, 1997: one covering two dump trucks equipment as full and complete satisfaction of the petitioner’s
and a bulldozer to secure the loan amount of P2,375,000.00, and total loan obligation. Respondent likewise failed to timely
another covering bulldozer and a wheel loader to secure the loan rectify its alleged mistake in the original complaint and deed of
amount of P1,550,000.00. Petitioners defaulted in the assignment, taking almost a year to act.
amortizations and the entire obligation became due and
demandable. CA reversed the RTC ruling. It hinges on the following reason:
1. Not binding for it was not signed by respondent.
On April 10, 2000, respondent bank filed a suit for replevin with 2. Respondent was not estopped by its own declaration
damages, praying that the equipment covered by the first deed because they were innocent mistake and plain
of chattel mortgage be seized and delivered to it. oversight on the part of the staff.
3. Petitioners were aware that there were five pieces of
Deed of Assignment was reached by negotiations drafted by heavy equipment under chattel mortgage
East West Banking which provides: 4. After delivery, continued negotiation.
“the ASSIGNOR is indebted to the ASSIGNEE in the aggregate Estanislao’s Contention

a. the appellate court erred in ordering the payment of the
sum of P7,305,459.52, Philippine currency, inclusive of accrued
principal obligation in a replevin suit which it erroneously
interests and penalties as of August 16, 2000, and in full
treated as a collection case
payment thereof, the ASSIGNOR does hereby ASSIGN,
b. the deed of assignment is binding between the parties
TRANSFER and CONVEY unto the ASSIGNEE those motor
although it was not signed by the respondent, constituting
vehicles, with all their tools and accessories, more particularly
as it did an offer which they validly accepted
described as follows:
c. the respondent is estopped from collecting or foreclosing on
Make : Isuzu Dump Truck
the second deed of chattel mortgage.
xxx
Make : Isuzu Dump Truck
xxx East West’s Contention
Make : x x x Caterpillar Bulldozer x x x a. No legal effect between the parties for failure of the
respondent to sign the same.
That the ASSIGNEE hereby accepts the assignment in full b. The deed was founded on a mistake on its part because it
payment of the above-mentioned debt x x x. (Emphasis honestly believed that only one chattel mortgage had been
supplied)” constituted to secure the petitioners obligation
c. The non-inclusion of the second deed of chattel mortgage in
the original complaint was a case of plain oversight.
Petitioners affixed their signatures on the deed of assignment.
d. The continued negotiations in August 2001 between the
However, for some unknown reason, respondent banks duly
parties, after delivery of the three units of heavy equipment,
authorized representatives failed to sign the deed. The vehicles proves that petitioners acknowledged their continuing
were delivered. obligations to respondent under the second deed of
mortgage
On October 6, 2000 and March 8, 2001, respectively, petitioners e. the deed of assignment did not have the effect of novating
completed the delivery of the heavy equipment mentioned in the original loan obligation.
the deed of assignment two dump trucks and a bulldozer to
respondent, which accepted the same without objection. Issue:
Did the deed of assignment which expressly provides that the
However, on June 20, 2001, respondent filed a manifestation transfer and conveyance to respondent of three units of heavy
and motion to admit an amended complaint for the seizure equipment and its acceptance thereof shall be in full payment
and delivery of two more heavy equipment the bulldozer of the total outstanding obligation to the latter operate to
extinguish the debt, such that it is a bar to replevin suit?
HELD: This being so, the amended complaint for replevin

Discussion: The petition has merit. The deed of assignment was should be dismissed, because the chattel mortgage agreement
a perfected agreement which extinguished petitioners total upon which it is based had been rendered ineffectual.
outstanding obligation to the respondent. The deed explicitly
provides that the assignor (petitioners), in full payment of its WHEREFORE, the petition is GRANTED. The Decision of the
obligation in the amount of P7,305,459.52, shall deliver the Court of Appeals dated April 13, 2007 in CA-G.R. CV No. 87114
three units of heavy equipment to the assignee (respondent), and its Resolution dated June 25, 2007 are hereby SET ASIDE.
which accepts the assignment in full payment of the above- The March 14, 2006 decision of the Regional Trial Court of
mentioned debt. Antipolo, Branch 73, which dismisses Civil Case No. 00-5731, is
hereby REINSTATED.
This simply means, this could only mean that should petitioners
complete the delivery of the three units of heavy equipment
covered by the deed, respondents credit would have been ONG v. ROBAN LENDING CORPORATION (2009)
satisfied in full, and petitioners aggregate indebtedness of
P7,305,459.52 would then be considered to have been paid in Facts: On different dates July 14, 1999 to March 20, 2000,
full as well. petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-
Ong obtained several loans from Roban Lending Corporation
The Nature of the Assignment was Dation in Payment (respondent) in the total amount of P4,000,000.00. These loans
It is whereby property is alienated to the creditor in satisfaction were secured by a real estate mortgage on petitioner’s parcels
of a debt in money. Such transaction is governed by the law on of land located in Binauganan, Tarlac City.
sales. Even if we were to consider the agreement as a
compromise agreement, there was no need for respondent’s On February 12, 2001, petitioners and respondent executed an
signature on the same, because with the delivery of the heavy Amendment to Amended Real Estate Mortgage
equipment which the latter accepted, the agreement was consolidating their loans inclusive of charges thereon which
consummated. Respondents approval may be inferred from its totaled P5,916,117.50. On even date, the parties executed a
unqualified acceptance of the heavy equipment. Dacion in Payment Agreement wherein petitioners assigned
the properties covered by TCT No. 297840 to respondent in
Upon due acceptance, the contract is perfected, and from that settlement of their total obligation, and a Memorandum of
moment the parties are bound not only to the fulfillment of Agreement.
what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in In April 2002, Spouses Ong filed a complaint before RTC Tarlac
keeping with good faith, usage and law. for declaration of mortgage as abandoned, annulment of
deeds, alleging that the MOA and the Dacion in Payment
With its years of banking experience, resources and manpower, executed are void for being pactum commissorium.
respondent bank is presumed to be familiar with the
implications of entering into the deed of assignment, whose The Spouses alleged that the loan was founded on several
terms are categorical and left nothing for interpretation. The uniform PNs and decried the charges as illegal and revolting as
alleged non-inclusion in the deed of certain units of heavy they show any survival against the loan. Roban maintained the
equipment due to inadvertence, plain oversight or mistake, is legality of its transaction with petitioners.
tantamount to inexcusable manifest negligence, which
should not invalidate the juridical tie that was created. It took CA held RTC decision that there was no pactum commissorium.
them a year before raising an objection.
Issue:
Presumption on the Validity of Contracts Whether or not the MOA and the DPA were considered pactum
Since the agreement was consummated by the delivery on commissorium and thus void.
March 8, 2001 of the last unit of heavy equipment under the
deed, petitioners are deemed to have been released from all Pactum Commissorium Present, Elements
their obligations to respondent. This Court finds that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium. The
Since there is no more credit to collect, no principal obligation elements of pactum commissorium, which enable the
to speak of, then there is no more second deed of chattel mortgagee to acquire ownership of the mortgaged property
mortgage that may subsist. without need of any foreclosure proceedings are:
1. There should be a property mortgaged by way of
A chattel mortgage cannot exist as an independent contract security for the payment of the principal obligation.
since its consideration is the same as that of the principal 2. There should be a stipulation for automatic
contract. Being a mere accessory contract, its validity would appropriation by the creditor of the thing mortgaged
depend on the validity of the loan secured by it. in case of non-payment of the principal obligation
within the stipulated period.
IN THE CASE: MOA and DPA contain no provision for CA reversed the dismissal, held that the complaint states a
foreclosure proceedings nor redemption. Under the MOA, cause of action, respondents having alleged that there was
the failure to pay within 1-year gives respondent the power to partial performance of the agreement to settle their obligation
enforce the DPA transferring to it ownership of the properties. via dacion en pago when they agreed to have the properties
Respondent in effect, automatically acquires ownership of the appraised to thus place their agreement within the exceptions
properties upon petitioner’s failure to pay their debt within the provided under Article 1403.
stipulated period.
Dacion en Pago, Concept and Application
In a true dacion en pago, the assignment extinguishes the It is a mode of extinguishing an existing obligation partakes of
monetary debt, but in this case, it was made as a security, as the nature of sale whereby property is alienated to the creditor
evidenced in the nature of the MOA and DPA signed on the in satisfaction of a debt in money. It is an objective novation of
same day. the obligation; hence, common consent of the parties is
HELD: WHEREFORE, the challenged Court of Appeals Decision required in order to extinguish the obligation.
is REVERSED and SET ASIDE. The Memorandum of Agreement Laigo’s Contention
and the Dacion in Payment executed by petitioner- spouses Sometime in December, year 2000, the protest of plaintiffs
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent notwithstanding and in blatant breach of the agreed "Dacion
Roban Lending Corporation on February 12, 2001 are declared en pago" as the mode of full payment of plaintiffs' mortgage
NULL AND VOID for being pactum commissorium (2088). obligation, defendant Dao Heng Bank proceeded to foreclose
the mortgaged properties above-described and sold said
DAO HENG BANK v. LAIGO (2008) properties which were aggregately valued at more than P20
Million for only P10,776,242.00, an unconscionably very low
Facts: Sps. Lilia and Reynaldo Laigo obtained loans from Dao price;
Heng of P11M and executed Three Real Estate Mortgages
covering two parcels of land. The loans were payable within 12 Dao Heng Contention
months from the execution o the PN. As of 2000, respondents Quite to the contrary, there was no meeting of the minds
failed to settle their outstanding obligation, drawing them between defendant Dao Heng Bank and the plaintiffs to dacion
to verbally offer to cede to Dao Heng one of the mortgaged any of the mortgaged properties as full settlement of the loan.
lots by way of dacion en pago. Appraiser was commissioned.
Although there was a PROPOSAL and NEGOTIATIONS to settle
Dao Heng demanded payment of P10.385M, demand was the loan by way of dacion, nothing came out of said proposal,
unheeded. September 2000, foreclosure proceedings against much less did the negotiations mature into the execution of a
the mortgages and they were sold at a public auction wherein dacion en pago instrument. Defendant Dao Heng Bank found
BDO is the highest bidder. the offer to settle by way of dacion not acceptable and thus, it
opted to foreclose on the mortgage.
Redemption request, after showing the terms and conditions of
redemption, there was nothing heard from the respondents, Being likened to that of a contract of sale, dacion en pago is
would proceed to consolidate the titles after expiration of governed by the law on sales. The partial execution of a contract
redemption period. of sale takes the transaction out of the provisions of the Statute
of Frauds so long as the essential requisites of consent of the
Six days before the expiration of the redemption period or on contracting parties, object and cause of the obligation concur
December 27, 2001, respondents filed a complaint before the and are clearly established to be present.
RTC Quezon for Annulment, Injunction with Prayer for
Temporary Restraining Order (TRO), praying for the annulment IN THE CASE: Respondents claim that petitioner's commissioning
of the foreclosure of the properties subject of the real estate of an appraiser to appraise the value of the mortgaged
mortgages and for them to be allowed "to deliver by way of properties, his services for which they and petitioner paid, and
‘dacion en pago' one of the mortgaged properties as full their delivery to petitioner of the titles to the properties constitute
payment of [their] mortgaged obligation" and to, in the partial performance of their agreement to take the case out of
meantime, issue a TRO directing the defendant-herein petitioner the provisions on the Statute of Frauds.
to desist from consolidating ownership over their properties.
There is no concrete showing, however, that after the
By respondents' claim, Dao Heng verbally agreed to enter into appraisal of the properties, petitioner approved respondents'
a dacion en pago. There was no meeting of the minds. proposal to settle their obligation via dacion en pago. The
delivery to petitioner of the titles to the properties is a usual
RTC granted petitioner’s motion to dismiss. On the basis that condition sine qua non to the execution of the mortgage,
the claim must be based on a document or writing, both for security and registration purposes.
evidencing the alleged dacion en pago, otherwise it cannot be
enforced in action in court. For if the title to a property is not delivered to the mortgagee,
what will prevent the mortgagor from again encumbering it
also by mortgage or even by sale to a third party.
the Lupon Tagapamayapa. When no settlement was reached,

Finally, that respondents did not deny proposing to redeem the petitioner filed a Complaint before the RTC.
mortgages, as reflected in petitioner's June 29, 2001 letter to
them, dooms their claim of the existence of a perfected Guillermo countered that he had already paid the subject loan
dacion en pago. in full. He continuously delivered and sold copra to petitioner
from April 1998 to April 1999. Respondent said they had an oral
HELD: WHEREFORE, the Court of Appeals Decision of January arrangement that the net proceeds thereof shall be applied as
26, 2006 is REVERSED and SET ASIDE. The Resolution of July 2, installment payments for the loan.
2002 of the Regional Trial Court of Quezon City, Branch 215 He alleged that his deliveries amounted to ₱420,537.68 worth
dismissing respondents' complaint is REINSTATED. of copra. To bolster his claim, he presented copies of pesadas
issued by Elena and Vicente. He pointed out that the pesadas
did not contain the notation pd, which meant that actual
payment of the net proceeds from copra deliveries was not
given to him, but was instead applied as loan payment.
TAN SHUY v. MAULAWIN (2012)
He averred that Tan Shuy filed a case against him, because
Facts: Petitioner Tan Shuy is engaged in the business of petitioner got mad at him for selling copra to other copra
buying copra and corn in the Fourth District of Quezon buyers.
Province. According to Vicente Tan (Vicente), son of petitioner,
whenever they would buy copra or corn from crop sellers, they RTC. Net proceeds from Guillermos copra deliveries
would prepare and issue a pesada in their favor. represented in the pesadas, which did not bear the notation pd
should be applied as installment payments for the loan. It gave
A pesada is a document containing details of the transaction, weight and credence to the pesadas, as their due execution and
including the date of sale, the weight of the crop delivered, the authenticity was established by Elena and Vicente, children of
trucking cost, and the net price of the crop. He then explained petitioner. CA affirmed finding, it gave credence to the
that when a pesada contained the annotation pd on the total testimony of respondent Guillermo in that the net proceeds
amount of the purchase price, it meant that the crop delivered from the copra deliveries were applied as installment payments
had already been paid for by petitioner. for the loan.
Issues:
Guillermo Maulawin (Guillermo), is a farmer-businessman (1) Whether the pesadas require authentication before
engaged in the buying and selling of copra and corn. On 10 July
they can be admitted in evidence, and
1997, Tan Shuy extended a loan to Guillermo in the amount of
(2) Whether the delivery of copra amount to installment
₱420,000. In consideration thereof, Guillermo obligated
payments for the loan obtained by respondents from
himself to pay the loan and to sell lucad or copra to petitioner.
petitioner.
Below is a reproduction of the contract:
First Issue: We found no clear showing that the trial court and
the CA committed reversible errors of law in giving credence
No 2567 Lopez, Quezon July 10,
and according weight to the pesadas presented by
1997
respondents. As reproduced above, the trial court found that
the due execution and authenticity of the pesadas were
Tinanggap ko kay G. TAN SHUY ang halagang . (P420,000.00)
salaping Filipino. Inaako ko na isusulit sa kanya ang aking LUCAD at established by the plaintiffs daughter Elena Tan and sometimes
babayaran ko ang nasabing halaga. Kung hindi ako makasulit ng by plaintiffs son Vicente Tan.
LUCAD o makabayad bago sumapit ang ., 19 maaari niya akong
ibigay sa may kapangyarihan. Kung ang pagsisingilan ay RULE: In any event, petitioner is already estopped from
makakarating sa Juzgado ay sinasagutan ko ang lahat ng kaniyang questioning the due execution and authenticity of the pesadas.
gugol. Tan Shuy could have easily belied the existence of the pesadas
or receipts, and the purposes for which they were offered in
P................ [Sgd. by respondent]
evidence by simply presenting his daughter, Elena Tan Shuy, but
.
Lagda no effort to do so was actually done by the former given that
scenario. The pesadas having been admitted in evidence, with
According to Vicente, part of their agreement with Guillermo petitioner failing to timely object thereto, these documents are
was that they would put the annotation sulong on the pesada already deemed sufficient proof of the facts contained therein.
when partial payment for the loan was made.
The pesadas served as proof that the net proceeds from the
Petitioner alleged that despite demands Guillermo only copra deliveries were used as installment payments for the
remitted a total of P28,500 with an outstanding balance of debts of respondents.
P391,500. Thus, convinced that Guillermo no longer had the
intention to pay the loan, petitioner brought the controversy to Dation in Payment, Present
Dation in payment extinguishes the obligation to the extent of (FEBTC). That same day, the spouses Serfino’s counsel sent two
the value of the thing delivered, either as agreed upon by the letters to FEBTC informing the bank that the deposit in Grace’s
parties or as may be proved, unless the parties by agreement name was owned by the spouses Serfino by virtue of an
express or implied, or by their silence consider the thing as assignment made in their favor by the spouses Cortez.
equivalent to the obligation, in which case the obligation is
totally extinguished. On April 25, 1996, the spouses Serfino instituted Civil Case No.
95- 9344 against the spouses Cortez, Grace and her husband,
IN THE CASE: As found by the trial court, preponderance of Dante Cortez, and FEBTC for the recovery of money on deposit
evidence is on the side of the defendant. The defendant and the payment of damages, with a prayer for preliminary
explained that for the receipts (pesadas) from April 1998 to attachment.
April 1999 he only gets the payments for trucking while the
total amount which represent the total purchase price for On April 26, 1996, Grace withdrew ₱ 150,000.00 from her
the copras that he delivered to the plaintiff were all given savings account with FEBTC. On the same day, the spouses
to Elena Tan Shuy as installments for the loan he owed to Serfino sent another letter to FEBTC informing it of the pending
plaintiff. action; attached to the letter was a copy of the complaint filed
as Civil Case No. 95-9344.
Since the total amount of defendants loan to the plaintiff is During the pendency of Civil Case No. 95-9344, the spouses
P420,000.00 and the evidence on record shows that the actual Cortez manifested that they were turning over the balance
amount of payment made by the defendant from the proceeds of the deposit in FEBTC (amounting to ₱ 54,534.00) to the
of the copras he delivered to the plaintiff is P378,952.43, the spouses Serfino as partial payment of their obligation under the
defendant is still indebted to the plaintiff in the amount of compromise judgment. The RTC issued an order dated July 30,
P41,047.53 (due to the corn pesadas). 1997, authorizing FEBTC to turn over the balance of the deposit
to the spouses Serfino.
RULE: The subsequent arrangement between Tan Shuy and
Guillermo can thus be considered as one in the nature of On February 23, 2006, the RTC issued the assailed decision
dation in payment. There was partial payment every time (a) finding the spouses Cortez, Grace and Dante liable for
Guillermo delivered copra to petitioner, chose not to collect the fraudulently diverting the amount due the spouses Serfino, but
net proceeds of his copra deliveries, and instead applied the (b) absolving FEBTC from any liability for allowing Grace to
collectible as installment payments for his loan from Tan Shuy. withdraw the deposit. The RTC declared that FEBTC was not a
We therefore uphold the findings of the trial court, as affirmed by party to the compromise judgment; FEBTC was thus not
the CA, that the net proceeds from Guillermos copra deliveries chargeable with notice of the parties’ agreement, as there was
amounted to ₱378,952.43. With this partial payment, no valid court order or processes requiring it to withhold
respondent remains liable for the balance totaling ₱41,047.57. payment of the deposit. Given the nature of bank deposits,
FEBTC was primarily bound by its contract of loan with Grace.
SERFINO v. FEBTC (2012) There was, therefore, no legal justification for the bank to refuse
payment of the account, notwithstanding the claim of the
Facts: There was an action for collection of of sum of money spouses Serfino as stated in their three letters.
instituted by the petitioner spouses Godfrey and Gerardina
Serfino (collectively, spouses Serfino) against the spouses Serfino Contention
Domingo and Magdalena Cortez (collectively, spouses Cortez). Upon receipt of a notice of adverse claim in proper form, it
becomes the duty of the bank to: 1. Withhold payment of the
By way of settlement, the spouses Serfino and the spouses deposit until there is a reasonable opportunity to institute legal
Cortez executed a compromise agreement on October 20, proceedings to contest ownership; and 2) give prompt notice
1995, in which the spouses Cortez acknowledged their of the adverse claim to the depositor. The bank may be held
indebtedness to the spouses Serfino in the amount of ₱ liable to the adverse claimant if it disregards the notice of
108,245.71. To satisfy the debt, Magdalena bound herself "to adverse claim and pays the depositor.
pay in full the judgment debt out of her retirement benefits.
By allowing Grace to withdraw the deposit that is due them
Payment of the debt shall be made one (1) week after under the compromise judgment, the spouses Serfino claim
Magdalena has received her retirement benefits from the that FEBTC committed an actionable wrong that entitles them
Government Service Insurance System (GSIS). In case of default, to the payment of actual and moral damages.
the debt may be executed against any of the properties of the
spouses Cortez that is subject to execution, upon motion of the FEBTC’s Defense
spouses Serfino. Insists on the correctness of the RTC ruling. It claims that it is
not bound by the compromise judgment, but only by its
No payment was made as promised. Instead, Godfrey contract of loan with its depositor.
discovered that Magdalena deposited her retirement benefits
in the savings account of her daughter-in-law, Grace Cortez, As a loan, the bank deposit is owned by the bank; hence, the
with the respondent, Far East Bank and Trust Company, Inc. spouses Serfino’s claim of ownership over it is erroneous.
Magdalena Cortez undertake[s] and bind[s] herself to pay in full the

Issue: judgment debt out of her retirement benefits as Local [T]reasury
The determination of the obligation of banks to a third party Operation Officer in the City of Bacolod, Philippines, upon which full
payment, the plaintiffs waive, abandon and relinquish absolutely any of
who claims rights over a bank deposit standing in the name of
their claims for attorney’s fees stipulated in the Promissory Note (Annex
another. "A" to the Complaint).15 [emphasis ours]
Discussion: We find the petition unmeritorious and see no Only when Magdalena has received and turned over to the
reason to reverse the RTC’s ruling. spouses Serfino the portion of her retirement benefits
corresponding to the debt due would the debt be deemed
The spouses Serfino’s claim for damages against FEBTC is paid.
premised on their claim of ownership of the deposit with FEBTC.
The deposit consists of Magdalena’s retirement benefits, which ONLY A RECOURSE: In the present case, the judgment debt was
the spouses Serfino claim to have been assigned to them under not extinguished by the mere designation in the compromise
the compromise judgment. judgment of Magdalena’s retirement benefits as the fund from
which payment shall be sourced.
That the compromise agreement authorizes recourse in case of
SERFINO CLAIM: That the retirement benefits were deposited in default on other executable properties of the spouses Cortez, to
Grace’s savings account with FEBTC supposedly did not divest satisfy the judgment debt, further supports our conclusion that
them of ownership of the amount, as "the money already there was no assignment of Magdalena’s credit with the GSIS
belongs to the [spouses Serfino] having been absolutely that would have extinguished the obligation.
assigned to them and constructively delivered by virtue of the
x x x public instrument[.]" By virtue of the assignment of Since no valid assignment of credit took place, the spouses
credit, the spouses Serfino claim ownership of the deposit, Serfino cannot validly claim ownership of the retirement
and they posit that FEBTC was duty bound to protect their right benefits that were deposited with FEBTC. Without ownership
by preventing the withdrawal of the deposit since the bank had rights over the amount, they suffered no pecuniary loss that has
been notified of the assignment and of their claim. to be compensated by actual damages. The grant of actual
damages presupposes that the claimant suffered a duly proven
COURT:We find no basis to support the spouses Serfino’s claim pecuniary loss.
of ownership of the deposit.
Claim for moral damages not meritorious because no duty
"An assignment of credit is an agreement by virtue of which exists on the part of the bank to protect interest of third
the owner of a credit, known as the assignor, by a legal cause, person claiming deposit in the name of another.
such as sale, dation in payment, exchange or donation, and
without the consent of the debtor, transfers his credit and In the absence of a law or a rule binding on the Court, it has no
accessory rights to another, known as the assignee, who option but to uphold the existing policy that recognizes the
acquires the power to enforce it to the same extent as the fiduciary nature of banking. It likewise rejects the adoption of a
assignor could enforce it against the debtor. judicially-imposed rule giving third parties with unverified
claims against the deposit of another a better right over the
It may be in the form of sale, but at times it may constitute a deposit.
dation in payment, such as when a debtor, in order to obtain
a release from his debt, assigns to his creditor a credit he has As current laws provide, the bank’s contractual relations are
against a third person." with its depositor, not with the third party; "a bank is under
obligation to treat the accounts of its depositors with
As a dation in payment, the assignment of credit operates as meticulous care and always to have in mind the fiduciary nature
a mode of extinguishing the obligation; the delivery and of its relationship with them.
transmission of ownership of a thing (in this case, the credit due
from a third person) by the debtor to the creditor is accepted "In the absence of any positive duty of the bank to an adverse
as the equivalent of the performance of the obligation.” claimant, there could be no breach that entitles the latter to
moral damages.
The terms of the compromise judgment, however, did not
convey an intent to equate the assignment of Magdalena’s HELD: Petition for review is denied and decision of RTC
retirement benefits (the credit) as the equivalent of the affirmed. Costs against the petitioners.
payment of the debt due the spouses Serfino (the obligation).
There was actually no assignment of credit; if at all, the PEN v. JULIAN (2016)
compromise judgment merely identified the fund from which
payment for the judgment debt would be sourced: Facts: The Julians obtained P60K loan from Adelaida Pen. On
May 23, 1986, ey were again extended loans in the amounts of
(c) That before the plaintiffs file a motion for execution of the decision
P50,000.00 and P10,000.00, respectively by appellant Adelaida.
or order based [on this] Compromise Agreement, the defendant,
Two (2) promissory notes were executed by the appellees in valid, rendering the respondents liable to still pay their
favor of appellant Adelaida to evidence the foregoing loans, As outstanding obligation with interest.
security, on May 23, 1986, the appellees executed a Real Estate
Mortgage over their property covered by TCT No. 327733 CA affirmed and pronounced Deed of Sale as void, but not
registered under the name of appellee Santos Julian, Jr. The because of lack of consideration but because deed of sale
owner's duplicate of TCT No. 327733 was delivered to the Pens. having been executed at the same time as the real estate
mortgage, which rendered the sale as a prohibited pactum
Pen’s Allegation commissorium in light of the fact that the deed of sale was
When the loans became due and demandable, appellees failed blank as to the consideration and the date.
to pay despite several demands. As such, appellant Adelaida
decided to institute foreclosure proceedings. However, she was Issues
prevailed upon by appellee Linda not to foreclose the property (1) Whether or not the CA erred in ruling against the
because of the cost of litigation and since it would cause her validity of the deed of sale.
embarrassment as the proceedings will be announced in public (2) Whether or not the CA erred in ruling that no monetary
places at the City Hall, where she has many friends. interest was due for Linda’s use of Adelaida’s money.
Instead, appellee Linda offered their mortgaged property as Deed of Sale as Pactum Commissorium
payment in kind. After the ocular inspection, the parties Article 2088 of the Civil Code prohibits the creditor from
agreed to have the property valued at P70,000.00. Thereafter, appropriating the things given by way of pledge or mortgage,
on October 22, 1986 appellee executed a two (2) page Deed or from disposing of them; any stipulation to the contrary is null
of Sale duly signed by her on the left margin and over her and void.
printed name.
The first element was present considering that the property of
OFFERED 100,000: Upon the agreement of the parties, the amount the respondents was mortgaged by Linda in favor of Adelaida
of P100,000.00 was deducted from the balance of the appellees' as security for the farmer's indebtedness.
indebtedness, so that as of October 15, 1997, their unpaid
balance amounted to P319,065.00. Appellants allege that As to the second, the authorization for Adelaida to appropriate
instead of paying lthe] said balance, the appellees instituted on the property subject of the mortgage upon Linda's default was
September 8, 1994 the civil complaint and filed an adverse implied from Linda's having signed the blank deed of sale
claim and lis pendens which were annotated at the back of the simultaneously with her signing of the real estate
title to the property. mortgage.
Julian’s Allegations The haste with which the transfer of property was made upon
At the time the mortgage was executed, they were likewise the default by Linda on her obligation, and the eventual transfer
required by the appellant Adelaida to sign a one (1) page of the property in a manner not in the form of a valid dacion en
document purportedly an "Absolute Deed of Sale". Said pago ultimately confirmed the nature of the transaction as a
document did not contain any consideration, and was pactum commissorium.
"undated, unfilled and unnotarized". They allege that their
total payments amounted to P115,400.00 and that their last The CA justly deduced that the completion and execution of the
payment was on June 28, 1990 in the amount of P100,000.00. deed of sale had been conditioned on the non-payment of the
debt by Linda, and reasonably pronounced that such
Linda Julian offered to pay appellant Adelaida the amount of circumstances rendered the transaction pactum commissorium.
P150,000.00. The latter refused to accept the offer and
demanded that she be paid the amount of P250,000.00. Unable Elements of Valid Dacion En Pago
to meet the demand, appellee Linda desisted from the offer and 1. The existence of money obligation
requested that she be shown the land title which she conveyed 2. The alienation to the creditor of a property by the
to the appellee Adelaida, but the latter refused. Upon debtor with the consent of the former.
verification with the Registry of Deeds of Quezon City, she was 3. The satisfaction of the money obligation of the debtor.
informed that the title to the mortgaged property had already To have a valid dacion en pago, therefore, the alienation of
been registered in the name of appellee Adelaida under TCT the property must fully extinguish the debt. Yet, the debt of
No. 364880, and that the transfer was entered on July 17, 1987. the respondents subsisted despite the transfer of the property in
favor of Adelaida.
RTC ruled in favor of the Julians, trial court concluded that they
had not agreed on the consideration for the sale at the time “THEY STILL HAVE TO AGREE WITH THE PRICE” The petitioners insist
they signed the deed of sale; that in the absence of the that the parties agreed that the deed of sale would not yet
consideration, the sale lacked one of the essential requisites contain the date and the consideration because they had still
of a valid contract; that the defense of prescription was to agree on the price. On October 15, Linda offered to sell the
rejected because the action to impugn the void contract was mortgaged property, while on October 18 they had ocular
imprescriptible; and that the promissory notes and the real inspection, If that was so, there was no plausible reason for still
estate mortgage in favor of the petitioners were nonetheless leaving the consideration on the deed of sale blank if the deed
was drafted by Adelaida on October 20, 1986, especially fact, they continuously availed of and benefit from the credit
considering that they could have conveniently communicated facilities for five years.
with each other in the meanwhile on this significant aspect of
their transaction. RTC upheld the validity of the promissory notes. It found that,
in 2001 alone, Equitable restructured loans amounting to
CONSENT, OBJECT, CONSIDERATION. Perfection of contract upon US$228,200 and P1M. It invalidated the escalation clause
meeting of the minds of the parties on each of these requisites. contained therein because it violated the principle of mutuality
To reach that moment of perfection, the parties must agree on of contracts. Nevertheless, it took judicial notice of the
the same thing in the same sense, so that their minds meet as depreciation of peso during the intervening period and
to all the terms. declared the existence of extraordinary deflation.
Subsequently, RTC ordered the use of the 1996-dollar exchange
They must have a distinct intention common to both and rate in computing respondents’ dollar-denominated loans.
without doubt or difference; until all understand alike, there can Equitable was made to pay the sum of money and for damages
be no assent, and therefore no contract. (due to the effect on the reputation by reason of Equitable
The minds of parties must meet at every point; nothing can be freezing their accounts).
left open for further arrangement. So long as there is any
uncertainty or indefiniteness, or future negotiations or RTC issued an Omnibus Order denying Equitable’s MR for lack
considerations to be had between the parties, there is not a of merit and ordered the issuance of the Writ of Execution.
completed contract, and in fact, there is no contract at all. Upon issue, three real properties were levied upon.
In a sale, the contract is perfected at the moment when the CA granted the injunction application and was issued.
seller obligates herself to deliver and to transfer ownership of a Notwithstanding the injunction, the properties of Equitable
thing or right to the buyer for a price certain, as to which the were sold in public auction and the respondents were the
latter agrees. highest bidders and certificate of sale was awarded to them.
The absence of the consideration from Linda's copy of the CA dismissed the petition for certiorari, it found Equitable guilty
deed of sale was credible proof of the lack of an essential of forum shopping because the bank filed its petition for
requisite for the sale. In other words, the meeting of the minds certiorari in the CA several hours before withdrawing its petition
of the parties so vital in the perfection of the contract of sale for relief in the RTC and failed to disclose the date and
did not transpire. certificate of non-forum shopping. MR was denied.
And, even assuming that Linda's leaving the consideration CONTENTION: Equitable asserts that it was not guilty because the
blank implied the authority of Adelaida to fill in that relief was withdrawn on the same day petition was filed. It also
essential detail in the deed of sale upon Linda's default on ascribed that the petition for certiorari was meritorious because
the loan, the conclusion of the CA that the deed of sale was the RTC committed grave abuse for issuing omnibus order.
a pactum commisorium still holds, for, as earlier Equitable was Not Guilty of Forum Shopping
mentioned, all the elements of pactum commisorium were The petition for relief in RTC and petition for certiorari in CA did
present. not have identical causes of action. Equitable substantially
complied with the rule on forum shopping when it moved to
withdraw its petition for relief in RTC on the same day it filed
1250. Extraordinary Inflation or Deflation for the petition. It was an indication that it had no intention of
maintain two actions at the same time.
EQUITABLE PCI BANK v. NG SHEUNG NGOR (2007)
541 SCRA 223 Trial Court Committed Grave Abuse of Discretion
March 1, 2004 Order denied due course to the notices of appeal
Facts: On October 7, 2001, respondents Ng Sheung Ngor, Ken
of both Equitable and respondents. However, it declared that
Appliance Division, Inc. and Benjamin E. Go filed an action for
the February 5, 2004 decision was final and executory only
annulment and or reformation of documents and contracts
with the respect of Equitable. The execution of decision was
against petitioner Equitable PCI Bank (Equitable) and its
undertaken with indecent haste, effectively obviating or
employees at RTC Cebu. They claimed that Equitable induced
defeating Equitable’s right to avail of possible legal remedies.
them to avail of its peso and dollar credit facilities by offering
low interest rates, so they accepted the proposal and signed the
The Promissory Notes Were Valid
bank’s reprinted promissory notes on various dates.
RTC upheld the validity of the promissory notes, despite
respondent’s assertion that those documents were contracts
They, however, were unaware that the documents contained an
of adhesion.
Identical Escalation Clauses granting Equitable authority to
increase interest rates without their consent.
A contract of adhesion is a contract whereby almost all of its
provisions are drafted by one party. The participation of the
EQUITABLE’S ANSWER: Asserted that respondents knowingly
other party is limited to affixing his signature or his “adhesion”
accepted all the terms and conditions contained in the PNs. In
to the contract. For this reason, contracts of adhesion are strictly Requisites for Extraordinary Inflation or Deflation
construed against the party who drafted it. to Affect an Obligation
• They are not necessarily invalid, as they are as binding 1. That there was an official declaration of extraordinary
as ordinary contracts. It becomes void only when the inflation or deflation from the BSP;
dominant party takes advantage of the weakness of 2. That the obligation was contractual in nature;
the other party, completely depriving the latter of the 3. That the parties expressly agreed to consider the
opportunity to bargain for an equal footing. effects of the extraordinary inflation or deflation.
IN THIS CASE:As the trial court has noted, if indeed the terms and IN THE CASE:Despite the devaluation of the peso, the BSP never
conditions were prejudicial to the respondents, they could have declared a situation of extraordinary inflation. Moreover,
walked out and negotiated with another bank at the first although it arose from a contract, the parties did not agree to
available instance. But they did not. Instead they continuously recognize the effects of such. Therefore, respondents should
availed of Equitable’s credit facilities for 5 long years. pay their dollar-denominated loans at the exchange rates
fixed by the BSP on the date of the maturity.
While RTC categorically found that respondents had
outstanding dollar and peso-denominated loans with Moral and Exemplary Damages: Lacked Basis for Award
Equitable, it failed to ascertain the total amount. It was not able In breach of contract, moral damages are recoverable only if
to explain how it reach the values. the defendant acted fraudently or in bad faith or in wanton
disregard of his contractual obligations.
Escalation Clause Violated the Principle of
Mutuality of Contracts IN THE CASE: RTC found that respondents did not pay Equitable
Escalation clauses are not void per se. However, one which the interest due or the amount due. The bank has the right to
grants the creditor an unbridled right to adjust the interest set-off the deposits in its hands for the payment of a depositor’s
independently and upwardly, completely depriving the debtor indebtedness. The damages they sustain was due to their failure
of the right to assent to an important modification in the to pay loans. No basis. Exemplary follows moral, thus none.
agreement is considered void. Clauses of that nature violate
the principle of mutuality of contracts. HELD: The respondents Ng Sheung Ngor, doing business
under the name “Ken Marketing”, Ken Appliance Division, Inc.
Article 1309. The contracts must bind both contracting parties; its validity or and Benjamin E. Go to pay Equitable PCI Bank the principal
compliance cannot be left to the will of one of them.
amount of their dollar-and-peso denominated loans.
The Equitable’s promissory notes uniformly stated therein as of:
If subject promissory note is extended, the interest for They are also ordered to pay the interest as based of the time
subsequent extensions shall be at such rate as shall be of demand with rate of 12% per annum until full satisfaction.
determined by the bank. RTC Cebu shall compute the exact amount on the respective
dollar-denominated and peso-denominated loans.
Equitable dictated the interest rates if the term of the loan
was extended. Respondents had no choice but to accept them. ALMEDA v. BATHALA MARKETING (2008)
This was a violation of Article 1308 of the Civil Code. 542 SCRA 470
Furthermore, the assailed escalation clause did not contain the
Facts: Sometime in May 1997, respondent Bathala Marketing
necessary provisions for validity:
as lessee renewed its Contract of Lease with Ponciano L.
1. That the rate of interest will only be increased if the
Almeda, as lessor. Under such, Ponciano agreed to lease a
applicable maximum rate of interest is increased by
portion of the Almeda Compound in Makati consisting of
law or by the Monetary Board.
7,348.25 sq,m., for a monthly rental of P1,107,348.69 for a term
2. That the stipulated rate of interest will be reduced if
of four years from May 1, 1997. The terms of lease were:
the applicable maximum rate of interest is reduced by
law or by the Monetary Board.
SIXTH – It is expressly understood by the parties hereto that the rental
Thus, due to the violation and absence, the escalation clauses rate stipulated is based on the present rate of assessment on the
found in the promissory notes are void. property, and that in case the assessment should hereafter be increased
or any new tax, charge or burden be imposed by authorities on the lot
There Was No Extraordinary Deflation and building where the leased premises are located, LESSEE shall pay,
Extraordinary deflation exists when there is an unusual decrease when the rental provided herein has become due, the additional rental
in the purchasing power of currency and such decrease could or charge corresponding to the portion hereby leased; provided,
however, that in the event that present assessment tax on said property
not be reasonably foreseen or was manifestly beyond the
should be reduced, LESSEE shall be entitled to reduction in the
contemplation of the parties at the time of the obligation.
stipulated rental, likewise in proportion to the portion leased by him;
ARTICLE 1250. In case of extraordinary inflation or deflation of the currency

SEVENTH – In case an extraordinary inflation of devaluation of the
stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an Philippine Currency should supervene, the value of the Philippine peso
agreement to the contrary. at the time of the establishment of the obligation shall be the basis of
payment.
During the effectivity of the contract, Ponciano died. In a letter, devaluation that would justify the application of Article 1250 of
petitioners advised respondent that the former shall assess and the civil code. Furthermore, absent an official pronouncement
collect the VAT on its monthly rentals. Bathala contended that or declaration by competent authorities of the existence of
VAT may not be imposed as the rentals fixed in the contract of extraordinary inflation during a given period, the effects of
lease were supposed to include the VAT therein. extraordinary inflation are not to be applied.
They received another letter petitioners informing the former

that its monthly rental should be increased by 73% pursuant
to condition 7 of the contract and Article 1250 of the Civil
Code. Respondent opposed demand and insisted that there
was no extraordinary inflation to warrant such application.
Respondents refused to pay VAT and adjusted rentals.
Bathala filed for a declaratory relief on the interpretation of

Conditions 6 and 7. Meanwhile, Eufemia Almeda (wife) and
Romel Almeda (son) filed for an ejectment, rescission and
damage suit for failure to vacate premises after demand.
RTC denied petitioners their right to pas onto the respondent

the burden of paying the VAT since it was not a new tax that
would call for the application of the sixth clause. The court
likewise denied their right to collect the demanded increase for
there was no extraordinary inflation or devaluation under the
seventh clause of the contract of lease. CA affirmed except on
payment and affirmative reliefs.
Issue:
Whether the amount of rentals due the petitioners should be
adjusted by reason of extraordinary inflation or devaluation.
Liability of the Respondent for the Payment of VAT

The person primarily liable for the payment of VAT is the lessor
who may choose to pass it on to the lessee or absorb the same.
Beginning January 1, 1996, the lease of real property ensued.
Notwithstanding the mandatory payment of the 10% VAT by
the lessor, the actual shifting of the said tax burden is clearly
optional. Ponciano did not charge nor provided for its
additional imposition in the 1997 renewal.
The sixth condition as well reads “new taxes” imposed after the
effectivity of the lease, after May 1997 and RA 7716 took effect
in 1994, thus the VAT cannot be considered as “new tax” in May
1997, and it does not fall within the coverage.
Petitioners Cannot Legitimately Demand Rental

Adjustment Because of Extraordinary Inflation
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.
Extraordinary inflation exists when there is a decrease or

increase in the purchasing power of the currency which is
unusual or beyond the common fluctuation in the value of said
currency and it was unforeseen and beyond the contemplation
of the parties at the time of the establishment of obligation.
The factual circumstances obtaining in the present

IN THE CASE:
case do not make out a case of extraordinary inflation or
OBLIGATIONS AND CONTRACTS The following are considered limitations to the right:
Civil Code 1. If the debtor has two debts, one of P50 and another
for P200 and makes a payment of P50, he cannot
Articles 1252-1261
choose to apply it to the P200 debt because the
creditor cannot be compelled to accept partial
Special Forms of Payment
payments (1248).
Under the Civil Code there are four special forms of payment:
2. If there is only one obligation bearing stipulated
1. Application of payments (1252)
interest, the debtor cannot apply the payment to the
2. Dation in payment (1245)
capital because the law requires its application to the
3. Cession or Assignment in favor of Creditors (1255)
interest first (1253).
4. Tender of payment and consignation (1256)
3. The debtor cannot apply the payment to a debt that
SUBSECTION 1 is not yet liquidated.
APPLICATION OF PAYMENTS 4. He cannot choose a debt with a period for the benefit
of the creditor, when the period has not yet arrived.
ARTICLE 1252 5. When there is a n agreement as to the debts which are
He who has various debts of the same kind in favor of one and to be paid first, the debtor cannot vary the agreement.
the same creditor, may declare at the time of making the
payment, to which of them the same must be applied. Unless
How Application of Payment is Made
the parties so stipulate, or when the application of payment
is made by the party for who benefit the term has been (1) The debtor makes the designation.
constituted, application shall not be made as to debts which (2) If not, the creditor makes it, by so stating in the receipt
are not yet due. that he issues “unless there is cause for invalidating
the contract.”
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot Once a receipt has been issued, the debtor cannot contest such
complain of the same, unless there is a cause for invalidating
application made by the creditor which was validated by his
the contract.
acquiescence. But an application made without the knowledge
Application of Payments and consent of the debtor is not valid.
It is the designation of the debt which is being paid by a debtor
who has several obligations of the same kind in favor of the By “invalidating the contract” it really means the debtor’s
creditor to whom payment is made. assent to the application by such causes as mistake, violence,
intimidation, fraud which can invalidate contracts.
The rules under Article 1252 until 1254 apply to a person owing
Tolentino: We must frankly admit that the Code has used erroneous terminology
several debts of the same kind of a single creditor. Simply for it the real intention of the law is that the application made by the creditor can
stated, it is the phrase applied to show which debt, out of two or be contested by the debtor.
more debts owing to the same creditor, is being paid.
(3) If neither, or the application is not valid, then
Example. Allan owes B P1M due on April 1, and he still owes P1M on application is made by operation of law under Articles
April 5 and another P1M on April 10. There is a need to know the 1253 and 1254.
application of payments to know what obligation will be extinguished.
Revocation
Requisites to Use Application of Payments GENERAL RULE: Once application of payment is made, it cannot
1. There must be two or more debts (severality of debts). be revoked.
2. The debts must be of the same kind.
EXCEPTION: If both parties agree, however, if it will prejudice
3. The debts are owed by the same debtor in favor to the
third persons it cannot be invoked.
same creditor (thus, only one creditor and debtor).
4. All the debts must be due unless otherwise stipulated.
When Application Must be Made
5. They payment is not enough to extinguish all debts.
Application must be made at the time when payment by the
debtor is made, not afterwards.
Rule When Debts are Not Yet Due
Despite the facts that not all the debts are not yet due, there
When Application Cannot be Availed Of
can be application of payments only when:
(1) In case of a partner-creditor
1. If the parties so stipulate.
(2) Surety or a solidary guarantor. There is only one debt
2. When the application of payment is made by the party
and that it is contingent on the failure of principal.
for whose benefit of the term has been constituted.
Instance. Debtor has P50,000 and the debtor has to make the
Preferential Right of Debtor
choice: (1) 20,000 with 6% interest due today; (2) 20,000 due
It is the debtor who is given by the law the right to select which
today secured by mortgage; (3) 10,000 (4) a 4-carat ring and
of his debts he is paying. This right is not absolute however. He
(5) 50,000 with interest and penalty due two years from now.
cannot impair the rights granted by the law to the creditor.
ARTICLE 1253 SUBSECTION 2

If the debt produces interest, payment of the principal shall PAYMENT BY CESSION
not be deemed to have been made until the interests have
been covered. ARTICLE 1255
The debtor may cede or assign his property to his creditors
Interest Must be Paid First in payment of his debts. This cession, unless there is
This is obligatory. The debtor cannot insist that his payment be stipulation to the contrary, shall only release the debtor from
credited to the principal instead of the interest, unless the responsibility for the net proceeds of the thing assigned. The
agreements which, on the effect of the cession, are made
creditor agrees otherwise. However, if this is allowed, the result
between the debtor and his creditor shall be governed by
in the reduction of the principal leads to the decrease of the special laws.
total interest collectable.
Payment by Cession, Concept
What Interest Is Supposed to be Paid It is the process of transfer of debtor’s property to the creditors
1. Interest by way of compensation; and not subject to execution so that the latter may sell them and
2. Interest by way of damages due to default. thus apply the proceeds to their credits. The purpose of the
transfer or assignment or the cession is for the creditors to sell
ARTICLE 1254 these properties, and to apply the proceeds in proportion to
When payment cannot be applied in applied in accordance
their respective credit.
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 Kinds of Assignment
satisfied. 1. Legal – majority of the creditors must agree, governed
by the insolvency law.
If the debts due are of the same nature and burden, the 2. Voluntary – Article 1255, wherein all creditors must
payment shall be applied to all of them proportionately. agree for such to apply.
Rules in Case No Application of Payment Made Requisites for Voluntary Assignment

1. Apply it to the most onerous (in case the due and 1. More than one debt
demandable debts are of different natures) 2. More than one creditor
2. If the debts are of the same nature and burden, 3. Complete or partial insolvency of the debtor
application shall be made to all proportionately. 4. Abandonment of all debtor’s property not exempt
from the execution (unless validly waived)
Q. Debt 1 is for P1M while Debt 2 is for P2M and only P1M is 5. Acceptance or consent on the part of creditors
paid, how will the payment be applied?
Effect of Voluntary Assignment
A. If the debtor makes the application, the payment should be a. Creditors do not become owners; merely assignees,
credited to Debt 1. The debtor cannot insist that the creditor with authority to sell;
accept it for the second debt because he cannot be compelled b. Debtor is released up to the amount of the need
to receive partial payments. proceeds, unless stipulated.
c. Creditors will collect credits in the order of preference
If no application has been made, the law steps in, and agreed upon or in default, in the order established by
application will be made not equally but proportionately. law.
More Onerous Debts

Dacion En Pago Cession
1. Older ones, in case of running accounts.
Does not affect all the In general, affects all the
2. Interest-bearing debts even if the non-interest-
properties properties of debtor
bearing debt is older.
Does not require plurality of Requires more than one
3. Of two interest-bearing debts, that which charges the
creditors creditor
higher interest.
Only the specific or Requires the consent of all
4. Debts secured by mortgage or by pledge.
concerned creditor’s the creditors
5. Debts with a penalty clause.
consent is required
6. Advances for subsistence are more onerous than cash
May take place during the Requires full or partial
advance.
solvency of the creditor insolvency
7. A debt where the debtor is in mora is more onerous
Transfers ownership upon Does not transfer
than one where he is not.
delivery ownership, only possession
8. An exclusive debt is more onerous than solidary debt.
and administration are
transferred with authority to
NOTE: The following will not apply when application was made.
sell and convert to cash
In case of determining which is most onerous, the particular
circumstance with significant bearing at hand should be There is an of novation. This is not an act of
observed and balancing, applied proportionately as last resort. novation.
SUBSECTION 3 When Consignation is Sufficient Without Prior Tender

TENDER OF PAYMENT AND CONSIGNATION 1. When the creditor is absent or unknown or does not
appear at the place of payment (need not be judicially
Tender of Payment, Defined declared an absentee).
It is the act of offering the creditor what is due him together 2. When the creditor is incapacitated to receive payment
with a demand that the creditor accepts the same. It is a at the time it is due (unless there is representative).
manifestation made by the debtor to the creditor of his desire 3. When, without just cause, the creditor refuses to give it
to comply with the obligation with the offer of immediate receipt.
performance. 4. When two or more people claim the same right to
collect (an action for interpleader would be proper).
Consignation, Defined 5. When the title (written document) of the obligation
The act of depositing the thing due with the court or judicial has been lost.
authorities whenever the creditor cannot accept or refuses to 6. When the debtor has been previously notified by the
accept payment. It generally requires a prior tender of payment. creditor that the latter would not accept payment.
NOTE: Tender of payment, therefore, is a preparatory act which ARTICLE 1257

precedes consignation. The tender of payment by itself does In order that the consignation of the thing due may release
not cause the extinguishment of the obligation, unless the obligor, it must first be announced to the persons
completed by consignation. interested in the fulfillment of the obligation.
It is the consignation which constitutes a form of payment, and The consignation shall be ineffectual if its not made strictly
in consonance with the provisions which regulate payment.
must follow, supplement, or complete the tender of payment in
order to discharge the obligation.
Essential Requisites of Consignation
1. Existence of valid debt
ARTICLE 1256
2. Valid prior tender, unless tender is excused
If the creditor to whom tender of payment has been refuses
without just cause to accept it, the debtor shall be released 3. Prior notice of consignation (before deposit)
from responsibility by the consignation of the thing or sum 4. Actual consignation (deposit)
due. 5. Subsequent notice of consignation
Consignation alone shall produce the same effect in the Effects of the Deposit
following cases: 1. The property is in custodia legis
(1) When the creditor is absent or unknown, or does
2. Exempt from attachment or execution
appear at the place of payment;
(2) When he is incapacitated to receive the payment at 3. But if the property is perishable by nature, the court
the time it is due; may order the sale of the property
(3) When, without just cause, he refuses to give a 4. The debtor becomes the agent or receiver of the court
receipt;
(4) When two or more persons claim the same right to ARTICLE 1258
collect; Consignation shall be made by depositing the things due at
(5) When the title of the obligation has been lost the disposal of judicial authority, before whom the tender of
payment shall be proved, in a proper case, and the
Requisites for a Valid Tender of Payment announcement of the consignation in other cases.
1. It must be in legal tender (lawful currency) – not a
check but if there is consent then it is valid. How is Consignation Made?
2. It must include whatever interest is due. (1) The things due must be deposited with the proper
3. It must be unconditional; but if made with conditions judicial authorities.
and no protest on the creditor’s part he cannot later (2) There must be proof that:
one prescribe the terms for the validity of the a. Tender had been previously made.
acceptance which he had already made as there is b. Or that the creditor had previously notified
complete payment. the debtor that the consignation will be
4. The obligation must be due. made.
Unjust Refusal of the Tender of Payment ARTICLE 1259

The expenses of consignation, when properly made, shall be
1. That there was a previous tender of payment.
charged against the creditor.
2. That the tender of payment was of the very thing due,
or in case of money obligation, the that legal tender NOTE: Clearly, the consignation is due to the creditor’s fault,
currency was offered; for had he accepted, there would not have been any need for
3. That the tender of payment was unconditional; and the consignation. If not proper, against the creditor. Expenses
4. That the creditor refused to accept payment without include the preservation and warehousing of the goods.
just cause.
ARTICLE 1260 SECTION 2

Once the consignation has been duly made, the debtor may LOSS OF THE THING DUE
ask the judge to order the cancellation of the obligation.
When Is a Thing Considered Lost
Before the creditor has accepted the consignation, or before a. When it perishes
a judicial declaration that the consignation has been b. When it goes out of commerce
properly made, the debtor may with draw the thing or the
c. When it disappears in such a way that;
sum deposited, allowing the obligation to remain in force.
• Its existence is unknown
Effects of Valid Consignation • It cannot be recovered
1. Debtor may ask the judge to cancel the obligation NOTE: The terms loss does not refer strictly to actual or physical
2. The running of interest is suspended loss but also contemplates impossibility of performance.
3. It should be observed that before the creditor accepts
or before the judge declares the consignation has What Possibility of Performance Includes
been properly made, the obligation remains. (a) Physical impossibility
(b) Legal impossibility, which is either;
TOLENTINO: The following effects arise as of the time the things was placed at a. Directly caused as when prohibited by law;
the disposal of the court: b. When debtor is required to enter military
1. The debtor is released in the same manner as if he had performed the
draft
obligation at the time of the consignation, because this produces the
same effect as a valid payment. (c) Moral impossibility (1267)
2. The accrual of interest on the obligation is suspended from the
moment of consignation. ARTICLE 1262
3. The deteriorations or loss of the thing or amount consigned occurring An obligation which consists in the delivery of a determinate
without the fault of the debtor must be borne by the creditor, because thing shall be extinguished if it should be lost or destroyed
the risks of the thing are transferred to the creditor from the moment
without the fault of the debtor, and before he has incurred in
of deposit.
4. Any increment or increase in value of the thing after the consignation
delay.
inures to the benefit of the creditor.
When by law or stipulation, the obligor is liable even for
fortuitous events, the loss of the thing does not extinguish
Effects of Improper Consignation
the obligation, and he shall be responsible for damages. The
1. Obligation remains for the consignation was not an same rule applies when the nature of the obligations
effective payment. requires the assumption of risk.
2. If at the time of the consignation the debt is due and
requisites for a valid consignation are absent, the Two Kinds of Obligation to Give
debtor is now in default. 1. To give a generic thing;
2. To give a specific thing
Effect of Dismissal of the Case
If the case in which the consignation was made is dismissed by Effect of Loss to Deliver a Specific Thing
the court, the consignation naturally would produce no effect. GENERAL RULE: The obligation is extinguished.
When May Debtor Withdraw EXCEPTIONS: The

obligation is not extinguished in the following:
• As a matter of right: 1. When the debtor is at fault.
o Before the creditor accepted consignation 2. When the debtor is made liable for a fortuitous event:
o Before there is a judicial declaration that the a. By provision of law
consignation has been properly made b. Of a contractual stipulation
c. Assumption of risk on the part of debtor
• As a matter of privilege:
o When after proper consignation, the creditor Other instances which the law requires li ability despite the case
authorizes the debtor to withdraw thing. of fortuitous event:
1. Debtor is in default
ARTICLE 1261 2. When the debtor has promised to deliver the same to
If the consignation having been made, the creditor should two or more persons
authorize the debtor to withdraw the same, he shall lose
3. Obligations arising from the crime
every preference which he may have over the thing. The co-
debtors, guarantors and sureties shall be released. 4. When a borrower has lent the things to another who
is not a member of his own household
Effects of Article 1261 5. When the thing loaned has been delivered with
a. The obligation remains. appraisal of value, unless provided
b. The creditor loses any preference (priority) over the 6. When payee is solutio indebiti in bad faith
thing. ARTICLE 1263
In an obligation to deliver a generic thing, the loss or
c. The co-debtors (solidary), guarantors and sureties are
destruction of anything of the same kind does not extinguish
released (unless they consented). the obligation.
Effect of Loss on Obligation to Deliver a Generic thing

GENERAL RULE: The obligation continues to exist because a Effect of subjective impossibility
generic thing does not really perish. The extinguishment of the obligation depends. Usually the
obligations subsist unless personal considerations are involved
EXCEPTIONS: The following can be considered as exceptions: such as when only a particular company is prohibited by law to
1. Delimited generic thing (e.g. 50 kilos of sugar). furnish work on a certain day.
2. If generic thing has been segregated or set aside.
Effect of Loss Through a Fortuitous Event
Monetary Obligations in Reciprocal Obligations
An obligation to pay money, such as one under a pension plan, GENERAL RULE: The obligation that was not extinguished by
is generic. Here failure to raise funds not a defense. fortuitous event remains.
ARTICLE 1264 EXCEPTIONS: Some exceptions are provided for by law, such as:
The courts shall determine whether, under the
circumstances, the partial circumstances, the partial loss of 1. In the case of lease, if the object is destroyed both the
the object of the obligation is so important as to extinguish
lease and the obligation to pay exintguished.
the obligation
2. In contracts for a piece of work – the worker cannot ask
Effect of Loss for the price if the thing lost by fortuitous event prior
The rule under this is for those under fortuitous events. In to delivery (worker’s risk).
certain cases, partial loss may indeed be equivalent to a
complete loss. The judicial determination of the effect is needed Forms of Impossibility
(e.g. fountain pen is lost except the cover). 1. Physical
2. Legal
ARTICLE 1265 3. Objective
Whenever the thing is lost in the possession of the debtor, it 4. Subjective
shall be presumed that the loss was due to his fault, unless
there is proof to the contrary, and without prejudice to the Partial Impossibility
provisions of Article 1165. This presumption does not apply The rule in Article 1264 is applied. There is a need to refer to
in case of earthquake, flood, storm, or other natural calamity.
Articles 1234 and 1235. If at the time the performance becomes
impossible and the debtor has already performed its
Presumption of Loss was Due to Debtor’s Fault
obligations, the creditor must pay the part done so long as he
The debtor is presumed to be at fault. If a person for example
benefits for the compliance, or the debtor must return anything
is entrusted with several of cattle and he cannot account for the
more than what corresponds to the part already performed.
missing ones, he is presumed to be at fault.
Temporary Impossibility
When Presumption Does Not Apply
Temporary obstacles which may be expected to disappear in
The presumption of fault does not apply in the case of a natural
the future, do not extinguish the obligation, but merely delays
calamity. Although fire is not a natural calamity, if a tenant is
its fulfillment, unless it must be performed in a determinate
able to prove that the fire caused in his apartment was purely
time. But if indefinite or unknown duration, the obligation may
accidental he is not liable.
juridically be considered as impossible.
ARTICLE 1266
The debtor in obligations to shall also be released when the ARTICLE 1267
prestation becomes legally or physically impossible without When the service has become so difficult as to be manifestly
the fault of the obligor. beyond the contemplation of the parties, the obligor may
also be released therefrom, in whole or in part.
When the Impossibility Must Exist
Effect of Difficulty Beyond the Parties’ Contemplation
The impossibility must be after the constitution of the
This Article refers to moral impossibility or impracticability due
obligation. If it was before there is nothing to extinguish
to the change in certain conditions. This is also referred to as
because the performance was impossible from the start, hence
the Doctrine of the Frustration of the Commercial Object.
the obligation is void. This refers to subsequent impossibility.
Does Not Apply to Real Obligations

Object and Subjective Impossibility
It will be noted that Article 1267 refers to a service or a personal
There is objective impossibility when the act or service in itself
obligation to do or not to do, thus real obligations or of those
without considering the person of the obligor becomes
to give are not included under this article.
impossible like physical or legal impossibility.
It does not cover highly speculative contracts or agreements

There is subjective impossibility when the act or service cannot
like stocks and aleatory contracts such as insurance contracts.
be done by the debtor himself, but it can be accomplished by
others (e.g. illness).
Requisites for Moral Impossibility SECTION 3

1. The event or change in circumstances could not have CONDONATION OR REMISSION OF DEBT
been foreseen at the time of the execution of the
ARTICLE 1270
contract.
Condonation or remission is essentially gratuitous, and
2. It makes the performance of the contract extremely requires the acceptance by the obligor. It may be made
difficult but not impossible. expressly of impliedly.
3. The event must not be due to the act of any of the
parties. One and the other kind shall be subject to the rules which
4. The contract is for a future prestation. govern Inofficious donations. Express condonation shall,
furthermore comply with the forms of donation.
Example. The duty to construct a railroad when such
Condonation, Defined
construction was possible but very dangerous to life and
Defined as the gratuitous abandonment by the creditor of his
property, is excused by the law. But not the failure to grind
right. It is an act of liberality, by virtue of which, without
sugar cane due to non-construction of the railroad.
receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its
Discredited Theory of Rebus Sic Stantibus
entirety or in part or aspect of the same which the remission
It will endanger contractual relations simply by invoking that
refers. It can either be (1) express or (2) implied.
what has happened is beyond the manifestation of the parties
that it would render impossible. This is based on the doctrine
Requisites of Condonation or Remission
of unforeseen events.
1. That there must be agreement.
ARTICLE 1268 2. The parties must be capacitated and must consent.
When the debt of a thing certain and determinate proceeds 3. That there must be a subject matter (object)
from a criminal offense, the debtor shall not be exempted 4. The cause or consideration must be liberality, it must
from the payment of its price, whatever may be the cause for be essentially gratuitous.
the loss, unless the thing having been offered by him to the 5. Obligation must have been demandable at the time of
person who should receive it, the latter refused without remission (otherwise the remission is useless).
justification to accept it.
6. The remission must not be Inofficious (otherwise it
would be reducible.
Effect of Loss on Criminal Offense
7. Formalities of a donation are required in case of an
GENERAL RULE: It does not extinguish obligation, even if fortuitous
implied condonation.
event intervenes. This is one of the exceptions to the rule that
8. Waivers or remissions are not to be presumed
if the determinate thing is lost through fortuitous events, the
generally, they must be clearly and convincingly
obligation is extinguished.
shown, either by express stipulation or by acts
admitting of no other reasonable explanation.
EXCEPTION:When the creditor (the offended party in a crime) is
in mora accepiendi or default in the part of the creditor.
Class of Remission
As to Effect or Extent
Q. A commits the crime of theft, and is asked to return the car
1. Total
stolen to its owner B, before the car is delivered to B, it is
2. Partial
destroyed by fortuitous event, is A’s liability extinguished?
As Date of Effectivity
A. No. The obligation to deliver arose from a criminal offense
1. Inter vivos (during life)
and in such case, the rule is, he is liable even when loss is
2. Mortis cause (after death)
occurred by fortuitous event.
As to the From
ARTICLE 1269
The obligation having been extinguished by the loss of the 1. Implied or tacit (does not require formality, conduct is
thing, the creditor shall have all the rights of action which the sufficient)
debtor may have against third persons by reason of the loss. 2. Express or formal (this requires the formalities of a
donation if inter vivos; of a will or codicil if mortis
Extent of Creditor’s Rights causa).
Where a vessel guilty of negligence in a collision was the one
which sunk, ordinary its owners are relieved from any liability Unilateral Renunciation
for damages caused by the collision is sunk, ordinarily its obwer Even though condonation is a bilateral act, there is nothing that
are already relieved from liablity for damages caused by the can prevent a creditor from making unilateral renunciation of
collision to other vessels or owners of cargo; but if the vessel, his right, unilateral renunciation by the creditor is expressly
such insurance money is liable for the damages suffered by allowed under Article 6 of the Civil Code on waiver. There can
others. This article also applies to money paid to the debtor be such extinguishment of the obligation by such manner as
upon the expropriation. provided not violative of law or morals or good customs.
ARTICLE 1271 Presumption in Joint or Solidary Obligations

The delivery of a private document evidencing a credit, made Suppose that A and B owe C P100,000, evidenced by a private
voluntarily by the creditor to the debtor, implies the document.
renunciation of the action which the former had against the
1. If evidence of document is found in possession of A
latter.
who is a joint debtor, the presumption is that only A’s
If in order to nullify this waiver it should be claimed to be debt has been remitted.
inofficious, the debtor and his heirs may uphold it by proving 2. If evidence of debt is found in the possession of A who
that the delivery of the documents was made in virtue of is a solidary debtor, the presumption is that the whole
payment of the debt. obligation has been remitted.
3. In both cases, the presumption can be overthrown by
Effect of Delivery of Private Document Evidencing the superior contrary evidence.
Credit Voluntarily by Creditor to Debtor
The article speaks of a private document. The Code ARTICLE 1273
presupposes, that when the creditor delivers a private The renunciation of the principal debt shall extinguish the
document evidencing a debt to his debtor, he surrenders the accessory obligation; but the waiver of the latter shall leave
weapon for the enforcement of his right. This is not true in case the former in force.
of a public document, because there is always a copy in the
NOTE: This article follows the rule that “accessory follows the
archives which can be used to prove the credit.
principal.” A remission of the penalty does not remit the
• The private document must be the original of the
principal obligation, but if the principal obligation is condoned,
original in such cases.
the penalty is also condoned.
Example. Steffi made a PN in favor of Agassi in the amount of
ARTICLE 1274
P100M. After some time, Agassi voluntarily delivered the PN to It is presumed that the accessory obligation of pledge has
Steffi without collecting the P100M. Steffi is now in possession been remitted when the thing pledged, after its delivery to
of said note. There is a disputable presumption that there has the creditor, is found in the possession of the debtor or of a
been a remission. The presumption is merely disputable and third person who owns the thing.
not conclusive because it may be that the instrument was
delivered only for examination by Steffi or for collection. Remission of Pledge
Note here that only the accessory obligation of pledge is
Implied Remission presumed remitted. The principal obligation (the loan) remains
It should be noted that Article is an example of an implied in force) This is a disputable presumption.
remission. Voluntary destruction by the creditor of the (1) Possession by the debtor
instrument is likewise another form of implied remission. The (2) Possession by the third person who owns the thing.
intent to remit however must be proven.
SECTION 4
ARTICLE 1272 CONFUSION OR MERGER OF RIGHTS
Whenever the private document in which the debt appears is
found in the possession of the debtor, it shall be presumed ARTICLE 1275
that the creditor delivered it voluntarily, unless the contrary The obligation is extinguished from the time the characters
is proved. of creditor and debtor are merged in the same person.
Presumption of Voluntary Delivery Merger or Confusion, Defined

While Article 1271 gives a presumption of remission, this article It is the meeting in one person the qualities of creditor and
gives a presumption of voluntary delivery. This against speaks debtor with respect to the same obligation. It erases the
of a private document. This is also a disputable presumption. plurality of subjects of the obligations and extinguishes the
obligation because it is absurd that a person should enforce
Rule if the Instrument of Credit is Still in Creditor’s Hands and obligation against himself.
If the instrument of credit is still in the hands of the creditor,
this is evidence that the debt has not yet been paid, unless the Requisites of a Valid Merger
contrary be full proved. 1. It should take place between principal debtor and
creditor.
To rebut this presumption, a receipt of payment must be 2. The merger must be clear and definite.
presented as such (Agner v. BPI Family Saving Bank, 2013). In 3. The very obligation must be same and identical.
the aforementioned case it was shown that there is a need to 4. The confusion must be total or as regards to the entire
prove that indeed such payment was done because in this case obligation.
the promissory note with chattel mortgage was still in the
possession of the bank while the petitioners allege that they Between Principal Debtor and Creditor
already have paid for the outstanding balance without any Confusion of the creditor with the person of the guarantor does
proof of payment. Thus, the presumption of continuance of not extinguish the principal obligation. No merger if debtor and
debt prevails. creditors represented different juridical entities even if the
officers of both are the same.
Example of Merger SECTION 5

A makes a check payable to bearer, and hands the check C, who COMPENSATION
hands it to D, who finally hands it to A. Here A owes to himself.
ARTICLE 1278
This is a clear case of merger; thus, obligation is extinguished.
Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other.
Extinction of Real Rights
Real rights, such as usufruct over the property, may be Compensation, Defined
extinguished by merger when the naked owner himself It is a mode of extinguishing to the concurrent amount, the
becomes the usufructuary. Also known as consolidation of obligations of those persons who in their own rights are
ownership. reciprocally debtors and creditors of each other. It is the
offsetting of two obligations which are being reciprocally
Example. A had two brothers named B and C. A gave a parcel extinguished if they are equal value, or extinguished to the
of land to B in usufruct (right to use and right to the fruits), and concurrent amount if of different values.
the same parcel of to C in naked ownership. If later C donates
the naked ownership of the land to B, B will now have the full It is a sort of balancing between two obligations, it involves a
ownership and it is as if merger has been resulted. figurative operation of weighing two obligations
simultaneously in order to extinguish them to the extent in
Revocation of Merger which the amount is covered by the other.
If the reason for the confusion ceases, the obligation is revived.
When the act which occasions the merger is terminated or Distinguished from Payment
revoked, the obligation is recreated in the same condition that Payment Compensation
it had when the merger took place. Capacity to dispose of the These capacities are not
thing paid and capacity to necessary.
ARTICLE 1276 receive payment are
Merger which takes place in the person of the principal
required for creditor and
debtor or creditor benefits the guarantors. Confusion which
takes place in the person of any of the latter does not debtor.
extinguish the obligation. Operates by the act of the Operations by law.
parties.
Release of Guarantor Performance must be There may be partial
The extinguishment of the principal obligation through complete. extinguishment of
confusion releases the guarantors, because the obligation of obligation.
latter is merely accessory.
Advantages is that compensation is simple, taking effect
Merger in Guarantor without action by either party. And there is more guaranty in
When the merger takes place in the person of a guarantor, the making the credit effective, because there is less risk of loss by
obligation is not extinguished. Thus, if the guarantor acquires the creditor due to insolvency or fraud by debtor.
the credit, his obligation as a guarantor is extinguished, but the
principal obligation subsists and can be enforced by him Distinguished from Merger
against the debtor and the other co-guarantors. Merger Compensation
Involves only one There must always be two
Example. Allan owes Beth P700,000, guaranteed by Chris. Beth obligation. obligations.
assigns her credit to Selena. Selena assigns the credit to Jane. Only one persons in whom There are two persons who
Jane assigns the credit to guarantor Chris. Allan still has to pay the characters of creditor are mutually debtors and
Chris the P700,000, but the guaranty is extinguished. and debtor meet with creditors to each other in
respect to the same two separate obligations,
Example. When the mortgaged property belongs to a third obligation. each arising from a different
person, and mortgagee acquires ownership of the entire cause.
property, the mortgage is deemed extinguished.
Kinds of Compensation
ARTICLE 1277 As to the Effect or Extent
Confusion does not extinguish a joint obligation excepts as
1. Total – if both obligations are completely extinguished
regards the share corresponding to the creditor or debtor in
whom the two characters concur. because they are of the same or equal amounts.
2. Partial – when a balance remains, it usually happens
Merger in Joint Obligation when one is larger in two debts.
A and B jointly owe C P1,000,000. If C assigns the entire credit
to A, A’s share is extinguished, but B’s share remains, in other As to the Origin or Cause
words, B would still owe A the sum of P500,000. In a joint 1. Legal
obligation, the debts are distinct in separate. 2. Voluntary or Conventional
3. Judicial Affirmative Requisites

4. Facultative (1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
Conventional Compensation the other;
This is compensation by agreement of the parties, even if some (2) That both debts consist in a sum of money, or if the
requisite provided by law should be wanting. It is intended to things due are consumable, they be of the same kind,
eliminate or overcome obstacles which prevent extinguishment and also of the same quality if the latter has been
of obligations. Requisites of conventional compensation: stated;
1. That each of the parties can dispose of the credit he (3) That the two debts be due;
seeks to compensate. (4) That they be liquidated and demandable.
2. That they agree to the mutual extinguishment of their
credits. Negative Requisites
1. Over neither of the debts must there be any retention
Judicial Compensation or controversy commenced by third persons and
This is compensation which takes place when the defendant, communicated in due time to the debtor.
who is creditor of the plaintiff for an unliquidated amount, sets 2. There must have been no waiver of the compensation.
up his credit as a counterclaim against the plaintiff, and his 3. The compensation of the debts must not have been
credit is liquidated by the judgment, thereby compensating it prohibited by law.
with the credit of the plaintiff.
Prohibited Compensation
Facultative Compensation 1. Debts arising from a depositum (except bank deposits,
This is compensation which can be set up only at the option of which are by law considered as loans to the bank).
the creditor, when legal compensation cannot take place 2. Debts arising from the obligations of a depository.
because of the want of some legal requisites for the benefit of 3. Debts arising from the obligation of a bailee in
the creditor. Here, one of the parties has the choice of claiming commodatum.
the compensation or of opposing it. 4. Debts arising from a claim for future support due by
gratuitous title.
Example. A owes B P1 million demandable and due on January 5. Debts consisting in civil liability arising from a penal
12, 2004. B owes A P1 million demandable and due on or before offense.
January 31, 2004. On January 12, 2004, B, who was given the 6. Damages suffered by a partnership through a fault of
benefit of the term, may claim compensation because he could a partner cannot be compensated with profits or
then choose to pay his debt on said date, which is “on or before benefits which he may have earned for the partnership
January 31.” If, upon the other hand A claims, compensation, B by his industry.
can properly oppose it because B could not be made to pay
until January 31, 2004. NOTE: There can be no compensation when the object of the
obligation is specific or determinate because there is only one
NOTE: Facultative compensation is unilateral and does not of such and cannot be duplicated.
require mutual agreement, voluntary and conventional
compensation requires mutual consent. FIRST AFFIRMATIVE REQUISITE:
That each of the obligors be bound principally, and that he be at
ARTICLE 1279 the same time a principal creditor of the other
In order that compensation may be proper, it is necessary: 1. Firstly, there must be a relationship of debtor and
(1) That one of the obligors be bound principally, and creditor.
that he be at the same time a principal creditor of
2. Secondly, there must be two debts and two credits.
the other;
(2) That both debts consist in a sum of money, or if the 3. Thirdly, they must generally be bound as prinicipals.
things are due consumable, they be of the same
kind, and also of the same quality if the latter has SECOND AFFIRMATIVE REQUISITE
been stated; That both debts consist in a sum of money, or if the things are
(3) That the two debts be due; due consumable (fungible), they be of the same kind, and also of
(4) That they be liquidated and demandable; the same quality if the latter has been stated.
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. THIRD AFFIRMATVE REQUISITE
That the two debts are due
Legal Compensation “Due” means that the period has arrived, or the condition has
The requisites enumerated under Article 1279 are those for been fulfilled. On the other hand, demandable may refer to the
legal compensation; voluntary compensation in general fact that neither of the debts has prescribed or that the
requires no requisite except that the agreement be voluntarily obligations are not considered as invalid or illegal under the
and validly entered into. eyes of the law.
FOURTH AFFRIMATIVE REQUISITE Jurisdiction of the Court Regard the Value of Demand
That they be liquidated or demandable GENERAL RULE: The jurisdiction of the court depends upon the
- If one of the debts already prescribed, there can be no totality of demand in all causes of action irrespective of whether
compensation, for the simple reason that said debt is the plural cases arose out of the same or different transactions.
no longer demandable.
EXCEPTIONS:The following are considered exceptions:
Liquidate debts are those where the exact amount has already 1. When the claim joined under the same complainant
been determined, though not necessarily in figures since the are separately owned by, or due to, different parties in
capacity would have arrived by simple arithmetic process would which cases each separate claim furnishes the
be considered as sufficient. jurisdictional test.
2. Where not all the causes of action joined are demands
FIRST NEGATIVE REQUISITE or claims of money.
That over neither of the debt must here be any retention or
controversy commenced by third persons and communicated n ARTICLE 1284
due time to the debtor. When one or both debts are rescissible or voidable, they may
This contemplates cases like garnishment proceedings, writ of be compensated against each other before they are judicially
rescinded or avoided.
preliminary injunction and those of interpleader.
Effect of Judgment
ARTICLE 1280
Rescissible or voidable debts are valid until rescinded or voided,
Notwithstanding the provisions of the preceding article, the
guarantor may set up compensation as regards what the compensation is allowed meanwhile. To avoid unfairness if
creditor may owe the principal debtor. rescission or annulment is later on decreed by the court, it is as
if no compensation ever took place. The decree thus acts
Guarantor May Set Up Principal Debt retroactively.
This is an exception to Article 1279 (1) because a guarantor is
subsidiarily bound. Extinguish of obligation also extinguishes Example. A owes B P1M. Later A had forced B to sign a PN for
the guaranty. P1M in favor of A. The first debt is valid; the second is voidable.
But if all the requisites for legal compensation are present, both
Example. A owes B P500,000. C is the guarantor of A. B owes A debts are extinguished for the second one is not yet annulled.
P100,000. When B sues A and A cannot pay. C can be liable for
P400,000 because C can set up payment for the compensation. ARTICLE 1285
The debtor who has consented to the assignment of rights
ARTICLE 1281 made by a creditor in favor of a third person, cannot set up
Compensation may be total or partial. When the two debts against the assignee the compensation which would pertain
are of the same amount, there is total compensation. to him against the assignor, unless the assignor was notified
by the debtor at the time he gave his consent, that he
NOTE: This article is true for all the different kinds of reserved his right to the compensation.
compensation whether voluntary or legal.
If the creditor communicated the cession to him but the
debtor did not consent thereto, the latter may set up the
ARTICLE 1282 compensation of debts previous to the cession, but not of
The parties may agree upon the compensation of debts subsequent ones.
which are not yet due.
If the assignment is made without the knowledge of the
Voluntary Compensation debtor, he may set up the compensation of all credits prior to
It is not limited to obligations which are not yet due. The parties the same and also later ones until he had knowledge of
may compensate by agreement any obligations, in which the assignment.
objective requisites are not present. It is necessary however,
that they should have the capacity to dispose. Effect of Assignment of Compensation of Debts
Under Article 1290, “when all the requisites mentioned in Article
ARTICLE 1283 1279 are present, compensation takes effect by operation of
If one of the parties to a suit over an obligation has a claim law, and extinguishes both debts to the concurrent amount,
for damages against the other, the former may set it off by even though the creditors and debtors are not aware of the
proving his right to said damages and the amount thereof. compensation.” Thus, compensation takes place automatically
or ipso jure.
Judicial Compensation or Set-Off
Pleading and proof of the counterclaim must be made. All the
Defense of Compensation
requisites under 1279 must be present, except that at the time
Now then, if after compensation has taken place one of the
of the pleading, the claim need not yet be liquidated. The
extinguished debts is assigned to a stranger, ordinarily the
liquidation must be made in proceedings. The court cannot on
defense of compensation should be set up.
its own declare the compensation.
EXCEPTION:This takes place when the assignment (after the ARTICLE 1286
compensation has taken effect) was made with the consent. Compensation takes place by operation of law, even though
Such consent operates as waiver of the right to compensation. 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.
EXCEPTION TO THE EXCEPTION: When “at the time he gave his
consent, he reserved his right to the compensation.” Compensation by Operation of Law
This applies to compensation by operation of law. It covers
Three Cases Covered by the Article indemnity for expenses of transportation or indemnity for
1. The assignment may be made with the consent of the expenses of exchange.
debtor.
2. The assignment may be made with the knowledge but ARTICLE 1287
without the consent (or against the will) of the debtor. Compensation shall not be proper when one of the debt
3. The assignment may be made without the knowledge arises from a depositum or from the obligations of a
of the debtor. depository or of a bailee in commodatum.
Neither can compensation be set up against a creditor who

FIRST CASE: Assignment Made with Consent of Debtor
has claim for support due by gratuitous title, without
EFFECT: Compensation cannot be set up as defense because
prejudice to the provisions of paragraph 2 of Article 301.
there has been consent and therefore a waiver.
When Legal Compensation Cannot Take Place
EXCEPTION:If the right to the compensation (which has already This Article speaks of the instance when legal compensation
taken place) is reserved. cannot take place, such as:
1. When one debt arises from a depositum (not bank
Example. A owes B P1,000,000. B in turn owes A P200,000. deposit, for this is really a loan).
Because both debts are already due, and because all requisites 2. When one debt arises from the obligations of a
are present, both debts are automatically extinguished up to depositary.
the amount of P200,000. Later, however, B with the consent of
A, assigned his P1,000,000 credit to C. How much can C collect NOTE: The depositor is given the right to claim compensation.
successfully from A?
3. When one debt arises from the obligations of a bailee
C can collect from A the whole P1,000,000. A cannot set up the in commodatum (the borrower of property who pays
defense of compensation as of the P200,000 in view of his nothing for the loan).
consent to the assignment.
NOTE: The lender may claim compensation, the borrower is not
Had A reserved his right to the compensation A would be allowed to do so.
forced to give only P800,000.
In these three instances, since the depositor and the lender
SECOND CASE: Assignment with Knowledge but Without have an option to claim or not to claim compensation these are
the Consent or Against the Will of the Debtor examples of facultative compensation.
EFFECT: Compensation can be set up regarding debts previous to
the cession or assignment. This refers to debts maturing before 4. When one debt arises because of a claim of support
the assignment (before the notice). due to gratuitous title.
5. When the debt arises from a criminal liability. But the
Example. A owes B P1M. B owes A P200K. Both debts are already offended party may claim compensation.
due. Later B, with the knowledge but without the consent or
against the will of A, assigned the P1,000,000 to C. How much NOTE: Support in arrears may be compensated but not future
can C successfully collect from A? support, for this is vital to the life of the recipient.
If A sets up the defense of partial compensation as to In the foregoing discussion, while compensation cannot be
previously maturing debts, C can collect only P800,000. There made use of by one party, compensation may be claimed by
had already been compensation with respect to the P200,000. the other party. This kind of compensation, whereby only one
side can claim it but not the other, is referred to as facultative
THIRD CASE: Assignment Without Knowledge of Debtor compensation.
EFFECT: Debtor can set up compensation as defense for all debts
maturing prior to his knowledge of the assignment, whether the Q. A has a P1,000,000 savings deposit with the PNB. One day,
debts mature before or after assignment. Reckoning point here A borrowed P200,000 from Bank. Without asking permission
is the time of knowledge of the assignment. from A, the Bank subtracted P200,000 from A’s account, leaving
a balance of P800,000 in A’s favor. Is the bank’s action proper?
This refers to partial compensation towards debts which had
matured or compensable prior to his knowledge.
A. Yes. Compensation is allowed here, because in this case the Compensation which extinguishes principal obligations also
relationship between the bank and the depositor is that of a extinguishes accessory obligation. This is up to the concurrent
creditor and debtor. amount.
Q. A asked B to keep P1,000,000 for him. Now, A is indebted to
B for the amount of P400,000. When A asks for the return of Legal Compensation is a Matter of Defense
this money, B gives him only P600,000, alleging partial Although compensation takes place by operation of law, it must
compensation. Is B correct? be alleged and proved by the debtor who claims its benefits.
Once proved, its effects retroact from the moment the
A. No. B is not correct because the P1,000,000 deposit with him requisites provided by law concurred.
is not subject to compensation.
Renunciation of Compensation
Obligations to a Depositary Compensation can be renounced, either at the time obligation
The following are some of the obligations of a depositary: is contracted or afterwards. Compensation rests upon a
(a) The depositary is obliged to keep the thing safely and potestative right, and a unilateral declaration of debtor would
to return it, when required, to the depositor, or to his be sufficient renunciation.
heirs and successors, or to the person who may have
been designated in the contract. Compensation can be renounced expressly or impliedly.
(b) Unless there is a stipulation to the contrary, the Examples of implied renunciation of compensation:
depository cannot deposit the thing with the third 1. By not setting it up in the litigation.
person. 2. By consenting to the assignment of the credit
(c) If deposit with a third is allowed, the depositary is 3. By paying the debt voluntarily, without knowledge
liable for the loss if he deposited it with a person who that it had been extinguished by compensation.
is manifestly careless or unfit.
(d) The depositary is responsible for the negligence of his SECTION 6
employees. NOVATION
(e) The depositary cannot make use of the thing
ARTICLE 1291
deposited without the express permission of the
Obligations may be modified by:
depositor. (1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
Commodatum, Defined (3) Subrogating a third person in the rights of the
It refers to a gratuitous loan of a movable property which is to creditor.
be returned undamaged to the lender. It is a loan for use at
loan. This arrangement is for the benefit of the borrower. Novation
It is the extinguishment of an obligation by the substitution or
Depositum, Defined change of the obligation by a subsequent one which
One of forms of contracts of bailment, being a naked bailment extinguishes or modifies the first, either by changing the object
of goods to be kept for the use of the bailor without reward. or principal conditions and other modes. Novation is a juridical
act od dual function at the time it extinguishes an obligation
ARTICLE 1288 and it creates a new one lieu of the old.
Neither shall there be compensation if one of the debts
consists in civil liability arising from a penal offense. Kinds of Novation
According to Object or Purpose
NOTE: The criminal cannot claim compensation. But the victim 1. Real/Objective – changing the object or principal
can be allowed. This article should be specifically limited to the conditions of the obligation.
accused to prevent his escaping of the liablity by leading prior 2. Personal/Subjective – change of persons
credits against the offended party. a. Substituting the person of the debtor
b. Subrogating a third person in the rights of
ARTICLE 1289
the creditor.
If a person should have against him several debts which are
3. Mixed – change of object and parties
susceptible of compensation, the rules on application of
payment shall apply to the order of compensation.
According to Form of its constitution
ARTICLE 1290 1. Express
When all the requisite mentioned in Article 1279 are 2. Implied (when two obligations are essentially
present, compensation takes effect by operation of law, and incompatible with one another)
extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the
According to its Extent/Effect
compensation.
1. Total or extinctive
NOTE: Legal compensation takes place ipso jure or 2. Partial or modificatory
automatically unless there has been a valid waiver.
Requisites of Novation ARTICLE 1293

1. The existence of a valid old obligation. (If void or non- Novation which consists in substituting a new debtor in place
existent nothing to novate; if voidable, allowed until it of the original one, may be made even without the knowledge
or against the will of the latter, but not without the consent
is annulled).
of the creditor. Payment by the new debtor gives him the
2. The intent to extinguish or modify the old obligation rights mentioned in Article 1236 and 1237.
by a substantial difference.
3. The capacity and consent of all the parties (except in Personal or Subjective Novation
the case of expromision). There are two kinds of subjective novation:
4. Validity of the new obligation. 1. Change of the debtor (passive)
2. Change of the creditor (active)
ARTICLE 1292
In order that an obligation may be extinguished by another
Substitution of Debtor
which substitute the same, it is imperative that it be so
Article 1293, refers to the passive subjective novation, which
declared in unequivocal terms, or that the old and the new
be on every point incompatible with each other. may be in the form of:
1. Expromision (where the initiative comes from the
Express or Implied Novation third party)
According to the manner or form, novation is classified into: 2. Delegacion where the initiative comes from the
1. Express novation, declared in unequivocal terms. debtor, for it is he who delegates another to pay the
2. Implied novation, partial or complete incompatibility. debt, and thus, he excuses himself.
Implied Novation EXPROMISION

All that is required is incompatibility between the original and In here the (a) the initiative comes from a third person and (b)
the new one. It is whether they can stand together, each one it is essential that the old debtor be released from his obligation
having an independent existence. It is usually done by making otherwise there will be no expromision, no novation.
substantial changes.
• In the object or subject matter of contract. Example. D owes C P1,000,000. F, a friend of D, approaches C
• In the cause or consideration of contract. and tells him: “I will pay you what D owes you. From now,
• In the principal terms or conditions of contract. consider me as your debtor, not D. D is to be excused.” C
agrees. There is expromision, and even if F does not pay C, D
Instances of No Valid Extinctive Novation cannot be made liable anymore for the obligation is already
(1) Slight alteration or modification of building plans exintguished on the part of D.
(2) New contract is a supplementary agreement
(3) Additional interest agreed upon Requisites for Expromision
(4) When additional security is given 1. The initiative must come from a third person (who will
(5) When after a final judgment, a contract was entered be a new debtor).
into precisely to provide a method of payment. 2. The new debtor and the creditor must consent.
(6) Guarantor enters into an agreement with the creditor 3. The old debtor must be excused or released from his
that he will also be a principal debtor. obligation (his consent is not required).
(7) When the creditor in the meantime refrains from suing
the debtor DELEGACION
(8) When the place of payment is changed or variation in This is defined as a method of novation caused by the
the amount of partial payments replacement of the old debtor by a new debtor who the old
(9) When a public instrument is executed to confirm a debtor has proposed the new debtor and agreed upon.
valid contract
(10) When payment of the purchase price is made by Here the initiative comes from debtor himself. The old debtor
execution of a promissory note must be released form the obligation.
Novation is Never Presumed Example. My friend F will pay my debt. I therefore, wish to be
There is no novation in the absences of a new contract executed released from my obligation, and both the friend and the
by the parties. It must be established that the old and new are creditor agree, this would be an example of delegation.
incompatible in all points, or that the will to novate appear by
express agreement of the parties or in acts of equivalent import, Parties in Delegacion
the novation must be clearly provided it is never presumed. 1. Delegante – original debtor
2. Delegatario – the creditor
A deed of cession with a right to repurchase the land does not 3. Delegado – the new debtor
extinguish or supersede a contract of lease over the same
property, and the filing of a guarantee bond to forestall Requisites for Delegacion
foreclosure does novate the mortgage, since both agreement 1. Initiative must come from the old debtor.
can stand together. 2. All the parties must give consent.
NOTE: The consent of the creditor may be: NOTE: Article 1296 does not apply in cases of novation by
(a) Express or implied subrogation of the creditor.
(b) Before or after the new debtor has given consent
(c) Conditional Modificatory Novation in Relation to Accessory
Article 1296 applies in particular to extinctive novation. If the
Rights of the New Debtor novation is merely modificatory, are guarantors and sureties
The law says, that payment by the new debtor gives him the released, if the novation was made without their consent?
rights mentioned in Articles 1236 and 1237, namely beneficial (a) If more onerous, only liable for the original obligation.
reimbursement or reimbursement and subrogation. (b) If less onerous, they are still responsible.
ARTICLE 1294 NOTE: Despite the extinguishment of the old obligations, the
If the substitution is without the knowledge or against the accessory obligations would remain if it was agreed and the
will of the debtor, the new debtor’s insolvency or non- debtors of said accessory obligations give their consent.
fulfillment of the obligation shall not give rise to any liability
on the part of the original debtor.
Effect on Stipulation Pour Autrui
NOTE: This article refers to expromision. In case of insolvency Accessory obligation or stipulations made in favor of third
or non-fulfillment the old debtor will no longer be liable for the persons (stipulation pour autrui) remain unless said third
expromision was brought about without his initiative. persons have their consent to the novation.
ARTICLE 1295 Reason: Their rights to the accessory obligations should not be
The insolvency of the new debtor, who has been proposed by prejudiced without their consent.
the original debtor and accepted by the creditor, shall not
revive the action of the latter against the original obligor, ARTICLE 1297
except when said insolvency was already existing and of If the new obligation is void, the original one shall subsist,
public knowledge or known to the debtor, when he delegated unless the parties intended that the former relation should
his debt. be extinguished in any event.
NOTE: This article refers to delegacion. The article only covers Effect if New Obligation is Void
and deals only with insolvency. In other causes, the old debtor Unless the parties intended the it shall be extinguished in any
is no longer liable. event, when the new obligation is void, there is no novation,
and the old obligation shall subsist. But if the old obligation was
Requisites to Hold Old Debtor Liable void, the new obligation is extinguished.
1. Insolvency was already existing and of public
knowledge at the time of delegacion. Other Facts
2. Or the insolvency was already existing and known to (a) If the new obligation is subject to a condition and said
debtor at the time of delegation. condition does not materialize the old obligation
subsists.
Instances when Article 1295 on Delegacion Does Not Apply (b) If a new obligation was intended, but the new contract
1. When the third person was only an agent, messenger was never perfected for lack of necessary consent, the
or employee of the debtor. old obligation continues.
2. When the third person acted only as guarantor or
surety. Rule if New Obligation is Merely Voidable
3. When the new debtor merely agrees to make himself The following instances may happen:
solidarily liable for the obligation. 1. The old obligation is novated because the new
4. New debtor merely agreed to make himself jointly or obligation is valid until annulled.
partly liable for the obligation. 2. If the new obligation is annulled, the old obligation
subsists, and whatever novation has taken place will
ARTICLE 1296 naturally have to be set aside.
When the principal obligation is extinguished in
consequence of a novation, accessory obligation may subsist ARTICLE 1298
only insofar as they may benefit third persons who did not The novation is void if the original obligation was void,
give their consent. except when annulment mat be claimed only be the debtor,
or when ratification validates acts which are voidable.
Effect on Accessory Obligations
The extinguishment of the principal obligation by novation Effect if Original Obligation was Void
extinguishes the obligation to pay interests, unless otherwise One of the requisites for a valid novation is that the obligation
stipulated. It releases pledges and mortgages as well as must be valid. Therefore:
guarantors and sureties, unless the latter agree to be bound 1. If the old obligation is void, there is no valid novation.
under the new obligation. The reason is that they were to 2. If the old obligation is voidable and has already been
answer for a particular obligation. annulled there in more obligation. Novation is void.
Rule if the Old Obligation is Voidable Conventional or Voluntary Subrogation

There may be a valid novation, provided that: The consent of all parties is required. Generally, the debtor loses
(a) Annulment may only be claimed by the debtor the right to present against the new creditor, which he, the
(b) Or when ratification validates the act which are debtor could have set up against the old creditor.
voidable (e.g. actions of agent without authority).
Conventional Subrogation and Assignment of Credit
Rule if Old Obligation was Extinguished by Loss As between conventional subrogation and assignment of credit,
1. If the loss was purely because of a fortuitous event the latter, insofar as the creditor is concerned, should be
without liability on the part of the debtor, the novation preferred, for it has advantages, without the corresponding
is void for there would be no obligation. disadvantages of conventional subrogation.
2. If the loss made the debtor liable, there is still an
existing monetary obligation that may be subject of Assignment of Credit Conventional Subrogation
novation. Mere transfer of the same Extinguishes the obligation,
right or credit. The transfer and creates a new one.
Prescribed Obligation as Subject of Novation did not extinguish the
It can be, unless the prescription is set up by the debtor then credit.
the obligation continues since this failure amount to a waiver. This doe not require the This requires debtor’s
A prescribed debt, constitution as it does a natural obligation, debtor’s consent. Mere consent.
may be the cause or consideration of a new obligation to pay notification to him is
therefor. sufficient.
The defect in the credit is The defect in the old
ARTICLE 1299 not cured by simply obligation may be cured in
If the original obligation was subject to a suspensive or
assigning the same. such a way that the new
resolutory condition, the new obligation shall be under the
obligation becomes entirely
same condition, unless otherwise stipulated.
valid.
Effect if the Original Obligation was Conditional
GENERAL RULE: The conditions attached to the old obligations are The debtor generally still Thus here, there is no right
also attached to the new obligation. has the right to present to present against the new
against the new creditor any creditor any defense which
EXCEPTION: Unless if there is a contrary stipulation. defense available as against he the debtor could have
old creditor. set up against the old
ARTICLE 1300 creditor.
Subrogation of a third person in the rights of the creditor is
either legal or conventional. The former is not presumed, ARTICLE 1302
except in cases expressly mentioned in this Code; the latter It is presumed that there is legal subrogation:
must be clearly established in order that it may take effect. (1) When a creditor pays another creditor who is
preferred, even without the debtor’s knowledge;
Subrogation (2) When a third person, not interested in the
Transfer to a third personal all the rights appertaining to the obligation, pays with the express or tacit approval
creditor; the right to proceed against guarantors, possessor of of the debtor;
(3) When, even without the knowledge of the debtor, a
mortgages, subject to any legal provision or any modification
person interested in the fulfillment of the obligation
agreed upon. pays, without prejudice to the effects of confusion as
to the latter’s share.
Kinds of Subrogation
From the viewpoint of cause or origin Legal Subrogation
1. Conventional or voluntary (requires an agreement and This article refers to legal subrogation that is under the
the consent of the original parties). operation of law, the provision provides three instances.
2. Legal subrogation
FIRST INSTANCE
From the viewpoint of extent When the creditor pays another creditor who is preferred, even
1. Total subrogation without the debtor’s knowledge.
2. Partial subrogation
Example. Ligaya has two creditors: Glorio, who is a mortgage
NOTE: Legal obligation must be presumed, and that creditor for P1,500,000, and Solita, who is an ordinary creditor
conventional subrogation must be established. for P600,000. Solita, without Ligaya’s knowledge, paid Ligaya’s
debt of P150,000 to Gloria. Here Solita will herself now be a
ARTICLE 1301 mortgage creditor for P1,500,000 and an ordinary creditor for
Conventional subrogation of a third person requires the P600,000. If Ligaya fails to pay the P1,500,000 debt, Solita can
consent of the original parties and of the third person.
have the mortgage foreclosed. Same answer if with knowledge.
Modified Example. Suppose in Solita paid Gloria only P1.3M for Example. A owes B P500,000. With the consent of both, C pays
Ligaya’s total indebtedness (due to them being friends), Solita B, P250,000. Now B and C are the creditors of A to the amount
can still recover from Ligaya the whole P1.5M because again, of P250,000. Suppose A has only P250,000, who should be
Solita steps into the shoes of Gloria. preferred?
Modified Example. If it turns out however, that the balance was It should be the original creditor. He should be preferred
actually P300K (Ligaya already paid P1M), Solita can only inasmuch as he is granted by law preferential right to recover
recover P300,000 under the rule of beneficial reimbursement. It the remainder, over the person subrogated in his place by virtue
is Solita’s fault that she did not inform Ligaya of her intention of the partial payment of the same credit. For as long as the
to pay. Thus, Solita must run against Gloria to recover P1M. original credit has not been fully satisfied, then he has a right
of preference over the new creditor.
SECOND INSTANCE
When a third person, not interested in the obligation, pays with
the express or tacit approval of the debtor.
Example. Eubolo owes Luna P1M secured by a mortgage.

Blesilda, a classmate of Eubolo, and having no connection with
the contract at all, paid Luna the P1M with Eubolo’s approval.
There is subrogation because although she is not interested,

she nevertheless paid off Luna with the approval of the debtor.
THIRD INSTANCE
When, even without the knowledge of a debtor, a person
interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latter’s share.
Person Interested
They include (1) guarantor and (2) owner of the property
mortgaged as security for the debt.
Example. D owes C P1M secured by a mortgage and by

guaranty of G. If G, even without D’s knowledge, pays C the
P1,000,000, G will be subrogated in C’s place. But of course, the
guaranty is extinguished. This is what the law means when it
says that there is legal subrogation without prejudice to the
effects of confusion as to the latter’s share in the obligation.
ARTICLE 1303
Subrogation transfers to the person subrogated the credit
with all the rights thereto appertaining either against the
debtor or against third persons, be they guarantors or
possessors of mortgages, subject to a stipulation in a
conventional subrogation.
NOTE: If transferred credit is subject to suspensive condition,

new creditor cannot collect until after such condition is fulfilled.
So, despite the fact that there is legal subrogation, the parties
may still enter into a conventional subrogation.
ARTICLE 1304
A creditor, to whom partial payment has been made, may
exercise his right for the remainder, and he shall be
preferred to the person who has been subrogated in his place
in virtue of the partial payment of the same credit.
Partial Subrogation
Here there are two creditors
1. Old creditor (remains as such due to unpaid balance)
2. New creditor (extent to what he paid the old)
OBLIGATIONS AND CONTRACTS present conditions have been so difficult, we are asking for
Articles 1252-1304 some consideration and leeway on your demands.”
JURISPRUDENCE NOTES
Accordingly, by September 20, 2000, Central Surety issued
Bank of Commerce Check in the amount of P6M payable to
1252. Application of Payment
Premier. The check was received, however, for undisclosed
reasons the Premier Bank return the check to Central Surety.
PREMIER DEV’T BANK v. CENTRAL SURETY (2009)
579 SCRA 359
In a letter dated September 28, 2000, Premier demanded not
Facts: On August 29, 1999 and respondent Central Surety & only the payment of the P6M loan but also of the P40.498M
Insurance Company (Central Surety) obtained two loans from loan. In the same letter, they threatened foreclosure of the
Premier Development, summarized as follows. securities both the pledge and the real estate mortgage, should
Central Surety fail to pay within ten days from date.
First Loan
LOAN: Industrial loan of P6,000,000 with 17% interest per In a reply on September 29, 2000, Central Surety, through its
annum (payable monthly in arrears) and the principal counsel wrote Premier Bank and re-tendered the payment of
payable on due date and a penalty of 24% per annum based check.
on the unpaid amortization/installment or the entire unpaid
balance of loan. This is evidenced in a Promissory Note No. On the same day, the spouses paid their own personal loan of
714-Y (PN 714-Y). P2.6M for membership shares in Manila Polo Club.
MATURITY DATE: August 14, 2000 On October 13, 2000, Premier Bank responded and signified
acceptance of the checks under the following application of
SECURITY:Deed of Assignment of Pledge covering Central payments signified that it received a total of P8.6M.
Surety’s Membership Fee Certificate No. 217 covering its Significantly, the P8.6M check payments were not applied in
proprietary share in the in Wack Wack Golf and Country Club full to Central Surety’s P6M loan under 714-Y and the
Incorporated. personal loan under 717-X. Premiere Bank also applied the
proceeds thereof to a commercial loan under PN235-Z
Both PN and Deed of Assignment Constancio T.
LIABILITY: (another loan) and the commercial loan of P40.498M under
Castaneda and Engracio T. Castaneda, president and vice PN 376-X. [Note how the application of payments were used
president of Central Surety solidarily bound themselves to on four separate obligations].
the payment of the obligation.
APPLICATION OF PAYMENTS:
In all, should Central Surety failed to pay with its loan with COM 235-Z P1,044,939.45 (Commercial Loan by Casent Realty)
IND 717-X P1,456,693.15 (Personal Loan for Manila Polo Club)
Premier Development Bank it would be liable for (1) unpaid COM 367-Z P4,476,200.18 (Commercial Loan worth P40,898M)
interest up to maturity date; (2) unpaid penalties up to maturity COM 714-Y P1,619,187.22 (Industrial Loan of P6M)
date; and (3) unpaid balance of the principal.
Total P8,600,000.00
Second Loan
Strongly objecting to such application, Central Surety’s counsel
LOAN: Commercial loan in the amount of P40,498,000 under
wrote Premier Bank and demanded for application of the check
PN 376-X.
payments to the P6M loan (PN 714-Y) and their P2.6M loan
(PN 717-X) and asked for the release of the pledge. Premiere
MATURITY DATE: October 10, 2001.
bank refused to accede to the demand and insisted that it had
the sole discretion on application of payments.
SECURITY: Real Estate Mortgage over Condominium
Certificate Title No. 8804, Makati City.
COMPLAINT: Central Surety filed a complaint for damages and
release of security collaterally, specifically praying that the court
LIABILITY: Transacted by Constancio T. Castaneda and
render judgment that:
Engracio T. Castaneda, as president and vice president on
1. Declare the P6M loan as fully paid.
behalf of Central Surety.
2. Release to Central Surety the pledged certificate.
3. Payment of damages
In August 22, 2000, Premiere sent a letter to Central Surety
4. Payment of costs of suit.
demanding payment of the P6M loan. The letter stated that
“unless the loan is settled on or before 5 days from the date
RTC dismissed the complaint and ruled that the stipulation in
hereof, the stock shall be transferred in the name of Premier in
the PN granting Premiere Bank sole discretion in the
accordance with the Deed of Assignment with Pledge.”
application of payment, although it partook of a contract of
adhesion was valid. It also ruled that the application of the
In their reply, Central Surety stated, “we are intending to settle
payment to the loan of Casent Realtly and the Personal loan
the account by the end of September, as you may know the
is void and must be annulled.
CA reversed and set aside the court’s ruling and held that the to declare the said note due and payable without the need of
August 22 letter demanding for the payment of the P6M loan demand or notice of any kind. The demand made by Premiere,
operates as a waiver on its sole determination of application of being a mere superfluity, cannot be equated with a waiver
payments. of right to demand payment of all matured obligations.
NOTE: The court did not discuss the issue on the P2.6M Premiere did not waive its right to apply payment of P6M loan
personal loan because both lower courts ruled in annulling the when it specifically demanded its payment. It is an elementary
Premiere Bank’s application of payments to the personal loan rule that the existence of waiver must be positively
because they are not obligations of Central Surety. As there demonstrated, must not be only voluntary but also made
are only two loans, the P6M industrial loan and the P40.498M knowingly and intelligently, mere silence should not be
commercial loan. construed surrender thereof.
Issues Moreover, any inference of a waiver is avoided by the plain

1. Whether Premiere waived its right of application of express provision of the PN itself: No failure on the part of
payments on the loans of Central Surety. Premiere to exercise, and no delay in exercising any right
2. Whether the P6M loan was extinguished with the thereunder, shall operate as waiver thereof. A diligent creditor
encashment of BC Check 08114. should needlessly be interfered with in the prosecution of his
3. Whether the Wack Wack Membership pledge must be legal remedies.
released.
When Central Surety directed the application of its payment to
Creditor Given Right to Apply Payments its specific debt it knew it had another debt. It is also aware that
At the hub of the controversy is that statutory provision on the same PN contains same provisions on Premiere’s capacity
application of payments as discussed in Article 1252: to apply payments, it reads:
ARTICLE 1252. He who has various debts of the same kind in favor of one and the In case I/We have several obligations with Premiere Bank, I/We hereby empower
same creditor, may declare at the time of making the payment, to which of them Premier Bank to apply without notice and in any manner, it sees fit, any or all
the same must be applied. Unless the parties so stipulate, or when the application of my/our deposits and payments to any od my/our obligations whether due
of payment is made by the party for whose benefit of the term has been or not. Any such application of deposits and payments shall be binding and
constituted, application shall not be made as to debts which are not yet due. conclusive upon us.
If the debtor accepts from the creditor a receipt in which an application for
Regarding the other PN worth P40.898M, it contained the
payment was made, the former cannot complain of the same, unless there is a
cause for invalidating the contract. provisions stating that the PN “shall be immediately due and
demandable upon occurrence of xxx My/Our failure to pay any
The debtor’s right to apply payment is not mandatory. This is amortization due hereunder, (iii) My/Our failure to pay money
clear from use of the word “may” rather than the word shall. due under any other document or agreement evidencing
Indeed, the debtor’s right has been considered directory. obligations for borrowed money.” By virtue of which, PN
evidencing the P40.898M became due and demandable.
Article 1252 gives the right to the debtor to choose which of RULE: The amounts tendered by Central Surety were insufficient
the several obligations to apply a particular payment that he to cover its more onerous obligations, Premiere Bank cannot be
tenders to the creditor. But likewise granted in the same faulted for exercising the authority granted to it under the PN
provisions is the right of the creditor to apply such payment in and payment of the obligations as it deemed fit.
case the debtors fails to direct its application.
Release of the Pledged Wack Wack Membership
A debtor, in making a voluntary payment, may at the time of On Contract of Adhesion – not invalid; a ready-made form of
payment direct an application of it to whatever account he contract on the others, the other party is free to reject it entirely
chooses. If he does not the right is passed to the creditor. But or adheres by consenting such.
if neither party, the court will apply law and equity. In interpreting contracts of adhesion, the unwary weaker party
Verily, the debtor’s right to apply payment can be waived and shall be shielded from the deceptive schemes from the ready-
even be granted to the creditor if the debtor so agrees. made covenants. (Article 24, CC).
IN THE CASE:The records show the Premiere Bank and Central IN THIS CASE: CentralSurety does not appear so weak as to place
Surety entered into several contracts of loan, securities by way at a distinct disadvantage. Considering that it is a known
of pledges, and suretyship agreements. In at least two PNs (1) business entity, it could have negotiated with the bank on a
PN 714-Y (P6M) and PN 376-X (P40.49M), Central Surety more favorable term.
expressly agreed to grant Premiere Bank the authority to
apply any and all of its payments. The Dragnet Clause
The Deed of Assignment with Pledge shows that is peculiarly
All Debts Were Due; No Waiver on Part of Petitioner specified an amount of P15M and was intended to cover not
It is to be noted that the Wack Wack Loan is already past the only PN (6M) but also future advances. The intent was for the
due and demand stage. By its terms, Premiere Bank was entitled Wack Wack Membership to serve a security also for future
advancements. The subsequent loan was nothing more than a Bank has been closed a new checking account with the same
fulfillment of the intention of the parties, thus it was still drawee bank is opened for practical purposes. The letter further
insufficient thus the subsequent surety agreement. stated that the postdated checks issued will be replaced with
new ones in the same drawee bank.
The provision is in the nature of a dragnet clause, it would
subsume all debts of respondent of past and future origins. It Socorro Diaz wife of the buyer, paid Espina P200,000
is a valid and legal undertaking, and the amounts specified as acknowledged as partial payment for the condo unit. On July
consideration in the contracts od not limits for which the 26, 1992, private respondent sent petitioner a Notice of
pledge or mortgage stands as security as they are considered Cancellation of the Provisional Deed of Sale. However, despite
as continuing security and is not discharged by the repayment the Notice of Cancellation from private respondent, the latter
of the account named in the mortgage until the full amount of accepted payment from petitioner per Metrobank Check
all advancements have been paid. 395694 dated and encashed on October 28, 1992 in the amount
of P100,000. February 24, 1993, private respondent filed a
A dragnet clause is a clause stating that a mortgage secures all complaint for Unlawful Detainer against Diaz before MTC
the debts that the mortgagor may at any time owe to the Antipolo.
mortgagee. Also known as a blanket mortgage clause is one
which is specifically phrasing to subsume all debts of past or MTC ordered Diaz to vacate the unit and to pay the total arrears
future origins. Such clauses are carefully scrutinized and as rentals, he vacates the premises; to pay the amount of P300
construed. per appearance, and costs of suit.
Prudential v. Alvar (2005) CA reversed the decision and dismissed the complaint for
The critical issue resolved was whether the “blanket mortgage” unlawful detainer with costs against petitioner Espina. MR was
clause applies even to subsequent advancements for which denied.
other securities were intended. The court then declared that the Issue
special security for subsequent loans must first be exhausted in Whether the provisional deed of sale novated the existing
a situation where the creditor desires to foreclose on the contract of lease and that there was no cause of action for
subsequent loans that are due. ejectment against Diaz.
IN THE CASE:Premiere Bank has the right to foreclose the Wack Discussion: The issue is in favor of Espina.
Wack Membership, the security corresponding to the first
promissory note, with the deed of assignment that originated CONTENTION THAT PROVISIONAL DEED OF SALE NOVATED THE
the dragnet clause. The release of the Wack Wack CONTRACT OF LEASE: The contention cannot be sustained.
Membership as pledged security cannot be done as sought Respondent originally occupied the condo unit in question in
by Central. 1987 as lessee. While he occupied as lessee, Espina agreed to
sell the condo unit to respondent by installment.
The chain of contracts concluded between Premiere and It did not novate the existing lease contract. The novation must
Central Surety reveals that the Wack Wack Membership which be proved since its existence is not presumed. Thus, a deed of
stood as security of PN 714-Y (P6M), and which also stands as cession of the right to repurchase a piece of land, does not
secutiy for subsequent debts is a pledge. Its return is upon the supersede a contract of lease over the same property.
pretext that Central Surety is entitled to pay only the obligation
of the PN (6M) thus extinguishing the pledge. After the initial downpayment, respondent’s checks in payment
of six installments all bounced and were dishonored upon
HELD: The petitions are partially granted; the CA decision is presentment because the bank account was closed. Thus, the
reversed and the RTC decision is reinstated with the provisional deed of sale was terminated by a notarial notice of
modification deleting the attorney’s fees. cancellation.
ESPINA v. COURT OF APPEALS (2000) Nonetheless, respondent Diaz continued to occupy premises
334 SCRA 186 and pay back his rentals. Failing do so, respondent’s possession
became unlawful and his eviction was proper. Hence, on
Facts: Mario S. Espina is the registered owner of Condominium February 24, 1993, petitioner filed with the MTC, Rizal for an
Unit No. 503, Victoria Valley Condominium, Volley Golf action for unlawful detainer against Diaz.
Subdivision, Rizal. On November 29, 1991, Mario Espina as
seller and Rene G. Diaz, as buyer executed a Provisional Deed CONTENTION: Petitioner’s subsequent acceptance of such
of Sale, it was the sale of the unit for the amount of P100,000 payment effectively withdrew the cancellation of the
to be paid upon the execution of the contract and the balance provisional sale of such.
to be paid through PCI Bank postdated checks. (1 – 400,000; 2-
6 – 200,000 total of P2,500,000). The court does not agree. Unless the application of payment is
expressly indicated, the payment shall be applied to the
Subsequently, in a letter dated January 22, 1992, petitioner obligation most onerous to the debtor.
informed private respondent that his checking account with PCI
made to believe by the bank manager that the collaterals they

The unpaid rentals constituted the more onerous
IN THIS CASE: offered to obtain loans were already sufficient.
obligation of the respondent. As the payment did not fully
settle the unpaid rentals, petitioner’s cause of action for RTC ruled in favor of China bank declaring defendants jointly
ejectment survives. and severally liable for the amount representing the deficiency
judgment. CA affirmed reducing the penalty from 24% to 12%
HELD: The courts reverse the CA decision and revives the per annum as well as attorney’s fees from 5% to 2%.
decisions of the RTC Antipolo Rizal affirming MTC Antipolo.
Issue:
TAN v. CHINA BANKING (2016) Whether Lorenze Realty’s obligation was fully settled when the
800 SCRA 636 real properties constituted as securities for the loan were sold at
the public auction for P85,000,000.00
Facts: Petitioner Lorenze Realty and Development Corporation
(Lorenze Realty) is a domestic corporation duly authorized by
Tan’s Contention
Philippine laws to engage in real estate business. It is
Argued that they are no longer liable for the deficiency
represented by Joel and Eric Tan in substitute to their deceased
obligation because the proceeds of the sale are enough to
parents Spouses Tan.
cover the principal amount of the loan which is just P71.05M
On several occasion in 1997, Lorenze Realty obtained from
China Bank’s Contention
China Bank various amount of loans and credits (17 loans
Not exintguished by the foreclosure because Article 1253
evidenced by promissory notes totaling of P71,050,000). It is
applies payment of interests, penalties and expenses of the sale,
expressly stipulated in the Promissory Notes that Lorenze
yielding the balance of P29.25M.
Realty agreed to pay the additional amount of 1/10 of 1% per
day of the total amount of obligation due as penalty to be
Rule: The court resolves to deny the petition. In contracts of
computed from the day that the default was incurred until full
loan, the debtor is expected to deliver the sum of money due
payment. And additional 10% of the total amount due including
the creditor together with application of payment.
interests, surcharges and penalties as attorney’s fees. As
security for the said obligations, Lorenze Realty executed Real
Application of Payment
Estate Mortages over 11 parcels of land in Valenzuela City.
A debtor, in making a voluntary payment, may at the time of
the payment direct an application to whatever account he
Subsequently, Lorenze Realty incurred in default in payment of
chooses, unless he has waived that right.
its amortization prompting China Bank to cause the
extrajudicial foreclosure of the Real Estate Mortgages
In the event that the debtor failed to exercise the right to elect,
constituted on the securities after the latter failed to heed to its
the creditor may choose to which among the debts the
demand to settle the entire obligation.
payment is applied as in the case at bar.
IN THE CASE: It is noteworthy that after the sale of the foreclosed
The mortgaged properties were sold at a public auction
properties at the public auction, Lorenze Realty failed to
wherein Chinabank emerged as highest bidder evidenced in a
manifest its preference among which of the obligations that
certificate of sale for the amount of P85M.
which among the obligations that were all due the proceeds of
STATEMENT OF ACCOUNT OF LORENZE REALTY: P114,258,179.1 TOTAL the sale should be applied. Its silence is construed as
Principal amount P71,050,00.00 acquiescence to China Bank’s application of the payment to the
Interest P13,521,939.21 interest and penalties and the remainder to the principal which
Penalties P19,763,257.50
Registration Expenses P9,542,013.00
is sanctioned by Article 1253 of the Civil Code.
Filing Fee P351,300.00
Publication Fee P25,970.00 Their assumption that the obligation was fully satisfied by the
Sheriffs Fee P2,000
sale of the securities does not hold any water. The amount of
Posting Fee P700
their entire liability should be computed on the basis of the rate
After deducting from the total amount of loan obligation the of interest as imposed by CA minus the proceeds of the sale.
P85M proceeds from the REM foreclosure, there remains a
balance of P29,528,179.1. China Bank demanded from HELD: Premises considered, the petition is denied. The assailed
Lorenze Realty for the payment of the remaining loan but such decision and resolution of the Court of Appeals are hereby
demand was unheeded. This prompted an action for the affirmed.
collection of sum of money against Lorenze Realty, the Ongs
and the Tans (officers) at RTC Makati. 1253-1254. Absence of Stipulation Where
Payment May be Applied
The other party disclaim liability by alleging that the surety
agreements did not express the true intention of the parties. MARQUEZ v. ELISAN CREDIT (2015)
They claimed that they just signed the surety contracts without 755 SCRA 31
reading the fine terms stipulated therein because they were

Facts: On December 16, 1991, Nunelon R. Marquez obtained a Elisan Credit’s Contention
loan (first loan) from Elisan Credit Corporation for P53,000 Daily payments were properly credited against the interest and
payable in 180 days. The petitioner signed a promissory note not against the principal.
which that it is payable in weekly installments and subject to
26% annual interest. In case of non-payment, the petitioner Issue:
agreed to pay 10% monthly penalty based on the total amount Did the respondent act lawfully when it credited the daily
unpaid and another 25% of such amount for attorney’s fees, payments against the interest instead of the principal? Could
exclusive of costs and judicial and extrajudicial expenses. the chattel mortgage cover the second loan?
SECURITY: Chattel mortgage over a motor vehicle, it stipulated RULE: The petition is partly meritorious. The court rules that:
that the motor vehicle shall stand as a security for the first loan 1. The respondent acted pursuant to law and
and all other obligations of every kind already incurred or which jurisprudence when it credited the daily payments
may hereafter be incurred. Both parties acknowledged the full against the interest instead of the principal.
payment of the first loan. 2. The chattel mortgage could not cover the second
loan.
Subsequently, the petitioner obtained another loan (second
loan) from the respondent for P55,000 evidenced by a PN and Rebuttable Presumptions of Article 1176 and 1253
a cash voucher on June 15, 1992 with same terms and There is a need to analyze and harmonize Article 1176 (receipt
conditions as the first promissory note. When it matured, the of the principal gives rise to the presumption as interest paid)
petitioner had only paid P29,960 leaving an unpaid balance of and Article 1253 (payment of interest before principal) of the
P25,040. Due to liquidity problems, the petitioner asked the Civil Code to determine whether the daily payments made after
respondent if he could pay in daily installments. The the second loan’s maturity should be credited against the
respondent granted such request. interest or against the principal.
As of September 1994, or 21 months after the second loan’s The cited provisions appear to be contradictory but they in fact
maturity, the petitioner had paid P56,440. Despite the receipt support and are in conformity. Both provisions are also
of the amount, Elisan Credit filed for judicial foreclosure of presumptions, as such, lose their legal efficacy in the face of
chattel mortgage for failing to pay such amount. Alleging the proof or evidence to the contrary.
failure to pay the 10% monthly penalty and 25% attorney’s
fees. A writ of replevin was issued. IN THE CASE: There are two undisputed facts crucial in resolving
the first issue (1) failure to pay the full amount of second loan
MTC found for the petitioner and held that the second loan was and (2) second loan was subject to interest, penalty and fees.
fully exintguished. It held that when an obligee accepts the
performance or payment of an obligation, knowing its CONTENTION: Marquez that he denies having consented to the
incompleteness or irregularity and without expressing any interest, penalty, and attorney’s fees because he purportedly
protest or objection, it is fully complied with. signed the PN in blank.
The MTC noted the acceptance of the daily payments made by This allegation deserves scant consideration, it is self-serving
the petitioner without protests making the claim to be without and unsupported by evidence. The PN contained exactly the
legal basis. same terms and conditions as the first loan, as mirror image
except amount of principal. Thus, there was sufficient reason to
RTC affirmed the ruling of the MTC, but upon MR it reversed believe that he was aware of such. Petitioner is an engineer by
itself, stating the application of Article 1253 and that the chattel profession, thus, he will not just easily sign a blank document.
mortgage was revived.
Article 1176 in Relation to Article 1253
CA affirmed the ruling with modification stating that the daily Article 1176 falls under Chapter I (Nature and Effect of
payments covered the payment of interests and not for the Obligations) and Article 1253 falls under Subsection I
principal. It reduced monthly penalty from 10% to 2%. (Application of Payments).
Marquez’s Contention The structuring of these provisions, properly considered, means

He insists that his daily payments should be deemed to have that Article 1176 should be treated as a general presumption
been credited against the principal as the official receipts issued subject to the more specific presumption under Article 1235.
by the respondent were silent with respect to the payment of The first is relevant on question pertaining effects and nature
interests and penalties invoking Article 1176 (receipt of the of obligations in general, while Article 1253 is specifically
principal give rise to the presumption of payment of interest) pertinent on questions involving application of payments and
and of Article 1235 (qualified acceptance of irregular of extinguishing obligations.
incomplete obligation). He denies having stipulated upon and
consented to the interest, penalty and payment of attorney’s The presumption under Article 1176 does not resolve the
fees and receiving any demand letter. question of whether the amount received by the creditor is a
payment for principal or interest. Under this article the amount
received by the creditor is payment for the principal, but a The chattel mortgage could not validly cover the second loan.
doubt arises on whether or not the interest is waived because The order of foreclosure was without legal and factual basis as
the creditor accepts the payment for the principal without such. The court refers to Acme Shoe v. CA (1196) where it
reservation with respect to the interest. Article 1176 resolves resolved the issue whether a chattel mortgage could be
this doubt by presuming that the creditor waives the payment foreclosed due to the debtor’s failure to settle the subsequent
of interest because he accepts payment for the principal loan. The Chattel Mortgage Law requires the parties to the
without any reservation. contract to attach an affidavit of good faith and execute and
oath that the mortgage is made for the obligations specified
On the other, the presumption under Article 1253, resolves and for no other purposes. The debt referred in the law is
doubts involving payment of interest-bearing debts. The doubt current, not an obligation contemplated.
pertains to the application of payment; the uncertainty is which
did the creditor receive. Article 1253 resolves this doubt by IN THE CASE: The only obligation specified in the chattel
providing a hierarchy, first be applied to the interest; then mortgage contract was the first laon which the petition later
payment shall then be applied to the principal only after the fully paid. By virtue of Section 3 of the Chattel Mortgage Law,
interest has been fully paid. the payment of the obligation terminated the chattel mortgage
and it ceased to exist upon full payment, accessory follows the
IN THE CASE: Since the doubt in the case pertains to the principal.
application of the daily payment, Article 1253 shall apply. Only
when there is waiver of interest shall Article 1176 apply. The parties did not execute a fresh chattel mortgage, nor did
they amend the chattel mortgage to comply with the Chattel
The court rules that the respondent properly credited the daily Mortgage Law which requires the obligation to be specified in
payments to the interest and not to the principal because: the affidavit in good faith. Thus, there no longer a chattel
1. The debt produces interest mortgage that could cover the second loan.
2. A portion of the second loan remain
3. No waiver of interest. The order to foreclose the motor vehicle therefore had no legal
basis because the second loan was not in compliance with the
There was No Waiver of Interest Chattel Mortgage law for not having an affidavit and was not
The fact the official receipts did not indicate whether the amendment to such nor a fresh chattel mortgage as security,
payments were made for the principal or the interest does not thus indeed the foreclosure was without legal basis.
prove that the respondent waived the interest. The daily
payments were done after the second loan had already HELD: The petition is partially grant, modifying the CA decision.
matured and a portion of the principal remained unpaid. As Ordering Marquez to pay the balance of P25,040, and the
stipulated the principal is subject to 26% interest. respective interest. It also ordered Elisan Credit to return/deliver
• He was already in default when he started making the seized motor vehicle subject to chattel mortgage to the
daily payments, thus the 10% monthly penalty and possession of the petitioner, if impossible of delivery, then the
25% attorney’s fees became affective. amount of P30,000.
In short, the stipulated monetary interest (26%) and the 1256. Exceptions to Prior Tender
interest for default (10% monthly) were now due and
demandable. The respondent waived neither of the interest. FAR EAST BANK & TRUST v. DIAZ REALTY (2001)
363 SCRA 659
IN THE CASE:It was not proven that the respondent accepted the
Facts: Sometime in August 1973, Diaz and Company got a loan
payment of the principal. The silence of the receipts on whether
from former Pacific Banking Corporation in the amount of
the daily payments were credited against eh unpaid balance
P720,000 with interest of 12% per annum increased 20%. The
does not mean that the respondent waived the payment of
loan was secured by real estate mortgage over two parcels of
interest. There is no presumption of waiver of interest.
land owned by Diaz Realty in Davao.
The stipulated interest and interest for default had already

In 1981, Allied Banking Corporation rented an office space in
accrued and that daily payments were correctly applied to
the building construction on the mortgaged properties, with
either of the interests. Article 1253 is obligatory and only
conformity of the mortgagee Pacific, the parties agreed that the
dispensed through mutual agreement, where in this case, there
monthly rentals shall be paid directly to the mortgagee for the
was no mutual agreement.
lessor’s account, either to partly or fully pay off the aforesaid
mortgage indebtedness.
REDUCTION OF STIPULATED RATES: Following the case of MCMP
Construction Corp v. Monark, the rates are reduced as follows:
Sometime in December 1986, appellant FEBTC purchased the
1. 26% interest p.a. reduced to 2% interest p.a.
credit of Diaz & Company in favor of PaBC, but it was not until
2. 10% monthly interest to 120% interest p.a.
March 23, 1988 that Diaz was informed about it.
3. 25% interest as attorney’s fees to 2% of the due.
Cashier Ramon Lim told him that as of such date, his loan was
The Chattel Mortgage could not Cover the Second Loan
P1,447,142.03; that he (Diaz) asked the defendant to make an
accounting of the monthly rental payments made by Allied fact honored by the drawee bank. Moreover, petitioner was in
Bank; that on December 14, 1988, Diaz tendered to FEBTC the possession of the money for several months.
amount of P1,450,000.00 through an Interbank check, in
order to prevent the imposition of additional interests, Tender of Payment, Defined
penalties and surcharges on its loan; that FEBTC did not Tender of payment is the definitive act of offering the creditor
accept it as payment; that instead, Diaz was asked to deposit the what is due him or her, together with the demand that the
amount with the defendant’s Davao City Branch Office, allegedly creditor must accept the same. More important, there must be
pending the approval of Central Bank Liquidator Renan Santos; a fusion of intent, ability, and capability to make good such
offer, which must be absolute and must cover the amount due.
It was changed into a money market placement, but even after
it matured there was still no news on the acceptance of such as IN THE CASE: Respondent intended to settle its obligation with
a tender of payment. Prompting him to file the case in RTC. petitioner is evident from the records. After learning its loan
balance, it presented to petitioner a check in the amount of
AFFIRMATIVE DEFENSE: When FEBTC purchased from Pacific for P1.45M with the specific notation that it was for full payment of
P1.828M, that despite such purchase, Pacific Davao Branch, its Pacific Bank account. The latter accepted the check, and
continued to collect interests and penalty charges on the loan. now insists as deposit. The check was fully funded. These acts
It was therefore not FEBTC which collected the interest rates demonstrate respondent’s intent, ability and capability to fully
mentioned in the complaint, and that it sought to negotiate settle and extinguish its obligation to petitioner
with the plaintiffs, and the FEBTC has no knowledge of the rates
of interest imposed and collected prior to the purchase of the ON THE CONTENTION OF WITHDRAWAL OF MONEY: Such withdrawal
credit of Pacific. would not affect the efficacy or the legal ramifications of the
tender of payment made on November 14, 1988. As already
RTC ordered computation of interest and add to the principal discussed, the tender of payment to settle respondent’s
and compared with the deposit, and if the P1.45M check was obligation as computed by petitioner was accepted, the check
not enough, then plaintiff shall pay the deficiency. MR modified given in payment thereof converted into money, and the
including the money market and principals. money kept in petitioner’s possession for several months
CA sustained the RTC finding that there was a valid tender of ON THE CONTENTION THAT THERE WAS NO CONSIGNATION: For
payment in the sum of P1.45M, made by Diaz Realty, Inc. in consignation be necessary, creditor must have refused, without
favor of FEBTC. The appellate court reasoned that petitioner just cause, to accept the debtor’s payment. However, as pointed
failed to effectively rebut evidence that it tendered the check to out earlier, petitioner accepted respondent’s check. It was
liquidate its indebtedness, and that petitioner had unilaterally incumbent upon petitioner to refuse, or accept it as payment. It
treated the same as a deposit instead. The interest rate is cannot be treated as deposit. Thus, by accepting the tendered
computed using the 12% reckoned from July 9, 1988 until full check and converting it into money, petitioner is presumed to
and final payment of whole indebtedness. have accepted it as payment. To hold otherwise would be
inequitable and unfair to the obligor.
Issues Considered: SECOND ISSUE: The Nature of Respondent’s Account
1. Efficacy of the alleged tender of payment made by the It was an assignment of credit. Petitioner’s acquisition of Diaz’s
respondent credit did not involve any changes in the original agreement.
2. The effect of the transfer to petitioner of respondent’s neither did it vary the rights and the obligations of the parties.
account with Pacific Thus, no novation by conventional subrogation could have taken
3. Interest rate applicable place. There is no need for debtor’s consent to assign credit.
4. Status of the real estate mortgage.
Thus, petitioner had the right to collect the full value of the
FIRST ISSUE: Tender of Payment credit from respondent, subject to the terms as originally
RULE: In general, a check does not constitute legal tender, and agreed upon in the Promissory Note.
that a creditor may validly refuse it. It must be emphasized,
however, that this dictum does not prevent a creditor from THIRD ISSUE: Applicable Interest Rate
accepting a check as payment. In other words, the creditor has However, because there was a valid tender of payment made
the option and the discretion of refusing or accepting it. on November 14, 1988, the accrual of interest based on the
stipulated rate should stop on that date. Thus, respondent
was informed that the obligation summed up to
IN THIS CASE: should pay petitioner-bank its principal obligation in the
P1,447,142.03. On November 14, 1988, petitioner received amount of P1,067,000 plus accrued interest thereon at 20
from Interbank Check No. 81399841 dated November 13, 1988, percent per annum until November 14, 1988, less interest
bearing the amount of P1,450,000. payments paid to Pacific.
FEBTC bank did not refuse respondent’s check. On the contrary, FOURTH ISSUE: Status of Mortgage Contract
it accepted the check which, it insisted, was a deposit. As The Real Estate Mortgage executed between respondent and
earlier stated, the check proved to be fully funded and was in Pacific to secure the former’s principal obligation, as well as the
provision in the Contract of Lease between respondent and petitioner’s obligation to return the option/ reservation fee to
Allied Bank with regard to the application of rent payment to respondent. Hence, petitioner can no longer withdraw the
the former’s indebtedness, should subsist until full and final same.
settlement of such obligation pursuant to the guidelines set
forth in this Decision. Thereafter, the parties are free to Pabugais’ Contention
negotiate a renewal of either or both contracts, or to end any He contends that he can withdraw the amount deposited
and all of their contractual relations. with the trial court as a matter of right because at the time he
moved for the withdrawal thereof, the CA has yet to rule on the
HELD: Petition is denied, CA decision affirmed. Respondent consignation’s validity.
Diaz Realty is ordered to pay FEBTC its principal loan obligation
in the amount of P1,067,000 with interest. Issue:
1. Was there a valid consignation?
PABUGAIS v. SAHIJWANI (2004) 2. Can petitioner withdraw the amount consigned as a
423 SCRA 596 matter of, right?
Facts: Pursuant to an Agreement and Undertaking dated
Consignation, Concept and Application
December 3, 1993, petitioner Teddy G. Pabugais in
It is the act of depositing the thing due with the court or judicial
consideration of P15,487,500 agreed to sell to Dave P.
authorities whenever the creditor cannot accept or refuses to
Sahijwani a lot containing 1,239 sq.m. located at North Forbes
accept payment and it generally requires a prior tender of
Park, Makati.
payment. The following are requisites for valid consignation:
1. There was a debt due;
Respondent paid petitioner the amount of P600,000.00 as
2. The consignation of the obligation had been made
option/reservation fee and the balance of P14,887,500.00 to be
because the creditor to whom tender of payment was
paid within 60 days from the execution of the contract,
made refused to accept it, or because he was absent
simultaneous with delivery of the owner’s duplicate Transfer
or incapacitated, several persons claim to be entitled
Certificate of Title in respondent’s name, the Deed of Absolute
to the amount; title of the obligation is lost.
Sale; the Certificate of Non-Tax Delinquency on real estate taxes
3. Previous notice of the consignation had been given to
and Clearance on Payment of Association Dues.
the person interested in the performance of the
• Failure of payment – forfeiture of P600K
obligation;
• Failure of delivery – return 600K and 18% interest.
4. The amount due was placed at the disposal of the
court
Petitioner failed to deliver the required documents. He returned
5. After the consignation has been made, the person
the amount of P600K by way of FEBTC Check but was however,
interested was notified thereof.
dishonored. Petitioner claimed that he twice tendered to
Failure in any of these requirements is enough ground to render
respondent, through his counsel, the amount of P672,900.00 in
a consignation ineffective. There must be the existence of a
the form of FEBTC Manager’s Check dated August 3, 1994, but
valid tender of payment.
said counsel refused to accept the same.
CONTENTION: The reasons why his client did not accept
Respondent’s Counsel
petitioner’s tender of payment were:
Respondent’s counsel, on the other hand, admitted that his
(1) the check mentioned in the August 5, 1994 letter of
office received petitioner’s letter dated August 5, 1994, but
petitioner manifesting that he is settling the obligation
claimed that no check was appended thereto. And that hat
was not attached to the said letter; and
there was no valid tender of payment because no check was
(2) the amount tendered was insufficient to cover the
tendered and the computation of the amount to be tendered
obligation. It is obvious that the reason for
was insufficient.
respondent’s non-acceptance of the tender of
payment was the alleged insufficiency thereof–and
RTC declaring the consignation invalid for failure to prove
not because the said check was not tendered to
that petitioner tendered payment to respondent and the
respondent, or because it was in the form of
latter refused to receive the same. The manager’s check
manager’s check.
allegedly offered by petitioner was not legal tender, hence,
there was no valid tender of payment. Appealed to CA.
While it is true that in general, a manager’s check is not legal
tender, the creditor has the option of refusing or accepting it.
Upon petitioner’s counsel substitution, petitioner executed a
Payment in check by the debtor may be acceptable as valid, if
“Deed of Assignment” assigning in favor of Atty. De Guzman,
no prompt objection to said payment is made. Consequently,
Jr., part of the P672,900.00 consigned with the trial court as
petitioner’s tender of payment in the form of manager’s check
partial payment of the latter’s attorney’s fees. Petitioner then
is valid.
filed for motion to withdraw consigned money, but was
intervened by Atty. De Guzman, Jr.
The manager’s check in the amount of P672,900.00
(representing the P600,000.00 option/reservation fee plus 18%
CA declaration the consignation as valid. It held that the
interest per annum computed from December 3, 1993 to
validity of the consignation had the effect of extinguishing
August 3, 1994) which was tendered but refused by On August 14, 2000, a son of the Benos spouses paid the bank
respondent, and thereafter consigned with the court, was P159,000 representing the principal and interest. On the same
enough to satisfy the obligation. There being a valid tender day, the Lawilao spouses also went to the bank and offered to
of payment in an amount sufficient to extinguish the pay the loan but the bank refused to accept payment. The
obligation, the consignation is valid. Lawilao spouses then filed for consignation but was dismissed.
Amount Can No Longer be Withdrawn They then filed to MTCC for consolidation of ownership, the
The amount consigned with the trial court can no longer be Benos spouses moved to dismiss on the grounds of lack of
withdrawn by petitioner because respondent’s prayer in his jurisdiction and lack of cause of action, but was denied and trial
answer that the amount consigned be awarded to him is ensued.
equivalent to an acceptance of the consignation, which has the
effect of extinguishing petitioner’s obligation. MTCC rendered judgment in favor of the Benos spouses for
there was lack of legal basis to demand consolidation of the
Petitioner failed to manifest his intention to comply with the ownership over the subject property.
“Agreement and Undertaking” by delivering the necessary
documents and the lot subject of the sale to respondent in RTC reversed the decision and declared the consolidation of
exchange for the amount deposited. Withdrawal of the money the subject property in favor of the Lawilao spouses.
consigned would enrich petitioner and unjustly prejudice
respondent. CA affirmed the decision of the RTC and MR was also denied.
VIOLATION OF ARTICLE 1491 FORBIDDING LAWYERS: The withdrawal of Argument of the Benos’ Spouses
the amount deposited in order to pay attorney’s fees to The consolidation was not proper because the Lawilao spouses
petitioner’s counsel, Atty. De Guzman, Jr., violates Article 1491 violated the terms of the contract by not paying the bank loan;
of the Civil Code which forbids lawyers from acquiring by that having breached the terms of the contract, the Lawilao
assignment, property and rights which are the object of any spouses cannot insist on the performance thereof by the Benos
litigation in which they may take part by virtue of their spouses.
profession.
Argument of the Lawilao Spouses
That petitioner knowingly and voluntarily assigned the subject Asserted that the Pacto de Retro Sale reflected the true
amount to his counsel did not remove their agreement within agreement, they claimed that they complied with their
the ambit of the prohibitory provisions. obligation when they offered to pay the loan to the bank and
filed a petition for consignation; and that because of the failure
HELD: The petition is denied and the decision of the CA of the Benos spouses to redeem property, the title ownership
declaring consignation proper of the amount of P672,900 be be consolidated in their favor. Thus, there must already be a
valid and the obligation is extinguished is affirmed, no costs consolidation of ownership to them.
whatsoever.
BENOS v. LAWILAO (2006) Issue:
509 SCRA 549 Whether the Lawilao spouses can consolidate ownership over
the subject property.
Facts: On February 11, 1999, petitioner-spouses Jaime and
Marina Benos (Benos spouses) and respondent Gregorio and
No Valid Tender of Payment
Janice Lawilao (Lawilao spouses) executed a Pacto de Retro
The evidence shows that the Lawilao spouses did not make a
Sale where the Benos Spouses sold their clot and building
valid tender of payment and consignation of the balance of the
thereon for P300,000 one half of which is to be paid in cash to
contract price. The amount of P159,000 deposited with the
the Benos spouses and the other half to paid to the bank to pay
MTCT is in relation to a previous civil case, and to the case in
off the loan the Benos spouses which was secured by the same
action. Did not appeal this finding and became binding,
lot and building.
Notification as Requisite to the Consignation

Under the contract, the Benos spouses could redeem the
Consignation is made by depositing the proper amount to the
property within 18 months from the date of execution by
judicial authority, before whom the tender of payment and the
returning the contract price otherwise the sale would become
announcement of the consignation shall be proved. All
irrevocable without necessity of a final deed to consolidate
interested parties are to be notified of the consignation.
ownership over the property in the name of Lawilao spouses.
Compliance with these are mandatory.
After paying the P150,000 the Lawilao spouses immediately
IN THE CASE: Records show that the Lawilao spouses filed for
took possession of the property and leased out the building
consignation against the Bank in Civil Case 310 without
thereon. However, instead of paying the loan to the bank,
notifying the Benos spouses. The petition was dismissed for lack
Janice Lawilao restructured it twice. Eventually, the loan
of cause of action against the bank. Hence, the Lawilao spouses
became due and demandable.
failed to prove their offer to pay the balance of the purchase
price and consignation. In fact, they never notified the Benos

spouses of their offer to pay. AFPMBAI’s reply
It argued that since no prior valid tender of payment was
As the Benos spouses are concerned, there was no full and made by the petitioners, the consignation case was fatally
complete payment of the contract price, which gives them the defective and susceptible to dismissal.
right to rescind the contract in relation to Articles 1191 and
1592 of the civil code. RTC denied AFPMBAI’s motion to dismiss declaring since title
has been transferred to the name of the petitioners and the
RESCISSION MADE IN ANSWER WITH COUNTERCLAIM: In the instant action involves consignation of loan payments, it possessed
case, while the Benos spouses did not rescind the Pacto de jurisdiction to continue with case. MR denied.
Retro sale through a notarial act, they nevertheless rescinded in
their answer with counterclaim. It satisfied the requisites for CA held that the case is for specific performance of AFPMBAI’s
judicial rescission of the subject Pacto de Retro Sale. contractual and statutory obligation as developer of the homes
and was under the jurisdiction of the HLURB.
The MTC thus correctly dismissed the complaint for
consolidation of ownership filed by the Lawilao spouses for Issue
their failure to comply with the conditions of the Pacto de Retro Does the complaint in civil case fall within the exclusive
Sale. There must be mutual restitution. jurisdiction of the HLURB?
HELD: The Pacto de Retro Sale is deemed to be rescinded and Does the complaint in the civil case make out a case for valid
petitioners are ordered to return the P150,000 to Lawilaos. consignation?
CACAYORIN v. AFPMBAI (2013) Cacayorin’s Arguments

696 SCRA 311 Assert that there was a valid consignation. They add that since
a deed of absolute sale has been issued in their favor, and
Facts: Petitioner Oscar Cacayorin is a member of respondent
possession of the property has been surrendered to them, not
Armed Forces and Police Mutual Benefit Association
to mention that title has been placed in their name, HLURB lost
(AFPMBAI), a mutual benefit association engaged in the
jurisdiction of the case
business of developing low-cost housing projects for personal
of AFP, PBP at the like. He filed an application with AFPMBAI to
AFPMBAI’s Arguments
purchase a piece of property owned by the latter in Puerto
It insists that the case lies with HLURB as it spring from their
Princesa City.
contractual relation as seller and buyer of a subdivision lot. The
respondents add that in effect, petitioners are extracting
On July 4, 1994, Oscar and his wife and co-petitioner, Thelma
specific performance for it which places their case within the
and Rural Bank executed a Loan and Mortgage Agreement,
jurisdiction of the HLURB.
with the former as borrower and bank as lender, under he
auspices of PAG-IBIG HDMF Financing Program.
RULE: The court grants the petition.
The Rural Bank Issue a letter of guaranty that the proceeds of
petitioners’s approved loan in the amount of P77,418 shall be
The Complaint is a Case for Consignation
released to AFPMBAI after title to the property is transferred in
Under Article 1256, the debtor shall be released from the
petitioners’ name and after the registration and annotation of
responsibility by consignation of the thing or sum due without
the mortgage agreement.
need of prior tender of payment under the exceptions.
AFPMBAI executed in petitioner’s favor a Deed of Absolute Sale
IN THE CASE: It appears that the debt of the petitioner is
and a TCT was issued in their name, with the corresponding
outstanding, that the Rural Bank’s receiver PDIC, informed
annotation of their mortgage agreement with the Bank.
petitioners that it has no record of their loan, and AFPMBAI has
Unfortunately, the PAG-IBIG loan did not push through and
possession over their documents as well as the TCT; that they
Rural Bank closed and was placed under receivership by
were ready to pay their loan in full and that, but they do not
PDIC. AFPMBAI was able to take possession of the loan
know which of the two Rural Bank or AFPMBAI should receive
documents and the TCT while petitioners were unable to pay
the payment.
the loan/consideration of their property. AFPMBAI made oral
and written demands for payment.
It now appears that there are two entities which the
petitioners must deal with in order to fully secure their title
Petitioners filed for consignation of loan payment, recovery
to the property:
of title and cancellation of mortgage annotation against
1. Rural bank (PDIC) which is the apparent creditor under
AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa
the Loan and Mortgage Agreement
City. They alleged that as a result to the closure of the bank and
2. AFPMBAI which is currently in possession of the loan
PDIC’s claim that their loan papers cannot be located, they were
documents and the certificate of title, and the one
left in a quandary as to where they should tender full payment
making the demand to the petitioners.
of the loan and how to secure cancellation of mortgage.
The allegation in the complaint present a situation wherein the The Raymundos wrote PNCC requesting payment of the first
creditor is unknown or that two or more entities appear to annual rental in the amount of P240,000 which was due and
possess the same right to collect from petitioners. payable upon the execution of the contract. They also assured
the latter that they had already stopped considering other
This presents a unique situation where the buyer, through no proposals.
fault of his own, was able to obtain title to real property in his
name even before he could pay purchase price in full. There Petitioner expressed its intention to terminate the contract, as
appears to be no vitiated consent, nor there is any other it had decided to cancel or discontinue with the rock crushing
impediment to the consummation of their agreement. project, due to financial as well as technical difficulties. The
Raymundos refused to accede to the petitioner’s request. They
AFPMBAI made oral and written demands, which naturally insisted in the performance of the obligation and demanded.
aggravated their confusion as to who was their rightful creditor PNCC objected stating that it was only liable for P20,000. This
to whom payment should be made. prompted the petitioners to file for an action for Specific
Performance with Damages.
The Lack of Prior Tender of Payment is Not Fatal
They filed the case for the exact reasons that they were at a loss RTC rendered a decision ordering PNCC to pay the Raymundos
as to which between the two (Rural Bank or AFPMBAI) was the amount of P492,000 which represented the rentals for two
entitled to such tender of payment. years, with legal interest. CA affirmed and denied the MR.
Article 1256 authorizes consignation alone without need of On “Industrial Clearance” and the Temporary Use Permit
prior tender of payment when the case falls under the Petitioner is now estopped from claiming that the Temporary
exceptions. Use Permit was not the industrial clearance contemplated in the
contract. In the letter, “Industrial Permit” mentioned in the letter
Consignation is Necessarily Judicial; Jurisdiction RTC referred to the Temporary Use Permit issued, and it can be
Article 1258 expressly provides that consignation should be gleaned that indeed it was considered as such, otherwise
made due to a disposal of judicial authority. The provisions petitioner could have simply told private respondents that the
preclude consignation in venues other than the courts. suspensive conditions have not given rise yet to the obligation.
Elsewhere what may be made is the valid tender of payment Instead, it also recognized its obligation to pay the rentals from
but not consignation. The HLURB then has no jurisdiction on the date the permit was issued.
the case anymore.
The issuance of the industrial clearance has already become
HELD: The petition is gnrated the CA deicison is annulled and operative. Otherwise, petitioner did not have to solicit the
set aside and the RTC Puerto Princesa decision is reinstated, the conformity of the private respondents to the termination of the
case is remanded to the said court for continuation of the contract for there was no obligation to start with.
proceedings.
1266-1267. Doctrine of Unforeseen Events in Invoking Article 1266 and Rebus Sic Stantibus
Obligations to Do CONTENTION: Petitioner asserts that is should be released from
the obligatory force of the contract of lease because the
PHILIPPINE NAT’L CONSTRUCTION v. CA (1997) purpose of the contract did not materialize and causes beyond
272 SCRA 183 the control (due to the abrupt change in political climate after
EDSA revolution and financial difficulties).
Facts: This petition was sparked by petitioner’s refusal to pay
the rentals as stipulated in the contract of lease on an
It is a fundamental rule that contracts, once perfected are law
undivided portion of 30,000 sq.m. of a parcel of land owned by
between the parties. But the law recognizes exceptions to the
the Raymundos. The lease contract execution in November 18,
obligatory force of contracts, one of them is Article 1266.
1995, reads in part as follows:
1. Period of five years commencing on the date of
IN THIS CASE: Petitioner cannot, however, successfully take refuge
issuance of the industrial clearance.
in the said article, since it is applicable only to obligations to
2. Monthly rate of P20,000 pesos and increased yearly by
do and not to obligations “to give”. An obligation to do
5% based on the agreed monthly rate.
includes all work or service while an obligation to give is a
3. Paid yearly.
prestation which consists in the delivery of a movable or an
4. Right to erect on the leased property (rock crushing
immovable thing to create a real right.
plant)
5. Termination by mutual agreement, upon termination
The obligation to pay rentals or deliver the thing in a contact
or expiration they shall vacate the premises.
of lease is an obligation to give, and does not fall within the
scope of Article 1266. At any rate, the unforeseen event and
On January 7, 1986, PNCC obtained a temporary use permit for
causes mentioned by the petitioner are not legal or physical
the proposed rock crushing project. The permit was to be
impossibilities contemplated in the said articles.
valid for two years unless sooner revoked by the Ministry.
Services won a bid for the operation of a fleet of taxicabs within

Besides, petitioner failed to state, specifically the circumstance the Subic Naval Base in Olongapo. As highest bidder, Guerrero
brought about by the abrupt change in the political climate in was to provide radio-controlled taxi service within the US Naval
the country. Base, Subic Bay as demand requires 160 operational taxis
consisting of four-wheel, four doors, four passengers, radio
Principle of Rebus Sic Stantibus, Not Applicable controlled, meter-controlled sedans.
Under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist, On September 22, 1972 with the advent of martial law,
the contracts also cease to exist. This theory is said to be the President Marcos issued Letter of Instruction No. 1, which was
basis of Article 1267 which enunciates doctrine of unforeseen the seizure and control of all privately-owned newspapers,
events is not an absolute application of rebus sic stantibus. Only magazines, radio and television facilities and all other media of
in absolutely exceptional changes of circumstances that communication.
equity demands assistance for the debtor.
On September 25, 1972, the Radio Control Office issued
CONTENTION: Petitioner wants this court to believe that the Memorandum Circular No. 4 suspending the acceptance and
abrupt change in the political climate of the country after the processing of applications for radio station construction
EDSA revolution and its poor financial condition rendered the permits and for permits to own or possess radio transmitters or
performance of the contract impractical and inimical. receivers.
RULE:The court cannot subscribe to this argument. Mere On the same day, Guerrero and Victorino D. Magat, as General
pecuniary inability to fulfill an engagement does not Manager of Spectrum Electronic Laboratories, executed a
discharge a contractual obligation, nor does it constitute a Letter-Contract for the purpose of transceivers valued at
defense to an action of specific performance. $77,620.59. Victorino was to deliver the transceivers within 60
to 90 days after receiving notice from Guerrero of the assigned
“It must be of judicial that after the assassination of Sen. Aquino radio frequency, taking note of Government Regulations.
(1983), the country has experienced political upheavals, turmoil,
Victorino then placed an order for the transceivers.
daily mass demonstrations, inflation, hatred of the people and
snap election. It entered into the contract with open eyes of the
deterioration conditions of the country.” [NOTE: The contract On September 29, 1972, Navy Exchange Officer, confirmed
was stipulated in 1985]. that Guerrero won the bid for the commercial transportation
contract. On October 4, 1972, middle man Aligada informed
Award is Not Excessive
Victorino Magat that the radio frequency has not yet been
CONTENTION: The award of P492,000 representing two years of
assigned by Guerrero however, Victorino advised to advise his
rentals is considered to be excessive considering that it did not
supplier to proceed with production pending information.
benefit from the property. And that the permit was revoked
already for failure to use within one year from the issuance
On March 27, 1973, Victorino, informed Guerrero that the
thereof. Hence, the payable rent should only be for one year.
order with the Japanese supplier has not been cancelled. If
such, the Japanese firm would forfeit deposit as fee.
RULE: He cannot complain that the award is excessive, the
Guerrero cannot get letter of credit from the Central Bank due
temporary permit was valid for two years but was revoked after
to the refusal of the government to issue a permit to import
one year of non-use. However, the non-use of the permit and
the transceivers. Guerrero commenced operation using
the non-entry to the into the property was imputable to
radio units borrowed from US government. Victorino thus
Philippine National Corporation and cannot be taken
canceled his order with Japanese Supplier.
advantage of in order to evade or lessen the petitioner. They
unquestionably suffered pecuniary losses because of their
CHARGE: On 1973, Victorino filed RTC a complaint for damages
inability to use the leased premises.
arising from breach of contract against Guerrero. Trial court
dismissed the complaint. And was archived for failure to
Petitioner was Given Right to be Heard
prosecute on 1984.
The trial court was in fact liberal in granting several
postponements. It is imputable to the petitioner for the failure
On March 11, 1985, the Heirs of Victorino Magat moved to
to comply with the submission of memoranda.
reinstate the case and to substitute Victorino who died in
February 1985.
HELD: The instant petition is denied and the decision of the CA
is affirmed.
RTC decided in favor of the Heirs of Victorino Magat and
ordered Guerrero Santiago to pay temperate, moral and
MAGAT, JR. v. COURT OF APPEALS (2000)
exemplary damages.
337 SCRA 298
Facts: Private respondent Santiago A. Guerrero (Guerrero) was CA dismissed the complaint and found the contract void ab
President and Chairman of “Guerrero Transport Services” a initio for not be able to be imported through Philippine ports.
single proprietorship. Sometime in 1972 Guerrero Transport MR by the heirs was denied.
HELD: There was no breach of contract, however, Guerrero is

Issue released from the obligation and the complaint is dismissed
Whether the contract between Victorino and Guerrero for the due to the application of Article 1267 on the denial of his permit
purchase of radio transceivers was void. Whether the to import and refusal of issuance of letter of credit.
transceivers subject of the contract were banned/contraband
items prohibited by the LOI and the Admin Circular to import. TAGAYTAY REALTY v. GACUTAN (2015)
761 SCRA 87
Discussion: The contract was valid, and the radio transceivers
Facts: On September 6, 1976, Arturo Gacutan entered into
were not contraband (unlawful goods exported or imported).
contract to sell with Tagaytay Realty for the purchase on
installment of a residential lot with an area of 308 sq.m. in
The Goods were Not Contraband; Contract Not Void
Foggy Heights Subdivision being developed by Tagaytay
The LOI and Admin Circular did not render “radios and
Realty. Gacutan executed an Express Undertaking in favor of
transceivers” illegal per se. The circular ordered by the Radio
Tagaytay Realty which reads as follows:
Control Office was to suspend acceptance and processing of
application for permits to possess, own, transfer, purchase and We [Tagaytay] undertake to complete the development of roads, curbs, gutters,
sell radio transmitter and receivers. Therefore, possession and drainage system, water and electrical systems, as well as all the amenities to be
importation of the transceivers were legal as long as one has introduced in FOGGY HEIGHTS SUBDIVISION, such as, swimming pool, pelota
court, tennis and/or basketball court, bath house, children’s playground and a
necessary license over it. Transceivers are not prohibited but clubhouse within two years from 15 July 1976, on the understanding that failure
merely regulated goods. The LOI and Admin Circular did not on the part to complete such development within the stipulated period shall
render the transceivers outside the commerce of man. They give the VENDEE the option to suspend payment of the monthly
amortization on the lot/s he/she purchased until completion of such
were valid objects of the contract, contract is valid.
development without incurring penalty or interest.
Determining Breach of Contract; Applying Article 1267 It is clearly understood, however, that the periods during which we cannot pursue
GUERRERO’S TESTIMONY: He testified that a permit to import the said development by reason of any act of God, any act or even constituting force
majeure or fortuitous event, or any restriction, regulation, or prohibition by the
receivers from Japan was denied by the Radio Control Board. government or any of its branches or instrumentalities, shall suspend the
He stated that he personally went to the Office and were denied running of said 2-year period and the running thereof shall resume upon
to a permit to import. cessation of the cause of the stoppage or suspension of said development.
They also went to the office of the President, wehere Secretary In a letter dated November 12, 1979, Gacutan informed
Ronaldo B. Zamora explained that radios were banned like Tagaytay Realty that he was suspending his amortizations
guns because of martial law. He also testified that this because the amenities had not been constructed in
prevented him from securing a letter of credit from central accordance with the undertaking. Despite receipt of the
bank. [NOTE: Testimony not rebutted]. communication asking for the progress so that he could resume
the payment of his amortizations, Tagaytay Realty did not reply.
ARTICLE 1267. When the service has become so manifestly beyond the Instead on June 10, 1985, Tagaytay Realty sent a letter to
contemplation of the parties, the obligor may also be released therefrom, in whole Licutan a statement of account demanding for the balance of
or in part.
the price, plus interest and penalty.
IN THE CASE:Here, Guerrero’s inability to secure a letter of
credit and to comply with his obligation was a direct On October 4, 1990, Licutan sued Tagaytay Realty for specific
consequence of is denial of permit to import. For this, he performance in the HLURB, praying that the petitioner be
cannot be faulted. ordered to accept his payment of the balance of the contract
without interest and penalty, and delivery of property.
DAMAGES CANNOT BE AWARDED, NO BAD FAITH: Bad faith does not
simply connote bad judgment or negligence, it presupposes a TAGAYTAY REALTY’S ANSWER AND CONTENTION: Tagaytay Realty
conscious doing of a wrong. Guerrero, honestly relied on the answered sought to be excused in performing its
presentation of the Radio Control Office and the Office of the obligations under the contract invoking Article 1267 of the
President. Civil Code as its basis. It contended that the depreciation of
the Philippine Peso, since the time of the execution of the
His borrowing of the transceivers is not bad faith. Guerrero contract, the increase in the cost of labor and construction
was faced with the danger of cancellation of his contract with materials, and the increase in the value of the lot in question
Subic Naval Base. It was a prudent and swift alternative. There were valid justifications for its release form the obligation to
was no proof of deliberate and malicious intent to dishonor construct and develop the amenities.
contract with Victorino Magat. • In addition, it purposely suspended its development
because its lot buyers had not constructed their house
ACTUAL DAMAGES CANNOT BE AWARDED: The testimony given by in the subdivision (which would lead to deterioration).
middleman Aligada were self-serving and that there was no
reasonable degree of certainty and was hearsay. HLURB Arbiter Decision in favor of Licutan which ordered
Tagaytay to accept the payment of the balance of the contract
price and to executed and deliver the absolute deed of sale
covering the property and title. HLURB Board affirmed. OP It so opting, it was not driven by extremely difficult
(Office of the President) upheld the decision of the Board. CA situation that would place it at any disadvantage, but its
affirmed the OP and denied the MR. desire to benefit from cost saving. Such cost saving
strategy dissuaded the lot buyers from constructing the
Contentions of Tagaytay Realty house in the subdivision, and from residing therein. In short,
• Licutan is guilty of laches. the unilateral suspension of the construction of the amenities
• Must be discharged because extraordinary and was intended to save themselves from costs, and its plea for
unforeseeable circumstances had rendered its duty to relief from its contractual obligation was properly rejected
perform its obligation so onerous, that its performance because it would thereby gain a position of advantage at the
would lead to an economic ruin. expense of owners like Licutan.
• No one could have benefited from the amenities and that
it was of wastage and loss of resources for none of the Article 1267; Requisites
buyers had constructed their house in subdivision. The invocation of this article by the petitioner Tagaytay Realty
• Suffered extreme economic hardships in the political and is factually unfounded. For Article 1267 to apply, the following
economic turmoil of the 1980s which was unforeseeable. conditions should concur:
• Article 1267 if equity demanded as an exception for the (a) The event or change in circumstances could not have
excessive rigidity of obligatory force. been foreseen at the time of the execution of the
• Should be partially or wholly excused from its duties. contract;
• It sent letters of demand negates the idea of delay. (b) It makes the performance of the contract extremely
difficult but not impossible;
Assertions of Licutan (c) It must not be due to the act of any of the parties; and
• Article 1159 provides contracts have force of law and (d) The contract is for future prestation.
should be complied with and the non-compliance cannot
be held easily at will of one party. IN THE CASE: The requisites did not concur herein because the
• The reason of Tagaytay Realty did not justify or excuse the difficulty of the perofrmance should be such that one party
non-construction of the amenities. would be placed at a disadvantage. Mere inconvenience or
• Tagaytay Realty cannot seek refuge in Article 1267 by unexpected impediments or increased expenses did not suffice
merely alleging inflation without laying down the legal and to reliver the debtor from a bad bargain.
factual basis to justify release from its obligation
• Written extrajudicial demands wiped out periods that have In addition, its argument of the worsening economic conditions
lapsed and started the prescriptive period anew. in the 1980s cannot justify the suspension, the unilateral
suspension of the construction had preceded the worsening
Issues of the economic conditions in 1983.
Was the petitioner Tagaytay Realty released from its obligations
to construct the amenities of Foggy Heights Subdivision? The latter cannot use such because the legal obligation to
complete the amenities was within one year or two years
RULE: The appeal is partly meritorious. from 1976 thus, it could have been done within 1978 which
is long before the worsening of the economy in 1983.
I. Petitioner was not relieved from its statutory and
contractual obligations to complete the amenities II. Respondent as Installment Buyer Should Pay
The Annual Interest but Not Penalty
The law is not on the side of Tagaytay Realty.
Under PD 957, Section 20, all developers, are mandated to CONTENTION: The respondent insists that his unpaid obligation
complete their subdivision projects, including amenities, within was only the balance of the contract price amount to P8,587.50.
one year from the issuance of their licenses. He declines to pay interest and penalty on the ground that the
petitioner had not constructed the amenities as promised
Pursuant to Section 30 of Presidential Decree No. 957, the under the undertaking.
amenities, once constructed, are to be maintained by the
developer like the petitioner until a homeowners’ association RULE:Licutan was liable for the stipulated 12% interest but not
has been organized to manage the amenities. the penalty. Accordingly, the parties agreed to an 84-month or
seven-year term of installment on the net contract price of
IN THE CASE: The petitioner did not comply with its legal P23,562.00 at the monthly rate of P415.95, the monthly rate
obligation to complete the construction of the subdivision being inclusive of the 12% interest per annum.
project, including the amenities within one year from the
issuance of license. Instead, its unilaterally opted to suspend the This is the amortization interest, which is designed to
construction of the amenities to avoid incurring maintenance compensate Tagaytay realty for waiting seven years before
expenses. receiving the total principal amount.
III. Claim of Respondent Not Barred by Laches

The CA correctly declared that laches did not set in to bar the CONTENTIONS: They averred that private respondent gave them
claim of the respondent because he had made periodic his express verbal authorization to debit the questioned
written demands upon the petitioner that indicated that he amount. They claimed that private respondent later refused to
had not abandoned or declined to assert the claim. execute a written authority.
In 1979, he manifested the intention to avail himself of his right RTC dismissed complaint for lack of cause of action. CA
to suspend the payment of his amortizations pursuant to the reversed the decision ordering BPI to credit Edvin Reyes’s
undertaking. Since then until 1984, he had continuously account with the P10,556 plus interest.
requested the petitioner for updates on the progress of the
construction of the amenities so that he could resume his Issue
amortizations.
Verbal Authorization was Proven by Evidence
The petitioner did not respond to his requests. His efforts to We find that petitioners were able to prove this verbal authority
have the petitioner construct the amenities so that he would by preponderance of evidence. The testimonies of Bernardo
already pay for the lot demonstrated his prudence and alacrity and Romero deserve credence. In the testimony it read,
in insisting on his rights, negating any hint of bad faith or of “Mr. Reyes instructed Mrs. Bernardo to debit his account with the bank.
lack of diligence on his part. His account was maintained jointly with his wife then he promised to
drop by to give us a written confirmation, sir.”
HELD: The Court affirms the judgment with modification by
increasing the amount payable and the petitioner shall have Meanwhile, Edvin’s allegation that he did not give any verbal
executed the deed of absolute sale covering the property. authorization was uncorroborated. Nor does he inspire
credence. His past and fraudulent conduct is an evidence
1279-1290. Compensation against him. He concealed from petitioner bank the death of
Fernandez on December 28, 1989. He even declared under the
penalties of perjury in withdrawal slip stating that his co-
BPI v. COURT OF APPEALS (1996)
255 SCRA 571
depositor is still living.
Facts: On September 25, 1985, private respondent Edvin F. Legal Compensation

Reyes opened Savings Account at petitioner BPI Cubao. It is a The elements of legal compensation are all present in the case
joint account with his Sonia F. Reyes. Another joint account with at bar. The obligors bound principally are at the same time
his grandmother in 1986 with same branch. He regularly creditors of each other. BPI bank stands as a debtor of the
deposited in this account the US Treasury Warrants payable to Edvin Reyes, a depositor. At the same time, said bank is the
the order of Emeteria M. Fernandez as her monthly pension. creditor of the private respondent with respect to the
dishonored U.S. Treasury Warrant which the latter illegally
Emeteria died on December 28, 1989 without the knowledge transferred to his joint account. The debts involved consist of a
of the US Treasury Department. She was still sent US Treasury sum of money. They are due, liquidated, and demandable. They
Warrant dated 1990 in the amount of $377 or P10,556. On are not claimed by a third person.
January 4, 1990, Edvin, deposited check of Fernandez in the
joint savings account with his late grandmother. WIFE NOT A PARTY: We hold that the presence of private
Two months after on March 8, 1990, private respondent close respondent’s wife does not negate the element of mutuality of
savings account joint with his late grandmother and transferred parties, i.e., that they must be creditors and debtors of each
its funds amounting to P13,112.91 to his joint account with his other in their own right. The wife of private respondent is not a
wife. Later, on January 26, 1991, the US Treasury Warrant (last party in the case at bar.
one) was dishonored as it was discovered that Fernandez died
three (3) days prior to its issuance. Indeed, the right of the petitioner bank to make the debit is
clear and cannot be doubted. To frustrate the application of
On February 19, 1991, Edvin received an urgent telegram from legal compensation because the parties are not all mutually
BPI requesting him to contact Assistant Manager and he was obligated would result in unjust enrichment on the part of the
informed that the treasury check was subject of a claim by private respondent and his wife who herself out of honesty has
Citibank NA. He assured BPI that he would drop by the bank to not objected to the debit.
look into the matter. He also verbally authorized them to
debit from his other joint account the amount stated in the The rule as to mutuality is strictly applied at law. But not in
dishonored Warrant. On the same day, petitioner debited the equity, where to allow the same would defeat a clear right or
amount of P10,556 from his saving account with wife. permit irremediable injustice.
Surprisingly, private respondent demanded from petitioner HELD: The CA decision is annulled and set aside and the
bank restitution of the debited amount. He claimed that decision in the trial court is reinstated.
because of the debit, he failed to withdraw his money when he
needed them. He then filed a suit for Damages against BPI.
PNB v. COURT OF APPEALS (1996) RTC stated the parties are not principally bound to each other
259 SCRA 174 with respect with the $2,627.11 coming from a bank in Jeddah
as remittances; neither they are at the same time creditor of
Facts: The defendant applied/appropriated the amounts of
each other. Therefore, the obligations are not subject to
$2,627.11 and P34,340.38 from the two remittances of the
compensation or set off. They are only debtor and creditor only
plaintiff principals abroad. The two remittances are:
with respect to the double payments; but are trustee-
(1) $2,627 from NCB Jeddah which for the benefit of the
beneficiary as to the foreign fund transfer of $2,627.11.
plaintiff to be credit to his account at Citibank (this
amount was intercepted by BPI for compensation).
Deduction of P34K from $28,392 Libya Remittance:
(2) $28,392.38 from Libya and was intended to be
However, concerning the delivery of the amount of P34,340,
deposited in plaintiff account in the BPI (where the
the receipt issued seems to uphold the idea that said amount
P34,340 was deducted from).
was voluntarily delivered by the plaintiff to the defendant. This
is because the receipt is now in the hands of the plaintiff,
Ramon Lapez made a demand upon the defendant for
indicating that such receipt was handed over when he paid or
remittance of the equivalent of $2,627.11 by means of a letter
allowed the deduction from the $28,392 (Libya fund transfer)
this was answered by PNB.
ad it was shown that the subsequent fund transfer was
intended for credit and deposit. RTC ordered PNB to pay
There was instance that the Lapez account was doubly
Lapez of the $2,627.11. There was written authorization and
credited which amounted:
evidence of receipt of payment.
1. $5,679 (November 1980)
2. $5,885 (January 1981)
CA PNB continued to insist that it validly set-off the $2,627.11.
The appellate court rejected and affirmed RTC decision.
With an aggregate amount of P87,380.44. PNB made a
demand upon the plaintiff for the refund of the double or
Issue:
duplicated credits erroneously made by means of a letter. A
Whether or not CA erred in not ruling that
deduction of P34,480.58 was made by the defendant and was
legal compensation has taken place.
issued a receipt.
Discussion: In framing the issue; PNB implicitly admits the

ANALYSIS OF THE RTC
correctness of finding that it is liable for the amount. After a
The issue raised in the trial court was that
careful scrutiny there is indeed no existence of legal
1. Whether PNB was justified in making the
compensation as discussed by the lower courts.
compensation or set-off against the two remittances
course through it in favor of respondent to recover on
PNB’S CONTENTION: Since CA ruled PNB could not do a shortcut
the double credits it previously made in 1980 and
and intercept funds coursed through it, for transmittal to
1981 based on the principle of solutio indebiti.
another bank, and deposited to an account who happens to
2. Whether or not the claim is barred by statute of
own some money to PNB, and because CA order PNB to return
limitations.
the intercepted amount to Lapez, therefore, there must be
now legal compensation of the amount, they are now official
The trial court went on the analyze using the elements of legal
creditor and debtors to each other.
compensation under Article 1279 (PSDLR). Both debts consist
RULE: This argument is making a mockery of the entire judicial
in a sum of money, are both due, liquidated and demandable,
process of this country. We see in this clever ploy to use the
and over neither of them has a retention or controversy. The
Court to validate or legalize an improper act of the petitioner
main question that was left was that were both obligors bound
bank, with the not impossible intention of using this case as a
principally as debtors and creditors the same time?
precedent for similar acts of interception in the future. This
• They are creditor and debtor to each other with
attitude deserves a warning. Petition is herewith denied for
respect to Ramon Lapez as a depositor to the bank.
being plainly unmeritorious.
Interception of $2,627 NCB Jeddah Remittance:
STIPULATION POUR AUTRUI: However, the relationship created by EGV REALTY v. COURT OF APPEALS (1999)
310 SCRA 657
the telexed fund transfers from abroad was a contract
between a foreign bank and local bank asking PNB to pay an Facts: EGV Realty (EGV) is the owner/developer of a seven-story
amount to Lapez is a stipulation pour autrui. (In favor of third condominium building knowns as Cristina Condominium.
person, in which Lapez is a third person). Cristina Condominium Corporation (CCC) holds title to all
common areas and oversees managing and administering the
SOLUTIO INDEBITI, A QUASI-CONTRACT: By the principle of solutio common areas and for security.
indebiti the plaintiff who unduly received something by mistake
became obligated to return what he unduly received (2154). Respondent Unisphere International (Unisphere) is the
Thus, there was created a relationship between obligor and owner/occupant of Unit 301 of the said condominium. On
obligee, or of debtor and creditor under a quasi-contract. November 28, 1981, Unisphere’s Unit 301 was allegedly robbed
of various items value at P6,165 and was reported to CCC.
in court. Unisphere’s claim for loss was not passed by legal

Unisphere demanded compensation and reimbursement authority as to elevate it to the level of a debt.
from petitioner CCC for the losses incurred as a result. CCC
denied any liability for the losses claimed to have been incurred For compensation to take place, there must be debt. A debt is
by Unisphere for goods belong to Armtrade, a third party. a claim which has been formally passed upon the highest
authority to which it can in law be submitted and has been
As a consequence, Unisphere withheld payment of its monthly declared to be a debt.
dues since November 1982. CCC sent letter demanding
payment for past dues. On 1984, EGV Realty executed a Deed A claim on the other hand, is a debt in embryo. It is a mere
of Absolute Sale over Unit 301 in favor of Unisphere, a title was evidence of a debt and must pass through the process
issued bearing an annotation of the unpaid condominium due in prescribed by law before it develops into a debt.
the amount of P13,142.
IN THE CASE: It has not been sufficiently established that
EGV and CCC jointly filed to SEC for collection of the unpaid compensation or set-off is proper as there is lack of evidence
monthly dues against Unisphere. Unisphere alleged that it to show that EGV Realty and CCC and respondent Unisphere
could not be deemed in default of the payment because its are mutually creditors and debtors to each other (1279, No.1).
tardiness was occasioned by failure to comply to provide
security that could have stopped the robbery. HELD: The Court finds the CA decision to be reversed and set
side and reinstating the SEC decision by Officer Villaflor.
It asserted a counter-claim that the amount of P12,295
representing the total value of its loss due to the two robberies METROBANK v. TONDA (2000)
be awarded to it by way of damages for the latter’s failure to 338 SCRA 254
secure premises.
Facts: Spouses Tonda applied for and were granted by
Metrobank commercial letters of credit for a period of 8
SEC Villaflor. Unisphere was ordered to pay CCC the unpaid
months from June 14, 1990 and February 1, 1991 about the
dues. MR was denied. An appeal was sent to SEC En Banc but
importation of raw textile materials to be used in the
was dismissed for being filed out of time.
manufacturing of garments.
CA reversed the dismissal for that it was filed on time. It allowed

The Spouses Tonda (in their capacity as officer of Honey Tree
the compensation of the losses and after off-set Unisphere was
Apparel Corporation), executed eleven trust receipts to secure
ordered to pay P847.67 representing the balance after the
the release of the raw materials to HTAC. The imported fabrics
compensation. MR was denied.
had principal value of P2.803M withdrawn by HTAC under the
11 trust receipts issued by the Spouses Tonda.
Issue
Whether or not the ruling of CA on the offsetting is unfounded.
Due to their failure to settle obligation under trust receipts
upon maturity, Metrobank sent a letter making its final
Procedural Aspects
demand upon Tonda to settle their past due accounts on or
Unisphere’s non-
SEC EN BANC DECISION FINAL AND UNAPPEALABLE:
before August 15, 1992 and the obligation amount was at that
observance of “no second MR” rule rendered the SEC En Banc
said date to be P4.87M.
ruling final and appealable and the no court can exercise
The Spouses Tonda failed to comply with their obligations
appellate jurisdiction to review the decision. Instead of
stated in the trust receipt agreements and failed to account for
appealing, Unisphere filed for a “second MR” which is
such.
prohibited under the SEC rules.
CRIMINAL CHARGE: Metrobank filed a complaint against Tonda for
Therefore, the appeal before the CA could have been
violation of PD 115 or Trust Receipts Law in relation to Article
dismissed outright for being time-barred. Rules of
315(1) of the RPC. However, it was dismissed by the
procedure are intended to ensure proper administration of
Prosecutor for the failure of establishing the elements of estafa.
justice and the protection of substantive rights in judicial and
DOJ reversed the dismissal by the prosecutor and ordered the
quasi-judicial proceedings. Blatant violation smack a dilatory
filing of the information against the Spouses Tonda.
tactic which the court cannot simply countenance.
CA granted the Spouses’ petition and dismissed the criminal
No Compensation took Place; Just a Claim not a Debt
complaint for Metrobank failed to show a prima facie case of
While respondent Unisphere does not deny its liability for its
violation of the Trust Receipts Law.
unpaid dues to the petitioners, the latter do not admit any
responsibility for the loss suffered by the former occasioned by
CA RATIOCINATION: There was a loan restructuring agreement,
the burglary. At best, what respondent Unisphere has against
and that it was intended to pay the entire principal of outstand
petitioner is just a claim, not a debt. Such being the case, it is
trust receipts account. The checks were received, and they
not enforceable in court. It is only the debts that are enforceable
receive an acknowledge of receipt of the check totaling up to
P2.8M from the Metrobank officer.
restructuring. (In a letter signed by HTAC VP). No restructuring

So that the contention of Metrobank that the money had not happened.
been actually applied was devoid of merit, considering that the
petitioners were still in the process of negotiation for a The payment of the trust receipts accounts never became
reasonable loan structuring agreement. effectual on account of the failure of parties to finalize a
loan restructuring agreement.
It ruled following Tan Tiong Tick case that if the parties fail to
reach an agreement regarding the restructuring of loan, HANDWRITTEN NOTE, NO REFERENCE TO PAYMENT OF TRUST RECEIPTS:
Metrobank can validly apply the amount deposited by the The acknowledgement being questioned made no reference to
petitioners as payment of the principal obligation under the Spouses Tonda trust receipt obligations.
trust receipts account.
Compensation Not Applicable Covering Penal Offenses
CONTENTION: The CA used the ruling in Tan Tiong Tick implying
Stating that Metrobank has a right to use the deposited amount
that in making the deposit, the Spouses Tonda are entitled to
in connection with any of its banking business and that the
set off, by way of compensation their obligations to
deposited was intended for payment of the outstanding
Metrobank.
obligations of HTAC under trust receipts.
RULE: Article 1288 points out that if one of the debts consists in
Issue civil liability arising from a penal offense, compensation would
Whether or not inspite failure of the parties to agree upon a be improper and inadvisable because the satisfaction of such
restructuring agreement, Metrobank can still apply the P2.8M obligation is imperative. (The amount to be returned from the
deposit as payment to the principal amount covered by the trust trust receipts is subject to a civil liability in a criminal
receipts. proceeding, which is this estafa case.)
There Was Violation of PD 115, There is then Estafa Estafa, Committed

The Trust Receipts Law declares that the failure to turn over the The crime under PD 115 is an offense malum prohibita
goods or the proceeds realized from the sale thereof is a regardless of the regardless of the existence of malice. A mere
criminal offense punishable under Article 315(1) of the RPC. The failure to deliver the goods if not sold constitutes a criminal
law is violated whenever the entrustee or to whom the receipts offense under the said law.
were issued fails to:
1. Return the goods covered by the trust receipts. TRINIDAD v. ACAPULCO (2006)
2. Return the proceeds of the sale of the said goods. 493 SCRA 179
The foregoing acts constitute estafa punishable by the RPC law.
Facts: On May 6, 1991, Estrella Acapulco filed a Complaint
before the RTC seeking the nullification of a sale she made favor
IN THE CASE:
Given that various trust receipts were executed by
of Trinidad. Alleging that sometime in February 1991, a certain
Spouses Tonda and that as entrustees, they did not return the
Primitivo Canete requested her to sell a Mercedes Benz for
proceeds from the goods sold nor goods themselves to
P580,000 and that if Acapulco herself will buy the car then the
Metrobank, there is no dispute that the Spouses Tonda failed
price would only be P500K.
to comply with the obligations under the trust receipts.
Trinidad borrowed from Acapulco for two days but instead of

Rectification of the Facts from the CA
returning the car as promised, Trinidad told Acapulco to buy
The foregoing findings and conclusion of the CA are rectified:
the car from Canete for P500K and that Trinidad would pay
• First, the amount of P2.8M was not directly paid to
Acapulco when he return from Davao. Following such, they
Metrobank to settle the trust receipt accounts, but deposited
executed a deed of sale in favor of Acapulco with Canete.
in a joint account of Joaquin G. Tonda and a certain Wa Tieng
Subsequently, there was a deed of sale between Trinidad and
En.
Acapulco, even though Trinidad did not pay her any
• In a letter signed by HTAC’s VP for Finance, Metrobank was
consideration for the sale.
informed that the amount “may be applied anytime to the
payment of the trust receipts account upon implementation
When Trinidad returned from Davao he refused to pay the
of the parties of the terms of the restructuring.
amount of P500K saying that said amount would just be
• The parties failed to agree on the terms of the loan
deducted from whatever outstanding obligation respondent
restructuring agreement.
had with petitioner. Due to the failure to pay respondent,
• Acceptance of offer must be unqualified and absolute in
Acapulco checks in favor with Canete (the first sale) bounced,
order for it to perfect the contract.
thus criminal charges were filed against Acapulco.
AMOUNT OF P2.8M NOT DIRECTLY PAID TO METROBANK: It was not to
settle the trust receipt account, but it was deposited in a joint PRAYER:Respondent then prayed that the deed of sale between
account of Joaquin G. Tonda and a certain Wang Tien En. It was her and Trinidad be declared null and void, and the car be
conditioned that the amount may applied upon payment for trust returned, and petitioner be ordered to pay damages.
receipts upon implementation of the parties of the terms of the
ANSWER: Trinidad contended that it is not true that he borrowed

the car and that any demand was made to return it; he also did COURT’S ANSWER: This claim must fail. Respondent sold the car
not give any instruction to Acapulco to buy the car from Canete to petitioner on March 4, 1991 for P500K, while she filed here
because as early as September 1990, Canete as already sold the nullification of the sale on May 6, 1991.
car at time respondent executed the deed of sale in his favor in
March 1991, respondent was already in possession of the deed As legal compensation takes place ipso jure, and retroacts to the
of sale from Canete. date when its requisites are fulfilled, legal compensation has
already taken place at the time of the sale. At such time,
RTC ruled on the issue of the existence of dacion en pago. It petitioner owed respondent the sum of P500K which is the price
held that there was no such dation present in this case as of the vehicle. Like wise Acapulco also owed Trinidad P566K.
common consent was not proven. Thus, deed of sale was void
and ordered to return the car to Acapulco with damages. APPLICATION OF COMPENSATION: By operation of law, the P500K
which Trinidad owed to Acapulco is off-set against P566K owed
SUPPLEMENTAL MOTION OF TRINIDAD ON COMPENSATION: For the first by Acapulco to Trinidad, leaving a balance of P66K which
time, Trinidad averred that assuming that respondent did not respondent should pay with 12%pa from the date of deed. It is
agree to having the purchase price charged against the P566K reckoned from the Supplemental Motion date.
Acapulco owed to him, legal compensation would have
extinguished such for it is under the operation of law. Moral Damages Not Awarded
She was worried. This testimony is insufficient to award moral
RTC denied the MR and ruled that the defense of legal damages. And there are no moral damages, exemplary
compensation was not alleged or pleaded. CA affirmed finding damages cannot also be awarded.
that the issue of legal compensation was filed too late as it was
brought up only in the supplemental motion. HELD: The petition by Trinidad is granted, there exists legal
compensation between the two and thus the CA decision is
Trinidad’s Arguments reversed and set aside.
The purchase price of the car had been automatically offset by
Acapulco’s own monetary obligation of P566K even if he and PHILIPPINE TRUST COMPANY v. ROXAS (2015)
respondent had not agreed to offsetting by Article 1290. 772 SCRA 323
Facts: Spouses Roxas procured loans from PTC in the amount

Acapulco’s Comments of P2.523M to finance their real estate business. Secured by
It was only in the Supplemental Motion for Reconsideration REM on their real properties. On April 10, 1979, Spouses Roxas
that petitioner changed his theory and started claiming legal and Roben Group entered in to a contract of building
compensation as a defense. Article 1279 also requires the both construction under which PTC granted an additional loan of
debts should consist of sum of money; where in this case, one P900K.
of the obligations does not entail payment of money but
delivery of a car. This was superseded with another contract with PTC, Roxas and
Dominguez (substituting Roben) under the same terms and
Issue: conditions.
Should legal compensation be appreciated?
The new contract stipulated that the money loaned from PTC
Discussion: The court resolves to grant the petition. While it is shall be devoted to the funding of the housing projects, the
true that petitioner failed to raise the issue of legal rentals of which when finished, would be used to liquidate the
compensation at the earliest opportunity, this should not loan. PTC may only release the proceeds of the loan for the
preclude the courts from appreciating the same. purchase of materials and supplies when requested. However,
PTC released P870K out of the P900K to Dominguez even
Compensation, Present and Applicable though the Spouses Roxas agreed only to release not more
Compensation takes effect by operation of law even without than P450K as evidence in a PN in December 1979.
the consent or knowledge of the parties concerned when all the
requisites mentioned in Article 1279 are present. Since it takes Due to financial difficulties, however, the Spouses Roxas did not
place ipso jure, when used as a defense it retroacts to the finish the housing project. As a result, they did not receive
date when all of its requisites are fulfilled. monthly rentals from prospective lessees of the house which
led to missed amortization payments in their loan from PTC.
IN THE CASE:It was proven that Trinidad owed Acapulco P500K
while Acapulco owed Trinidad P566K; that both debts are due, Spouses Roxas included a cross-claim against PTC. In response,
liquidated and demandable and neither of the debts are subject PTC filed a counterclaim against the Spouses of their unpaid
of a controversy commenced by third person. obligation amounting to P3.053M plus interest and AFees.
CONTENTION: The obligation is not a sum of money, but a There was an extrajudicial foreclosure on the same real estate
delivery of car as argued by Acapulco. mortgages. The Spouses Roxas opposed the petition and filed
a complaint against PTC. RTC favored the Spouses and ordered

PTC to pay P100,000; moral damages; exemplary and AFees. Doctrine of Election of Remedies
When a party having knowledge of the facts makes an election
CA affirmed the decision of RTC and became final and between inconsistent remedies, the election is final and bars
executory, prompting the Spouses Roxas to file a MOEx. PTC any action inconsistent with the elected remedy.
responded filing an opposition to the MOEx where it raised for
the first-time legal compensation to offset the judgment IN THIS CASE:PTC’s choice of setting up the Spouses Roxas
debt due to the Spouses Roxas. unpaid obligation as a counterclaim precludes it from raising
compensation of the same loan obligation.
RTC denied the Opposition to the MOEx holding that PTC has
deemed to have waived the legal compensation as a defense Equitable in nature this doctrine is designed to mitigate
because it failed to invoke such in its answer. possible unfairness to both parties. It rests on the moral
premise that it is fair to hold people responsible for choices.
CA dismissed petition for lack of merit and found that not all
requisites of legal compensation was present and that such Requisites of Legal Compensation, Not Present
defense of compensation was belatedly raised. The fourth requisite is absent. It is not yet liquidated and
demandable. A debt is liquidated when its existence and
PTC’S CONTENTION: It argued that it belatedly raised the issue of amount are determined. Compensation can only take place
legal compensation as a defense because it cannot raise such between certain and liquidated debts it cannot extend to
because the RTC judgment debt was not yet due at the time it unliquidated, disputed claims.
filed the answer.
Since the loan obligation, including its amount and
IN THE CASE:
Issue demandability is still being disputed in another civil case, the
Whether or not the principle of legal compensation may be credit cannot be considered yet as liquidated.
applied to offset the judgment debt of Philippine Trust
Company and the loan obligation of Spouses Roxas. [NOTE: PTC was also considered to be guilty of forum shopping.]
Doctrine of Immutability of Final Judgments HELD: The petition for review is denied and lack of merit and
A judgment has become final and executory is immutable and the resolution of the Court of Appeals is hereby affirmed.
unalterable and may no longer be modified, even if the
modification is meant to correct what is meant to be erroneous MARPHIL EXPORT v. ALLIED BANKING (2016)
conclusion of fact or law. This case does not fall to any of the 803 SCRA 627
exceptions. It was filed too late. Facts: Marphil is engaged in exportation of cuttlefish, cashew
and similar agricultural products. To finance its purchase and
IN THE CASE: There is nothing unjust or inequitable in the
export, Allied bank granted Marphil a credit line from which it
issuance of the WOEx in this case because execution will have
availed several loans evidenced by PN. These loans were in the
no effect on the unpaid loan obligation to PTC. And such action
nature of advances to finance the exporter’s working capital
exists in another civil case in the Court of Appeals.
requirements and export bills.
What is inequitable is to allowed PTC to recover its credit in full

The loan was secured by Three Continuing Guaranty or
(in a separate civil case) while concurrently being allowed to
Continuing Surety Agreements executed by Lim, Lim Shiao
offset its judgment in this case, there would be double
Tong and Enrique Ching. In addition, irrevocable letters of
recovery. In addition, the execution cannot be delayed when
credits also served as collaterals for loans. Allied Banking
the decision already became final 23 years ago.
required them to execute a Letter of Agreement where they
undertake to reimburse Allied bank in the event the export
Legal Compensation
bill/drafts covering the letters of credit are refused by the
Although legal compensation takes effect by operation of law,
drawee.
it must be alleged and proved as a defense by the debtor who
claims its benefits. Only after such is proved will its effects
TRANSACTION INVOLVED: It involved the export of cashew nuts to
retroact from the moment when requisites occurred.
Intan Trading (Intan) in Hongkong. Upon application of Intan,
PTC ARGUMENT:It could not have raised legal compensation as a Nanyang Bank, a bank based in China, issued irrevocable
defense during trial because it was not yet a debtor of the letters of credit with Marphil as beneficiary and Allied Bank as
Spouses Roxas when it filed its answer. correspondent bank covering two purchases of cashew nuts.
COURT’S REPLY: This argument is unconvincing. Citing the Rules First Order. LC 22518, after the first shipment was made Marphil
of Court, a party may set forth statements of claim alternatively presented export documents including drafts to Allied Bank.
or hypothetically. Thus, the defense of compensation would The latter credited Marphil’s credit line the peso equivalent of
have been properly allowed under the Rules event if PTC face value in the amount of P1.98M and this amount was
disclaimed any liability. deducted from the loan obligation.
Second Order (problematic). Marphil availed additional loans in RULE: Theletter agreement simply creates a separate obligation
their credit line. Similar to the first order, Intan applied for and under on Marphil’s part to refund the amount of the proceeds,
opened LC 21970 with Nanyang Bank in the amount of in case of dishonor. As an independent obligation, Marphil is
$185,000 with Marphil as the beneficiary and Allied as bound to fulfill this obligation to reimburse.
correspondent bank. After receiving the export documents,
Allied Bank credited P1.913M the peso amount in the LC. Allied Bank’s Right to Debit Marphil’s Account
The court upheld the right of a collecting bank to debit a client’s
However, on July 2, 1988, Allied Bank informed Marphil that it account for the value of a dishonored check it previously credited
received a cable from Nanyang Bank noting some by virtue of the principle of legal compensation.
discrepancies in its shipping documents. And it still received
another cable from such noting the discrepancies and that Since the relationship between the banks and depositors has
Intan refused to accept the discrepancies. Thus, Nanyang been held to be that of creditor and debtor in a simple loan,
refused to reimburse Allied in the amount. legal compensation may take place when the requisites under
Allied informed Marphil that it has dishonored LC 21970 and Article 1279 are present.
that it was reversing the earlier credit of P1.913M. Lim was
made to sign a blank PN supposed to cover for the amount and IN THIS CASE: WhenAllied Bank credited the amount of P1.913M
filed up by Allied only up to P1.505M. to Marphil’s account, it became the debtor of Marphil. However,
once Nanyang Bank dishonored the export document and draft
On March 6, 1990, Marphil filed a Complaint for Declaratory for LC 21970,
Relief against Allied.
Marphil became the debtor of Allied Bank for the amount
MARPHIL’S CONTENTION: Marphil asked the court to declare PN by virtue of its obligation to reimburse the bank under the
4202 void, and to declare as fully paid its other obligations to Letter Agreement. This obligation is a sum of money which
Allied Bank. Marphil maintained that it had fully paid its became demandable upon notice. Thus, legal compensation
account with Allied Bank and that PN 4202 was void for lack may take place between the two debts.
of consideration.
Allied Bank properly exercised its right to set off:
ALLIED BANK’S REPLY: It filed its Answer with Counterclaim and 1. Having signed the Letter Agreement, Marphil
Petition for writ of Preliminary Attachment. It maintained that expressly undertook that in case of dishonor of the
PN 4202 was supported by consideration and denied full draft for the letter of the credit, it will refund to Allied
payment. As counterclaim, it claimed to collect the three PNs. Bank whatever the latter has credited in its favor.
CA rendered decision that PN 2463, PN 2730 are fully paid but 2. Prior to debiting the amount, Allied Bank informed
held petitioners liable for the face value of LC 21970. It found Marphil twice of Nanyang Bank’s refusal to honor the
Allied Bank not directly liable for the P1.913M because it was tender of documents on LC 21970.
not a confirming bank. It could only be a discounting bank
which bought drafts under the letter of credit. 3. It immediately informed Marphil that it was debiting
the amount of the dishonored draft.
Issues
1. Whether Allied Bank’s debit memo on Marphil’s credit Allied Bank Marphil
line in the amount of P1.913M was valid. As debtor For the amount it The obligation of
2. Whether RTC and CA created a new obligation when it credited under the reimbursement in the
held Marphil liable for the P1.913M. draft Letter Agreement
I. Validity of the Debit Memo Marphil has existing

loan obligations
Allied Bank as Correspondent Bank in LC 21970 As creditor The obligation of For the amount it
Allied Bank is not a confirming bank which undertakes Nanyang reimbursement in credited under the
Bank’s obligation as issuing bank, but at most, buys the drafts the Letter draft
drawn by Marphil as exporter at a discount. It did not act as a Agreement
confirming bank, it must have assumed a direct obligation to
the seller as if it had issued the letter of credit itself. II. Obligation of P1.913M to Allied Bank
There is no new obligation. This was a prior and existing
Allied Bank’s Right to Reimbursement (Letter Agreement) obligation of Marphil separate from the amount covered by the
The letter of agreement is a contract between Marphil and draft. Allied Bank credited the Marphil’s account the P1.913M
Allied Bank where the latter agreed to purchase the draft and upon purchase of the draft.
credit the former its value on the undertaking that Allied Bank
will be reimbursed in case the draft is dishonored.
However, when LC 21970 was dishonored by Nanyang Bank, it RTC ruled in favor of Licaros and found Gatmaitan liable under
reversed its credit memo thereby leaving the parties in their MOA and PN and for the interest and AFees.
previous situation “that Marphil has existing loan
obligations from advances made by Allied Bank.” Simply CA reversed the decision and held that respondent Gatmaitan
put, this is the amount not proven to have been paid in the did not at any point become obligated to pay to petitioner
many loans obtained by Marphil in its credit line. Licaros the amount stated in the promissory note. MR denied.
HELD: The petition is partly granted. Marphil and Lim are Issue
ordered to pay jointly and severally Allied Banking Corporation Whether the MOA is one of assignment of credit or
(now PNB) wit the principal amount of P1,913,763.45 with conventional subrogation.
interest rate of 6%pa from 1990 until the date of finality of this
judgment. And 6% from decision until satisfaction. Discussion: This matter is determinative of whether or not
Gatmaitan is liable to Licaros under the PN and MOA.
1291-1304. Novation Assignment of Credit and Conventional Subrogation

An assignment of credit has been defined as the process of
LICAROS v. GATMAITAN (2001) transferring the right of the assignor to the assignee who would
362 SCRA 548 have then the right to proceed against the debtor. It may be
Facts: Anglo-Asean is a private bank registered and organized gratuitous or onerous. It has an effect like that of a sale.
to do business under the laws of the Republic of Vanuatu but
not in the Philippines. Its business consists primarily in receiving On the other hand, subrogation, has been defined as the
fund placements by way of deposits from institutions and transfer of all the rights of the creditor to a third person, who
investors and thereafter investing such deposits in money substitute him in all his rights. It may either be legal or
market placements and potentially profitable capital venture. conventional. Legal is by operation of law, conventional is by
agreement of the parties.
Enticed by lucrative prospect of doing business with Anglo-
Asean, Abelardo Licaros, decided to make a fund placement DISTINCTION: Conventional subrogation is not identical to
with said bank sometime in the 1980s. It did not end well, after assignment of credit; the consent of debtor is not necessary in
investing he encountered tremendous and unexplained order assignment may produce legal effects. The law requires
difficulties in retrieving, not only the interest or profits, but even is not the consent of the debtor, but merely notice him as the
the very investments he had put in Anglo-Asean. assignment takes effect only from the time has knowledge
thereof. On the other hand, conventional subrogation requires
He asked for the counsel of Antonio P. Gatmaitan, a reputable an agreement among the three parties. It is a new contractual
banker and investment manager who had been extending relation based on the mutual agreement among them.
consultancy services to various firms and corporations here and
abroad. Gatmaitan voluntarily offered to assume the payment IN THE CASE: The MOA is in the nature of a conventional
of Anglo-Asean’s indebtedness to Licaros subject to certain subrogation and that the MOA never came in to effect due to
terms and conditions the failure of the parties to get the consent of Anglo-Asean to
Pertinent MOA Agreements the agreement, and as such respondent never became liable
• Gatmaitan undertakes to pay $150,000 on or before for the amount stipulated.
July 15, 1993. For this purpose, Licaros has to deliver a
non-negotiable promissory note bearing the material That Gatmaitan and Licaros had intended to treat their
consideration. agreement as one of conventional subrogation is plainly borne
• Grants Gatmaitan full power and authority, for his own by a stipulation in their Memorandum of Agreement, to wit:
use and benefit and cost and expense to demand to
WHEREAS, the parties herein have come to an agreement on the nature,
prosecute and proceedings therefore.
form and extent of their mutual prestations which they now record
herein with the express conformity of the third parties concerned.
Thereafter, Gatmaitan presented to Anglo-Asean the MOA for
collecting the $150,000. No formal response was ever made by The third party is admittedly Anglo-Asean Bank. Had the
said bank to either them, Anglo-Asean has not acted on the intention been merely to confer on appellant the status of a
claims to date. mere assignee of the credit, there no such reason to include
such stipulation of express agreement.
Gatmaitan did not bother anymore to make good his promise
to pay Licaros the amount stated in his promissory note. Licaros CONTENTION: The MOA could not have intended to be
sent demand letters, for he felt that he had a right to collect on subrogation considering that no new obligation was created
the basis of the PN regardless of the outcome. Thus he sent because the obligation of Anglo-Asean bank to pay was not
demand letters, but Gatmaitan did not heed such. Licaros filed extinguished. Because the old obligation was never
complaint and prayed be paid P3.5M with interest and AFees. extinguished the same cannot be considered as subrogation.
liable and that the check issued did not discharge loan for it
COURT’S REPLY: This contention did not persuade the court. bounced.
Precisely, if conventional subrogation had taken place with the
consent of Anglo-Asean Bank to effect a change in the person RTC rendered in favor of Llamas ordering Garcia and De Jesus
of its creditor, there is necessarily created a new obligation to pay the principal amount, interests and AFees and costs. This
whereby Anglo-Asean Bank must now give payment to its new ruling was reversed by CA.
creditor, herein respondent.
CA ruled that no novation – express or implied – has taken
INTENTION OF PARTIES FOR A CONVENTIONAL SUBROGATION: This is place when Llamas accepted the check from De Jesus. The
shown not only by the whereas clause also by the signature check was issued precisely to pay for the loan covered by PN.
space WITH OUR CONFORME reserved for signature of a Llamas’ acceptance did not serve to make De Jesus sole debtor.
representative of Anglo-Asean Bank. These provisions in the
aforementioned Memorandum of Agreement may not simply Issues
be disregarded or dismissed as superfluous. 1. Whether or not there was novation in this case.
The Memorandum of Agreement embodies certain provisions 2. Whether or not Garcia has no liability for he was only
that are consistent with either a conventional subrogation or an accommodation party.
assignment of credit. It has not been shown that any clause or 3. Whether the judgment was proper.
provision in the Memorandum of Agreement is inconsistent or
incompatible with a conventional subrogation. RULE: The petition has no merit.
On the other hand, the two cited provisions requiring consent First Issue: Novation
of the debtor to the memorandum is inconsistent with a CONTENTION: Garcia seeks to explicate himself from the
contract of assignment of credit. Thus, if we were to interpret obligation as joint and solidary debtor by insisting that
the same as one of assignment of credit, then the novation, either through substitution of De Jesus as sole debtor
aforementioned stipulations regarding the consent of Anglo- or the replacement of the PN by a check.
Asean Bank would be rendered inutile and useless considering
that, as previously discussed, the consent of the debtor is not COURT’S REPLY: The
facts of the case dispel the second part of the
necessary in an assignment of credit. contention; the obligation was not extinguished because the
check bound upon presentment.
HELD: As above stated, the Memorandum of Agreement
embodies a contract for conventional subrogation and in such Novation, Concept and Application
a case, the consent of the original parties and the third person In general, there are two modes of substituting the person of
is required. The absence of such conformity by Anglo-Asean the debtor: (1) expromision and (2) delegacion. In
Bank prevented the Memorandum of Agreement from expromision, the initiative for the change does not come from
becoming valid and effective. Accordingly, the Court of Appeals -- and may even be made without the knowledge of -- the
did not err when it ruled that the Memorandum of Agreement debtor, since it consists of a third persons assumption of the
was never perfected. obligation.
GARCIA v. LLAMAS (2003) As such, it logically requires the consent of the third person and
417 SCRA 292 the creditor. In delegacion, the debtor offers, and the creditor
Facts: This case started out as a complaint for sum of money accepts, a third person who consents to the substitution and
and damages by Llamas against Garcia and De Jesus. The assumes the obligation; thus, the consent of these three
complaint alleged that on December 24, 1996, De Jesus persons are necessary. Both modes of substitution by the
borrowed P400K from Llamas and executed a PN wherein they debtor require the consent of the creditor.
bound themselves jointly and severally to pay the loan on or
before January 23, 1997 with a 5% interest per month; that the Novation may also be extinctive or modificatory. It is
loan has long been overdue and despite repeated demands extinctive when an old obligation is terminated by the creation
they failed and refused to pay it. of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that
Garcia answer that he assumed no liability under the it remains compatible with the amendatory agreement.
promissory note for he signed it mere as accommodation
party for De Jesus and that he is relieved from any liablity Whether extinctive or modificatory, novation is made either by
arising from the note for it was paid by Jesus. changing the object or the principal conditions, referred to as
objective or real novation; or by substituting the person of the
Llamas argued that the loan remained unpaid for the check De debtor or subrogating a third person to the rights of the
Jesus issued had bounced. De Jesus asserted that out of the creditor, an act known as subjective or personal novation.
supposed P400K he received only P360K where the P40K
having been advance and that he paid P120K by way of Requisites of Novation
interests. Llamas argued that under the PN they are solidarily 1. There must be a previous valid obligation.
2. The parties concerned must agree to a new contract. Third Issue: Propriety of Summary Judgment
3. The old contract must be extinguished. Apropos thereto, it must be stressed that the trial courts
4. There must be a valid new contract. judgment against petitioner was correctly treated by the
appellate court as a summary judgment, rather than as a
Novation may also be express or implied. It is express when judgment on the pleadings. His Answer apparently raised
the new obligation declares in unequivocal terms that the old several issues -- that he signed the promissory note allegedly
obligation is extinguished. It is implied when the new obligation as a mere accommodation party, and that the obligation was
is incompatible with the old one on every point. extinguished by either payment or novation. However, these
are not factual issues requiring trial
The test of incompatibility is whether the two obligations can
stand together, each one with its own independent existence. HELD: Petition denied the decision is affirmed.
IN THE CASE:The court holds that no novation took place. The CALIFORNIA BUS LINES v. STATE INVESTMENTS (2003)
parties did not unequivocally declare that the old obligation 418 SCRA 297
had been extinguished by the issuance and acceptance of the Facts: On 1979, Delta Motors (Delta) applied for financial
check, or that the check would take place of the note assistance from State Investment (engaged in quasi-banking).
State investment agreed to extend a credit line to Delta for
There is no incompatibility between the PN and the Check. The P25M in three separate credit agreements. On several
check had been issued precisely to answer for the obligation. occasions, Delta availed of the credit line and eventually
On the one hand, the note evidences the loan obligation; and became indebted to State Investment of P24.010M.
on the other, the check answers for it. Verily, the two can stand [Delta here as debtor, State Investments as the creditor]
together.
Meanwhile from April 1979 to May 1980, California Bus Lines,
Novation is Never Presumed Inc. (CBLI) purchased on installment basis 35 units of MAN
Consequently, that which arises from a purported change in the Diesel Buses and 2 units of MAN Conversion Engines from
person of the debtor must be clear and express. It is thus Delta. They executed 16 promissory notes in favor of Delta. In
incumbent on petitioner to show clearly and unequivocally that each promissory note, CBLI promised to pay Delta or order of
novation has indeed taken place. P2.3M payable in 60 monthly installments with 14%intpa.
CBLI further promised to pay 25%AFees. CBLI executed 35
IN THE CASE:In the present case, petitioner has not shown that Chattel Mortgages over the 35 buses in Deltas favor.
he was expressly released from the obligation, that a third [CBLI here as debtor, Delta as the creditor]
person was substituted in his place, or that the joint and
solidary obligation was cancelled and substituted by the Upon due date, they entered into a restructuring agreement for
solitary undertaking of De Jesus. new schedule and extension and it was changed from monthly
to daily remittances. In case of default, Delta would have the
More important, De Jesus was not a third person to the authority to take over the management and operations of CBLI.
obligation. From the beginning, he was a joint and solidary
obligor of the P400,000 loan; thus, he can be released from it DELTA-STATE INVESTMENT AGREEMENT: On 1981, Delta executed a
only upon its extinguishment. Respondents acceptance of his Continuing Deed of Assignment of Receivables in favor of
check did not change the person of the debtor, because a joint State Investments as security for its obligations on the credit
and solidary obligor is required to pay the entirety of the agreements. It was restricted under a MOA on 1982. It
obligation. obligated itself to pay P40,000/month.
Second Issue: Accommodation Party
CBLI, on the other side of the story, was now having trouble
CONTENTION: Petitioner avers that he signed the promissory note meeting its obligations to Delta, which prompted the latter to
merely as an accommodation party; and that, as such, he was threaten CBLI with the enforcement of the management and
released as obligor when respondent agreed to extend the term takeover clause. However, CBLI was granted a WOPInj.
of the obligation. This reasoning is misplaced, because the note
herein is not a negotiable instrument. MOA EXECUTION FOR STATE INVESTMENTS: Pursuant to the MOA,
Delta executed a Deed of Sale assigning to State Investments
COURT REPLY: An accommodation party is liable for the five of the sixteen promissory notes. Delta offered its
instrument to a holder for value even if, at the time of its taking, available units valued at P27M as payment in kind. On
the latter knew the former to be only an accommodation party. December 29, 1983, SIHI accepted Deltas offer, and Delta
The relation between an accommodation party and the transferred the ownership of its available buses to SIHI, which
party accommodated is, in effect, one of principal and in turn acknowledged full payment of Deltas remaining
surety -- the accommodation party being the surety. It is a obligation.
settled rule that a surety is bound equally and absolutely with
the principal and is deemed an original promisor and debtor When Statement Investments was unable to take possession of
from the beginning. The liability is immediate and direct. the buses, filed a petition for recovery of possession. SIHI
applied the proceeds from the sale of the said buses amounting with the addition of new obligations that were incompatible
to P12,870,526.98 to Deltas outstanding obligation. Deltas with the old obligations in the said notes.
obligation to SIHI was thus reduced to P20,061,898.97.
It cited that in the Compromise Agreement that the agreement
COMPROMISE AGREEMENT (DELTA and CBLI):CBLI agreed that Delta between CBLI was of full and final settlement of all their rights
would exercise its right to extrajudicial foreclosure on the and obligations as of the date of the agreement, and of the
chattel mortgages over the 35 bus units. CBLI vehemently issues in the case.
refused to pay SIHI the value of the five promissory notes,
contending that the compromise agreement was in full Elements of Novation
settlement of all its obligations to Delta including its Novation has two functions, one is to extinguish and existing
obligations under the promissory notes. obligation and two to substitute a new one in its place.
Novation is never presumed, and the it must appear by express
SIHI (State Investments) filed a complaint for collection of the agreement of the parties, or by their acts that are clear.
5PNs. Meanwhile, Delta filed a petition for extrajudicial Four Essential Elements of Novation
foreclosure of chattel mortgages pursuant to its Compromise 1. A previous valid obligation;
Agreement with CBLI. Consequently, State Investments was 2. An agreement of all parties concerned to a new
able to attach and physically take possession of 32 buses of contract;
CBLI. 3. The extinguishment of the old obligation; and
4. The birth of a valid new obligation.
Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI
which had previously however, SIHI filed an urgent motion to The extinguishment of the old obligation by the new one is a
amend this order claiming that through inadvertence and necessary element of novation which may be affected either
excusable negligence of its new counsel, it made a mistake in expressly or impliedly.
the list of buses in the Motion to Sell Attached Properties it had
earlier filed. While there is no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about
SIHI explained that 14 of the buses listed had already been sold novation, the touchstone for contrariety, however, would be an
to Delta on April 2, 1987, that two of the buses listed had been irreconcilable incompatibility between the old and the new
released to third party, claimant Pilipinas Bank, by Order dated obligations.
September 16, 1987of Branch 13 of the RTC of Manila.
Two Indicators Novation Can Extinguish and Substitute Old
CBLI opposed SIHIs motion to allow the sale of the 16 buses. 1. When novation has been explicitly and expressed
On May 3, 1989, Branch 13 of the RTC of Manila denied SIHIs stated in unequivocal terms; and
urgent motion to allow the sale of the 16 buses listed in its 2. When the old and the new obligations are
motion to amend. The trial court ruled that the best interest of incompatible on every point.
the parties might be better served by denying further sales of
the buses and to go direct to the trial of the case on the merits. Test of Incompatibility
The test of incompatibility is whether the two obligations can
RTC discharged CBLI from liability on the 5 PNs. The trial court stand together, each one having its independent existence. If
directed State Investments to return the 16 buses or to pay they cannot, they are incompatible and latter obligation
P4M (value of buses). The court also ruled that the novates the first.
restructuring agreement between Delta and CBLI novated
the five PNs; hence at the time Delta assigned the five Corollarily, changes that breed incompatibility must be
promissory notes to State Investments, the notes were essential in nature and not merely accidental. The
already merged in the restructuring agreements and incompatibility must take place in any of the essential elements
cannot be enforced against CBLI. of the obligation, such as its object, cause, or principal
conditions thereof; Otherwise, the change would be merely
Issues: modificatory in nature then it would insufficient to extinguish
1. Whether the Restructuring Agreement of 1981 the original obligation.
between CBLI and Delta novated the five promissory
notes Delta Motors assigned to State Investments. IN SUM OF MONEY: The obligation is not novated by instrument
2. Whether the Compromise Agreement superseded expressly recognizes the old, changes only terms of payment,
and/or discharged the subject five promissory notes. and adds other obligations not incompatible with the old ones,
or where the new contract merely supplements the old one.
CBLI Contention
It contends that the Restructuring Agreement did not merely The attendant facts do not make out a case of
IN THE CASE:
change the incidental elements of the obligation under the 16 novation. The restructuring agreement between Delta and
promissory notes, but it also increased the obligations of CBLI CBLI executed on 1981 shows that the parties did not
expressly stipulate that the restructuring agreement compromise agreement only covered the rights and obligations
novated the promissory notes. only of Delta and CBLI and only with respect to the 11 other
promissory notes that remained with Delta. Thus, even if
Absent an unequivocal declaration of extinguishment, only a there are issues, the compromise agreement still cannot bind
showing of complete incompatibility between the old and new the State Investments under the rule of compromise
would sustain a finding of novation by implication. agreements binding only to parties.
However, our review of its terms yields no incompatibility HELD: Petitioner California Bus Lines, Inc. is ordered to pay
between the PNs and the restructuring agreement. The five PNs State Investment House, Inc. (SIHI) the value of the 5
which Delta assigned to State Investments contained the promissory notes subject to the complaint in Civil Case less
following common stipulations: the proceeds from the sale of the attached sixteen buses.
1. They were payable in 60 monthly installments AQUINTEY v. TIBONG (2006)

2. Interest of 14% per annum 511 SCRA 414
3. Failure to pay any of the installments would render the Facts: On May 6, 1999, Agrifina Aquintey filed at RTC Baguio a
entire the remaining balance due and payable at the complaint for sum of money and damages against the
option of the holder of the notes. respondent Spouses Tibong. Aquintey alleged that Felicidad
4. In case of judicial collection, CBLI and Llamas were Tibong secured loans from her, and despite demands the
solidarily liable of attorney’s fees and expenses. Spouses Tibong failed to pay their outstanding loan of P773K
exclusive of interests (ranging from 6-7%).
Restructuring Agreement Pertinent Parts
• Daily payments in lieu of monthly installments ANSWER OF SPOUSES TIBONG: They admitted that they had secured
• Failure to remit daily remittance payment of interest loans and that its proceeds were re-lent to other borrowers with
and judicial proceedings for Attorney’s Fees. higher interest rates. They alleged that they had executed
• Enforcement of the chattel mortgages. deeds of assignment in favor of Aquintey and that their
• Take-over and management clause is enforced debtors had executed PNs in Aquintey’s favor. They alleged that
this resulted in a novation of the original obligation to Aquintey.
It is clear from the foregoing that the restructuring agreement, They insisted that by virtue of these documents, Aquintey
instead of containing provisions absolutely incompatible with became the new collector of their debtors; and the obligation
the obligation of the judgment, expressly ratifies such to pay the balance of their loans had been extinguished.
obligations and contains provision for satisfying them.
Agrifina Aquintey’s Case
There was no change in the object of the prior obligations. She and Felicidad Tibong were classmates and University of
The restructuring agreement merely provided for a new Pangasinan, the latter’s husband Rico was a distant relative of
schedule of payments and additional security by giving Delta Aquintey. She agreed to lend money to Felicidad. The latter said
the “take over and management” clause. Whereby parties that she would be earning interest rates higher than those given
expressly recognize the continuing existence and validity of by banks for bonnel and thread.
the old one, there can be no novation. Thus she allowed lending of P773K and each loan transaction
An agreement subsequently executed between a seller and a was covered either by a PN or an AR (acknowledgment receipt).
buyer that provided for a different schedule and manner of
payment, to restructure the mode of payments by the buyer, so In 1990, Felicidad Tibong gave to Aquintey City Trust Bank
that it could settle its outstanding obligations in spite of its Check in the amount of P50K as partial payment, this was
delinquency is not tantamount to novation. dishonored as having been drawn against insufficient funds. This
prompted Aquintey to file a criminal case against Felicidad of
CONTENTION: The Compromise Agreement superseded or violation of BP 22 and was ordered to pay the P50K.
discharged the five promissory notes.
Upon knowing that Tibong had re-loaned the money to other
COURT ANSWER: Having previously assigned the five PNs to State debtors, through the advice and facilitation of Atty. A-ayo, they
Investments, Dela had no more right to compromise the same. executed deeds of assignment of credits, in which Felicidad
Delta’ authority to collect in behalf of State Investments was by Tibong assigned to Aquintey the amount of P546K due from
express provision of the Deed of Assignment. her debtors. In the said deeds, Felicidad Tibong confirmed that
her debtors were no longer indebted to her.
The Compromise Agreement itself provided that it covered the
rights and obligations only of Delta and CBLI and that it did not Aquintey narrated that Felicidad showed to her the way to the
refer to, nor cover the rights of State Investments as the new house of the debtors to enable her to collect the payment from
creditor of CBLI in the subject promissory notes. them. She was able to collect an amount of P301K. Later on,
the debtors were not paying but she made to wait by Felicidad.
A compromise agreement determines the right and
obligations of only those parties to it. Therefore, the Felicidad Tibong’s Case
She alleged that both of them entered in to a re-lending

business. Aquintey asked her to pay her account since Aquintey Second Issue: Novation
needed money to buy a house and lot in Manila. But Tibong The burden to prove the defense than an obligation has been
told her that she could not pay yet since the loan of debtors are extinguished by novation falls on the debtor.
not yet due. Thus, through the advice of Atty. A-ayo she then
executed deeds of assignment in favor of Aquintey covering the Delegacion
sums of money due from her debtors. After signing, Aquintey Novation which consists in substituting a new debtor (delegado)
personally collected from Tibong’s debtors. in the place of the original one (delegante) may be made even
without the knowledge or against the will of the latter but not
RTC in favor of Aquintey ruling that the obligations were not without the consent of the creditor.
novated by the deed of assignments and PNs for there is no
express agreement. The debtor offers, and the creditor accepts a third person who
CA affirmed with modification on amount. It sustained the consents to the substitution and assumes the obligation. Thus,
ruling that the obligation has not been novated by the deeds the consent of the three are necessary. It is necessary that the
of assignment and PNs. Although Aquintey was subrogated as old debtor be released from the obligation. Without such
a new creditor, the obligation of Felicidad Tibong to Aquintey release there is no novation, the new debtor would just
remained there was no intention to novate the original become a co-debtor or surety.
obligation between them. It ruled however, that the deed of
assignment was onerous, making it affect as a payment. IN THIS CASE:CA correctly found that Tibong’s obligation to pay
the balance of their account with petitioner was extinguished,
Aquintey’s Contentions pro tanto, by the deeds of assignment of credit executed by
• Averred the ruling of P637K from which she claims to Felicidad Tibong in favor of Aquintey.
be P773K just because she lost the PN.
• Maintains that the deduction of P585K covered by the Assignment of Credit
deeds of assignment executed by Tibong and the PNs It is an assignment by which the owner of the credit (assignor)
of the latter’s debtors and that the balance of P51K by a legal cause (sale, dation, exchange or donation) and without
was erroneously arrived. the consent of the debtor, transfers his credit and accessory
• Avers that there was no novation, that the 11 deeds rights to another (assignee) who acquires the power to enforce
of assignment only two had her signature. it to the same extent as the assignor could enforce it against
• The assumption was only that the debtors became co- the debtor.
debtors but it did not release Tibong from the
obligation. It may be in the form of sale, but at time it may constitute
dation in payment. As such taking the nature of a sale a dation
Tibong’s Contentions en pago must the essential elements of a contract of sale,
• By virtue of the deed of assignment of credits, and the namely, consent, object certain, and cause or consideration
original debtor’s execution of the PNs, their loan must be present.
accounts amounting to P585K had been effectively It is an objective novation of the obligation.
extinguished (citing 1291 par. 2).
• Argues the Aquintey had been subrogated to their Elements of Dacion En Pago
right to collect the loan, and in fact as new creditor she 1. There must be a performance of the prestation in lieu
has been able to collect amount of P301K. of payment which may consist in the delivery of a:
• Averred that their obligation to petitioner cannot a. Corporeal thing
stand or exist separately from the original debtor’s b. Real right
obligation as the new creditor. Unjust enrichment. c. Credit against third persons
2. There must be some difference between the
Issues prestation due and that which is give substitution
1. Whether respondent Felicidad Tibong borrowed P773K 3. There must be an agreement between the creditor and
from petitioner. debtor that the obligation is immediately extinguished
2. Whether the obligation of respondents to pay the by reason of the performance of a different prestation.
balance of their loans was partially extinguished by the
execution of the deeds of assignment of credit to IN THE CASE:All the requisites of dation in payment are present
Aquintey. in this case. Tibong assigned to the petitioner her credits to
make good the balance of her obligation and testified to make
First Issue: Amount of the Loan Borrowed such partial payments of her account since she could not
In the case, petitioner alleged in her complaint that the comply with petitioner’s demands.
defendants are indebted to Aquintey of P773K. The Tibong
admitted that they had secured loans from Aquintey. Tibong They agree to relieve the latter of her obligation to pay the
however failed to prove the exact amount from petitioner. balance of her account, and for Aquintey to collect the same
They also failed to deny the admission of having P773K loan. from respondent’s debtors.
RICARZE’S CONTENTION FOR APPEAL: Damage or injury to the

CONTENTION THAT SIGNATURES OF DEBTORS WERE NOT AFFIXED: In an offended party is an essential element of estafa. The
assignment of credit, the consent of the debtor is not essential amendment of information substituting PCIBank for Caltex as
for its perfection. The assignment binds the debtor upon the offended party would prejudice his rights.
acquiring knowledge of the assignment. The duty to pay does
not depend on the consent of the debtor. CA declared that when PCIB restored the amount of the checks
to Caltex, it was subrogated to the latter’s rights against
The law does not require any formal notice to bind the debtor Ricarze. It further declared that in offenses against property,
to the assignee, all that the law requires is knowledge of the the designation of the name of the offended party is not
assignment. They obliged themselves to pay petitioner. absolutely indispensable for as long as the criminal act charged
Respondent Felicidad, likewise, unequivocally declared that be properly identified.
Cabang and Cirilo no longer had any obligation to her.
CONSTRUCTION OF CONTRACTS: Aquintey and respondent Felicidad Issue
agreed that the amounts due from respondents’ debtors were Whether or not there is valid subrogation between Caltex and
intended to “make good in part” the account of respondents. PCIBank, assuming there is, the Civil Case should be dismissed
Case law is that, an assignment will, ordinarily, be interpreted to prosecute.
or construed in accordance with the rules of construction
governing contracts generally, the primary object being always On Substitution Not Being Prejudicial to Accused
to ascertain and carry out the intention of the parties. The substitution by Caltex by PCIB is not substantial
amendment. The substitution did not alter the basis of the
HELD: Considering all the foregoing, we find that respondents charge in both Information, nor did it result in any prejudice to
still have a balance on their account to petitioner in the Ricarze. The evidence remained the same.
principal amount of P33,841.00, the difference between their
loan of P773,000.00 less P585,659.00, the payment of On Subrogation
respondents’ other debtors amounting to P103,500.00, and the RICARZE’S CONTENTION: He argues that in no way was PCIB
P50,000.00 payment made by respondents. subrogated to the rights of Caltex, considering that he has no
knowledge of the subrogation much less gave his consent.
RICARZE v. COURT OF APPEALS (2007) Alternatively, he argues that if the subrogation was proper, then
515 SCRA 302 the charges against him should be dismissed for they are
Facts: Eduardo Ricarze was employed as a collector-messenger tantamount to being void due to false allegations.
by City Service Corporation. He was assigned to the main office
of Caltex in Makati. Where he was assigned to collect checks The argument on subrogation is misplaced. The
COURT’S REPLY:
payable to Caltex and deliver them to the cashier. Court agrees with respondent PCIB’s comment that petitioner
failed to make a distinction between legal and conventional
On November 6, 1997, Caltex filed a criminal complaint subrogation.
against petitioner for Estafa through Falsification of Commercial
Documents. Romano (Caltex Manager), alleged that it was Subrogation is the transfer of all the rights of the creditor to a
discovered that a company check in the amount of P5.7M third person, who substitutes him in all his rights. It can either
payable to Dante R. Gutierrez has been cleared. It revealed that be legal or conventional.
two other checks were also missing and that the signature were
forgeries. Another check in the amount of P1.7M likewise • Legal Subrogation is that which takes place without
payable to a Dante R. Gutierrez was also cleared, it was that agreement but by operation of law because of acts.
these were not issued by Caltex and the signatures are forged. • Conventional Subrogation is that which takes place by
agreement of the parties.
Gutierrez, disowned the assailed savings account where the
amounts were deposit, as well as his signatures. He also denied Instances of legal subrogation are those provided in Article
withdrawing such amount and it was revealed that the savings 1302, especially when the application of Article 1302 (1), when
account was actually opened by Ricarze, and the forged checks a creditor pays another creditor who is preferred even without
were deposited and endorsed by him under Gutierrez. A bank the debtor’s knowledge.
teller was able to positively identify him. Two informations of
IN THE CASE: Thus,
petitioner’s acquiescence is not necessary for
the charge of Estafa through Falsification of Commercial
Document was file was filed with RTC Makati. subrogation to take place because the instant case is one of
• Check No. 72292 – P1,790,757.50 legal subrogation, which occurs by operation of law, without
• Check No. 74001 – P5,790,570.25 need of the debtor’s knowledge.
Pleaded not guilty to both charges, both were jointly tried such.
In the meantime, PCIB credited the amount of P581,229 to This, being subrogated to the right of Caltex, PCIB has the right
Caltex. RTC allowed substitution PCIB as private complainant to intervene in the proceedings, and under substantive laws is
for Caltex. entitled to restitution of its properties or funds, reparation, or
indemnification.
representative to conduct an ocular inspection of the plant and

On the Contention of Dismissal on False Allegations the leased property. However, during such inspection Meralco
This argument does not hold water. In offenses against officers came in and cut off power to the plant which
property, the designation of the name of the offended party is discouraged the investor.
not absolutely indispensable for as long as criminal act charged
in the complaint or information can be properly identified. Upon verification with Meralco, Ledonio discovered that there
were unpaid electric bills on the leased property amount to
HELD: The petition is denied. The assailed decision and hundreds and thousands of pesos. He claimed that he was
resolution of the Court of Appeals are affirmed. This case is never informed by MRMC of the existence of unpaid bills due
remanded to the Regional Trial Court of Makati City, for further to illegal connections.
proceedings.
Because of the work stoppage and loss of business
LEDONIO v. CAPITOL DEVELOPMENT (2007) opportunities, he suffered damages amounting to US$60,000
526 SCRA 379 which he attempts to recover from MRMC.
Facts: Capitol Development instituted a collection of sum of
money against Edgardo Ledonio. Capitol Development alleged Having failed to obtain compensation, Ledonio decided to
Ledonio obtained from Ms. Picache two loans covered by PNs. vacate and pull out but he can only do so, only when he signs
blank promissory note forms. And that the allotted spaces for
The first PN dated 9 November 1988, petitioner promised to the principal, interest, names were blank and Ms. Picache took
pay to the order of Ms. Picache the principal amount of P30,000 advantage of the petitioner’s signatures.
in monthly installments of P3K with the first installment due on
January 1989. RTC ruled in favor of Capitol Development because it gave
more credence to the facts it presented. It was shown the
The second PN dated 10 November 1988 Ledonio promised to Ledonio was a holder of BS Chemical Engineering, and it would
pay to the order of Ms. Picache the principal of P30,000 with be incredulous that a businessman like Ledonio would simply
36%intpa on 1 December 1988. sign blank sheets of paper just to vacate the premises. There
was also contradiction of the testimonies.
In case of default, both PNs provided that:
(a) Penalty equivalent to 20% of outstanding balance; The RTC also upheld the validity and enforceability of the
(b) Unpaid interest shall be compounded or added to the Assignment of Credit executed by Ms. Picache in favor of
balance of the principal amount and shall bear the Capital Development even in the absence of petitioner’s consent.
same rate of interest as the latter;
(c) AFees and liquidated damages 20% of total amount CA affirmed the RTC decision in toto, and denied the MR of
to be recovered. Ledonio stating the it was only mere reiterations.
On 1 April 1989, Ms. Picache executed an Assignment of Issue

Credit in favor of Capitol Development the debt from Ledonio Whether or not the Court of Appeals erred when it ruled that
in the principal sum of P60,000 under two PNs. there was an Assignment of Credit and that there was no
novation/subrogation in the case at bar.
Since Ledonio did not pay any of the loans upon due, Capitol
Development sent Ledonio several demand letters, but Ledonio Ledonio’s Arguments
failed and refused to settle his indebtedness. This prompted He asserts that consent of the debtor to the assignment of
Capitol Development on filing the charge. credit is an essential element in order for the assignee to have
a cause of action, thus Capitol cannot recover from Ledonio.
LEDONIO’S ANSWER: He sought dismissal of the Complaint
averring the Capitol Development had no cause of action and He further argues that even if there was indeed and assignment
he denied of obtaining any loan from Ms. Picache and of credit, then there had been a novation of the original loan
questioned the genuineness and due execution of the PNs for contracts when it subrogated the rights of Ms. Picache.
they were result of intimidation and fraud.
He argued that assignment of credit constitutes conventional
Ledonio’s Narration of Facts subrogation which requires the consent of all the parties (1301),
On February 24, 11988 he entered into a Contract of Lease of since he did not give his consent, he posits that the subrogation
real property in Quezon City with Mission Realty and was without force and effect.
Management Corporation (MRMC) where in Ms. Picache is an
incorporation and member of the Board of Director. COURT’S REPLY: This Court finds no merit in the present Petition.
This court cannot sustain Ledonio’s contention and hereby
Ledonio relocated his plant and machines for his garment declares that the transaction was an assignment of credit and
business to the leased property. After a month or two, a foreign not a conventional subrogation, thus his consent was not
investor was interested in doing business with hi, and sent a necessary for it to be valid and enforceable.
On July 23, 1966, they consolidated all their previous unpaid

[NOTE: The court distinguished the difference between Assignment of Credit and loans totaling to P440K and sought from Veronica another
Conventional Subrogation which is discussed in Licaros v. Gatmaitan, p.24] loan in the amount of P60L bringing their indebtedness to
P500K and executed a PN which reads in part:
There is No Conventional Subrogation
The Assignment of Credit, executed by Ms. Picache was a simple For value received, I/We jointly and severally promise to pay to the order of
deed of assignment. There is nothing in such which can be Veronica Gonzales … P500,000 with interest thereon at the rate of 5.5% per month
plus 2% service charge per annum.
interpreted to have intended a convention subrogation. The
terms were straightforward, “sell, assign, transfer, and Should I/We fail to pay any amortization or portion there when due, all other
convey” to Capitol Development the debt due her from installments shall be immediately being due and demandable and agree pay an
Ledonio evidenced by two PNs. additional amount equivalent to 1% per month of the due and demandable
amount as penalty charge and 25% AFees.
No reference was made to securing the “conforme” of Ledonio Upon maturity of the consolidated loan, Veronica filed at RTC
nor any space for his signature in the said document. Bulacan a complaint for collection of full amount plus interest
and other charges.
All that is required was the knowledge of the debtor to bind
him to the new creditor. No need for formal notice. SERVANDO’S ANSWER: He alleged that he did not obtain any loan
from the plaintiffs; and that it was Leticia Medel and her
LEDONIO HAD KNOWLEDGE OF THE ASSIGNMENT: In 1989, when the husband Dr. Rafael Medel who borrowed from Gonzales and
loans became overdue, Capitol Development was the one who that he merely signed as witness.
sent the demand letter to him not Ms. Picache. RTC ordered Servando Franco and Leticia Medel jointly and
severally to pay for the amounts. CA affirmed. SC struck down
Ledonio expressly acknowledge receipt of the demand letter the interest being iniquitous and unconscionable.
and even replied stating that he would settle his account with
respondents and consideration of losses. Upon the finality of the decision in Medel v. Court of Appeals
(where facts came from), Gonzales moved for execution.
AFFECTS HIM AS “THIRD PERSON.” That fact that the said document Servando Franco opposed, claiming that he and Gonzales
was made duly notarized makes it legally enforceable to third agreed to fixed the entire obligation at P775K.
persons. Article 1625 expresses than an assignment of credit
shall produce no effect unless it appears in a public instrument. According to Servando, their agreement, which was allegedly
embodied in a receipt dates February 5, 1992, whereby he made
HELD: Premises considered, the instant petition is denied and an initial payment of P400K where he only had a remaining
the decision of CA affirming the decision of RTC is hereby balance of P375K superseded the promissory note.
affirmed. Costs against the petitioner.
RTC granted the motion for execution over Servando’s
HEIRS OF SERVANDO FRANCO v. GONZALES (2012) opposition. On March 8, 2003 RTC issued MOExecution. MR
675 SCRA 97
was denied. CA affirmed.
Facts: On November 7, 1985, Servando Franco and Leticia
Medel (Servando and Leticia) obtained a loan from Veronica Issue:
Gonzales (Veronica), who was engaged in money lending Was there a novation of the August 23, 1986 promissory note
business under the name Gonzales Credit Enterprises, in the when Veronica Gonzales issued the February 5, 1992 receipt?
amount of P50K payable in two months. Veronica gave only the
amount of P47K to the borrowers and retained the P3K as Servando Franco’s Contention
advance interest for one month at 6%/month. They executed The heirs insist that RTC could not validly enforce a judgment
a PN of P50,000 evidencing the loan. based on a PN that had already been novated, that the
promissory note had been impliedly novated when the
On November 19, 1985, Servando and Leticia obtained from principal obligation of P500K had been fixed at P750K and the
Veronica another loan in the amount of P90K payable in two maturity date was extended.
months at 6%intpa with PN. But only received P84K. On
maturity of the two loans, they failed to pay the indebtedness. COURT’S FINDING: The petition lacks merits.
On June 11, 1986, Servando and Leticia secured from Veronica I. Novation did not transpire because no irreconcilable
still another loan (third one) in the amount of P300K maturing incompatibility existed between the promissory note and
in one month secured by REM over a property of Leticia the receipt
Yapthinchay (which executed an SPA in favor of Leticia Medel
CONTENTION: The receipt issued on February 5, 1992 by Veronica
to allow such mortgage). Only a sum of P275K was given. They
also failed to pay the third loan on maturity. Gonzales whereby it fixed Servando Franco’s obligation at
P750K and extending the maturity date were incompatible with
those of the original agreement under the PN.
Facts: On September 27, 1993, respondent Amador Domingo

COURT’S REPLY: The petitioner’s assertion is wrong. (Amador) and his wife the later Mercy Domingo executed a PN
in favor of Makati Auto Center, Inc. in the sum of P629K payable
Novation, Concept and Application in 48 successive monthly installments in the amount of
A novation arises when there is a substitution of an obligation P13,122 each. They simultaneously executed a Deed of Chattel
by subsequent one which extinguishes the first, either by Mortgage over a 1993 Mazda 323 to secure payment of the
changing the object or the principal conditions, or by PN. Makati Auto Center assigned its rights and interests to
substituting the person of the debtor, or by subrogating a third FEBTC over the PN and the Chattel Mortgage. By virtue of a
person in the rights of the creditor. merger, all the assets and liabilities of FEBTC were transferred
to and absorbed by BPI.
A new obligation extinguishes the prior agreement only when
the substitution is unequivocally declared or the old and the The spouses Domingo defaulted when they failed to pay 28
new obligations are incompatible on every point. monthly installments. BPI as surviving corporation demanded
the Spouses Domingo to pay the balance or to return the
IN THIS CASE:The receipt dated February 5, 1992, did not create vehicle for foreclosure.
a new obligation incompatible with the old one. To be clear,
novation is never presumed. This means parties to a should However, due to failure, BPI filed a complaint for Replevin and
expressly agree or that they be incompatible. Incompatibility Damages. BPI included a John Doe as defendants because at
must be essential in nature and must affect any of the essential the time of the filing BPI was already aware that the subject
elements of obligation, object, cause, conditions. vehicle was in the possession of a third person but did not yet
The issuance of the receipt created no new obligation. Instead, know the identity of said person.
Gonzales only thereby recognized the original obligation by Testimony of Vicente Magpusao
stating in the receipt that the P400K was “partial payment of The outstanding balance is P275,562 exclusive of interest and
loan” and by referring to the “the promissory note subject of other charges. Based on records, the Spouses Domingo issued
the case in imposing the interest.” The loan mentioned in the several postdated checks but not for the entire term. It was
receipt was still the same loan involving the P500K. known that Far East Bank did not turn over to BPI all the records
pertaining to the account of the Spouses Domingo.
The receipt was merely a proof of payment of his obligation
as ruled by RTC. It did not establish novation. An obligation to Testimony of Amador Domingo
pay a sum of money is not novated by an instrument that He admitted that his wife bought a car and was mortgaged to
expressly recognizes the old, or changes only the terms of FEBTC. He identified the Chattel Mortgage and the PN they
payment, or adds other obligations not incompatible with executed together. He recalled that Mercy issued 48 checks.
the old ones, or the new contract merely supplements the The 12 were cleared by the bank and his wife was able to
old one. obtain a discount.
A new contract that is a mere reiteration, acknowledgment While still paying for car, Carmelita Gonzales got interested buy
or ratification of the old contract with slight modifications the car and is willing to assume the mortgage. After furnishing
or alterations that can stand with the former one, and there the bank with a Deed of Sale duly notarized, Carmelita Gonzales
can be no incompatibility between them. subsequently issued a check payable to FEBTC and the
remaining postdated checks were returned to them. There were
It is worth noting that Servando’s liability was joint and solidary. accounts of the payments Ms. Gonzales made, and a check
The extension of the maturity date did not constitute as worth P385K was also issued.
novation.
On February 29, 1997 they received a demand letter from
II. Total Liability to be Reduced to P400K Espino Law Office on behalf of FEBTC. Amador’s lawyer stated
The balance of P375,000 was premised on the taking place of a that the motor vehicle had been sold to Carmelita Gonzales.
novation. However, as found now, novation did not take place.
Accordingly, Servando’s obligation, being solidary remained to METC. It found Amador’s testimony to be insufficient evidence
be that decreed in 1991 decision inclusive of interest less the to prove that he and his wife Mercy had been expressly released
amount of P400K paid by him. from their obligations and the Carmelita Gonzales assumed
their place as the new debtor within the context of subjective
HELD: The Court affirms the decision of the CA and orders the novation, if at all, Carmelita became a co-debtor or surety.
RTC to proceed with the execution on its decision on 1991
deducting the amount of P400K already paid by the late RTC held that there is novation, consent of the creditor to the
Servando Franco. substitution of the debtor need not be by express arrangement,
it can be implied. It noted that it accepted payments from
BPI v. DOMINGO (2015) Carmelita and only demanded from the Spouses Doming 30
754 SCRA 244 months after Carmelita assumed payments. CA affirmed.
Issue: the Spouses Domingo. The absence of objection on the part of

Whether or not there had been a novation of the loan BPI cannot be presumed as consent.
obligation with chattel mortgage of the spouses Domingo to BPI
so that the spouses Domingo were released from obligation and 2. There is no proof of consent to release the Spouses
Carmelita was substituted as debtor. Domingo as debtors from their obligation; Carmelita is
considered as an additional debtor.
COURT RULING: The Court answers in the negative and grants the
petition BPI. The consent of the BPI to the substitution of debtors cannot be
deduced from its acceptance of payments from Carmelita,
Creditor’s Consent to the Novation absent proof of its clear and unmistakable consent to release
Either expromision or delegacion, consent of creditor is needed. the Spouses Domingo from their obligation. Since the Spouses
The substitution of one debtor for another may delay or Domingo remained as debtors of BPI together with Carmelita,
prevent the fulfillment of the obligation because of financial the fact the demand was made 30 months after is immaterial.
inability or insolvency of the new debtor, hence the creditor
should agree to accept the substitution. The acceptance by a creditor of payments from a third person,
who has assumed the obligation, will result merely to the
BPI’S CONSENT, CHALLENGED. Both RTC and CA found delegacion addition of debtors and not novation. The creditor may therefore
for the Deed of Sale with Assumption of Mortgage between enforce the obligation against both debtors.
Domingo and Carmelita shows consent between them.
However, BPI’s consent (or FEBTC as an absorbed entity) as Absent proof that BPI gave its clear and unmistakable consent
creditor is being challenged herein. to release the spouses Domingo from the obligation to pay the
GENERAL RULE: Since novation implies a waiver of the right the car loan, Carmelita is simply considered as an additional debtor.
creditor had before the novation, thus waiver must be express. Any may still enforce against the spouses Domingo.
EXCEPTION: The existence of the creditor’s consent may also be 3. There is no sufficient or competent evidence to establish
inferred from the creditor’s acts, but such acts still need to be the return of the checks to the spouses Domingo and
“a clear and unmistakable expression of creditor’s consent.” assurance by FEBTC that they are released.
IN THE CASE:Amador failed to present proof of unmistakable Amador admitted that it was his wife Mercy, together with
consent of BPI to the substitution of debtors. Indubitably, there Carmelita who directly transacted with FEBTC regarding the sale
is no express consent of the BPI. of the subject vehicle to and assumption of mortgage by
Carmelita. Amador had no personal knowledge of what had
BASIS OF CA AND RTC ON IMPLIED CONSENT. The following were the happened so his testimony on the matter was hearsay.
basis by RTC and CA for inferring implied consent of the BPI:
1. BPI has a copy of the Deed of Sale and Assumption of There was no proof as to the issuance of the checks, delivery to
Mortgage executed between Mercy and Carmelita in the bank and the return of the checks. He failed to provide the
its file, indicating its knowledge of agreement. details surrounding the return, like how many checks returned
2. BPI returned the check and accepted Carmelita’s and to whom.
payments (through FEBTC) The checks were not presented for they are scared. No other
3. BPI did not demand any payment from the spouses supporting evidence was submitted to trial. The court
Doming not until 30 months after Carmelita assumed accords little weight to the testimony.
payment of the balance of the PN. • In addition, the “Marvin Orence” who gave the
reassurance is not yet ascertained identity, position.
SUPREME COURT ANSWER: The Court disagrees with the inferences
made by the CA and the RTC. The following reasons are cited HELD: The court is therefore convinced that there is no
why there is no implied consent by BPI. [Three reasons] novation by delegacion in this case and Amador remains a
debtor of BPI. Amador is ordered to pay the P275,562 balance
1. Documents are still under their name and no new on the PN, 10% AFees, costs but interest is reduced to 12%pa.
document was executed between BPI and Carmelita.
BPI’s possession of a copy of the Deed of Sale and Assumption LIABILITY OF ESTATE AND HEIRS: Amador has died during the
of Mortgage executed between Mercy and Carmelita in its file pendency of the litigation. To prevent future litigation in the
does not mean that it had consented to the same. The very enforcement of the award, the Court clarifies that Amador’s
Deed itself states that they agree to “seek the conformity of heirs are not personally liable for the debts of their predecessor.
FEBTC.” The extent of liability of heirs to BPI is limited to the value of
the estate. To rule otherwise would unduly deprive Amador’s
The documents are still in the name of the Spouses Domingo. heirs of their properties.
No new PN or chattel mortgage had been executed between
BPI and Carmelita. Even the account itself is still in the names of FORT BONIFACIO DEV’T CORPORATION v. FONG (2015)
754 SCRA 544
Facts: On June 5, 2000, Fort Bonifacio Dev’t Corporation (FBDC) RTC found FBDC liable to pay Fong to pay the P1.577M with
entered into a Trade Contract with MS Maxco for the execution legal interest. It held that the instant case was assignment of
of the structural and partial architectural works of one of its credit and it did not require FBDC’s consent as debtor for its
condo projects, the Bonifacio Ridge Condominium. Records validity and enforceability. Mere notice is enough for an
show that FBDC had right to withhold 5% of the contract price assignment takes place at the time of his knowledge and to
as retention money. bind third persons, only if it appears in a public instrument.
Under the Contract, FBDC had the option to hire other With respect to garnishment, the RTC held that it could not
contractors to rectify any errors committed by MS Maxco, as adversely affect Fong’s rights as assignee, considering that the
well as to deduct or set of any amount from the contract price. amount indicated in the Deed of Assignment was no longer MS
Maxco’s property but now of Fong, and thus cannot be
When, MS Maxco incurred delays and failed to comply with the garnished or attached. It was shown that the garnishment was
terms of the Trade Contract, FBDC took over and hired other made after FBDC was notified of the assignment.
contractors to complete the unfinished construction. The
corrective work was done on the numerous defects and CA affirmed RTC decision and it found that there was sufficient
irregularities caused by MS Maxco which cost P11.567M. amount left in the retention money which it can pay Fong. It
Pursuant to the Trade Contract, FBDC deducted said amount upheld that the payments made by FBDC to MS Maxco’s
from MS Maxco’s retention money. creditors cannot prejudice Fong for the assignment was valid
and enforceable.
The contract also provided that MS Maxco is prohibited from
assigning or transferring any of its rights obligations, or Issue:
liabilities under the said contract without written consent of Whether or not the Court of Appeals erred in ruling that FBDC
FBDC. In 2005, FBDC received a letter from the counsel of Fong was bound by the Deed of Assignment between MS Maxco and
informing that MS Maxco already assigned its receivables to Fong and if FBDC is liable to pay Fong the amount of P1.577M
Fong by Deed of Assignment. representing a portion of the retention money.
Under the deed of assignment, MS Maxco assigned the COURT RULING: The petition of FBDC is meritorious.
P1.577M to Fong as payment of the MS Maxco’s obligation to
the latter, which amount was to be taken from the retention Principle of Relativity of Contracts:
money with the FBDC. Assignment and Subrogation
Obligations arising from contracts have the force of law
FBDC’S REPLY: It acknowledged the 5% retention money of MS between parties and by virtue of the principle of relativity of
Maxco, but asserted that the same was not yet due and contracts, the same principle of the obligatory force applies by
demandable and that it was already the subject of garnishment extension to the contracting party’s assignees.
by MS Maxco’s other creditors.
Despite Fong’s repeated requests, FBDC refused to deliver to The reason that a contracting party’s assignees, though
Fong the amount assigned by MS Maxco. In January 2006, FBDC seemingly a third party to the transaction, remain bound by the
informed Fong that after the rectification of the defects as well original party’s transaction under the relativity principle which
as the garnishment made by MS Maxco’s creditors, nothing was further lies in the concept of subrogation which inheres in
left of its retention money with FBDC from which Fong’s claims assignment.
may be satisfied. This prompted Fong to file case.
When a person assigns his credit to another person, the latter is
FBDC’s Defenses deemed to the rights as well as the obligations of the former.
1. The delays and defective works of MS Maxco made By virtue of a Deed of Assignment, the assignee is deemed
FBDC hire other contracts to repair defects and subrogated to the rights and obligation of the assignor and is
complete the work to be deducted from the retention bound by exactly the same conditions as those which bound
money. the assignor. Accordingly, the assignee cannot acquire greater
2. Retention money was due only in January 2006 and rights than the assignor.
was already garnished in favor of other contractors.
3. As a result of the deductions and garnishment, no IN THE CASE: The court finds that MS Maxco, as the Trade
amount due to MS Maxco was left from the retention Contractor, cannot assign or transfer any of its rights,
money, thus FBDC is under no obligation to satisfy obligations, or liabilities under the Trade Contract without the
Fong’s claim. written consent of FBDC, the Client in view of Clause 19.0 on
4. It is not bound by the Deed of Assignment between Assignment and Sub-letting found in the Trade Contract itself.
Fong and MS Maxco, not being a party thereto.
However, Fong being a mere substitute or assignee Fong, as mere assignee of MS Maxco’s rights under the Trade
of MS Maxco was bound to observe the Trade Contract with FBDC, the right to recover any credit owing to any
Contract. unutilized retention money (which the money is bound by the
Trade contract), Fong cannot validly enforce such without
FBDC’s consent.
HELD: Without any proof showing that FBDC had consented CA MR. It reversed its decision stating that it is not disputed
to the assignment, Fong cannot validly demand from FBDC the that Amethyst failed to finish construction within the
delivery of the sum of P1.577M that was assigned to him by MS period stated the prescriptive period under a Deed of Sale is
Maxco. The practical efficacy of the assignment, even though ten years and they had until 31 December 2005 and that Ortigas
valid between Fong and MS Maxco, remains contingent on filed the present complaint on 07 July 2000 within such period.
FBDC’s consent.
Whether or not Ortigas validly rescinded the Deed of Sale due
ASB REALTY CORPORATION v. ORTIGAS (2015) to the failure of Amethyst and its assignee, the petitioner ASB,
777 SCRA 284 to fulfill the covenants of the Deed of Sale.
Facts: June 29, 1994, respondent Ortigas entered a Deed of
Sale with Amethyst Pearl Corporation involving a parcel of land Ortigas’ Action for Rescission Could Not Prosper
with an area of 1,012 sq.m. in Oranbo, Pasig City for the Ortigas never took to task such other buyers and Amethyst for
consideration of P2,024,000. Pertinent parts provide: failing to construct the buildings within the periods
• Building constructed be reinforced concrete, cement contractually imposed. It maintains, therefore, that Ortigas
hollow blocks and shall be of the following height of slept on its rights because it did not take any action against
not more than 14 storeys plus one penthouse. Amethyst during the period prescribed in the Deed of Sale.
• Final plans and specifications of said building be
submitted to Ortigas for approval not later than six Allegation on ASB as Amethyst’s Assignee
months from the date thereof. Should object, it shall Petitioner Ortigas argues in its right to rescind that the
notify and specify in writing the amendments required petitioner was bound by the covenants of the Deed of Sale
to perform with its buildings and submit the amended annotated in the name of the petitioner; and that the
plans within 60 days from receipt of notice. petitioner’s privity to the Deed of Sale was by virtue of its
• The vendee shall finish the construction of its building being the successor-in-interest or assignee of Amethyst.
within four years from December 31, 1991.
Examination of Agreement: The Deed of Assignment in
DEED OF ASSIGNMENT: On December 28, 1996, Amethyst Liquidation executed between Amethyst and ASB expressly
assigned the subject property to its sole stockholder, the ASB stated that “the assignor hereby assigns, transfers and conveys
Realty Corporation under a Deed of Assignment in unto the assignee one parcel of property”.
Liquidation in consideration of 100,000 shares of the • This indicates that the transfer was only the tangible
outstanding capital stock, such was transferred free from any asset consisting the piece of land and by no means
liens or encumbrances. did Amethyst assign the right or duties it has assumed
under the Deed of Sale.
On July 7, 2000, Ortigas filed its Complaint for Specific • ASB Realty became vested with rights of ownership
Performance against the ASB Realty, alleging violation of: free from any lien or encumbrance except those
• While the lot may be used only for office and annotated in the title.
residential purposes, defendant introduced
construction on the property which are commercial in Doctrine of Estoppel, Recognition of Transfer
nature like restaurants and retails stores. On the Allegation the “No Transfer Stipulation”. Ortigas
• Commercial structures extend up to the boundary apparently recognized without any reservation the issuance
lines of the lot in question. of the new certificate of title and the subsequent transfer by
• Failed to submit the final plans and specifications of assignment from Amethyst to ASB leading to a new certificate
its proposed building not later than 6 months from of title. As such, Ortigas was estopped from assailing the
June 29, 1994 and to complete construction of the petitioner’s acquisition and ownership of the property.
same within four years from December 31, 1991.
• It allowed putting up of commercial signs and The application of estoppel was appropriate. The doctrine of
advertisements over the area, which was prohibited. estoppel was based on public policy, fair dealing, good faith
and justice, and its purpose is to forbid a party to speak
Ortigas prayed for the reconveyance of the subject property, or against his own act or omission, representation, or
alternatively, for the demolition of the structures and commitment to the injury of another who relied thereon.
improvements thereon plus penalties and costs.
On the Performance Required from the Assignee
RTC. Dismissed the complaint. Amethyst was supposed to The annotation in the transfer certificate of title TCT No. PT-
finish construction on December 31, 1995 but up to the time 10597 bound the petitioner but not to the extent that
the property was transferred to ASB on December 28, 1996, rendered the petitioner liable for the nonperformance of
Ortigas never initiated any action against Amethyst to enforce the covenants stipulated in the Deed of Sale.
said provision. Making him guilty of laches or negligence on
such action. CA. Affirmed RTC. Ortigas can no longer enforce • Section 39 of The Land Registration Act requires
the said restrictions against ASB for the vendee was Amethyst. that every person receiving a certificate of title in
pursuance of a decree of registration, and every • Not having come under the duty not to violate any
subsequent purchaser of registered land who takes a covenant in the Deed of Sale when it purchased the
certificate of title for value in good faith shall hold the subject property despite the annotation, its failure to
same free of all encumbrances except as those noted comply with the covenants did not constitute a breach
on said certificate. Annotation are to charge the of contract.
purchaser or title holder with notice of such burdens. • It was Amethyst that defaulted on the covenants,
hence the action to enforce such provisions of the
In the case: By acquiring the parcel of land with notice of the contract or to rescind the contract should be against
covenants in the Deed of Sale, ASB bound itself to Amethyst.
acknowledge and respect the encumbrance. But it did not Rescission could not anymore take place against the petitioner
step into the shoes of Amethyst as a party in the Deed of once the subject property legally came into the juridical
Sale. possession of the petitioner who was a third party to the
Deed of Sale.
Thus, the annotation of the covenants contained in the
Deed of Sale did not give rise to a liability on the part of ODIAMAR v. VALENCIA (2016)
ASB as the purchaser or successor-in-interest without its 795 SCRA 18
express assumption of such duties or obligation. The Facts: On August 20, 2003, Valencia filed a complaint for sum
annotation was only the notice of the burden or lien. of money and damages against Odiamar, alleging that Odiamar
owed Valencia P120K. Odiamar purportedly issued China Bank
Burden to Perform Covenants of Check for the said amount to guarantee payment of the debt,
Deed of Sale Remained with Amethyst but was dishonored. Valencia lamented that Odiamar refused
Contractual obligations, unlike rights or benefits are generally to pay despite several demands. Odiamar sought the dismissal
not assignable. But there are recognized means by which on the ground that it was Odiamar’s deceased parents who
obligations may be transferred, like sub-contract or novation. owed Valencia money and that it should be filed in the
proceedings on their estates.
In the case: The substitution of the petitioner in the place of Odiamar averred that indeed Valencia participated n the
Amethyst did not result in the novation of the Deed of Sale. settlement proceedings and had issued a certification stating
1. It does not appear from the records that the consent that it Odiamar’s deceased parents who were indebted to
of Ortigas to the substitution had been obtained Valencia for P2M. Odiamar, as administratrix of her parent’s
despite its essentiality to the novation. estate agreed to pay such indebtedness on installment but
2. ASB Realty did not expressly assume Amethyst’s Valencia refused to accept payments.
obligations under the Deed of Sale, whether through
the Deed of Assignment in Liquidation or others. Valencia countered that Odiamar personally borrowed
3. The consent of ASB Realty (as the new debtor), which almost half of the P2.1M from her, as evidenced by the checks
as essential to the novation as that of Ortigas she issued. While Valencia conceded that Odiamar made
(creditor) was not obtained. [NOTE: Delegacion used as basis]. several installment payments, she pointed out the Odiamar
failed to make any succeeding payments. Valencia denied
There is still no express or implied indication that the petitioner participating in the proceedings and clarifying that it was
had assumed Amethyst’s obligations. In short, the burden to Odiamar who prepared the certification and she signed it on
perform the covenants under the Deed of Sale, or the liability the belief that petitioner would make good of the promise of
for the nonperformance thereof, remained with Amethyst. payment.
Propriety of Rescission under Article 1191 RTC ruled in favor of Valencia and ordered Odiamar to pay
Based on the foregoing, Ortigas’ complaint predicated on P1.71M (unpaid portion of the P2.1M debt); 12%int; P10K
Article 1191 of the Civil Code. It is proper if one of the parties AFees and costs. RTC refused to give credence to petitioner’s
commits a substantial breach of its provisions. It abrogates the contention that it was her deceased parents who borrowed
contract from its inception and requires mutual restitution of money from Valencia, observing that while Valencia
the benefits received. acknowledged that indeed Odiamar’s parents owed her P700K
out of the P2.1M, Odiamar also admitted that she obtained
In the case: Ortigas did not have a cause of action against the personal loans from Valencia. Hence, RTC held that Odiamar
petitioner for the rescission of the Deed of Sale. Under Section cannot deny her liability to Valencia.
2, Rule 2 of the Rules of Court elements of cause of action:
4. Right in favor of the plaintiff Further by assuming the liability of her deceased parents and
5. Obligation of defendant not to violate such right agreeing to pay their debt in installments, a mixed novation
6. An act or omission constituting a breach of such took place and Odiamar substituted her parents in their place
as debtor. Thus, the liability of the estate of deceased parents
The second and third elements were absent in this case. Simply were extinguished and transferred to the petitioner.
because ASB Realty is not privy to the Deed of Sale because
it was not the party obliged thereon.
CA affirmed RTC it agreed that petitioner cannot deny her Parties agreed that Ang shall pay for the bills for electricity,
liability to Valencia for her admission that she borrowed money telephone, office rentals, and salaries until December 2004.
to Valencia a couple of times.
Without Ang’s consent, Figuera paid all the utility bills
The appellate court concurred with the RTC that a novation amounting to P107K. Thus, on January 17, 2005, Figuera only
took place insofar as Odiamar was substituted in the place of tendered the amount of P42K after deducting the amounts
her late parents considering she undertook their debt. paid from the consideration of the Deed.
However, CA pointed out that there was no novation with
respect to the object of contract for it recognized the old and Ang refused to accept the payment, Figuera mailed the Formal
the parties merely changed the terms of paying the same. Tender of Payment and gave Ang five (5) days to accept the
amount.
Issue
Whether or not Odiamar should be held liable to Valencia for She still refused. This prompted Figuera to file a complaint at
the entire debt in the amount of P2,100,000.00. RTC Cebu against Ang. Figuera then consigned the amount of
P42K to the RTC.
FACT OF LIABILITY IS WELL-ESTABLISHED: While Valencia
acknowledged that Odiamar’s deceased parents owed her Ang maintained that the amount due pursuant to the Deed is
P700K, Odiamar also admitted obtaining loans from Valencia. P150K not P42K and she cannot have compelled to accept
Having admitted that she obtained loans from her (P1.4M), partial payments.
without showing that the same had been extinguished,
petitioner cannot aver and was settled by judicial admission. On May 19, 2005, Figuera conveyed the rights, assets, interest,
liabilities, and causes of action over EIDC in favor of the Enhance
Applying the principle on judicial admissions, Odiamar’s debt Visa Service (EVSI) through a Deed of Assignment Coupled
to Valencia amounted to only P1.4M and not the whole P2.1M. with Interest. Thus, on June 14, 2004, EVSI substituted Figuera.
The unpaid balance (minus the installment) is now P1.010M
out of the P1.4M personal loan by Odiamar. RTC ruled in favor of Ang for the Deed mandates Ang to pay
There is No Novation by Substitution of Debtor the December 2004 utility bills. Figuera however paid the utility
While it is observed that indeed Odiamar agreed to settle her bills without her consent. And that tender was not full payment.
late parents’ debt evidenced by the check and installment
payments, there was no allegation of proof that the estates of CA affirmed and option to pay was not present and tender is
her deceased parents were released from any liability not full payment so it not a valid tender.
thereby.
To constitute novation by substitution of debtor, the former Figuera’s Arguments
debtor must be expressly released from the obligation and that 1. Figuera was eager to pay the bills of EIDC being the
third person or new debtor must assume the place. EIDC’s new owner.
2. Figuera had been subrogated to the right of Ang’s
The fact that the creditor accepts payments from a third creditors (the companies where the bills must be paid)
person who assumed obligation, will only result in the upon payment of the utility bills. Thus, Ang became
addition of debtors and not novation. Figuera’s debtor.
3. They became debtors and creditors to each other.
Novation is never presumed, and it must appear by express 4. The obligation of P107,903.21 were compensated by
agreement or by their acts that are too clear and unequivocal operation of law.
to be mistaken. The intent to novate (animus novandi) was 5. The tender of P42K is valid as full payment.
not satisfactorily proven. 6. Consignation is valid.
HELD: All told, having established that there is no novation Ang’s Arguments
took place and that no interest was actually due, factoring the 1. Figuera’s contention that legal subrogation and
payments made by Odiamar for her account, Odiamar is compensation took place requires proof that should
ordered to pay Valencia the remaining balance of her personal have been established during the trials.
debt which is P1.010M. 2. There was admission on Figuera’s part that there was
nothing in the Deed that grants her the option to pay
FIGUERA v. ANG (2016) the utilities nor allow deduction.
795 SCRA 175 3. Legal subrogation cannot take place because the
Facts: Maria Remedios Ang (Ang) is the registered owner of situation of the parties is not among such instances.
Enhance Immigration and Documentation Consultants. On 4. The issues of legal subrogation and compensation
December 16, 2004, Ang executed a Deed of Assignment of were raised for the first time in appeal.
Business Rights transferring all her business right over the
EIDC to Figuera for P150K. Issue
Whether or not there was a valid tender of payment and 1. In the assignment of business rights, Figuera stood as Ang’s
consignation. debtor for the consideration of P150K and Figuera became
Ang’s debtor for the P107K through Figuera’s subrogation to
COURT RULING: The court grants the petition of Figuera and the rights of Ang’s creditors.
reverse the CA ruling affirming the RTC findings. The court may
properly address the questions even though they are raised for 2. Both debts consist of a sum of money, which are both due,
the first time in appeal. This is because the determination of the liquidated and demandable.
question newly raised is necessary in arriving at a just decision
and complete resolution of the case. 3. Neither party alleged that there was any claim raised by third
persons against the said obligation.
There is Legal Subrogation
Subrogation, sometimes referred to as substitution, is an arm EFFECT:Even without the knowledge and consent of Ang or
of equity that may guide or even force one to pay a debt for Figuera, their obligation as to the amount of P107K had
which an obligation was incurred but was paid by whole or in already been exintguished. Consequently, Figuera owes Ang
part by another. It transfers to the person subrogated the credit, due amount of P42K.
all the rights appertaining thereto, either against the debtor
or against third persons. There is Valid Tender of Payment and Consignation
Tender of payment is the act of offering to the creditor what is
Subrogation of a third person in the rights of a creditor may due him, together with the demand for the creditor to accept
either be legal or convention. Article 1302 provides the it. To be valid, the tender of payment must be a fusion of intent,
presumption of legal subrogation. ability, and capacity to make good such offer, which must be
absolute and must cover the amount due.
IN THE CASE: Figuera based her claim on the third type of
subrogation. She claims that as the EIDC’s new owner, she is IN THE CASE:The remaining amount due in Figuera’s obligation
interested in fulfilling Ang’s obligation to pay the utility bills. is P42K. Thus, Figuera’s tender of the remaining amount to Ang
Since the payment of the bills was long due prior to the is valid and Ang offered no valid justification in refusing to
assignment of business rights to Figuera, the failure to settle accept the payment.
the bills would eventually lead to disconnection. These utilities
are obviously necessary for the continuation of Figuera’s Due to the creditor’s refusal, without any just cause, to the valid
business transaction. The court agrees that it became tender of payment, the debtor is released from her obligation
absolutely necessary for her to pay the bills since Ang did not by the consignation of the sum due.
do so when the obligation become due.
HELD: The court grants the petition and the decision of the
ON THE ARGUMENT THE CONSENT OF ANG WAS NOT GIVEN: A clear Court of Appeals is reversed.
reading of Article 1302 provides that, the consent or approval EVER ELECTRICAL v. PBCOM (2016)
of the debtor is required only if a third person who is not 799 SCRA 313
interested in the fulfillment of the obligation pays such. Facts: Ever Electrical Manufacturing (Ever Electrical), is a duly
organized domestic corporation with a history of transacting
On the other hand, no such requirement exists in cases of with PBCOM. On December 13, 2002, Ever Electrical,
payment by a creditor to another creditor who is preferred represented by Vicente, took out a loan from PBCOM in the
and by in the fulfillment of the obligation. Notably, Article amount of P65M for its working capital. Ever Electrical
1302(1) and (2) does not require the debtor’s knowledge. mortgaged two parcels of land in Calamba, Laguna with a PN
and a maturity date of December 27, 2010 under 8.59%intpa.
Therefore, legal subrogation took place despite absence of
Ang’s consent to Figuera’s payment of the EIDC bills. On February 14, 2003, the parties entered into a compromise
Figuera is now deemed as Ang’s creditor by operation of law. agreement whereby Vicente voluntarily undertook to pay Ever
Electrical’s loan with PBCOM. Under the compromise
There is Legal Compensation agreement, Vicente would make partial payments in the PN.
Article 1278 states that there is compensation when two The compromise agreement partly reads:
persons in their own rights are creditors and debtors to one
another. The elements of legal compensation are found in Whereas, Vicente has offered to assume full liability and to undertake full payment
Article 1279. When all these elements are present of all the past due account of Ever Electrical xxx without prejudice of his right for
reimbursement under Article 1236 of the Civil Code.
compensation takes effect by operation of law and extinguishes
both debts to the corresponding amount, even thought both Whereas, Vicente fully understands that failure on his part to make partial
parties are now aware of the compensation (Article 1290). payments of the amount due under the PN shall make the whole balance of
the unpaid amounts due and demandable less the amounts paid without any
necessity of notice to him.
IN THIS CASE: All elements of legal compensation are present.
RTC approved the Compromise Agreement thus the loan was IN THE CASE: The compromise agreement entered by the parties
restructured. However, Vicente was not able to pay which does not contain any provision releasing Ever Electrical
promoted PBCOM to file with the RTC for MOEx. from its liability to PBCOM. In fact the approved compromise
agreement states:
RTC granted the MOEx and PBCOM won as highest bidder for
the levied properties that were executed in the auction sale. Whereas, Vicente has offered to assume full liability of all the past due account of
Ever Electrical and to exempt from any and all liabilities his co-defendant
sureties George C. Go and Ng Meng Tam arising from and subject of the above
CA ruled that since Vicente defaulted in the payments and litigation, without prejudice to Vicente’s right to avail himself of reimbursement.
under the terms of the compromise agreement to which he
agreed a WOEx was in order. There is nothing to be construed from the above stated
paragraph releasing Ever Electrical from its obligation. Under
Ever Electrical’s Arguments the terms of the agreement, Vicente is an additional person
The petitioners assert that Vicente had fully complied with the who would ensure payment of loan. U
terms of the compromise agreement and that the WOEx was
issued prematurely because: Under the rules of novation, the mere act of adding another
1. That Vicente did not violate terms of the compromise person to be personally liable, did not constitute novation
agreement. since there was no agreement to release the old debtor.
2. That compromise agreement effectively novated the
original contract pursuant to Article 1293 of the Civil HELD: Since there was no novation, PBCOM may proceed to
Code. collect from the original debtor, Ever Electrical, under the terms
He argues that the WOEx was erroneously issued against Ever of the original loan agreement. There is no irregularity.
Electrical for it obligation to PBCCOM was already extinguished
as it was substituted by Vicente when he assumed full WHITE MKTG v. GRANDWOOD FURNITURE (2016)
responsibility of the loan repayment. 810 SCRA 409
Facts: On May 26, 1995, Grandwood Furniture & Woodwork

Issue (Grandwood) obtained a loan in the amount of P40M from
Whether the CA erred in ruling that the writ of execution, levy Metrobank, secured by a REM over a parcel of land. Metrobank
on execution and auction sale were valid. eventually sold its rights and interests to Asia Recovery
Corporation and which assigned such to CGAM (Cameron
COURT RULING: The court denies the petition. Granville 3 Asset Management).
CONTENTION: Petitioners essentially argue that since the parties On July 24, 2013, after Grandwood failed to pay the loan which
entered into a compromise agreement, which was judicially already amount to P68M, thus CGAM3 initiated extrajudicial
approved, the same novated the original loan agreement. foreclosure proceedings of the REM. During the Auction Sale, in
September 17 2013, wherein White Marketing Development
COURT REPLY: The court disagrees. Corporation (White Marketing) declared highest bidder.
Novation, Elements and Evidence On September 30, 2013, a certificate of sale was registered and
Novation is done either by changing the object or principal annotated. But the Sheriff sent a letter to White Marketing
conditions, by substituting the person of the debtor, or by informing that Grandwood intended to redeem the
subrogating a third person in the rights of the creditor. It is of foreclosed property. In response, White Marketing stated that
relative extinguishment since a new obligation is created in it no longer had the right to redeem.
lieu of the old obligation. The following requisites must be met:
1. There must be a previous valid obligation; Insisting, Grandwood sent a letter on December 3, 2013 to the
2. There must be an agreement of the parties concerned Office of the Clerk of Court of RTC (OCC-RTC) insisting of its
to a new contract; ministerial duty to recognize the said right of redemption, to
3. There must be extinguishment of the old contract; accept tender of payment and issue a certificate of redemption.
4. There must be validity of the new contract.
The OCC-RTC refused to accept the tender because it was
Novation is never presumed for it must be established that the confronted with conflicting laws on the matter of redemption
old and new contract are incompatible on all points or expressly period. Thus, Grandwood was prompted to file its Petition for
stated. In the absence of such, a contract may still be Consignation, Mandamus and Damages before the RTC.
considered novated impliedly if it passes incompatibility test.
RTC it dismissed the petition for mandamus. The trial court
Rule in Substituting Debtor ruled that the redemption period applicable in the mortgage
When there is no agreement that the first debtor shall be between Metrobank and Grandwood was Section 47 of RA
released from the responsibility, it does not constitute novation, 8791 or the General Banking Law of 2000. By said law,
and the creditor can still enforce the obligation against the Grandwood should have redeemed the property before the
original debtor (Mercantile Insurance v. CA). registration of certificate of sale in September 30, 2013.
CA reversed the RTC ruling and remanded the case for the IN THIS CASE: Grandwood had three months from the foreclosure
determination of the redemption price. It ordered the OCC-RTC or before White Marketing registered the certificate of
to receive the consigned amount and to issue certificate of foreclosure sale in order to redeem the foreclosed property.
redemption in Grandwood’s favor. It ruled that Section 47 of RA
8791 applied only in cases of foreclosure of REM by a White Marketing as the highest bidder in the foreclosure sale
mortgagee bank. steeped into the shoes of the assignee-mortgagee from
CGAM3 by ARC from Metrobank and has the benefit of the
It also declared the White Marketing was not privy to the redemption period.
contract of loan and the accessory contract of mortgage, it
considered the limitation on the right of redemption on WHITE MKTG “NOT A BANK” CONTENTION: The shorter redemption
juridical person inapplicable. White Marketing moved for MR period may help the mortgagee-bank to encourage
and appealed to the SC. prospective assignees to accept the assignment of credit for a
consideration. It serves as an additional security and protection
White Marketing’s Arguments to mortgagee banks for them to maintain a solvent status.
It insisted that the right of redemption already lapsed, and the
parties agreed to be bound by RA 8791. White Marketing The period is not extended by mere fact that the bank assigned
asserted that when Metrobank assigned its rights, its assignees, its interest to the mortgagee to a nonbanking institution
acquires whatever rights the former had under the REM. because the assignee merely steps into the shoes of the
mortgagee bank and acquires all its rights, interests, and
Grandwood’s Arguments benefits under the mortgagee, including the shortened
White Marketing could not enjoy the provision of Section 47 of redemption period.
RA 8791 on the redemption period because it was not a
banking institution. It asserted that its exercise of redemption HELD: Wherefore the decision of the CA and its resolution to
rights was not against Metrobank in accordance with REM. deny an MR is hereby reversed and set aside. The RTC decision
of Pasig City is hereby reinstated.
Issue
Whether or not CA erred in declaring that Section 47 of RA
8791 is not applicable in the case at bar.
COURT RULING: The Court finds merit in the petition.
In the case at bench, it is undisputed that Metrobank assigned

its rights to ARC, which later assigned the same to CGAM3. After
Grandwood defaulted, CGAM3 foreclosed and White Marketing
emerged as he highest bidder in the foreclosure sale. Thus,
White Marketing stepped in the shoes of Metrobank.
Assignment of Credit and Subrogation

FBDC v. FONG:By virtue of deed of assignment, the assignee is
deemed subrogated to the rights and obligations of the
assignor and is bound exactly by the same conditions as those
which bound the assignor.
Through the assignment of credit, the new creditor is entitled

to the rights and remedies available to the previous creditor and
includes accessory rights such as mortgage or pledge.
Consequently, ARC acquired all the rights, benefits,

IN THIS CASE:
and obligations of Metrobank under its mortgage contract with
Grandwood. The same can be said for subsequent assignees or
successors in interest including White Marketing.
When a property of a juridical person is sold

SECTION 47, RA 8791:
pursuant to an extrajudicial foreclosure, it shall have the right
to redeem the property until, but not after, the registration
of the Certificate of the Foreclosure Sale with the applicable
Register of Deeds which in no case shall be more than three
(3) months after foreclosure, whichever is earlier.
EXTINGUISHMENT OF OBLIGATIONS There is valid payment in Dela Cruz v. Concepcion; even if the
creditor said that there was no authority of the third person.
Review Notes under Atty. Galas
What was the basis of the court that there was a valid payment?
PAYMENT OR PERFORMANCE
1241. Payment made to an incapacitated, it shall only be valid
1. Kept the thing
1233. Performance must be total and complete, subject to the
2. Redounded to his benefit
exceptions under Article 1234 and 1235.
Instance: If X who is the debtor of C, and C has a son who is 17

1234. Substantial performance in good faith, complete
years old, receives the payment, the payment is not valid, unless
performance, less damages suffered by the creditor.
the son kept the payment, or he has spent it but redounded to
his benefit, like the payment of tuition or medicine, as long as
1235. Accepting knowing its incompleteness or irregularity
beneficial.
without any protest.
AGNER v. BPI
But, suppose C is married to W, W dies, C remarries to M.
Was there payment on the part of the debtors? What was the
Suppose X paid to M, there is no extinguishment of the
reason given by the court why was there no fulfillment of the
obligation, the absence of privity, the payment pertains to the
obligation on upholding the contention of the bank?
terminated property regime of C and W. That is not M, this is
not considered a valid payment.
MULTI-INTERNATIONAL v. MARTINEZ
What was the basis why the court refused to acknowledge the
GR: Payment to third person, it must be proven to show that it
pay slip that was supposed to be proof?
redounded to the benefit of the creditor, subject of exceptions.
CINCO v. COURT OF APPEALS
EXCEPTIONS
The fact the creditor refuses to accept or withdraw of amount
Under 1241: No need to prove benefit to the creditor
as satisfaction of the obligation, the refusal based on the
1. If after the payment, the creditor acquires the
absence of her knowledge on the mortgage of the already
creditor’s rights. (Third person acquires rights of the
mortgaged product.
creditor)
2. If the creditor ratifies the payment to the third person
GUMABAN v. PNB
3. If by the creditor’s conduct, the debtor has been led
Why did PNB did not have sufficient proof showing that there
to believe that the third person had the authority to
was full payment to Gumabon despite the allegation of the
receive the payment. (Principle of estoppel)
bank that there was no more obligation of the bank to
Gumabon?
Additional Exceptions
4. Article 1242 on payment to third person in possession
STRONGHOLD INSURANCE v. REPUBLIC-ASAHI
of the credit itself. (Not the evidence of credit)
Effect of death. Why did the court rule on the death of JD
5. Article 1285 on the debtor’s consent on the
Santos?
assignment of credit, thus compensation cannot be
set-up.
1236. The creditor cannot be made to compel to receive the
6. When there is a new creditor, but the old creditor
payments from third persons, but if he receives it is valid.
failed to inform the debtor and the performance was
• If with knowledge and consent, he is entitled to full
made to him.
reimbursement and subrogation to the rights of the
7. When debtor pays despite knowledge that he can set-
creditor.
up compensation.
• If without knowledge and consent, he is only entitled to
beneficial reimbursement.
1242. In NPC v. Ibrahim (2015), when the payment made by
NPC to Mangondato for he was in possession of credit. What is
1239. Payment by an incapacitated person shall only be valid
the credit itself? It’s for you to find out.
by virtue of the exception of Article 1427 on Natural
Obligations. If the creditor has spent or consumed it in good
Evidence of Credit vs. Credit Itself
faith.
It would refer to a negotiable instrument, like promissory note,
payable to order to a person. If the check is payable to a
1240. To whom shall payment be made: (1) creditor; (2)
person, this is not the credit itself, there is merely an evidence
successor-in-interest and (3) authorized representative.
of credit.
NO VALID PAYMENT:
But if the person if holding a negotiable instrument like a check
1. PNB v. Tan
that is payable to bearer or payable to cash, it is the credit
2. Culaba v. Court of Appeals
itself, whoever is in possession of such is presumed to be the
3. Allied Banking v. Lim Sio Wan
owner of the credit.
2. When through the fault of the creditor they have been

If it presented to bank for encashment and bank pays in good impaired.
faith, there is already extinguishment of the obligation by the
good faith. Even if it turns out to have been stolen. If it was 1250. Requisites of extraordinary inflation or deflation to affect
payable to bearer, the bank is not required to look beyond. The obligations are laid out in Equitable PCI v. Ng Sheung Ngor:
presumption is that it can be enchased anywhere. 1. That there was an official declaration of extraordinary
deflation or inflation from the BSP;
What is envisioned under Article 1242, is the check payable to 2. That the obligation was contractual in nature;
bearer wherein it is the credit itself, not payable to order for this 3. That the parties expressly agree to consider the effects
is only an evidence of credit. of the extraordinary inflation or deflation.
1243. Payment made to the creditor by the debtor after the 1251. Where payment be made.
latter has been judicially ordered to retain the debt shall not be 1. Agreed upon by parties
valid. 2. If determinate, where the object is at the time of
• Garnishment creation of objection
• Interpleader 3. Indeterminate, at the place of the debtor
• Injunction
Application of Payments
1244. If the creditor refuses the debtor cannot compel the
creditor to accept even if it is of superior quality. 1252. The debtor has several debts in favor of one creditor, the
debtor can choose what payment is to be applied.
1245. Dation in Payment • Debtor has the preferential choice subject to the rules
One of the examples of novation which at the time of creation on 1253 (interest before principal) and partial
consists of money, but in the fulfillment, the debtor offers a payments cannot be accepted (1248).
thing in lieu of the prestation. • Creditor can apply to the payment (usually the most
beneficial to him), if the debtor accepts then the
This is an objective novation. When there is acceptance, there application is valid. This can only have objected to by
is already a perfected dacion it will now be governed by the the debtor to oppose application.
law on sales. However, mere acceptance does mean there is o If made to an obligation that is void.
already ownership, but the parties have to do a further act, the o If consent thereto was vitiated.
execution of a Deed of Sale. If the parties so agree, regardless • If both refuse, 1253 and 1254 applies.
of the value, it can extinguish the whole obligation or otherwise
they can hire a commissioner to check the value. NOTE: They can apply the payment even if the period or term
There can be no revival of the obligation, remember the has not yet been due provided that the term is for the benefit
following rules: to whom the application is given right to.
1. If what was delivered is a thing that is defective, there
can be no revival, but the creditor can sue the debtor 1253. If produces interest, interest first.
for damages for breach of warranty against hidden
defects 1254. If same nature and kind, then oldest, or most onerous.
2. If what was delivered was a real property, and that he • Obligation secured v. interest – latter
was ousted and ejected therefrom, the can sue debtor • If all has interest – highest interest, unless one is of the
for damages for breach of warranty from eviction. oldest, if they of same burden.
• If payment is insufficient, it should be applied to the
These are the remedies available to the creditor in a perfected interest rather than principal.
dacion en pago, but not the revival of the obligation.
Situation (Board Example)
DAO HENG BANK v. LAIGO: The mere inspecting of the X owes Y the following and all are due in 2017:
property does not mean acceptance of the dacion en pago. 1. P100,000 with interest of 12% plus 0.1% penalty for
everyday of delay.
1248. Creditor cannot be compelled accept partial payment 2. P100,000 with interest of 8% per annum
(1232); neither can the debtor be made to pay partial payment. 3. P100,000 with interest of 12% per annum secured
by a pledge.
Exception. Debt that is partly liquidated and partly unliquidated. 4. Obligation where X is solidarily liable with A to
[e.g. principal (liquidated) and interest (unliquidated)] deliver a determinate thing but was lost through
the fault of X after demand made by Y (value of
1249. The legal tender is the Philippine peso unless expressly object is at P100,000).
stipulation. Payment through mercantile documents payable 5. P500,000 loan incurred in January 2006.
to order, it shall only produce effect of payment: If X has 100,000 in December 2017; where shall P100,000
1. When it is encashed apply?
Q. If you were the debtor, where shall you apply the P100,000? insolvency to compel creditors to accept the proposal
• (1) it is interest with penalty it is most onerous, the of assignment.
payment shall be for the interest and penalty not the
principal (1233, 1248). • Take note of the difference between of dation in
• (2) if there is any excess, the excess shall be applied to payment and payment by cession.
the interest.
• (4) his sole liability is more onerous than his solidary Dation in Payment Payment by Cession
liability One property involved Universality of property to
• (3) it is secured by a pledge which can be foreclosed debtor, except those
• (5) has already prescribed; no need to perform exempt
obligation Not required to be insolvent Requires to be insolvent
Special Situation under Number 4 When is a Debtor Deemed Insolvent

The obligation is converted to monetary obligation consisting When he cannot comply with his obligations when these
of the price, value, damages and interest. obligations become due and demandable. The law does not
require judicial declaration of insolvency.
Rules on Solidary Obligation on Loss and Impairment
If there is impairment is because of fault of one of the solidary debtors Tender of Payment and Consignation
and is in delay, the others shall be liable for their share but not for the
For the provisions on tender of payment and consignation,
payment of damages and interests, it is solely shouldered by the one
always remember the case of TORCUATOR V. BERNABE (GR
who caused the fault or incurred in delay.
134219, 2005). Where it stated that if there is no debt owing
If the object of the prestation was lost by fault of one of the solidary there is no application of tender of payment and consignation
debtors, then the other solidary debtors can perform the obligation under Art.1256.
upon demand.
If it is merely for exercise of right or privilege such as:
The paying solidary debtor can demand reimburse for the entire value, 1. Option contract
price, interest and damages from the solidary debtor who was
2. Right to Redeem (legal redemption)
responsible for the loss and incurred in delay and upon to whom
3. Right to Repurchase (Pacto de Retro sales)
demand was made.
Then under these instances, the mere act of tender without

PREMIERE DEV’T BANK v. CENTRAL SURETY
more would be sufficient to protect the right of the parties
Why was the application by the creditor valid despite on the
thereto. There is no need for consignation.
objection and contention of the debtor?
Excerpt from the case itself:

TAN v. CHINA BANKING
In cases such as the one before us, which involve the
Why was the application of payment by the bank valid?
performance of an obligation and not merely the exercise
of a privilege or right, payment may be affected not by
ESPINA v. COURT OF APPEALS mere tender alone but by both tender and consignation.
Why is the payment of the rentals being more burdensome,
than that payment of the amortization of the purchase price of The rule is different in cases which involve an exercise of a
the condominium unit? right or privilege, such as in an option contract, legal
redemption or sale with right to repurchase, wherein
mere tender of payment would be sufficient to preserve
MARQUEZ v. ELISAN CREDIT
the right or privilege. Hence, absent a valid tender of
How did the court harmonize the provisions of Article 1176 and
payment and consignation, petitioners are deemed to
Article 1253? And why Article 1253 was made applicable here? have failed to discharge their obligation to pay.
Payment by Cession
The debtor is incapable of fulfilling his obligation where he has However, in normal instances, the mere act of sending letters
several creditors. The debtor has several creditors and he is without accompanying payment not sufficient what is to be
financially incapable with complying with the obligations. tendered is the very thing itself.
• He would propose the universality of his properties, Heirs of Bacus v. CA: Option to buy, the Heirs of Bacus refused
he will assign (except those exempted), so that it can the tender of the amount due. Suppose in that case, if the
be sold and apply the net proceeds thereof in lessees-buyers would tender the amount due, but the creditor
proportion to their respective credits. refuses to accept and there was unjust refusal, however the
lessees-buyers, instead of consigning it to the court, he just
• If creditors refused to accept the proposal, he can kept the money.
compel them to accept it, by filing to the court to be Q. Does that mean that the lessees-buyers now lose the right
declared insolvent. The judicial declaration of to buy the property due to absence of consignation?
A. No, it is not a debt. That contract of option, is one of not Exceptions to Prior Tender; Consignation Alone is Sufficient
falling under tender of payment and consignation, this is not a Article 1256(2) are instances wherein there can be immediate
debt, but a mere exercise of privilege or right. consignation without the need of prior tender.
Instance under Redemption Consignation alone shall produce the same effect in the
If the property is foreclosed, there is that period of redemption, following:
suppose the redemptioner offers to redeem the property, but 1. When the creditor is absent or unknown, or does not
the party who bought it did not accept, must he consign to be appear at the place of payment.
protect his right? 2. When he is incapacitated to receive the payment at
the time it is due.
A: No, it is not a debt owing. This is an exercise of right or 3. When, without just cause, he refuses to give a
privilege. There is no more need to consign. receipt.
4. When two or more persons claim the same right to
Payment through a Check collect.
It does extinguish obligation. If the creditor accepts the check 5. When the title of the obligation is lost.
then it shall become a valid tender (Far East Bank v. Diaz Realty). [AIRTL]
In Pabugais v. Sahijwani, the court said that there was a valid Meatpacking Corporation v. Sandiganbayan
tender but what was only found that there was a check, but the Tender of payment may be extrajudicial; however, consignation
court said that there was already a valid tender because how is necessarily judicial. You have to deliver the very thing due to
can the Sahijwani say that the amount is “insufficient”. This was the courts.
sufficient basis for the court.
FAR EAST BANK v. DIAZ REALTY
Requisites for Tender of Payment and Consignation Why was there a valid tender of payment?
1. There must be a debt owing.
2. There must be a valid tender of the very thing due by BENOS v. LAWILAO
debtor and there must be unjust refusal by the Why did the court say that there was no proper consignation?
creditor. Why did the court deny the withdrawal of the consigned
3. The debtor must inform person interested of his desire property?
to consign or a prior notice.
4. Consign to the proper judicial authorities. CACAYORIN v. AFPMBAI
5. Subsequent notice. Why is there exception? The application of there is no more
need of prior need under 1256.
The law says that non-compliance with the communication
requirements (notice) of consignation, does not make the
consignation void, it only makes it ineffectual. LOSS OF THE THING DUE
• The purpose of notice is to allow the creditor to 1262. Merely a reiteration of the principles when the debtor
reconsider the acceptance of payment. shall be not liable for the loss of the thing if loss without the
• Ineffectual it does not say void, it does not produce fault of the debtor. Article 1174 on Fortuitous Events.
any legal effect but not void.
1263. In an obligation to deliver a generic thing, the loss or
Withdrawal of the Thing Consigned destruction of anything of the same kind does not extinguish
As a matter of right – any time before the court declares the the obligation.
consignation valid or proper.
1264. The courts shall determine where shall the partial loss
As a matter of privilege – obtain consent of the creditor (after result to the loss of the object.
declaration of valid consignation).
• If the creditor consents, whatever security is attached 1265. PRESUMPTION: Whenever the thing is lost in the
to the obligation shall be released and he becomes an possession of the debtor, it shall be presumed that the loss was
unsecured creditor. due to his fault, unless there is proof to the contrary (which is
exercise of diligence required under the circumstances). This
Effects of Valid Consignation presumption does not apply in case of earthquake, flood,
1. It shall retroact to the time of consignation. storm, natural calamity.
2. If it earns interest, it stops at the time consignation
was made. 1266. Legal or physical impossibility.
• Objective impossibility which is akin to legal, the act
NOTE: Not from the time of declaration or pronouncement of or object is prohibited.
court that consignation is proper.
• Subjective impossibility is where the person is Formalities of Donations

prohibited to perform the obligation (Ed Sheeran – Form is important for:
Perfect). It can be performed by others. 1. Validity
2. Enforceability
1267. Plea of the debtor to be released for the performance of 3. Convenience
the obligation and it becomes so difficult as it becomes Donations have forms to be observe the forms.
manifestly beyond the contemplation of the parties.
Immovable
Requisites (Tagaytay Realty v. Gacutan) The renunciation of the delivery of the immovable must be in
1. The event or change in circumstances could not have a public document, there must an intervention of a notary
been foreseen at the time of the execution of contract. public. The acceptance must also be in a public instrument.
2. It makes the performance of the contract extremely • Any absent would make the remission void.
difficult but not impossible.
3. The event must no be due to the act of any of the Movable or Monetary in Nature
parties. If it exceeds P5000 in value, it must be in writing as well as
4. The contract is for future prestation. the acceptance. It is not required to be in a public instrument.
Article 1267 Does Not Apply
• Real obligations (obligations to give) for they are 1271. PRESUMPTION THAT THERE IS RENUNCIATION: When
governed by Article 1250 (extraordinary inflation or there is delivery of a private document evidencing a credit.
deflation). Article 1267 applies solely to service, or Evidence of credit is in a private instrument.
obligations to do. • Promissory Note is an example
• Aleatory contracts where it is based on contingency • But if notarized, no presumption of renunciation,
like insurance contracts. but if there is a public document that has several
• Highly speculative agreements like stocks copies, in order to rise the presumption of
renunciation, what must be delivered to the debtor
PHILIPPINE NATIONAL CONSTRUCTION v. COURT OF must be the original of the original.
APPEALS
The payments of rentals are an obligation to do. TO NULLIFY THE WAIVER: If in order to nullify this waiver, it
should be claimed to be inofficious, the debtor and his heirs
MAGAT, JR. v. COURT OF APPEALS may uphold may uphold that the delivery of the documents
The debtor was relieved due to the impossibility of the acts due was made in virtue of payment of the debt.
to the issuance of the Letter of Instruction prohibiting the
importation of transceivers. 1272. PRESUMPTION OF VOLUNTARY DELIVERY. Whenever the
private document in which the debt appears is found in the
1268. GENERAL RULE: When debt of a thing certain and possession of the debtor, it shall be presumed to have been
determinate proceeds from a criminal offense, the debtor shall delivered voluntarily, unless the contrary is proved.
not be exempted from the payment of its price, whatever may
be the cause for the loss. BAR QUESTION
Here is X who borrowed money from Y for P500K. Y died, the
EXCEPTION:When the thing has been offered by the offender to heirs of Y demanded payment of P500K. X said that there was
the offended party, but latter refused without justification to already payment. Showed the check, at the back of the check it
accept. reads that “In Full Payment of the Obligation.”
1269. The obligation having been extinguished by the loss of Q. Is there extinguishment of the obligation?
the thing, the creditor shall have all the rights of action which A. No. There is no signature on the part of the creditor. It might
the debtor may have against third persons because of the loss. just be written by the debtor due to the absence of the
signature. Precisely in Culaba v. Court of Appeals, there was no
Example: When there is a car collision, if the one at fault can signatures on the receipts. The basic requirement of proof –
claim insurance, the offended party shall have all the rights of signature. Without signature, it is mere scrap of paper.
action which the debtor may have.
1273. The renunciation of the principal debt shall extinguish
CONDONATION OR REMISSION the accessory obligation; but the waiver of the latter shall leave
It is bilateral but not reciprocal, because there is no the former in force.
consideration. This is based on the liberality of the creditor.
1274. Disputable presumption: The accessory obligation of
1270. Essentially gratuitous and requires acceptance by pledge is remitted when the thing pledges, after its delivery to
debtor. the creditor is found in the possession of:
(a) The debtor of the thing
(b) The third person who owns it
CONFUSION OR MERGER place by force of law, lest the law concerning legal
compensation be for naught.
1275. X borrowed money from Y; Y endorsed the PN to A; A to
B; B endorsed it back to X. The person of the creditor and debtor 1280. Guarantor can set up compensation as regards to what
is merged. the creditor may owe the principal debtor.
Requisites 1282. Conventional or voluntary compensation. The parties may

1. It must take place creditor and the principal debtor. agree upon the compensation of debts which are not yet due.
2. The very same obligation must be involved.
3. The confusion must be total, or as regards to the entire 1283. Judicial compensation. If one of the parties to a suit over
obligation (exception under 1277 on joint obligation)/. an obligation has a claim for damages against the other, the
former ma set it off by proving his right to the said damages
1276. Guarantors are released. But confusion of guarantors and the amount there. It need not be liquidated, it can be
does not extinguish the obligation. maturing at the time of complaint, provided that it
matured at the time of decision of the court.
1277. Confusion does not extinguish a joint obligation except
to the share of the joint debtor, not to other joint debtors. 1284. Compensation is allowed on those not voidable and
rescissible before declaration of nullity.
COMPENSATION
1285. Assignment to Third Person and Compensation
There can be no compensation on the following: • 1285(1): Assignment of rights by a creditor in favor of
1. When one obligation is simple and the other is a third person, if the debtor consents he cannot set-
alternative up compensation. Unless, he has reserved right over
2. One is with a penal clause and the other a simple one debts that have already matured.
• 1283(2) With the knowledge of the debtor, but
1278. Compensation shall take place when two persons, in their without the consent or against the will, the debtor can
own right, are creditors and debtors of each other. set up compensation to all debts that have already
matured, or are all due and demandable.
Kinds of Compensation: • 1285(3) Without the knowledge, then it follows that
1. Legal there is no consent, the debtor can set-up
2. Conventional compensation for all debts that have matured, and
3. Judicial still maturing, provided it matured at that time
that assignment had come to his knowledge.
1279. ELEMENTS OF LEGAL COMPENSATION
1. That one of the obligors be bound principally, and that On Prescription and Legal Compensation
he be at the same time a principal creditor of the If at one time all the requisites of Article 1279 have concurred,
other; but if both have matured at one time together, even if one of
2. That both debts consist in a sum of money, or if the the debts have prescribed, compensation can still be set up.
things are consumable, they be of the same kind, and
also of the same quality of the latter has been stated; 1287. Compensation shall not be proper:
3. That the two debts be due; 1. Debt arises from a depositum
4. That they be liquidated and demandable; 2. Debt arising from obligations of a depositary
5. That over neither of them there be any retention or 3. Bailee in a commodatum
controversy, commenced by third persons and 4. When one debt arises because of a claim of support
communicated in due time to the debtor. due to a gratuitous title.
1288.
What is meant by communicated in due time by third 5. When the debt arises from a criminal liability.
persons?
Examples of Facultative Compensation
PNB Madecor v. Uy (GR. 129598, 2001) This is when compensation can be set-up by one of the parties:
DUE TIME: By in due time should be meant the period before 1. In a debt in depositum, it can be raised by the
legal compensation was supposed to take place, considering depositor but not by a depositor.
that legal compensation operates so long as the requisites 2. In a debt in commodatum, the bailor can raise
concur, even without any conscious intent on the part of the compensation but not the bailee.
parties. 3. If arising from criminal offense, the compensation can
be set-up by the offended party.
A controversy that is communicated to the parties after that
time may no longer undo the compensation that had taken
1289. If there are several debts which are susceptible of BPI v. CA

compensation the rules on application of payment shall apply Was the compensation? Was compensation proper?
to the order of compensation.
PNB v. CA
1290. It takes place by operation of law even if they are not Why was there no proper compensation? This is an example of
aware. But there is a need to set-up; otherwise it would be stipulation pour autrui.
renounced.
EGV REALTY v. CA
Renunciation of Compensation Why is there no legal compensation? Why was there no debt?
1. Not setting it up in litigation
2. Not objecting to the assignment by the creditor METROPOLITAN BANK v. TONDA
3. Paying the debt even though one can set-up There liability arises from a criminal offense. (1288).
compensation
TRINIDAD v. ACAPULCO
Instance (Board Example) (Discussion of Article 1285) There was a valid compensation of 566K and 500K.
C’s credit (D’s debt) D’s credit (C’s debt)
1. P75,000 due on 1. P80,000 due on PHILTRUST BANK v. ROXAS
March 16, 2015 October 1, 2015 There was no valid compensation because the amount of the
loan is not yet liquidated for it is being decided in a separate
2. P100,000 to be 2. P75,000 due on civil case.
paid December 31, January 1, 2016
2015 MARPHIL EXPORT v. ALLIED BANKING
3. P50,000 due – 3. P35,000 to be paid There is legal compensation between the letters of credit and
February 1, 2016 on November 1, the obligation in the letter agreement between Marphil and
2016 Allied Banking.
Q. Suppose D gave consent to C but reserves his right. Suppose NOVATION

then that on January 5, 2016, C assigns his credit to A. Which
of the following debts may be invoked by D from debts of C 1291. Obligations may be modified by:
(D’s credit)? (1) Changing their object or principal condition
(2) Substituting person of the debtor.
A. He can set-up compensation to the first two, because both (3) Subrogating a third person to the rights of the
are due and demandable. It is important to note here that D creditor.
reserved his right to set-up compensation to debts that
have matured. Thus, if D had not reserved his right to set-up 1292. NOVATION IS NEVER PRESUMED. It must be expressly
compensation to the debts, then he could have not set-up agreed upon by the parties, there can be an implied novation
compensation to the first two due and demandable debts. wherein the old and the new obligation are so incompatible to
each other wherein they cannot stand together.
Q. If without consent but with his knowledge, or against the
will. Modificatory Changes which does not result to full novation:
1. An obligation unsecured is not novated by the fact
A. Still the same for it covers all the debts that are due and when parties agree to a security of a mortgage, surety
demandable which are the first two debts (those which or guaranty, this is not novation.
matured). 2. The creditor changes the terms of performance. If you
change the term or the period to comply with the
Q. Suppose that it was assigned on January 5, 2016 without the obligation there is no novation.
knowledge of the debtor and it came to the knowledge of the
debtor the following year on January 5, 2017. If you change the juridical tie, like from commodatum into a
contract of lease there is definitely novation for a change in
A. He can set-up compensation to all the debts, even though principal conditions like:
they are still maturing at the time of assignment, they have • Negotiorum gestio to Agency
matured at the time of his knowledge. Thus, all are susceptible • Contract of Sale to Contract of Loan
to compensation.
At the time of assignment Debt No. 3 was still maturing, but at REQUISITES FOR NOVATION
the time of his knowledge it has already matured, thus, he can 1. There must be a valid old obligation.
set-up compensation to the debts that have matured at the 2. There must be an agreement of the parties of the
time of the knowledge. The reckoning period is the time of extinguishment of the old obligation.
knowledge. 3. The extinguishment of the old obligation.
4. There must be a valid new obligation.
NOTE: In expromision however, the consent of the old debtor 1299. If the original obligation was subject to a condition, they
need not be given. It is sufficient that creditor accepts. are carried over unless stipulated.
1293. Novation which takes place in substituting a new debtor
in place of the original one, may be made without the Subrogation
knowledge or against the will of the latter (old debtor), but not 1300. Subrogation of a third person in the rights of the creditor
without the consent of the creditor. Payment by the new debtor is either legal or conventional. The former is not presumed,
gives him the rights mentioned in Article 1236 and 1237. latter must be clearly established.
1301. Conventional subrogation of a third person requires the
EXPROMISION consent of the original parties of the third person.
Requisites of Expromision
1. The initiative comes from the third person (who will be 1302. It is presumed that there is legal subrogation:
the new debtor) 1. When a creditor pays another creditor who is
2. The new debtor and the creditor must consent. preferred, even without debtor’s knowledge.
3. The old debtor must be excused (or released) from his 2. When a third person, not interested in the fulfillment
obligation (his consent is not required). of the obligation, pays with the express or tacit
approval of the debtor;
NOTE: Rules on 1236 and 1237 applies here, especially when it 3. When, even without the knowledge of the debtor, a
is done without the consent of the debtor. person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion to
DELEGACION the latter’s share.
1. The initiative comes from the old debtor.
2. All parties must give consent. 1302 (1). When a creditor pays another creditor, who is preferred
3. The old debtor must be released from the obligation. even without the debtor’s knowledge.
What if the new debtor is insolvent? Is there revival of the Instance. X is indebted to A, and he also has a debt from B. His
old obligation between the old debtor and the creditor? debt to B was secured by a real estate mortgage. If A pays B,
there is legal subrogation, for B is the preferred creditor due to
ARTICLE 1294 ARTICLE 1295 mortgage.
Expromision Delegacion
Insolvency or non- It shall not revive the action IMPORTANT DISCUSSION OF JOINT OBLIGATIONS AND LEGAL SUBROGATION
fulfillment of the obligation against the original debtor. Q. Now suppose A and B obtained a loan from C. B executed a
shall not give rise to any mortgage in favor of C. A, without the knowledge of B, paid the
liability on the part of the EXCEPT (when it be revived) entire obligation. Does that mean that A is subrogated to the
original debtor. 1. The insolvency was rights C and thus can demand the entire amount from B or ask
already existing and was to deliver the mortgage property to A? Does this fall under 1302
of public knowledge. (3)?
2. The insolvency was
already existing and A. You go back to your earlier principles that we have discussed.
known to the old debtor He is interested because A is a co-debtor, but there is no
at the time of consent.
delegacion. (Even if not • Absent any stipulation on their liability, their
public knowledge) obligation is considered joint. One is only liable for his
share in debt.
1296. GENERAL RULE: When the principal obligation is • He cannot be considered to be a person interested in
extinguished by reason of novation the accessory obligations the fulfillment of (B’s) obligation. He cannot ask for the
are extinguished. delivery of the title of the mortgage because there has
already been full satisfaction of the obligation.
EXCEPTION: When the accessory obligations may benefit the third • Suppose in solidary. He is only entitled to
persons who did not give their consent. Under Article 1311, reimbursement from his co-debtors.
stipulations pour autrui like a beneficiary in insurance contract.
1303. Subrogation transfer the credit as well as the rights like
1297. If the new obligation is void the original one shall subsist, mortgage, securities.
unless the parties intended that the former relation should be
extinguished in any event. 1304. PARTIAL SUBROGATION. The exercise of the remainder,
the old creditor shall be deemed preferred. The new creditor
1298. Novation is void if the original obligation was void. did not fully pay the obligation.
EXCEPTION: Except when the annulment may be claimed:
1. Only be the debtor
2. When ratification validates voidable acts. Concise Case Briefs for Novation
LICAROS v. GATMAITAN CALIFORNIA BUS LINES v. STATE INVESTMENTS

There was conventional subrogation, only that it was not perfected because of The attendant facts do not make out a case of novation. The
the absence of the requirement under conventional subrogation, for the consent
restructuring agreement between Delta and California Bus
of the original parties are required.
Lines shows that the parties did not expressly stipulate that the
Facts: Licaros made fund placement to Anglo-Asean bank restructuring agreement novated the PBs. An agreement that
which it was not able to withdraw neither profits nor the fund provides for a different schedule and manner of payment, to
itself. Antonio Gatmaitan offered to assume the payment of restructure mode of payments is not tantamount of novation.
Anglo-Asean in behalf of Licaros. They executed a MOA stating
that Gatmaitan shall pay Licaros $150,000 and giving Gatmaitan There is also no incompatibility between the PNs and the
authority to use and benefit from proceedings from Anglo- restructuring agreement for both contained common
Asean bank. However, Anglo-Asean Bank did not act on the stipulations. There was no change in the object of the
MOA. However, Licaros claimed the amount from Licaros obligations, the parties expressly recognize the validity of
pointing out the MOA. the old one, thus there can be no novation.
Issue: Whether or not the MOA was a form of conventional AQUINTEY v. TIBONG
subrogation or of an assignment of credit. There is dation in payment, what was delivered was the assignment of credit in
favor of the creditor. The court discussed why was there dation in payment.
Rule: It was a conventional subrogation. There is a need to There exists a dacion en pago, which is an objective novation.
distinguish Assignment of Credit from Conventional The case provided the elements of a dation in payment:
Subrogation: 1. There must be a performance of the prestation in lieu
of payment which may consist in the delivery of a (1)
Conventional Subrogation Assignment of Credit corporeal thing; (2) real right; and (3) credit against
Consent of all the parties The consent of debtor is not third persons.
involved is required in order necessary in order 2. There must be some difference between the
for it to take effect (1301). assignment may produce prestation due and that which is given in substitution.
legal effects. 3. There must be an agreement between them that the
obligation is exintguished by reason of the new
The MOA was in the nature of a conventional subrogation for obligation.
two main reason which shows that they intended it to be such:
1. Whereas clause: “with the express conformity of the All the requisites of dation in payment are present in this case.
third parties” which is the Anglo-Asean Bank. Tibong assigned to the petitioner her credits to make good the
2. Signature space for Anglo-Asean bank with “WITH balance of her obligation and testified to make such partial
OUR CONFORME” which is reserved for bank payments of her account since she could not comply with
representative. petitioner’s demands.
It was indeed shown that the MOA was for a conventional RICARZE v. COURT OF APPEALS
subrogation, and Anglo-Asean’s consent is not given, thus,
the conventional subrogation did not take effect. Facts: Caltex filed a criminal complaint against Ricarze for
Estafa and that PCIB credit the amount of P581K in favor of
GARCIA v. LLAMAS Caltex, thus, it substituted Caltex in the proceedings.
There was no novation, it was a form of payment it did not lead into a novation
and they are solidarily liable. It will not remiss the other debtor from the
obligation. CA declared that when PCIB restored the amount of the checks
to Caltex, it was subrogated to the latter’s rights against Ricarze.
Facts: Garcia and De Jesus are both liable to Llamas for the
amount of P400K evidenced by a PN. De Jesus offered payment Issue: Whether or not Ricarze’s consent is essential.
through a check which bounced. Garcia seeks to explicate
himself from the obligation stating that the payment of the Rule: There is legal subrogation in this case, petitioner’s
check made by De Jesus made him a sole debtor and led to the acquiescence is not necessary for subrogation to take place
replacement of the PN by a check which novated the PN. because the instant case is one of legal subrogation, which
occurs by operation of law, without need of the debtor’s
Issue: Whether or not the check novated the PN. knowledge.
Rule: It did not. The parties did not unequivocally declare that Applicable is Article 1302 (3); When a creditor pays another
the old obligation had been extinguished by the issuance and creditor, who is preferred even without the debtor’s knowledge.
acceptance of the check. There is even no incompatibility. Caltex is a preferred creditor by PCIB because, it is because PCIB
Garcia’s status as an accommodation party is likened to a is a debtor of Caltex due to the relationship of creditor-debtor
surety, thus he is still solidarily liable. in a bank deposit.
LEDONIO v. CAPITOL DEVELOPMENT Rule: No. Both expromision or delegacion requires the consent
The Assignment of Credit, executed by Ms. Picache was a simple of the creditor. Amador failed to present proof of
deed of assignment. There is nothing in such which can be unmistakable consent of BPI to the substitution of debtors.
interpreted to have intended a convention subrogation. The Indubitably, there is no express consent of the BPI.
terms were straightforward, “sell, assign, transfer, and convey” • Even if the BPI has a copy of the Deed of Sale with
to Capitol Development the debt due her from Ledonio Assumption of Mortgage, the documents are still
evidenced by two PNs. No reference was made to securing the under their name and no new document was executed
“conforme” of Ledonio nor any space for his signature in the between BPI and Carmelita Gonzales.
said document. • There is no proof of consent to released Spouses
Domingo as debtors from their obligation; Carmelita
All that is required was the knowledge of the debtor to bind is considered as an additional debtor.
him to the new creditor. No need for formal notice. There is no • The acceptance by a creditor of payments from a third
showing that the document was intended as conventional person, who has assumed the obligation, will result
subrogation. merely to the addition of debtors and not novation.
The creditor may therefore enforce the obligation
HEIRS OF SERVANDO FRANCO v. GONZALES against both debtors. ***
Issue: Was there a novation of the promissory note when
Gonzales issued a receipt recognizing the payment? ***Be careful and wary when using this case as a basis for the
answer. Atty. Galas stated that this is a problematic application
Rule: The receipt dated February 5, 1992, did not create a new because it goes in conflict with the rules under Article 1236 and
obligation incompatible with the old one. To be clear, novation 1237 on payment by third person with consent of the debtors
is never presumed. This means parties to a should expressly which supposedly subrogated Carmelita to the rights of BPI.
agree or that they be incompatible. Incompatibility must be Carmelita would be put in an absurd position wherein she paid
essential in nature and must affect any of the essential elements in behalf of the Spouses, but she is still considered as an
of obligation, object, cause, conditions. additional debtor that is liable to BPI. Atty. Galas suggests us to
avoid using this unless the question is on all fours. And if this
The issuance of the receipt created no new obligation. Instead, happens, also include in your answer the proper application of
Gonzales only thereby recognized the original obligation by the provisions. Stick with the provisions.
stating in the receipt that the P400K was “partial payment of
loan” and by referring to the “the promissory note subject of FORT BONIFACIO DEVELOPMENT v. FONG
the case in imposing the interest.” The loan mentioned in the
receipt was still the same loan involving the P500K. Facts: FBDC entered into a Trade Contract with MS Maxco for
a condo project, FBDC had the right to withhold 5% of the
The receipt was merely a proof of payment of his obligation as contract price as retention money and that it can hire other
ruled by RTC. It did not establish novation. An obligation to pay contractors to rectify errors of MS Maxco (contractor). MS
a sum of money is not novated by an instrument that expressly Maxco incurred delays and failed to comply with the contract
recognizes the old, or changes only the terms of payment, or thus FBDC hired other contractors to finish construction. The
adds other obligations not incompatible with the old ones, or rectification cost P11.5M. Thus, FBDC deducted the amount
the new contract merely supplements the old one. from the retention.
However, it was shown that MS Maxco assigned P1.5M to Fong

BANK OF THE PHILIPPINE ISLANDS v. DOMINGO which is supposed to be deducted from the withheld retention
There was no novation. What was lacking was the consent of the creditor (BPI). money by FBDC. Thus Fong demanded for the amount
Even if it accepted, it was not enough evidence to show that it consented to the assigned.
subrogation.
Facts: The Spouses Domingo had a loan that was assigned to FBDC refused to deliver stating that the retention money was
BPI which was covered by a chattel mortgage over a 1993 used for the rectification of MS Maxco’s errors and that the
Mazda Car. The husband stated that while they were still paying amount was garnished by MS Maxco’s other creditors thus
for such, a certain Carmelita Gonzales got interested to buy the none was left of the amount of the retention money.
car and assume the mortgage. They entered in to a deed of sale Rule: The court finds that MS Maxco, as the Trade Contractor,
with assumption of mortgage with Gonzales. However, they still cannot assign or transfer any of its rights, obligations, or
were demanded payment by BPI despite the Deed of Sale with liabilities under the Trade Contract without the written consent
Assumption of Mortgage. of FBDC, the Client in view of Clause 19.0 on Assignment and
Sub-letting found in the Trade Contract itself.
Issue: Whether or not there had been a novation of the loan
obligation with chattel mortgage of the spouses Domingo to Fong, as mere assignee of MS Maxco’s rights under the Trade
BPI so that the spouses Domingo were released from obligation Contract with FBDC, the right to recover any credit owing to any
and Carmelita was substituted as debtor. unutilized retention money (which the money is bound by the
Trade contract), Fong cannot validly enforce such without Novation is never presumed, and it must appear by express
FBDC’s consent. agreement or by their acts that are too clear and unequivocal
to be mistaken. The intent to novate (animus novandi) was not
Without any proof showing that FBDC had consented to the satisfactorily proven.
assignment, Fong cannot validly demand from FBDC the
delivery of the sum of P1.577M that was assigned to him by MS HELD: All told, having established that there is no novation took
Maxco. The practical efficacy of the assignment, even though place and that no interest was actually due, factoring the
valid between Fong and MS Maxco, remains contingent on payments made by Odiamar for her account, Odiamar is
FBDC’s consent. ordered to pay Valencia the remaining balance of her personal
debt which is P1.010M.
ASB REALTY v. ORTIGAS
By acquiring the parcel of land with notice of the covenants in FIGUERA v. ANG
the Deed of Sale, ASB bound itself to acknowledge and respect Facts: Ang is the owner of EIDC, at one time, she executed a
the encumbrance. But it did not step into the shoes of Amethyst Deed of Assignment of Business rights transferring rights to
as a party in the Deed of Sale. EIDC worth P150K to Figuera. They agreed that Ang shall pay
for the utility bills, rentals and salaries.
Thus, the annotation of the covenants contained in the Deed of
Sale did not give rise to a liability on the part of ASB as the However, without Ang’s consent, Figuera paid all the utility bills
purchaser or successor-in-interest without its express amounting to P107K. Thus, Figuera only tendered P42K instead
assumption of such duties or obligation. The annotation was of P150K after deducting his payment. Ang refused to accept
only the notice of the burden or lien. payment, this prompted Figuera to file for consignation of the
P42K. Ang argued that the amount is P150K not P42K because
The burden to perform covenants of deed of sale remained she cannot be compelled to accept partial payments.
with Amethyst contractual obligations, unlike rights or
benefits are generally not assignable. But there are Issue: Whether or not there was a valid tender of payment and
recognized means by which obligations may be transferred, like consignation.
sub-contract or novation.
Legal Subrogation, Present
In the case: The substitution of the petitioner in the place of Ang contends that there was no consent. Payment of a person
Amethyst did not result in the novation of the Deed of Sale. interested in the fulfillment of the obligation even without the
1. It does not appear from the records that the consent knowledge of the debtor under Article 1302 (3).
of Ortigas to the substitution had been obtained
despite its essentiality to the novation. Therefore, legal subrogation took place despite absence of
2. ASB Realty did not expressly assume Amethyst’s Ang’s consent to Figuera’s payment of the EIDC bills. Figuera is
obligations under the Deed of Sale, whether through now deemed as Ang’s creditor by operation of law. (The
the Deed of Assignment in Liquidation or others. preferred creditors are the utility companies because it would
3. The consent of ASB realty as the new debtor which as render EIDC inoperable if the obligations were not paid).
essential to the novation as that of Ortigas (creditor)
was not obtained. [NOTE: Delegacion used as basis]. Legal Compensation, Present
All elements of legal compensation are present. In the
There is still no express or implied indication that the petitioner assignment of business rights, Figuera stood as Ang’s debtor
had assumed Amethyst’s obligations. In short, the burden to for the consideration of P150K and Figuera became Ang’s
perform the covenants under the Deed of Sale, or the liability debtor for the P107K through Figuera’s subrogation to the
for the nonperformance thereof, remained with Amethyst. rights of Ang’s creditors.
ODIAMAR v. VALENCIA Both debts consist of a sum of money, which are both due,
There is No Novation by Substitution of Debtor. While it is liquidated and demandable. Neither party alleged that there
observed that indeed Odiamar agreed to settle her late parents’ was any claim raised by third persons against the said
debt evidenced by the check and installment payments, there obligation.
was no allegation of proof that the estates of her deceased
parents were released from any liability thereby. EFFECT: Even without the knowledge and consent of Ang or
Figuera, their obligation of P107K had already been
To constitute novation by substitution of debtor, the former exintguished. Consequently, Figuera owes Ang due amount of
debtor must be expressly released from the obligation and P42K.
that third person or new debtor must assume the place.
Tender of Payment and Consignation, Valid
The fact that the creditor accepts payments from a third person The remaining amount due in Figuera’s obligation is P42K.
who assumed obligation, will only result in the addition of Thus, Figuera’s tender of the remaining amount to Ang is valid
debtors and not novation.
and Ang offered no valid justification in refusing to accept the Marketing emerged as he highest bidder in the foreclosure sale.
payment. Thus, White Marketing stepped in the shoes of Metrobank.
Due to the creditor’s refusal, without any just cause, to the valid Through the assignment of credit, the new creditor is entitled
tender of payment, the debtor is released from her obligation to the rights and remedies available to the previous creditor
by the consignation of the sum due. and includes accessory rights such as mortgage or pledge.
EVER ELECTRICAL v. PBCOM IN THIS CASE: Consequently, ARC acquired all the rights,
Facts: Ever Electrical entered a loan with PBCOM of P65M for benefits, and obligations of Metrobank under its mortgage
working capital secured by two real estate mortgages. The contract with Grandwood. The same can be said for subsequent
parties entered into a compromise agreement whereby assignees or successors in interest including White Marketing.
Vicente voluntarily undertook to pay Ever’s loan to PBCOM. • White Marketing as the highest bidder in the
Vicente was not able to pay thus prompted PBCOM to file for foreclosure sale stepped into the shoes of the
MOEx and PBCOM was the highest bidder. assignee-mortgagee from CGAM3 by ARC from
Metrobank and has the benefit of the redemption
He argues that the Writ of Execution was erroneously issued period.
against Ever Electrical for it obligation to PBCOM was already
extinguished as it was substituted by Vicente when he assumed
full responsibility of the loan repayment.
Issue: Whether or not the execution of the foreclosure of the

mortgages were valid.
Rule: Yes. There was no novation. The compromise agreement

entered by the parties does not contain any provision releasing
Ever Electrical from its liability to PBCOM. In fact the approved
compromise agreement states:
Vicente is an additional person who would ensure payment of

loan.
Under the rules of novation, the mere act of adding another
person to be personally liable, did not constitute novation since
there was no agreement to release the old debtor.
WHITE MARKETING v. GRANDWOOD FURNITURE

Facts: Grandwood Furniture obtained loan of P40M from
Metrobank which credit was sold to ARC which was assigned to
CGAM3. After Grandwood failed to pay the loan, CGAM3
intitated extrajudicial foreclosure of the mortgage.
During the auction sale, White Marketing declared as the

highest bidder. A certificate of sale was registered and If the two eventually fell in love, despite the
annotated. But the Shariff sent a letter to White marketing disparity in their ages and academic levels,
stating that Grandwood intended to redeem foreclosed this only lends substance to the truism that the
property. White Marketing stated that Grandwood no longer heart has reasons of its own which reason
had right to redeem. does not know."
Insisting, Grandwood sent a letter to consign the amount. But - Chua-Qua v. Clave, 189 SCRA 117
was denied. RTC stated that the redemption period has passed
because the certificate was already registered.
However, CA stated that the rule on redemption period under

RA 8791 applies only in cases of foreclosure by a mortgagee
bank. It declared that White Marketing was not privy to the
loan.
In the case at bench, it is undisputed that Metrobank assigned

its rights to ARC, which later assigned the same to CGAM3.
After Grandwood defaulted, CGAM3 foreclosed and White
3. Preparatory – a means for future transaction (agency)

OBLIGATIONS AND CONTRACTS D. According to the parties obligated:
Civil Code 1. Unilateral – only one has obligation (commodatum)
2. Bilateral – reciprocal prestations (sale)
Articles 1305-1315
E. According to their name and designation:
TITLE II
1. Nominate – the contract is given a particular special
CONTRACTS
name like commodatum, sale or agency.
2. Innominate – no special name “I give that you may
CHAPTER I
GENERAL PROVISIONS give, do ut des.”
ARTICLE 1305 F. According to the risk of fulfillment

A contract is a meeting of minds between two persons 1. Commutative – here the parties contemplate a real
whereby one binds himself, with respect to the other to give fulfillment, equivalent values are given.
something or to render some service. 2. Aleatory – here the fulfillment is dependent upon
chance, values vary like insurance.
Contract, Defined
It is an agreement on the declaration of a common will. It is a
G. According to the time of performance or fulfillment:
juridical convention manifested in legal form, by which, one or
1. Executed – one completed at the time the contract is
more persons (or parties), bind themselves to the fulfillment of
entered into, “what is already paid for.”
a prestation to give, to do or not to do.
2. Executory – one where the prestations are to be
complied with some future time, a perfected sale
Defintion by Sanchez Roman:
where property has not yet been delivered.
It is a juridical convention manifested in legal form, by virtue of
which one or more persons bind themselves in favor of another
H. According to the subject matter:
or others, or reciprocally, to the fulfillment of a prestation to
1. Contracts involving things – like sale
give, to do or not to do.
2. Contracts involving rights or credits – provided these
are transmissible like usufruct or assignment of credits
Elements of a Contract
3. Contracts involving services – like agencies or carriage
1. Essential Elements – without them contract cannot
exist.
I. According to obligations imposed and regard by law
2. Natural Elements – those found in certain contracts,
1. Ordinary – like sale, the law considers as ordinary
presumed to exist, unless the contrary is stipulated.
2. Institutional – like contract of marriage (labor)
3. Accidental Elements – these are the various particular
provisions that may be agreed upon by the
J. According to the evidence required for its proof:
contracting parties in the contract. They are called
1. Those merely requiring oral or parol evidence
accidental, because they may be present or absent,
2. Those requiring written proof (Statute of Frauds)
depending or parties agreed upon them.
K. According to the number of persons actually and physically
Classification of Contracts
entering into contracts
A. According to perfection or formation:
1. Ordinary – where two parties are represented
1. Consensual – perfect by mere consent (sale)
2. Auto-contracts – where only one person represents
2. Real – perfected by delivery (pledge, commodatum)
two different parties, but in different capacities; like an
3. Formal or solemn – those where special formalities are
agent representing his principal sells a specific car to
essential before the contract may be perfected
himself as a buyer.
(donation inter vivos of a real property)
L. According to the number of persons who participated in
B. According to cause or equivalence of value of prestations
drafting the contract:
1. Onerous – where there is an interchange of equivalent
1. Ordinary – like an ordinary sale
valuable consideration
2. A contract of adhesion – like on prepared by a real
2. Gratuitous or lucrative – this is free; thus, one party
estate company for the sale of real estate; or one
receives no equivalent prestation except a feeling that
prepared by an insurance company.
one has been generous or liberal
3. Remunerative – where one prestation is given for a
M. According to the nature of the contract:
benefit or service that had been rendered previously.
1. Personal
2. Impersonal
C. According to importance or dependence
1. Principal – contract can stand alone
2. Accessory – depends its existence on another contract
Stages of a Contract ARTICLE 1307

1. Preparation or Concepcion – here the parties are Innominate contracts shall be regulated by the stipulations
progressing with their negotiations; they have not yet of the parties, by the provisions of Title I and Title II of this
Book, by the rules governing the most analogous nominate
arrived at any definite agreement, although there may
contracts, and by the customs of the place.
have been a preliminary offer and bargaining.
2. Perfection or birth – here the parties have at long last Governing Rules for Innominate Contracts
came into a definitive agreement, the elements of the 1. Stipulations
subject matter and valid cause have been accepted by 2. Titles I and II of Book IV of Civil Code
mutual consent. 3. Rules on most analogous nominate contracts
3. Consummation or death or termination – here the 4. Customs of the place
terms of the contract are performed, and the contract
may be said to have been fully executed. Four Kinds of Innominate Contracts
1. do ut des (I give that you may give)
Parties to a Contract 2. do ut facias (I give that you may do)
The meeting of the minds really refers to two parties. If at the 3. facio ut des (I do that you may give)
time of supposed perfection, one of the parties had already 4. facio ut facias (I do that you may do)
previously died, there can be no meeting of the minds, hence
no contract. ARTICLE 1308
The contract must bind both contracting parties; its validity
Basic Principles and Characteristics of Contracts or compliance cannot be left to the will of one of them.
1. Freedom to stipulated
2. Obligatory force and compliance in good faith Mutuality of Contracts
3. Perfection by mere consent The binding effect of the contract on both parties is based on
4. Both parties are mutually bound the principles that (1) that obligations arising from contracts
5. Relativity have force and effect of law between the contracting parties
and (2) that there must be mutuality between parties based on
Not Anyone Can Enter into Contracts their essential equality to which is repugnant to have only one
1. Husband and wife (except complete separation) party bound by the contract.
2. Agency
Consequences of Mutuality
Essential Elements (a) A party cannot revoke or renounce a contract without
1. Consent the consent of the other nor can it have it set aside on
2. Subject Matter the grounds that he had made a bad bargain.
3. Cause (b) When the fulfillment of the condition depends upon
the sole will of the debtor, the conditional obligations
Q. If a contract of sale does not have any document, is that a is void (1182) if the condition is suspensive. If
valid contract? Yes, because it is perfected by mere consent. resolutory, the condition to give power to cancel the
same to one party is normal for the agreement is really
ARTICLE 1306 being fulfilled.
The contracting parties may establish such stipulations,
clauses, terms and conditions, as they may deem convenient, ARTICLE 1309
provided they are not contrary to law, morals, good customs, The determination of the performance may be left to a third
public order, or public policy. person, whose decision shall not be binding until it has been
made known to contracting parties.
The Principle of Freedom (Autonomy of Will)
The free entrance in to contracts generally without restraint is Determination by Third Person
one of the liberties guaranteed to the people. However, the For example, in a contract of sale, the fixing of the price and
constitutional prohibition against impairments of contracts are delivery date can be left to a third person. The decision is
only for those legal. binding only after it has been made to a third person.
Limitations of Nature of the Stipulations ARTICLE 1310

1. The law The determination shall not be obligatory, if it is evidently
inequitable. In such case, the courts shall decide, what is
2. Morals
equitable under the circumstances.
3. Good customs
4. Public order Evidently Equitable is Not Binding
5. Public policy (a) What is equitable is a question of fact to be
ascertained from the attendant circumstances.
NOTE: The parties may generally agree on any contract but the (b) The court is called upon to decide which is equitable.
name should not be controlling, what governs is what they
intended it to be but not what they call it.
ARTICLE 1311 Requisites for Stipulation Pour Autrui

Contracts take effect only between their parties, their 1. There must be a stipulation in favor of a third person.
assigns and heirs, except in case where the rights and 2. The contracting parties must have clearly and
obligations arising from the contract are not transmissible
deliberately conferred a favor upon a third person.
by their nature, or by stipulation or by provision of law. The
heir is not liable beyond the value of the property he 3. A mere incidental benefit or interest of a person is not
received from the decedent. sufficient.
4. The stipulation must be a part of the contract.
If a contract should contain some stipulation in favor of a 5. The third person communicated his acceptance to the
third person, he may demand its fulfillment provided he obligor before its revocation (revocation by original
communicated his acceptance to the obligor before its parties – can be by demand).
revocation. A mere incidental benefit or interest of a person
6. There must be no relation of agency between either of
is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person. the parties and the third person.
Principle of Relativity The Third Exception

Contracts are generally effective only between the parties, When a third person induces another to violate his contract
theirs assigns and their heirs. under Article 1314.
A contract can only bind the parties who had entered into it or The Fourth Exception
their successors who assumed their personalities or their Whereby in some cases, third persons may be adversely
juridical positions. As a consequence, such contract can neither affected by a contract where they did not participate. This is
favor nor prejudice a third person. evident in case of collective contract like collective bargaining
contracts, suspension of payment.
Parties to a contract cannot thereby impose any liability who is • Respecting of lease from a sale of the property.
a stranger to the contract, in any event, in order to bind a third
person contractually, an expression of assent by such The Fifth Exception
person is necessary. Where the law authorizes the creditor to sue on a contract
entered into by his debtor or accion directa.
Exceptions to the Principle of Relativity
(a) Where obligations arising from the contract are not Article 1652. Even if a lessor does not have to respect the
transmissible by their nature, by stipulation or by sublease, still the sublessee is subsidiarily liable to the lessor for
provision of law. any rent due from the lessee.
(b) Where there is a stipulation pour autrui or a
stipulation in favor of a third party. Article 1729. Those who put their labor upon or furnish
(c) Where third person induce another to violate his materials for a piece of work by the contractor have an action
contract (1314). against the owner up to the amount owing from the latter.
(d) Where, in some cases, third persons may be adversely
affected by a contract where they did not participate ARTICLE 1312
In contracts creating real rights, third persons who come
(1312, 2150, 2151).
into possession of the object of the contract are bound
(e) Where the law authorizes the creditor to use on a thereby, subject to the provisions of the Mortgage Law and
contract entered into by his debtor (Accion Directa) Land Registration laws.
GENERAL RULE Real Right in Property

Contracts take effect only between the parties, their assigns, A real right directly affects property subject to it. Hence,
and heirs, therefore, generally, its terms cannot determine the whoever comes into possession of property must respect such
rights of third persons. real right. A real right binds property over which it is exercised.
• This is an exception to the relativity of contracts.
Strangers therefore cannot generally demand the enforcement
of a contract nor can they demands its annulment, nor they are ARTICLE 1313
bound by the same. Creditors are protected in cases of contracts intended to
defraud them.
The First Exception
Right of Defrauded Creditors
When the obligation arising from the contract are not
This is another exception when an outsider can in a sense
transmissible by their nature, by stipulations, or by provisions
interfere with another’s contract. When a debtor enters into a
of law. Example is a contract of partnership or agency.
contract in fraud of his creditors.
The Second Exception – Stipulation Pour Autrui
Example. If A gratuitously gives B a parcel of land and A has no
It is a stipulation in favor of a third person conferring a clear
other property or cash left to satisfy his creditors, said creditors
and deliberate favor upon him, and which stipulation is merely
may ask for rescission of the contract, to the extent of prejudice.
part of a contract entered, neither as agent.

Any third person who induces another to violate his contract Real contracts, such as deposit, pledge and commodatum,
shall be liable for damages to the other contracting party. are not perfected until the delivery of the object of the
obligation.
Interference by Third Persons
This article gives an instance when a stranger to a contract can Perfection of Real Contracts
be sued in view of his unwarranted interference. Whoever is Real contracts require consent, subject matter, cause or
injured may properly sue for damages. consideration and delivery. Delivery is required of the very
• Another situation where third person may be nature of the contract.
extended in the effects of a contract.
For example, a depositary cannot be expected to comply with
The induced and the inducer, the inducer is the third person his obligation of keeping the object safely unless it is delivered
and the induced is the one violated the contract due to the to him.
inducement. Both of the mare solidarily liable subject to the
following requisites: The Real Contracts Referred to
1. Existence of a valid contract 1. Deposit
2. Knowledge by the third person of the existence of the 2. Pledge
contract 3. Commodatum, a loan where the identical object must
3. Interference by the third person in the contractual be returned.
relation without justification.
Future Real Contracts as Consensual Contracts
Example. S a move actress has a one-year contract with XYZ A contract “to make a deposit, to make a pledge, or to make a
studio. If F, a friend of S, induces her, without any justifiable commodatum” is a consensual contract. After the delivery, the
cause, to break the contract, then XYZ Studio can sue F for contract becomes a real contract.
damages. (Star Cine and Regal Films offering of a higher
amount of money for star to break contract). Example. A agreed to lend B his car on September 8. If on
• If there was legal justification, suppose the movie star September 8, A refuses to deliver. B can sue him for damages
was a minor, then there can be no damages for it was because of the consensual contract to make a commodatum. If
an invalid contract. A had delivered the car and B through negligence damages the
car, A can sue him of the real contract of commodatum.\
ARTICLE 1315
Contracts are perfected by mere consent, and from that ARTICLE 1317
moment the parties are bound not only to the fulfillment of No one may contract in the name of another without being
what has been expressly stipulated but also to all the authorized by the latter, or unless he has by law a right to
consequences which, according to their nature, may be in represent him.
keeping with good faith, usage, and law.
A contract entered into the name of another by one who has
Consensuality of Contracts no authority or legal representation, or who has acted
The perfection of a contract is the moment from which it exists, beyond his powers, shall be unenforceable, unless it is
the juridical tie between the parties arises from that time. ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other
Consensual contracts are perfected by mere consent which is
contracting party.
the meeting of the minds of the parties upon the terms of the
contract. The consent need not be made expressly. Requisite for a Person to Contract in the Name of Another
(a) He must be duly authorized (expressly or impliedly)
Perfection (b) he must have by law a right to represent him (like
Consensual contracts are perfected from the moment there is guardian or administrator)
agreement (consent) on the subject matter, and the cause of (c) Or the contract must be subsequently ratified
consideration. (expressly or impliedly).
Consequences of Perfection Implied Ratification

1. The parties are bound to the fulfillment of what has Ratification can be implied from acts, such as when the owner
been expressly stipulated and compliance thereof of a hacienda which was sold to strangers without his authority,
must be in good faith. (If the true intention is not collected the amount in a PN given as purchase price.
expressed in written agreement, the proper remedy is
reformation under Article 1359). Effect of Ratification
Ratification cleanses the contract from all its defects from the
2. The parties are also bound to all the consequences moment the contract was entered into. Hence, there is a
which according to their nature, may be in keeping retroactive effect. The can be no more ratification if the contract
with good faith, usage and law. is now revoked by the other party.
CHAPTER 2 Theories
ESSENTIAL REQUISITES OF CONTRACTS 1. Cognition Theory – contract is perfected only upon
the knowledge of the offer of the acceptance of the
GENERAL PROVISIONS
offeree. (Used if consent is manifestation through the
ARTICLE 1318 telegram).
There is no contract unless the following requisites concur: 2. Manifestation Theory – contracts are perfected the
1. Consent of the contracting parties; moment acceptance is declared regardless of whether
2. Object certain which is the subject matter of the the declaration had come to the knowledge of the
contract; offeror or not.
3. Cause of the obligation which is established. 3. Expedition Theory – contracts are perfected the
moment the offeree transmits the acceptance to the
Parties to Contract
offer, such as letter or telegram.
There must be at least two parties to every contract, and their
4. Reception Theory – contracts are perfected upon the
capacity and consent are essential element to its existence. The
time the acceptance is in the hand of the offeror
number of parties however, should not be confused with the
(regardless of knowledge or if he read the same).
number of persons. A single person can represent two parties.
Requisites of Consent
Requisites under Different Kinds of Contracts for Perfection
1. Plurality of subjects – there must be two or more
• Article 1318 enumerates the essential requisites for
parties present
the consensual contracts.
2. Capacity – the parties must be capable or capacitated
• Real contracts require a fourth requisite of delivery.
(if insane then voidable).
• Formal contracts require a fourth requisite of
3. Intelligent and free will – there must be no vitiation of
compliance with the formalities required by law.
consent, otherwise, voidable.
4. There must be no conflict between what was expressly
What Consent Presupposes
declared and what was really intended. (Otherwise
Consent presupposes legal capacity and the fulfillment of
remedy may be reformation or else the contract is
conditions should there be any attached,
void it is tantamount of being fictitious).
5. The intent must be declared properly (compliance
Effect of Non-Consent
with proper legal formalities).
1. If there is absolutely no consent, there is no contract.
The agreement may be considered inexistent or void.
Requisites for the Meeting of the Minds
The same rule applies to a simulated contract.
1. An offer that must be certain
2. If there is a vitiation or vice of consent such as error,
2. An acceptance that must be unqualified and
fraud, undue influence the contract is not void but it
absolute (If the acceptance is qualified, like a
is merely voidable.
condition, this constitutes as a counter-offer).
SECTION 1
CONSENT An Offer that is Certain
It must not be vague, misleading, or made as a joke. A
ARTICLE 1319 declaration of intention is not a certain offer.
Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the causes which are to If two contracts are offered, but they are independent from each
constitute the contract. The offer must be certain and the other, acceptance of one does not imply acceptance of the
acceptance absolute. A qualified acceptance constitutes a other (sale and lease).
counter-offer.
Acceptance made by letter or telegram does not bind the But if one contract depends on the other (loan and mortgage)
offeror except form the time it came to his knowledge. The it is essential that there be an agreement on both transactions.
contract, in such a case, is presumed t o have been entered in Otherwise no meeting of the minds.
to the place where the offer was made.
An Acceptance that is Unqualified and Absolute
Consent If there is completely no acceptance or if the offer is expressly
It is the meeting of the minds between the parties on the rejected there is no meeting of the mins. There can be no
subject matter and the cause of the contract, even if neither one perfected contract in a qualified acceptance for it is a counter-
has been delivered. It is the manifestation of the meeting of the offer.
offer and the acceptance upon the thing and the cause which
are to constitute the contract. Amplified Acceptance
There is acceptance but there is qualification, a mere
Example. A offered to sell B a car for P2M, before B could amplification of the offer must be understood as an
consent, A withdrew the offer. A was allowed to do so because acceptance of the original offer, plus a new offer which is
there was no meeting of the minds yet, no contract yet. contained in the amplification.
ARTICLE 1320
An acceptance may be express or implied.
Forms of Acceptance
Acceptance may be:
1. Express
2. Implied
3. Presumed by law
Examples of Implied Acceptance. An offer by Army to reward

persons giving information that would lead apprehension of
certain rebels when the act is performed by some members of
the public. Participation in the contest, with full compliance of
the rules, is implied acceptance when the offer is fulfilled.
ARTICLE 1321
The person making the offer may fix the time, place, and
manner of acceptance, all of which must be complied with.
Thing that May Be Fixed of the Offeror

(a) The time
(b) The place
(c) The manner of acceptance
ARTICLE 1322
An offer made through an agent is accepted from the time
acceptance is communicated to him.
Acceptance of an Offer Made through an Agent

The article applies when both offer, and the acceptance are
made through an agent. Any other intermediary is merely a sort
of messenger who must communicate to the person who sends
him, as thus there is no meeting of the minds.
ARTICLE 1323
An offer becomes ineffective upon death, civil interdiction,
insanity or insolvency of either party before acceptance is
conveyed.
When Offer Becomes Ineffective

1. Death
2. Civil Interdiction
3. Insanity
4. Insolvency
Other Instances
1. When the offeree expressly or impliedly rejects offer
2. When offer is accepted with qualification or
amplification
3. When before acceptance is communicated, the
subject matter has become illegal or impossible;
4. When the period of time given o the offer within which
to signify his acceptance already lapsed.
5. When the offer is revoked in due to time, before the
offeror has learned of its acceptance.
OBLIGATIONS AND CONTRACTS Autonomy of Contracts

Articles 1305-1308 Obligations arising from contracts have the force of law
between the parties and should be complied with in good faith.
JURISPRUDENCE NOTES
In characterizing the contract as having the force of law
between the parties, the law stresses the obligatory nature of a
1306. Autonomy of Contracts
binding and valid agreement.
WILLIAM GOLANGCO CONSTRUCTION v. PCIB (2006)

IN THE CASE: The provision in the construction contract providing
485 SCRA 293
for a defects liability period was not shown as contrary to law,
Facts: William Golangco Construction Corporation (WGCC) and morals, good customs, pubic order or public policy. By the
the Philippine Commercial International Bank (PCIB) entered nature of the obligation in such contract, the provision limiting
into a contract for the construction of the extension of the PCIB liability for defects and fixing specific guaranty periods was not
Tower II on October 20, 1989. It included the application of a only fair and equitable; it was also necessary. Without such
granitite wash-out finish on the exterior walls of the building. limitation, the contractor would be expected to make a
perpetual guarantee on all materials and workmanship.
In June 1, 1992, PCIB accepted turnover of completed work and
to answer for any defect arising within a period of one year, The contract did not specify a different period for defects in the
WGCC submitted a guarantee bond issued by Malayan granitite wash-out finish; hence, any defect therein should have
Insurance in compliance with the construction contract. been brought to WGCC’s attention within the one-year
defects liability period in the contract. The courts will not
The issue arose when portions of the granitite wash-out finish relieve a party from the effects of an unwise or unfavorable
of the exterior of the building began peeling off and falling from contract freely entered into.
the walls in 1993. WGCC made minor repairs.
Defects were Not Hidden
But in 1994, PCIB entered into another contract with Brains and CONTENTION: The lower courts conjectured that the peeling off
Brawns Corporation to re-do the entire granitite wash-out finish of the granitite wash-out finish was probably due to “defective
after WGCC that it was “not in a position to do the new finish materials and workmanship.” This they characterized as hidden
work” though it was willing to share a part of the cost. PCIB or latent defects.
incurred P11.6M for the repair work.
COURT REPLY: We, however, do not agree with the conclusion
Construction Industry Arbitration Commission that the alleged defects were hidden.
PCIB filed a request for arbitration with the CIAC for the 1. PCIB’s team of experts who were specifically employed
reimbursement of its expenses for the repairs made by another to detect such defects supervised WGCC’s
contractor it complaint WGCC alleged non-compliance with workmanship.
their contractual terms on materials and workmanship. WGCC 2. WGCC regularly submitted progress reports and of
interposed a P5.7M counter-claim for material cost. photographs.
3. WGCC work under fair and transparent circumstances.
CIAC declared WGCC liable for the construction defects in the PCIB had access to the site and exercised reasonable
project. WGCC filed for review with CA but was dismissed. supervision.
4. PCIB issued punch-lists for compliance before
Issue acceptance by it.
Whether or not petitioner WGCC is liable for defects in the 5. PCIB supplied the materials for the granitite wash-out
granitite wash-out finish that occurred after the lapse of the finish.
one-year defects liability period. 6. PCIB team of experts gave their concurrence to the
turn-over of the project.
COURT RULING: The court rules in favor of WGCC.
The purpose of the defects liability period was precisely to give
Defects Liability Period PCIB additional, albeit limited, opportunity to oblige WGCC to
The controversy pivots on the provision of defects liability make good any defect, hidden or otherwise, discovered within
period. Pertinent provision of the contract states: one year.
the CONTRACTOR hereby guarantees the work stipulated Under the circumstances, there were no hidden defects for
in this Contract and shall make good any defect in materials which WGCC could be held liable. Neither was there any other
and workmanship which [becomes] evident within one (1) defect for which PCIB made any express reservation of its rights
year after the final acceptance of the work. against WGCC.
A careful reading of the stipulations, however, leads us to the Indeed, the contract should not be interpreted to favor the one
conclusion that WGCC’s arguments are more tenable. who caused the confusion, if any. The contract was prepared by
TCGI for PCIB.
CASTRO v. TAN (2009) COURT RULING: Yes. The Court of Appeals correctly found that the
485 SCRA 293 5% monthly interest, compounded monthly, is unconscionable
and should be equitably reduced to the legal rate of 12% per
The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a annum.
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the The Suspension of Usury Law Ceiling
human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of
Not License to Raise Interest Rates
public or private morals. – Del Castillo, J. While we agree with petitioners that parties to a loan
agreement have wide latitude to stipulate on any interest rate
Facts: Angelina de Leon Tan, and her husband Ruben Tan were in view of the Central Bank Circular No. 905 s. 1982 which
the former registered owners of the 240 sq.m. residential lot in suspended the Usury Law ceiling on interest effective January
Barrio Canalate, Bulacan. On February 17, 1994, they entered 1, 1983, it is also worth stressing that interest rates whenever
into an agreement with petitioners Spouses Castro unconscionable may still be declared illegal.
denominated as Kasulatan ng Sanglaan ng Lupa at Bahay to
secure a loan of P30,000 they obtained from Spouses Castro. There is nothing in said circular which grants lenders carte
blanche authority to raise interest rates to levels which will either
Under the Kasulatan, the Spouses Tan undertook to pay the enslave their borrowers or lead to a hemorrhaging of their assets.
mortgage debt within 6 moths with an interest rate of 5% per
month compounded monthly. When Ruben Tan died, IN THIS CASE:The 5% monthly interest rate, or 60% per annum,
Angelina Tan was left with the responsibility of paying of the compounded monthly, stipulated in the Kasulatan. Thus, we
loan. However, she failed to pay. Thereafter, she offered to pay similarly hold the 5% monthly interest to be excessive,
the petitioners the principal amount of P30,000 plus a portion iniquitous, unconscionable and exorbitant, contrary to morals,
of the interest but petitioners refused and instead demanded and the law. It is therefore void ab initio for being violative of
payment of an accumulated P359,000.00. Article 1306 of the Civil Code. The court holds that the interest
should be 12% per annum.
On 1999, Spouses Castro caused the extrajudicial foreclosure of
the REM and emerged as the only bidder and the period of Freedom of Contract is Not Absolute
redemption expired and the title was consolidated to the CONTENTION: They also stress that it is a settled principle that the
Castros. After a writ of possession, the Tans were ejected. law will not relieve a party from the effects of an unwise, foolish
or disastrous contract, entered with all the required formalities
RTC. Tan with others, filed a Nullification of Mortgage and and with full awareness of what he was doing.
Foreclosure and/or partial rescission for they alleged that the
interest rate imposed on the principal amount of P30K was COURT REPLY: This contention deserves scant consideration. The
unconscionable. It ruled in favor of the respondents. freedom of contract is not absolute for it is subject to
reasonable legislative regulation like Article 1306 of the Civil
CA. It affirmed RTC finding the interest rate stipulated in the Code. To reiterate, we fully agree with the Court of Appeals in
Kasulatan as iniquitous or unconscionable and thus reduced the holding that the compounded interest rate of 5% per month, is
legal rate of 12% per annum. At the same time, the appellate iniquitous and unconscionable. Being a void stipulation, it is
court declared that respondents may redeem the mortgaged deemed inexistent from the beginning.
property notwithstanding the expiration of the period of
redemption, in the interest of substantial justice and equity. There is no unilateral of the terms and conditions of the
Kasulatan entered by the parties. Surely, it is more consonant
Arguments of the Spouses Castro with justice that the subject interest rate be equitably reduced
Petitioners contend that with the removal by the Bangko and the legal interest of 12% per annum is deemed fair and
Sentral of the ceiling on the rate of interest that may be reasonable.
stipulated in a contract of loan, the lender and the borrower
could validly agree on any interest rate on loans. Foreclosure Proceedings Cannot be Given Effect
CONTENTION: Petitioners argue that this cannot be done because
Arguments of Tan the right of redemption had long expired and same is no longer
The said stipulated interest for being excessive and contrary to possible beyond the one-year period.
morals, if not against the law. They also point out that a contract
has the force of law between the parties, but only when the COURT REPLY:It is evident that despite considerable effort on her
terms, clauses and conditions thereof are not contrary to law, part, respondent Tan failed to redeem the mortgaged property
morals, public order or public policy because she was unable to raise the total amount of
P359,000.00, an amount grossly inflated by the excessive
Issue interest imposed. Thus, it is only proper that respondents be
Whether or not the stipulated interest was contrary to law, given the opportunity to repay the real amount of their
morals, public order or public policy. indebtedness.
HELD: On this basis, we nullify the foreclosure proceedings held As to the P1.7M, The RTC found that the 23% interest rate p.a.,
on March 3, 1999 since the amount demanded as the which was then the prevailing loan rate of interest could not be
outstanding loan was overstated. Consequently, it has not been considered unconscionable, since banks are not hospitable or
shown that the respondents have failed to pay the correct equitable institutions but are entities formed primarily for profit.
amount of their outstanding obligation. Accordingly, we
declare the registration of the foreclosure sale invalid and It also found that Article 1229 of the Civil Code invoked by
cannot vest title over the mortgaged property. petitioners for the reduction of the interest was not applicable,
since petitioners had not paid any single centavo of the P1.7
MALLARI v. PRUDENTIAL BANK (2013) million loan which showed they had not complied with any part
697 SCRA 555 of the obligation.
Facts: On December 11, 1984, petitioner Florentino Mallari
CA found that the time deposit was equivalent only to the
obtained from Prudential a loan in the amount of P300K. Under
P300K principal but not sufficient to cover interest, penalties
the PN, the loan was subject to an interest of 21% per annum
and AFees agreed upon thus the balance of P594K. The interest
with AFees of 15% of the total value, and in case of default, a
rates and penalties were not unconscionable.
penalty and collection charge of 12% per annum. Petitioner
Florentino executed a Deed of Assignment wherein he
Issue
authorized the respondent bank to pay his loan with his time
Whether the 23% per annum interest rate and the 12% per
deposit with it on the amount of P300K.
annum penalty charge on petitioners’ P1.7M loan to which they
agreed upon is excessive or unconscionable.
On 1989, Spouses Mallari obtained again from Prudential a loan
of P1.7M with a maturity on March 1990 and that the loan will
Stipulated Interest Rates of 3% Per Month or Higher
bear an interest of 23% interest per annum, Petitioners
Is Excessive, Unconscionable and Exorbitant, Principle
executed a Deed of Real Estate Mortgage covering a property
MALLARI’S CONTENTION: However, petitioners now contend that
to answer for the said loan.
the interest rate of 23% p.a. imposed by respondent bank is
excessive or unconscionable.
Petitioners failed to settle obligation thus sent a demand letter
which was computed P571K on the first loan and P2.99M for
COURT REPLY: The court is not persuaded. We said that we need
the second loan. On 1992, the bank filed with RTC for the
not unsettle the principle we had affirmed in a plethora of cases
extrajudicial foreclosure of the mortgaged property for the
that stipulated interest rates of 3% per month and higher are
satisfaction of the P1.7M. On 1992, respondent Bank sent
excessive, unconscionable and exorbitant, hence, the
Spouses Mallari SOA that first loan is now P594K and the
stipulation was void for being contrary to morals.
second loan is now P3.171M.
IN THIS CASE:The interest rate agreed upon was 23% per annum
On 1992, Spouses Mallari filed a complaint alleging that
or less than 2% per month. Thus, there is no similarity of
1. The P300K loan should have been paid for the time
factual milieu for the application of those cases. We do not
deposit was already assigned to Prudential.
consider the interest rate of 23% p.a. agreed upon by
2. The bank still added the P300,000.00 loan to the P1.7
petitioners and respondent bank to be unconscionable.
million loan obligation for purposes of applying the
proceeds of the auction sale
Clearly, jurisprudence establish that the 24% p.a. stipulated
3. they realized that there were onerous terms and
interest rate was not considered unconscionable, thus, the 23%
conditions imposed by respondent bank when it tried
p.a. interest rate imposed on petitioners’ loan in this case can
to unilaterally increase the charges and interest over
by no means be considered excessive or unconscionable.
and above those stipulated.
PENALTY 12% PER ANNUM NOT EXCESSIVE: Here, petitioners

Prudential argued that:
defaulted in the payment of their loan obligation with
1. The interest rates were clearly provided in the PN.
respondent bank and their contract provided for the payment
2. The 300K deposit was used.
of 12% p.a. penalty charge, and since there was no showing that
3. The 300K was applied first to the interest and penalty
petitioners’ failure to perform their obligation was due to force
charges.
majeure or to respondent bank’s acts, petitioners cannot now
back out on their obligation to pay the penalty charge.
RTC denied the issuance of the WOPInj, but it reversed itself
and issued a restraining Order for the foreclosure. But RTC
A contract is the law between the parties and they are bound
granted the Motion to Lift by Prudential thus extrajudicial
by the stipulations therein.
foreclosure proceeded. A Certificate of Sale was issued to
Prudential being the highest bidder in the amount of P3.5M.
HELD: WHEREFORE, the petition for review is DENIED. The
Decision dated June 17, 2010 and the Resolution dated July 20,
RTC Dismissal. RTC found that P300,00 payment was paid for
2011 of the Court of Appeals are hereby AFFIRMED.
it was paid on the maturity date and furthered by extension.
HEIRS OF MANUEL UY EK LIONG v. CASTILLO (2013) COMPLAINT: Faulting respondents with unjustified refusal to
697 SCRA 294 comply with their obligation under the Kasunduan, petitioners
prayed that the former be ordered to execute the necessary
Facts: Mauricia and Felipe Castillo was owner of four parcels of
Deed of Absolute Sale over their shares in the subject parcels,
land with of aggregate 53,307 sq.m. in Lucena City. With death
with indemnities for moral and exemplary damages, as well as
of Felipe, it was extrajudicially partitioned between Mauricia,
attorney’s fees, litigation expenses and the costs of the suit.
Beunaflor, Victoria, Bertilla, Marietta, Leovina and Philip.
COUNTER-CLAIM: Agreement and the Kasunduan were illegal for

However, the property used as a security for the payment of a
being unconscionable and contrary to public policy,
tractor purchased by Mauricia’s nephew, Santiago from
respondents averred that Atty. Zepeda was an indispensable
Bormaheco it appears that the properties were sold in a public
party to the case. Together with the dismissal of the complaint
auction and ICP tendered the highest bid and CIP sold said
and the annulment of said contracts and TCT No. T-72026,
parcels to PMPCI. Respondents instituted Civil Case for
respondents sought the grant of their counterclaims for moral
annulment of the transaction or proceedings involving subject
and exemplary damages, as well as attorney’s fees and litigation
parcel of land as well as the TCT.
expenses.
Encountering, financial difficulties in the prosecution of this Civil
RTC rendered a decision finding the Kasunduan valid and
Case, respondent and Buenaflor entered in to an Agreement
binding between respondents and petitioners who had the
whereby they procured the legal services of Atty. Zepada and
right to demand its fulfillment as Manuel’s successors-in-
assistance of Manuel Uy Ek Liong as financiers agreed to
interest. Brushing aside Philip’s testimony that respondents
underwrite the litigation expenses entailed by the case. In
were forced to sign the Kasunduan, the RTC ruled that said
exchange they stipulated that in the event of a favorable
contract became effective upon the finality of this Court’s
decision Zepada and Manuel Uy Ek Liong shall would be
September 1990 Decision in G.R. No. 89561 which served as a
entitled to a share of 40% of all the realties and/or
suspensive condition therefor.
monetary benefits, gratuities or damages.
Having benefited from the legal services rendered by Atty.

On the same date, respondents entered into another
Zepeda and the financial assistance extended by Manuel,
Kasunduan whereby they agree to sell their remaining 60%
respondents were also declared estopped from questioning the
share in the subject parcels in favor or Manuel for P180K. The
validity of the Agreement.
parties stipulated that Manuel would pay a DP of P1K.
CA rendered the herein assailed decision, setting aside the

It was likewise agreed that any party violating the Kasunduan
RTC’s decision, upon the following findings and conclusions:
would pay the aggrieved party a penalty fixed in the sum of
1. The Agreement and the Kasunduan were by products
P50,000.00, together with the attorney’s fees and litigation
partnership between Atty. Zepeda and Manuel who,
expenses incurred should a case be subsequently filed in court.
as a non-lawyer, was not authorized to practice law;
The parties likewise agreed to further enter into such other
2. Void under 1491(5) which prohibits lawyers from
stipulations as would be necessary to ensure that the sale would
acquiring properties which are objects of litigation of
push through and/or in the event of illegality or impossibility of
which they have taken part.
any part of the Kasunduan. (Manuel died substituted by heirs).
3. Jointly designed to completely deprive respondents of
the subject’s parcels, the Agreement and Kasunduan
Supposedly acting on the advice of Atty. Zepeda, respondents
are unconscionable.
wrote petitioners a letter dated 22 March 1993, essentially
informing petitioners that respondents were willing to sell their
Issue
sixty (60%) percent share in the subject parcels for the
Whether or not the CA erred in finding the Kasunduan void ab
consideration of P500.00 per square meter.
initio for being contrary to law and public policy for being
violative of Article 1491 (5) of the Civil Code and CPR.
Insisting on the price agreed upon in the Kasunduan, however,
petitioners sent a letter dated 19 May 1993, requesting
COURT RULING: The petitioner is partly meritorious.
respondents to execute within 15 days from notice the
necessary Deed of Absolute Sale over their 60% share as
Article 1491(5), Inapplicable
aforesaid, excluding the 1,750-square meter portion specified
Admittedly, Article 1491 (5)45 of the Civil Code prohibits
in their agreement with Manuel. Informed that petitioners were
lawyers from acquiring by purchase or assignment the property
ready to pay the remaining P179,000.00 balance of the agreed
or rights involved which are the object of the litigation in which
price, respondents wrote a 28 May 1993 reply, reminding the
they intervene by virtue of their profession. The CA lost sight of
former of their purported refusal of earlier offers to sell the
the fact, however, that the prohibition applies only during the
shares of Leovina and of Buenaflor who had, in the meantime,
pendency of the suit and generally does not cover contracts
died. In a letter dated 1 June 1993, respondents also called
for contingent fees where the transfer takes effect only after
petitioners’ attention to the fact, among others, that their right
the finality of a favorable judgment.
to ask for an additional consideration for the sale was
recognized under the Kasunduan.
AGREEMENT: Executed in exchange for the legal services of Atty. In the absence of a showing that they expressly reserved the
Zepeda and the financial assistance to be extended by Manuel, right to pay the penalty in lieu of the performance of their
the Agreement concerned respondents’ transfer of 40% of the obligation under the Kasunduan, respondents were correctly
avails of the suit, in the event of a favorable judgment in Civil ordered by the RTC to execute and deliver a deed of
Case No. 8085. conveyance over their 60% share in the subject parcels in favor
of petitioners.
KASUNDUAN: While concededly subject to the same suspensive
condition, the Kasunduan was, in contrast, concluded by Considering that the Kasunduan stipulated that respondents
respondents with Manuel alone, for selling in favor of the latter would retain a portion of their share consisting of 1,750 square
60% of their share in the subject parcels for the agreed price of meters, said disposition should, however, be modified to give
P180,000.00. full effect to the intention of the contracting parties. Since the
parties also fixed liquidated damages in the sum of
Given these clear distinctions, petitioners correctly argue that P50,000.00 in case of breach, we find that said amount should
the CA reversibly erred in not determining the validity of the suffice as petitioners’ indemnity, without further need of
Kasunduan independent from that of the Agreement. compensation for moral and exemplary damages.
Kasunduan is a Valid and Binding Contract 1308. Principle of Mutuality of Contracts

Already partially executed with respondents’ receipt of
P1,000.00 from Manuel upon the execution thereof, the PHILIPPINE NATIONAL BANK v. CA (1994)
Kasunduan simply concerned the sale of the former’s 60% share 238 SCRA 20
in the subject parcel, less the 1,750-square meter portion to be
Facts: On April 7, 1982, Fernandez as owners of a NACIDA-
retained, for the agreed consideration of P180,000.00. As a
registered enterprise, obtained a loan from CIGLF from the PNB
notarized document that carries the evidentiary weight
in the amount of P50K as evidence by a Credit Agreement,
conferred upon it with respect to its due execution, the
under the PN the loan was to be amortized over a period of
Kasunduan was shown to have been signed by respondents
three years at 12% interest annually.
with full knowledge of its contents.
To secure the loan Fernandez executed a REM over a 1.5-
CONTENTION: The Kasunduan was tantamount to unjust
hectare parcel of unregistered agricultural land at Toledo City
enrichment and “a clear source of speculative profit” at their
which was appraised by PNB at P1,062 and given a loan value
expense since their remaining share in said properties had “a
of P531. In addition, there was a Chattel Mortgage over a
current market value of P9,594,900.00, more or less.”
thermo plastic-forming machine which had an appraised value
of P8,800 and a loan value of P4,400.
COURT FINDINGS: In the absence of any showing, however, that
the parties were able to agree on new stipulations that would
The Promissory Note, in turn, authorized the PNB to raise the
modify their agreement, we find that petitioners and
rate of interest, at any time without notice, beyond the
respondents are bound by the original terms embodied in the
stipulated rate of 12% but only ‘within the limits allowed by law.
Kasunduan. Obligations arising from contracts, after all, have
the force of law between the contracting parties who are
In 1983, they had additional loan of P50K which contained
expected to abide in good faith with their contractual
similar provisions and terms, but they executed a new credit
commitments, not weasel out of them.
agreement changing the amount of the loan from P50K to
P100K but otherwise preserving the stipulation, they
Moreover, when the terms of the contract are clear and leave
constituted another Real Estate Mortgage of 311 sq.m. which
no doubt as to the intention of the contracting parties, the
had a value of P40K with a loan value of P28K.
rule is settled that the literal meaning of its stipulations should
govern. In such cases, courts have no authority to alter a
In a letter dated August 1, 1984, the PNB informed Fernandez
contract by construction or to make new contract for parties.
that the interest rate of CIGLF loan account with us is now
25% per annum plus a penalty of 6% per annum on past
Since their duty is confined to the interpretation of the one
dues. The PNB further increased this interest rate to 30% on
which the parties have made for themselves without regard to
October 15, 1984; and to 42% on October 25, 1984.
its wisdom or folly, it has been ruled that courts cannot supply
material stipulations or read into the contract words it does not
The records show that as of December 1985, (private
contain.
respondents) had an outstanding principal account of
P81,000.00 of which P18,523.14 was credited to the principal,
PENALTY CLAUSE IN KASUNDUAN: Our perusal of the Kasunduan
P57,488.89 to the interest, and the rest to penalty and other
also shows that it contains a penal clause which provides that a
charges.
party who violates any of its provisions shall be liable to pay the
aggrieved party a penalty fixed at P50,000.00, together with the
Thus, as of said date, the unpaid principal obligation of (private
attorney’s fees and litigation expenses incurred by the latter
respondents) amounted to P62,830.32
should judicial resolution of the matter becomes necessary.
Fernandez filed a suit for specific performance against PNB and ALLIED BANKING CORPORATION v. CA (1998)
NACIDA for the release of mortgage and payment of damages. 284 SCRA 357
Trial court dismissed. CA disallowed the increases.
Facts: Spouses Tanqueco owned a 512 sq.m. lot at Quezon City.
On June 30, 1978, they leased the property to petitioner Allied
Issues
Banking for a monthly rental of P1000 for the first three years,
Whether or not CA erred in disallowing the increase of the
adjustable 25% every three years thereafter.
interest rates made by PNB.
The lease contract specifically states that, “the terms of this
COURT RULING: No. The petition is bereft of merit.
lease shall be 14 years any may be renewed for a like term at
the option of the lessee”
Unilateral Increase by Escalation Clause
In making the unilateral increases in interest rates, petitioner
Pursuant to the lease agreement, Allied introduced an
bank relied on the escalation clause in their credit agreement:
improvement on the property consisting of a concrete building
with a floor area of 340 sq.m. which it used as a branch office.
The Bank reserves the right to increase the interest rate within
As stipulated, the ownership of the building would be
the limits allowed by law at any time depending on whatever
policy it may adopt in the future and provided, that, the interest transferred to the lessors upon the expiration of the original
rate on this accommodation shall be correspondingly decreased term of the lease.
in the event that the applicable maximum interest rate is reduced
by law or by the Monetary Board. In either case, the adjustment In February 1988, the Tanqueco spouses executed a Deed of
in the interest rate agreed upon shall take effect on the effectivity Donation over the subject property in favor of their four
date of the increase or decrease in maximum interest rate. children. On 1991, a year before the expiration of the contract
of lease, the Tanqueco’s notified Allied that they were no longer
P.D. No. 1684 and C.B. Circular No. 905 no more than allow interested to renew the lease. Allied replied that it was
contracting parties to stipulate freely regarding any subsequent exercising its option to renew their lease under the same terms
adjustment in the interest rate that shall accrue on a loan or with additional proposals.
forbearance of money, goods or credits. In fine, they can agree
to adjust, upward or downward, the interest previously When the lease contract expired in 1992 private respondents
stipulated. However, contrary to the stubborn insistence of demanded that Allied vacate the premises.
petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without But the latter asserted its sole option to renew the lease and
the other’s consent. enclosed in its reply letter a cashier’s check in the amount of
P68,400.00 representing the advance rental payments for six
Contract Changes, Consent Required (6) months considering the escalation clause. Private
It is basic that there can be no contract in the true sense in the respondents however returned the check to Allied, prompting
absence of the element of agreement, or of mutual assent of the latter to consign the amount in court.
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 MeTC found contract violative of Article 1308 as well as
under duress or by a person of unsound mind. affirmed by RTC and the CA. On 1983, vacated the leased
premises by reason of the controversy.
Similarly, contract changes must be made with the consent of
the contracting parties. The minds of all the parties must meet Issue
as to the proposed modification, especially when it affects an Whether in a stipulation in a contract of lease to the effect that
important aspect of the agreement. In the case of loan the contract may be renewed for a like term at the option of he
contracts, it cannot be gainsaid that the rate of interest is lessee is void for being potestative or violative of the principle of
always a vital component, for it can make or break a capital mutuality of contracts.
venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect. Allied Banking’s Arguments
Allied insists before us that Provision No. 1 of the lease contract
IN THIS CASE: We cannot countenance petitioner bank’s was mutually agreed upon hence valid and binding on both
posturing that the escalation clause at bench gives it unbridled parties, and the exercise by petitioner of its option to renew the
right to unilaterally upwardly adjust the interest on private contract was part of their agreement and in pursuance thereof.
respondents’ loan. That would completely take away from
private respondents the right to assent to an important COURT REPLY: We agree with petitioner. Article 1308 of the Civil
modification in their agreement and would negate the Code expresses what is known in law as the principle of
element of mutuality in contracts. His silence per se cannot mutuality of contracts. It provides that “the contract must bind
be construed as an acceptance, there is even no implicit both the contracting parties; its validity or compliance cannot
agreement to the proposed increases in interest rate. be left to the will of one of them.”
HELD: Petition denied for lack of merit and CA decision affirm.

This binding effect of a contract on both parties is based on the As we see it, the only term on which there has been a clear
principle that the obligations arising from contracts have the agreement is the period of the new contract, i.e., fourteen (14)
force of law between the contracting parties, and there must be years, which is evident from the clause “may be renewed for a
mutuality between them based essentially on their equality like term at the option of the lessee,” the phrase “for a like term”
under which it is repugnant to have one party bound by the referring to the period.
contract while leaving the other free therefrom. the contract
while leaving the other free therefrom. RENDER THE OPTION WORTHLESS: If we were to adopt the contrary
theory that the terms and conditions to be embodied in the
The ultimate purpose is to render void a contract containing a renewed contract were still subject to mutual agreement by and
condition which makes its fulfillment dependent solely upon between the parties, then the option—which is an integral part
the uncontrolled will of one of the contracting parties. of the consideration for the contract—would be rendered
worthless. For then, the lessor could easily defeat the lessee’s
IN THE CASE: An express agreement which gives the lessee the right of renewal by simply imposing unreasonable and onerous
sole option to renew the lease is frequent and subject to conditions to prevent the parties from reaching an agreement, as
statutory restrictions, valid and binding on the parties. in the case at bar.
This option, which is provided in the same lease agreement, is VACATED BY ALLIED:Fortunately for the Tanquecos, Allied had
fundamentally part of the consideration in the contract and vacated the premises on 20 February 1993 indicating its
is no different from any other provision of the lease abandonment of whatever rights it had under the renewal
carrying an undertaking on the part of the lessor to act clause. Consequently, what remains to be done is for Allied to
conditioned on the performance by the lessee. pay rentals for the continued use of the premises until it
vacated the premises.
It is a purely executory contract and at most confers a right to
obtain a renewal if there is compliance with the conditions ON ATTACKING VALIDITY OF DONATION: Finally, Allied cannot assail
on which the right is made to depend. the validity of the deed of donation, not being a party thereto.
A person who is not principally or subsidiarily bound has no
The right of renewal constitutes a part of the lessee’s legal capacity to challenge the validity of the contract.
interest in the land and forms a substantial and integral
part of the agreement. HELD: The decision of CA is reversed and set aside. Considering
that Allied Banking already vacated the premises as of 1993, the
Even if such option is binding only on the lessor and can be renewed lease contract is deemed terminated as of that
exercised only by the lessee does not render it void for lack of date, however, petitioner required to pay rentals to
mutuality. After all, the lessor is free to give or not to give the respondent lessors at the rate provided in their existing
option to the lessee. contract.
And while the lessee has a right to elect whether to continue FLOIRENDO, JR. v. METROBANK (2007)
with the lease or not, once he exercises his option to continue 532 SCRA 43
and the lessor accepts, both parties are thereafter bound by
Facts: On March 20, 1996 Floirendo, Jr. obtained a loan from
the new lease agreement.
Metrobank to infuse additional working capital for his
company. As security he executed a REM over his four parcels
Their rights and obligations become mutually fixed, and the
of land in CDO. The loan was renewed for another year secured
lessee is entitled to retain possession of the property for the
by the same REM. It fixed the interest at 15.4% per annum for
duration of the new lease, and the lessor may hold him liable
the first 30 days and subject to upward/downward adjustment
for the rent therefor.
every 30 days thereafter based on any unpaid principal.
The lessee cannot thereafter escape liability even if he should The rate of interest and/or bank charges herein stipulated, during the
subsequently decide to abandon the premises. Mutuality term of this Promissory Note, its extension, renewals or other
obtains in such a contract and equality exists between the lessor modifications, may be increased, decreased, or otherwise changed from
and the lessee since they remain with the same faculties in time to time by the Bank without advance notice to me/us in the event
respect to fulfillment. of changes in the interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, in the rediscount rate of member
banks with the Central Bank of the Philippines, in the interest rates on
May be Renewed for a Like Term at the
savings and time deposits, in the interest rates on the bank’s
Option of the Lessee, Meaning
borrowings, in the reserve requirements, or in the overall costs of
Its exercise of the option resulted in the automatic extension funding or money;
of the contract of lease under the same terms and conditions.
The subject contract simply provides that “the term of this lease On 1997, Metrobank started imposing higher interest rates on
shall be fourteen (14) years and may be renewed for a like term loan as high as 30.244% on October 1997. As a result
at the option of the lessee.” petitioner could no longer pay the high interest rate charged
by Metrobank.
Respondent bank agreed provided petitioner would pay the in the interest rate prescribed by law or the Monetary Board of
arrears in interest amounting to the total sum of P163,138.33. the Central Bank of the Philippines,” does not give respondent
Despite payment by petitioner, respondent bank, instead of bank unrestrained freedom to charge any rate other than that
renewing the loan, filed with the Office of the Clerk of Court which was agreed upon.
and Provincial Sheriff, RTC, Cagayan de Oro City a petition for
foreclosure of mortgage which was granted. On August 17, Here, the monthly upward/downward adjustment of interest
1998, the auction sale was set. rate is left to the will of respondent bank alone. It violates the
essence of mutuality of the contract.
Prior on auction sale, Floirendo complaint for reformation of
real estate mortgage contract and PN referring to them as Escalation Clauses
Contracts of Adhesion alleging that Metrobank’s increased While it is true that escalation clauses are valid in maintaining
interest rates unilaterally imposed by respondent bank are fiscal stability and retaining the value of money on long term
scandalous, immoral, illegal and unconscionable. He also contracts, however, giving respondent an unbridled right to
alleged that the terms and conditions of the real estate adjust the interest independently and upwardly would
mortgage and the promissory note are such that they could be completely take away from petitioner the right to assent to an
interpreted by respondent bank in whatever manner it wants, important modification in their agreement, hence, would
leaving petitioner at its mercy negate the element of mutuality in their contracts.
RTC issued a TRO and a WOPInj. But Metrobank asserted that Such escalation clause would make the fulfillment of the
the interest stipulated by the parties was not per annum but contracts dependent exclusively upon the uncontrolled will of
monthly. That the 15.446% interest appearing therein was good respondent bank and is therefore void.
only for the first 30 days of the loan, subject to upward and
downward adjustment every 30 days thereafter. The terms of the IN THIS CASE: The promissory note gives respondent bank
real estate mortgage and promissory note voluntarily entered authority to increase the interest rate at will during the term of
into by petitioner are clear and unequivocal. There is, therefore, the loan. This stipulation violates the principle of mutuality
no legal and factual basis for an action for reformation of between the parties. It would be converting the loan agreement
instruments. into a contract of adhesion where the parties do not bargain on
equal footing, the weaker party’s (petitioner’s) participation
RTC dismissed complaint for reformation, dissolving WOPInj being reduced to the alternative “to take it or leave it.”
and directing the sale at public auction for the mortgaged
properties of Floirendo, Jr. It upheld the validity of the While the Usury Law ceiling on interest rate was lifted by Central
escalation clause. Bank Circular No. 905, nothing therein could possibly be read
as granting respondent bank carte blanche authority to raise
Issue interest rate to levels which would either enslave its borrower
Whether the mortgage contract and the promissory note (petitioner herein) or lead to hemorrhaging of his assets.
express the true agreement between the parties therein.
Article 1310, Courts are Granted Authority
COURT RULING: The Court agrees with the petitioner. Petitioner to Equitably Reduce or Increase Interest Rates
contends that the “escalation clause” in the promissory note Article 1310. The determination shall not be obligatory if it is
imposing 15.446% interest on the loan “for the first 30 days evidently inequitable. In such case, the courts shall decide what
subject to upward/downward adjustment every 30 days is equitable under the circumstances.
thereafter” is illegal, excessive and arbitrary. The determination
to increase or decrease such interest rate is primarily left to the IN THI CASE: 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;
discretion of respondent bank. 27% on August 11, 1997; 26% on September 10, 1997; 33% on October 15, 1997;
• Increases of interest rate unilaterally imposed by 26.5% on November 27, 1997; 27% on December 1997; 29% on January 13, 1998;
respondent bank without petitioner’s assent are 30.244% on February 7, 1998; 24.49% on March 9, 1998; 22.9% on April 18, 1998;
violative of the principle of mutuality of contracts and 18% on May 21, 1998.
ordained in Article 1308 of the Civil Code.

• Any contract which appears to be heavily weighted in Obviously, the rate increases are excessive and arbitrary. It is
favor of one of the parties so as to lead to an clear that respondent bank unilaterally increased the interest
unconscionable result is void. Any stipulation rate without petitioner’s knowledge and consent.
regarding the validity or compliance of the contract
which is left solely to the will of one of the parties is METROBANK IN BAD FAITH: Respondent bank then could not claim
likewise invalid. that there was no attempt on his part to comply with his
obligation. Yet, respondent bank hastily filed a petition to
IN THE CASE:The provision in the promissory note authorizing foreclose the mortgage to gain the upper hand in taking
respondent bank to increase, decrease or otherwise change petitioner’s four (4) parcels of land at bargain prices. Obviously,
from time to time the rate of interest and/or bank charges respondent bank acted in bad faith.
“without advance notice” to petitioner, “in the event of change
Requisites for Reformation, Present Ignacio F. Juico’s Testimony

There has been meeting of minds of the parties upon these He testified that prior to the release of loan, he was required to
documents. However, these documents do not express the sign a blank PN and was informed that the interest rate on the
parties’ true agreement on interest rates. And the failure of loan will be based on prevailing market rates. Every month,
these documents to express their agreement on interest rates China Banking would inform him by telephone of such rate.
was due to respondent bank’s inequitable conduct.
Petitioner testified that he is a Doctor of Medicine and engaged
HELD: WHEREFORE, we GRANT the petition. The Judgment in the business in distribution of medical supplies. He admitted
dated February 22, 2001 of the RTC of Cagayan de Oro City, having read the promissory note and that he was aware of his
Branch 39 in Civil Case No. 98-476 is REVERSED. The real estate obligation under them before he signed the same.
mortgage contract and the promissory note agreed upon by
the parties are reformed in the sense that any increase in the RTC ruled in favor of China Banking that there was a balance of
interest rate beyond 15.446% per annum should not be P8.9M since before the foreclosure the two PNs aggregated to
imposed by respondent bank without the consent of petitioner. P19.2M inclusive of principal interests, penalties and AFees. It
The interest he paid in excess of 15.446% should be applied to ruled that the amount was applied to the interest by Article
the payment of the principal obligation. 1253. It further held that Ignacio’s claim on signing a blank PN
was considered unbelievable.
JUICO v. CHINA BANKING CORPORATION (2013)
695 SCRA 520 CA affirmed the RTC decision. The CA recognized China
Banking’s right to claim deficiency from the debtor where the
Facts: Spouses Juico obtained a loan from China Banking
proceeds of the sale in an extrajudicial foreclosure were
Corporation as evidence by two PNs with sums of P6.2M and
insufficient and that the interest based on prevailing market
P4.13M respectively. The loan was secured by a Real Estate
rates were considered valid.
Mortgage over a property in Quezon. When petitioners failed
to pay the monthly amortizations due, respondent demanded Issue
full payment of the outstanding balance with accrued monthly Whether the interest rates imposed upon Spouses Juico by
interest. On 2001, the total amount due on the two PNs totaled China Banking are valid.
to P19.2M. On February 23, 2001, the mortgaged property was
sold at public auction with China Banking as highest bidder for CONTENTION OF THE SPOUSES JUICO: They are not valid as they were
P10.3M. not by virtue of any law or BSP regulation or any regulation.
They insist that the interest rates were unilaterally imposed by
On May 8, 2001, Spouses Juico received a demand letter for the the bank thus violates the principle of mutuality of contracts.
payment of P8.9M the amount of deficiency after applying the They argue that the escalation clause in the promissory notes
proceeds of the foreclosure sale to the mortgage debt. As its does not give respondent the unbridled authority to increase
demand remained unheeded, there was a collection suit. the rate unilaterally. Any change must be mutually agreed upon.
CONTENTION OF SPOUSES JUICO: They interpose that the principal ARGUMENTS OF CHINA BANKING: Spouses Juico failed to show that
loan was already paid when the mortgaged property was their case falls under any of the exceptions wherein findings of
extrajudicially foreclosed and sold for P10.3M. They contended fact of CA may be reviewed by SC. It contends that an inquiry
that they should only be held liable for P55K and stated that whether the interest rates imposed on the loans of petitioners
such deficiency cannot be enforced by China Banking because were supported by regulation requires a reevaluation of
it only consists of the penalty and interest. evidence which is a factual issue not a legal one.
Ms. Annabelle Yu’s Testimony (China Baking Loans Assistant) COURT RULING: The appeal is partly meritorious.
She testified that she handled the account of Spouses Juico and
assisted them on loan application. She called them monthly to Mutuality of Contracts and Escalation Clauses
inform them of the prevailing rates to be used in computing The principle of mutuality of contracts is expressed in Article
interest due on their loan. 1308 of the Civil Code. Article 1956 of the Civil Code likewise
ordains that “no interest shall be due unless it has been
Ms. Yu reiterated that the interest changes every month based expressly stipulated in writing.”
on the prevailing market rate and she notified petitioners of the
prevailing rate by calling them monthly before their account The binding effect of any agreement between parties to a
becomes past due. contract is premised on two settled principles:
1. That any obligation arising from contract has the force
When she was asked if there was any written authority from and effect of law between parties (1306).
petitioners for respondent to increase the interest rate 2. That there must be mutuality of between the parties
unilaterally, she answered that petitioners signed a PN based on their essential equality. Any contract which
indicating that they agreed to pay interest at the prevailing rate. appears to be heavily in favor of one of the parties as
to lead to an unconscionable result is void.
Escalation clauses refer to stipulations allowing in an increase REQUISITES FOR AN ESCALATION CLAUSE TO PRESERVE MUTUALITY:
in interest rate agreed upon by the contracting parties. There is 1. A detailed billing statement based on the new
nothing inherently wrong with escalations clauses which are imposed interest with corresponding computation of
valid stipulations in commercial contracts to maintain fiscal the total debt should have been provided by the
stability and to retain the value of money in long term contract. respondent to enable petitioners to make an informed
They are not void per se. decision.
2. An appropriate form must also be signed by the
WHEN ESCALATION CLAUSE BECOMES VOID: They become void when petitioners to indicate their conformity to the new
it grants the creditor an unbridled right to adjust the interest rates.
independently and upwardly, completely depriving the debtor
of the right to assent to an important modification in the Compliance with these requisites is essential to preserve the
agreement. A stipulation of such nature violates the mutuality mutuality of contracts. For indeed, one-sided impositions do
of contracts. The court nullifies the unilateral determination and not have the force of law between the parties, because such
imposition by creditor banks of increases in the interest rate impositions are not based on the parties’ essential equality.
provided in loan contracts.
Modifications in the rate of interest for loans pursuant to an
To reiterate, an escalation clause is void where the creditor escalation clause must be the result of an agreement between
unilaterally determines the rate of interest without the express the parties. Unless such important change in the contract terms
conformity of the debtor. Such unbridled right given to is mutually agreed upon, it has no binding effect. In the absence
creditors to adjust independently and upwardly would of consent on the part of the petitioners to the modification in
completely take away from the debtors the right to assent to the interest rates, the adjusted rates cannot bind them.
an important modification in in their agreement and would
negate the element of mutuality in their contracts. Ruling on the Interest Rate and Penalty
The Court considered as invalid the interest rates in excess of
The two promissory notes executed by the Spouses
IN THE CASE: 15%, the rate charged for first year. Based on the August 29,
Juico and China Bank provide: 2000 letter under the PN the obligation was P10.355M.
However, due to the unilateral increases from 15% to as high as
I/We hereby authorize the CHINA BANKING 24.50%, the balance ballooned. The original amount almost
CORPORATION to increase or decrease as the case may be doubled in only 16 months. The court also finds the penalty
the rate of interest rate/service charge presently stipulated charges of 36.5% per annum excessive and arbitrary reduced to
in this note without any advance notice to me/us in the 1% per annum.
event a law or Central Bank regulation is passed or
promulgated by the Central Bank of the Philippines or
Thus, the SOA as of the date of the foreclosure proceedings
appropriate government entities, increasing or decreasing
such interest rate or service charge.
should be modified stating that the amount to paid to China
Banking should be P15.06M instead of P19.2M and thus the
Here, the escalation clause in the promissory notes authorizing deficiency amount should be P4.76M instead of P8.9M.
the respondent bank to adjust the rate of interest on the basis
of a law or regulation issued by the Central Bank of the HELD: The petition is partly granted and the Spouses Juico are
Philippines should be read together with the statement after ordered to pay jointly and severally China Banking Corporation
the first paragraph where no rate of interest was fixed as it of P4.76M representing the amount of deficiency.
would be based on prevailing market rates.
PHILIPPINE NATIONAL BANK v. MANALO (2014)
717 SCRA 254
While the latter is not strictly an escalation clause, its clear
import was that interest rates would vary as determined by Although banks are free to determine the rate of interest they could
prevailing market rates. The parties intended the interest any impose on their borrowers, they can do so only reasonably, not
upward or downward adjustment to be determined by arbitrarily. They may not take advantage of the ordinary borrowers’ lack
of familiarity with banking procedures and jargon. Hence, any
prevailing market rates and not dictated on China Bank’s policy.
stipulation on interest unilaterally imposed and increased by them shall
be struck down as violative of the principle of mutuality of contracts. –
NO INDICATION OF COERCION: There is no indication that the Bersamin, J.
Spouses Juice were coerced into agreeing with the provisions of
the PN. In fact, petitioner Ignacio, a physician engaged in the Facts: Spouses Manalo applied for an All-Purpose Credit
medical supply business, admitted having understood his Facility in the amount of P1M with PNB to finance the
obligations before signing them. At no time did the petitioners construction of their house. After PNB granted application they
protest the new rates. executed a REM. On September 20, 1996 the credit facility was
renewed for P7M. Thus, a Supplement and Amendment to the
It is still void because it grants
ESCALATION CLAUSE IS STILL VOID:
REM was made. It was agreed upon the Spouses Manalo would
respondent the power to impose an interest rate without a make monthly payments on the interest.
written notice to petitioners and their written consent. The
monthly telephone calls advising them will not suffice.
After Spouses Manalo still failed to settle their unpaid account Issues
despite two demand letters, PNB foreclosed the mortgage as Whether or not the CA correctly ruled that there was no
emerged as highest bidder for P15.127M. After more than a mutuality of consent in the imposition of interest rates.
year that the Certificate of Sale has been issued to the PNB the
Spouses Manalo instituted this action for the nullification of the COURT RULING: The appeal lacks merit.
foreclosure proceedings and damages.
PROCEDURAL RULING: The validity of the interest rates and their
ALLEGATION: They alleged that they had obtained a loan for increases, and the lack of mutuality between the parties were
P1,000,000.00 from a certain Benito Tan upon arrangements issues validly raised in the RTC, giving the Spouses Manalo
made by Antoninus Yuvienco, then the General Manager of every right to raise them in their appeal to the CA.
PNB’s Bangkal Branch where they had transacted; that they had
been made to understand and had been assured that the Unilateral Determination of the Interest, Violation of 1308
P1,000,000.00 would be used to update their account, and that The credit agreement executed succinctly stipulated that the
their loan would be restructured and converted into a long-term loan would be subjected to interest at a rate “determined by
loan, and were surprised to learn that they have been declared the Bank to be its prime rate plus applicable spread,
in default of the obligations and property foreclosed. prevailing at the current month.”
COUNTER-ALLEGATION: PNB and Antoninus Yuvienco countered This stipulation was carried over to or adopted by the
that the P1,000,000.00 loan obtained by the Spouses Manalo subsequent renewals of the credit agreement. PNB thereby
from Benito Tan had been credited to their account; that they arrogated unto itself the sole prerogative to determine and
did not make any assurances on the restructuring and increase the interest rates imposed on the Spouses Manalo.
conversion of the Spouses Manalo’s loan into a long-term one;
that PNB’s right to foreclose the mortgage had been clear This is in violation of the principle of mutuality of contracts. Any
especially because the Spouses Manalo had not assailed the stipulation regarding the validity or compliance of the contract
validity of the loans and of the mortgage; and that the Spouses left solely to the will of one of the parties is likewise invalid.
Manalo did not allege having fully paid their indebtedness.
RTC rendered its decision in favor of PNB held that the Estoppel, Inapplicable
argument that there was “contract of adhesion” was unfounded PNB could not also justify the increases it had affected on the
because they had still accepted the terms and conditions of interest rates by citing the fact that the Spouses Manalo had
their credit agreement with PNB and had exerted efforts to pay paid the interests without protest, and had renewed the loan
their obligation; that the Spouses Manalo were now estopped several times.
from questioning the interest rates unilaterally imposed by PNB
because they had paid at those rates for three years without A borrower is not estopped from assailing the unilateral
protest. increase in the interest made by the lender since no one
who receives a proposal to change a contract, to which he
CA affirmed the decision of the RTC insofar as it upheld the is a party, is obliged to answer the same and said party’s
validity of the foreclosure proceedings initiated by PNB but silence cannot be construed as an acceptance thereof.”
modified the Spouses Manalo’s liability for interest. CA held
that PNB’s failure to indicate the rate of interest in the credit FAILURE TO NOTIFY: The credit agreements had explicitly
agreements would not excuse the Spouses Manalo from their provided that prior notice would be necessary before PNB
contractual obligation to pay interest to PNB because of the could increase the interest rates. In failing to notify the Spouses
express agreement to pay interest in the credit agreements. Manalo before imposing the increased rates of interest,
Nevertheless, the CA ruled that PNB’s inadvertence to specify therefore, PNB violated the stipulations of the very contract that
the interest rate should be construed against it because the it had prepared. Hence, the varying interest rates imposed by
credit agreements were clearly contracts of adhesion due to PNB have to be vacated and declared null and void, and in their
their having been prepared solely by PNB. place an interest rate of 12% per annum computed from their
default is fixed.
CA further held that PNB could not unilaterally increase the rate
of interest considering that the credit agreements specifically CORRECT RATE TO BE APPLIED:By virtue of Monetary Board Circular
provided that prior notice was required before an increase in No, 799, the interest is reduced from 12% to 6% per annum.
interest rate could be effected. Hence, the old legal rate of 12% per annum applied to
judgments becoming final and executory prior to July 1, 2013,
PNB’s unilateral imposition of the increased interest rate was but the new rate of 6% per annum applies to judgments
null and void for being violative of the principle of mutuality of becoming final and executory after said date.
contracts enshrined in Article 1308 of the Civil Code.
Reinforcing its “contract of adhesion” conclusion, it added that HELD: WHEREFORE, the Court AFFIRMS the decision
the Spouses Manalo’s being in dire need of money rendered promulgated by the Court of Appeals on March 28, 2006 in CA-
them to be not on an equal footing with PNB. G.R. CV No. 84396, subject to the MODIFICATION that any
amount to be refunded to the respondents shall bear interest
of 12% per annum computed from March 28, 2006 until June take into account the payment in two years totaling to P24M
30, 2013, and 6% per annum computed from July 1, 2013 until that the interest rates from 19% to 30%, penalties, AFees
finality hereof; that the amount to be refunded and its accrued imposed by Solidbank, were excessive, unconscionable and
interest shall earn interest at 6% per annum until full refund; immoral and that it had no carte blanche authority to
and DIRECTS the petitioner to pay the costs of suit. [CA: unilaterally raise the interest rates to levels as to enslave
Foreclosure valid, but liability for interest void.] borrower and hemorrhage it assets.
JONSAY v. SOLID BANK (2016) CA rendered judgment affirming RTC in toto. It agreed that
788 SCRA 552 Solidbank did no comply with publication requirements under
Section 3 of Act No. 3135. The Morning Chronicle was not a
Facts: Momarco, controlled and owned by the Spouses Jonsay,
newspaper of general circulation. It also noted that the pro
is an importer manufacturer and distributor of animal health
forma PN which Solidbank prepared and Spouses Jonsay
and feedmill products catering to cattle, hog and poultry
signed in blank, Solidbank enjoyed unrestrained freedom to
producers. On 1995 and 1997, Momarco obtained loans of
unilaterally increase interest rate in any month.
P40M and P20M from Solidbank which Spouses Jonsay
executed a blanket mortgage over three parcels of land in
The note gave it authority to increase or decrease the interest
Laguna. They were consolidated in a PN for P60M.
rate from time to time, “without any advance notice” and “in
the event the Monetary Board of the Central Bank of the
The stipulated interest was 18.75% per annum, along with an
Philippines raises or lowers the interest rates on loans.”
escalation clause tied to increases by which it was eventually
According to the CA, this provision violated the principle of
able to unilaterally increase the interest charges up to 30%
mutuality of contracts embodied in Article 1308 of the Civil
per annum.
Code. In addition, the action was not estopped and that the
prescriptive period to question a mortgage action is 10 years
Momarco religiously paid the monthly interests charged by
and only three years had passed.
Solidbank from November 199510 until January 1998, when it
paid P1,370,321.09.
CA Reversal. It found Solidbank’s contract valid and
Claiming business reverses brought on by the 1997 Asian
extrajudicial foreclosure of the mortgage enjoyed regularity. It
financial crisis, Momarco tried unsuccessfully to negotiate a
took into account the Affidavit of Publication and Certification
moratorium or suspension in its interest payments. Due to
form the Clerk of Court that the Morning Chronicle was a
persistent demands by Solidbank, Momarco made its next, and
newspaper of general circulation.
its last, monthly interest payment in April 1998 in the amount
• A pointed out that other than Florante’s bare
of P1,000,000.00. Solidbank applied the said payment to
testimonial allegations, the petitioners failed to
Momarco’s accrued interest for February 1998.
adduce evidence to debunk Solidbank’s compliance
with the publication of its auction notice. They were
Solidbank proceeded to extrajudicially foreclose on the
unable to show that the Morning Chronicle was not a
mortgage it submitted the winning bid of P82,327,249.54
newspaper of general circulation in Calamba City, that
representing Momarco’s outstanding loans, interests and
it was not published once a week, or that it could not
penalties plus AFees of P3.6M.
be found in newsstands.
Momarco claims that that on the date of the auction the fair
Issue
market value of their mortgaged lots had increased sevenfold
Whether or not CA erred in reversing its decision on the same
to P441,750,000.00. Thus on 2000, they filed for a Annulment of
set of facts and evidence which is not in accord with law.
the Extrajudicial Foreclosure of Mortgage, Injunction,
Accounting and Damages with Prayer for the Immediate
ARGUMENT: The petitioners decry how, after first declaring that
Issuance of a Writ of Preliminary Prohibitory Injunction.
“[a]ll told, we find no reason to disturb, much less reverse, the
(a) The amount is bloated
assailed decision of the RTC,” the CA could now be permitted
(b) The interest rates were illegal for exceeding the legal
to make a complete turnaround from its previous decision over
rate of 12% per annum
the same set of facts, and declare that the subject foreclosure
(c) The filing fee it charged has no legal basis
is valid, order the consolidation of Solidbank’s titles.
(d) The AFees of P3.6M was excessive and
unconscionable;
COURT RULING: There is merit in the petition.
(e) The previous payments were not taken into account
(f) Certificate of posting is invalid
There is No Legal Proscription Against an Adjudicating
(g) The certificate of posting is invalid
Court Adopting on MR on Position Contrary
(h) The publication of the notice of the auction sale was
to One It Had Previously Taken in a Case
defective for the notice was not a general circulation
What the CA simply did was to admit that it had committed an
error of judgment, one which it was nonetheless fully
RTC declared the extrajudicial foreclosure null and void. For the
authorized to correct upon a timely motion for reconsideration.
mortgage contract and PNs which the Spouses Jonsay signed
in blank were Contracts of Adhesion that Solidbank failed to
• Filing of an MR or New Trial interrupts the running of A mortgage contract whereby “specify and agree upon rates
period for finality of judgment. that could be subsequently upgraded at whim by only one
party to the agreement.” The Court declared as a contract of
Solidbank has Sufficiently Complied with the Publication adhesion a pro forma promissory note which creates a “take it
Requirement under Section 3 of Act No. 3135 or leave it” dilemma for borrower and gives the mortgagee
Foreclosure proceedings enjoy the presumption of regularity bank an unbridled right to adjust the interest independently
and the mortgagor who alleges the absence of a requisite has and upwardly, thereby completely taking away from the
the burden of proving such fact. That it is the burden of the borrower the “right to assent to an important modification in
petitioners to overcome this presumption. their agreement,” thus negating the element of mutuality in
their contracts.
IN THIS CASE:There is no dispute that there was publication of
the auction notice, which the CA in its amended decision now Besides, the pro forma promissory notes have the character of
held to have sufficiently complied with the requirement of a contract of adhesion, “where the parties do not bargain on
publication under Section 3 of Act No. 3135. equal footing, the weaker party’s [the debtor’s] participation
being reduced to the alternative ‘to take it or leave it.’”
Unfortunately, against the fact of publication and the
presumption of regularity of the foreclosure proceedings, the APPLICATION OF 1310.Attorney’s fees do not form an integral part
petitioners’ only contrary evidence is Florante’s testimonial of the cost of borrowing but arise only when collecting upon
assertion that the Morning Chronicle was not a newspaper of the notes or loans becomes necessary. Courts have the power
general circulation in Calamba City and that it could not be to determine their reasonableness based on quantum meruit
found in the local newsstands. and to reduce the amount thereof if excessive.
Admittedly, the records are sparse as to the details of the Concerning the P3,000,000.00 attorney’s fees charged by
publication: all that Crisostomo (publisher or Morning Solidbank and added to the amount of its auction bid, as part
Chronicle) stated is that his newspaper was “published and of the cost of collecting the loans by way of extrajudicial
edited in the province of Laguna and San Pablo City. foreclosure, the Court finds no factual basis to justify such an
But when RTC accredited the Morning Chronicle to publish excessive amount.
legal notices in Calamba City, it can be assumed that RTC
determined that it met the requisites for a valid publication The Court has not hesitated to delete or equitably reduce
of legal notices in such locality. This presumption lays the attorney’s fees which are baseless or excessive.
burden upon the petitioners to show otherwise
Recomputation of Total Loan Indebtedness Based on
Even though accreditation is not conclusive proof, but the Court Stipulated Interest and Exclusion of Penalties and
has seen that the petitioners failed to present proof to Reduction of Attorney’s Fees in an Excess of the Auction
overcome the presumption of regularity created by the Must be Paid to the Petitioners Jonsay
publisher’s affidavit of publication and the accreditation of the Coming now to the question of whether Solidbank must refund
Morning Chronicle by the RTC. any excess interest to the petitioners, the CA agreed with the
RTC that the loans should earn only 12% for Solidbank, which
There Mere Proposal to Extinguish their Loan Obligation would result in a drastic reduction in the interest which the
by Way of Dacion En Pago does not Novate Mortgage petitioners would be obliged to pay to Solidbank.
On the question of the petitioners’ failed proposal to extinguish
their loan obligations by way of dacion en pago, no bad faith Notwithstanding what this Court has said concerning the
can be imputed to Solidbank for refusing the offered settlement invalidity of the unilateral increases in the interest rates, the
as to render itself liable for moral and exemplary damages after ruling nonetheless violates the contractual agreement of the
opting to extrajudicially foreclose on the mortgage. parties imposing an interest of 18.75% per annum, besides the
fact that an interest of 18.75% per annum cannot per se be
An Escalation Clause in a Loan Agreement Granting the deemed as unconscionable back in 1995 or in 1997.
Lending Bank Authority to Unilaterally Increase the
Interest Rate without Prior Notice to To answer, then, the question of whether Solidbank must
and Consent of the Borrower is Void refund anything to the petitioners, the contracted rate of
After annulling the foreclosure of mortgage, the RTC reduced 18.75%, not the legal rate of 12%, will be applied to the
the interest imposable on the petitioners’ loans to 12%, the petitioners’ loans. Any excess either in the interest payments
legal interest allowed for a loan or forbearance of credit. In of the petitioners or in the auction proceeds, over what is validly
effect, the RTC voided not just the unilateral increases in the due to Solidbank on the loans, will be refunded or paid to the
monthly interest, but also the contracted interest of 18.75%. petitioners.
The implication is to allow the petitioners to recover what they
may have paid in excess of what was validly due to Solidbank. HELD: WHEREFORE, premises considered, the Amended
Decision dated November 26, 2012 of the Court of Appeals in
Zenith of Farcicality and Pro Forma Promissory Notes C.A.-G.R. CV No. 94012 is AFFIRMED with MODIFICATION in
that the stipulated interest rate on the loan obligation of

18.75% shall be applied, resulting in P67,551,216.78 as the
amount due from the Spouses Florante E. Jonsay and
Luzviminda L. Jonsay and Momarco Import Co., Inc. to
Solidbank Corporation (now Metropolitan Bank and Trust
Company).
In addition, the Spouses Florante E. Jonsay and Luzviminda L.

Jonsay and Momarco Import Co., Inc. are ORDERED to PAY
attorney’s fees in the amount of P675,512.17, which is one
percent (1%) of the loan obligation.
Thus, Solidbank Corporation (now Metropolitan Bank and Trust

Company) is ORDERED to PAY to the petitioners the amount of
P14,100,271.05, representing the excess of its auction bid over
the total loan obligation due from the petitioners, plus interest
at six percent (6%) per annum computed from the date of filing
of the complaint or March 15, 2000 up to finality; and thereafter,
both the excess of the auction proceeds and the cumulative
interest shall earn six percent (6%) per annum until fully paid.
NOTE: Refer to the table on the right to see how the reduction
of the interest rates affected the obligation and how the auction
sale proceeds shall be applied and appropriated.
OBLIGATIONS AND CONTRACTS The contents of the Deed of Donation of 15.8 hectares were
Articles 1311-1323 ceded, transferred and conveyed and Quezon City Gov’t
accepted the Donation under the terms and conditions:
JURISPRUDENCE NOTES
This donation is subject to the following conditions:
1311. Relativity of Contracts
2. The DONEE shall, within eighteen (18) months from the signing hereof,
undertake at its expense the following:
BALUYOT v. CA (1999) a. Cause the removal of structures built on the boundaries of the
311 SCRA 29 Donated lot;
b. Relocate inside the Donated lot all families who are presently
Facts: Petitioners Baluyot and others are residents of Barangay outside of the Donated lot;
Cruz-na-Ligas, Diliman, Quezon City. The Cruz-na-Ligas Home c. Relocate all families who cannot be relocated within the
boundaries of the Donated lot to a site outside of the University
Association, Inc. is a non-stock corporation of which petitioners
of the Philippines campus in Diliman, Quezon City;
and other residents are members. The petitioners filed a d. Construct a fence on the boundaries adjoining Kruz-na-Ligas and
complaint for specific performance and damages against the University. In the construction of the fence, the DONEE shall
establish a ten-meter setback in the area adjacent to Pook
respondent UP before RTC Quezon.
Amorsolo and the Peripheral Road (C.P. Garcia Street);
e. Construct a drainage canal within the area Donated along the
COMPLAINT: The following are the points of the complaint: boundary line between Kruz- na-ligas and Pook Amorsolo. In the
1. Plaintiff and their ascendant have been in open, peaceful, construction of the fence and the drainage canal, the DONEE shall
adverse and continuous possession in the concept of an owner conform to the plans and specifications prescribed by the DONOR.
since memory can no longer recall of the parcel of riceland
5. The DONEE shall, after the lapse of three (3) years, transfer to the qualified
known as Sitio Libis, Barrio Cruz-na-Ligas now Diliman, Quezon
residents by way of donation the individual lots occupied by each of them,
City. subject to whatever conditions the DONEE may wish to impose on said
donation;
2. Since Octboer 1972, the claims of plaintiff have been subject
6. Transfer of the use of any lot in the property Donated during the period of
of proceedings resulting in the issuance of Indorsement of the
three (3) years referred to in Item 4 above, shall be allowed only in these
Bureau of Lands, and an issuance of the Indorsement of the cases where transfer is to be affected to immediate members of the family in
President of the Philippines confirming the rights of the the ascending and descending line and said Transfer shall be made known to
bonafide residents of Barrio Cruz-na-Ligas to the parcel of land the DONOR. Transfer shall be affected by the Donee;
they have been possession or occupying.
7. The costs incidental to this Deed, including the registration of the property
Donated shall be at the expense of the DONEE.
3. UP Board of Regents approved the donation of about 9.2
hectares of the site directly to the resident of Brgy. Cruz-Na- The Donee shall also be responsible for any other legitimate obligation in
Ligas. After several negotiations it was increased to 5.8 favor of any third person arising out of, in connection with, or by reason of,
this donation.
hectares. Execution of the legal instrument to formalize it failed
because of the unreasonable demand of the residents for an
Quezon City Government prepared the groundworks in
area bigger than 15.8 hectares.
compliance the terms and conditions, however, defendant UP
failed to deliver the Certificate of Title of Property to be
4. Upon advice of counsel and close study of the said offer of
Donated to enable Quezon City Government to register the
UP to donate the 15.8 hectares, the plaintiff Association
Deed of Donation of that title be under its name.
proposed to accept and manifested in writing consent to
the intended donation directly to the plaintiff association
That defendant UP had continuously and unlawfully refused,
for the benefit of the bonafide residents of Barrio Cruz-na-
despite requests and several conferences made, to comply with
Ligas.
their reciprocal duty, to deliver the certificate of title to enable
the Donee, the defendant Quezon City Government, to register
5. However, UP backed out from the arrange to Donate directly,
the ownership so that the defendant Quezon City Government
and resumed to negotiate the donation thru the defendant
Quezon city Government under the terms that are can legally and fully comply with their obligations under the
said deed of donation;
disadvantageous or contrary to the rights of the bonafide
residents of the Barrio.
Upon expiration of the period of 18 months, for alleged non-
compliance of the Quezon City Government, UP unilaterally,
On June 13, 1986, an order was given stating that the UP as
capriciously, whimsically and unlawfully issued that AO 21
already decided to have the property subject of litigation
declaring deed of donation revoked, and the Donated property
Donated to the residents of Cruz-na-Ligas with, of course, the
be reverted to defendant UP.
conditions set therein. Thus, on August 5, 1986 defendant UP
executed a Deed of Donation in favor of the Quezon city
They alleged such revocation for it was illegal and prejudicial
Government for the benefit of the qualified residents of Cruz-
to the right of the plaintiff who are bonafide residents of
na-Ligas; Herein, nor plaintiff Association officers had
the Barrio Cruz na Ligas.
participated in any capacity in the act of execution of the said
deed of donation.
They alleged that it was unlawful because: COURT REPLY: This is error. While prescription does not run against
1. They were not made bound to comply with the terms registered lands, nonetheless a registered owner's action to
and conditions of the said donation allegedly violated recover possession of his land may be barred by laches.
by the defendant Quezon City Government.
2. UP, as averred in the preceding paragraphs 9 and 11, Laches is a defense against a registered owner suing to recover
was the one who insisted that the donation be possession of the land in its name but UP is not suing in this
coursed through the defendant Quezon City case. It is petitioner who are, and their suit is mainly to seek
Government; and the said revocation or reversion are enforcement of the Deed of Donation made by UP in favor
likewise pre-judicial to third parties who acquired of the Quezon City government.
rights therefrom; • The petitioners do not invoke laches, what they allege
in their complaint is that they have been occupying
They also argued that they were deceived into consenting to the land in question from time immemorial,
the lifting of the injunction in the case and in agreeing the adversely, and continuously in the concept of
dismissal upon the unjustified revocation of the donation owner but they are not invoking laches.
which they undertook as a condition to the dismissal. • They are merely claiming ownership by prescription
• Thus, they reiterate their claim to the ownership of the which is held untenable considering that the land in
42 hectares of the land. question is a registered land.
Application of Writ of Preliminary Injunction THERE IS A CAUSE OF ACTION NONETHELESS: The Court finds out that
They reproduce their material and allegation and that they there is still a cause of action on the complaint of the
petition for a WOPINJ against the UP from: petitioners. While, admittedly, petitioners were not parties to
• ejecting the plaintiff-farmers and from the deed of donation, they anchor their right to seek its
demolishing the improvements of riceland or enforcement upon their allegation that they are intended
farmlands beneficiaries of the donation to the Quezon City
• executing another deed of donation from occupants government. Art. 1311 (2) of the Civil Code provides:
who are not bonafide residents
If a contract should contain some stipulation in favor of a third
Prayer to the Court person, he may demand its fulfillment provided he
1. to restrain defendant UP or to their representative communicated his acceptance to the obliger before its
revocation. A mere incidental benefit or interest of a person is
from ejecting the plaintiffs from and demolishing their
not sufficient. The contracting parties must have clearly and
improvements on the riceland or farmland situated at deliberately conferred a favor upon a third person.
Sitio Libis;
2. To Declare Deed of Donation as valid and subsisting Requisites of a Stipulation Pour Autrui
and ordering the defendant UP to abide by the terms Under this provision of the Civil Code, the following requisites
and conditions thereof; must be present to have a stipulation pour autrui:
1. There must be a stipulation in favor of a third person;
RTC denied their application for preliminary injunction for the 2. The stipulation must be a part, not the whole of the
reason that they were not parties to the said deed of donation contract;
of which they could not show a clear legal right to the 3. The contracting parties must have clearly and
enforcement of such donation. deliberately conferred a favor upon a third person, not
• Quezon City Government however recognized the a mere incidental benefit or interest;
propriety, validity and legality of the revocation of the 4. The third person must have communicated his
Deed of Donation. acceptance to the obliger before its revocation; and
• Upon the Amended Complaint, the RTC refused to 5. Neither of the contracting parties bears the legal
dismiss because the facts show that the petitioners representation or authorization of the third party.
here are entitled to acquire ownership.
IN THIS CASE: The allegations in the following paragraphs of the
CA set aside the order of the RTC and ordered dismissal of the amended complaint are sufficient to bring petitioners' action
case where it ruled that petitioners did not allege any claim for within the purview of the second paragraph of Art. 1311 on
the annulment of UP’s title. The question is a collateral attack stipulations pour autrui:
and that there was no acquisition of ownership by laches. 1. The deed of donation contains a stipulation that the
Quezon City government, as donee, is required to
Issue transfer to qualified residents of Cruz-na-Ligas, by way
Whether or not the complaint states a cause of action. of donations, the lots occupied by them;
2. This stipulation is part of conditions and obligations
The trial court held that the donation by UP to the Quezon City imposed by UP, as donor, upon the Quezon City
Government had already been revoked and that petitioners for government, as donee;
whose benefit donation was made, had no cause of action for 3. The intent of the parties to the deed of donation was
specific performance. But denied dismissal on ground of laches. to confer a favor to them by transfer of lots.
4. That the conferences were held between the parties to ANSWER: It denied the allegation and alleged that Fil-Anchor
convince UP to surrender the certificates of title to the was only able to deliver 1,097 reams and was short of 2,875
city government, implying that the donation had been reams in total disregard of their agreement and failed to deliver
accepted by petitioners by demanding fulfillment the balance of printing paper despite demand leading to actual
thereof and that private respondents were aware of damages and failed to realize expected profits.
such acceptance; and • Amended complaint reduces alleged unpaid
5. All the allegations considered together from which it obligations of P763K.
can be fairly inferred that neither of private
respondents acted in representation of the other; each RTC it declared that Integrated Packaging should pay Fil-
of the private respondents had its own obligations, in Anchor the sum of P763K representing the value of the printing
view of conferring a favor upon petitioners paper. However, it found the counterclaim of petitioner
meritorious that were it not for the delay, petitioner could have
It is hardly necessary to state that our conclusion that sold books to Philacor and realized profit of P790K from the
petitioners' complaint states a cause of action against sale and that is suffered dislocation of business.
respondents is in no wise a ruling on the merits. That is for
the trial court to determine considering respondent UP's CA reversed the RTC deleting that award of P790K in favor of
defense that the donation to the Quezon City government, Integrated Packaging for lack of factual and of legal basis.
upon which petitioners rely, has been validly revoked.
Issues
RULING ON WOPINJ, TENTATIVE: The trial court denied injunction 1. Whether or not Fil-Anchor violated the order
claiming the donation had already been revoked and therefore agreement;
petitioners had no clear legal right to be protected. It is evident 2. Whether or not Fil-Anchor is liable for Integrated
that the trial court's ruling on this question was only tentative, Packaging’s breach of contract with Philacor.
without prejudice to the final resolution of the question after
the presentation by the parties of their evidence. COURT RULING: The petitioner’s contention lacks factual and legal
basis, hence, bereft of merit.
HELD: The CA decision is reversed, and the case is remanded
to the RTC for the trial on the merits. I. Petitioner Failed to Perform Reciprocal Obligation
CONTENTION: Private respondent violated the order agreement
INTERGRATED PACKAGING v. CA (2000) when the latter failed to deliver the balance of the printing
333 SCRA 171 paper on the agreed dates.
Facts: Integrated Packaging and Fil-Anchor Paper executed on COURT REPLY: The transaction between the parties is a contract
May 5, 1978 an Order Agreement whereby latter would deliver of sale whereby Fil-Anchor (seller) obligates himself to deliver
to the former 3,450 reams of printing paper that is worth the printing paper to Integrated Packaging (buyer) which also
P1.040M on various schedules. The materials were to be paid must pay a sum of money and that a sale gives rise to a
within 30-90 days from delivery. reciprocal obligation. Reciprocal obligations are to be
performed simultaneously, so that the performance of one is
On June 7, 1978, Integrated Packaging entered into a contract conditioned upon the simultaneous fulfillment of the other.
with Phillippine Appliance Corporation (Philacor) to print
three volumes of Philacor Cultural Books for delivery on Thus, Fil-Anchor undertakes to deliver the printing paper of
various dates minimum of 300,000 copies at P10.00 each with various quantities subject to Integrated Packaging’s obligation
at a total cost of P3M. to pay on a maximum of 90-day credit for these materials.
As of July 30, 1979, Fil-Anchor had delivered 1,097 reams of the Note that in the contract, petitioner is not even required to make
3,450. Integrated Packaging alleged that it wrote Fil-Anchor to any deposit, down payment or advance payment, hence, the
immediately deliver the balance because further delay would undertaking of private respondent to deliver the materials is
greatly prejudice the petitioner. Integrated Packaging conditional upon payment by petitioner within the period.
encountered difficulties in paying private respondent said Clearly, petitioner did not fulfill its side of the contract as
amount. Fil-Anchor made formal demand. its last payment was in August 1981 which would only cover
• Meanwhile Integrated Packaging failed to fully comply delivery invoices until October 1980.
with its contract with Philacor for the printing of books • The private respondent's suspension of its deliveries
thus it demanded compensation from the delay and to petitioner whenever the latter failed to pay on time,
damage it suffered due to failure. as in this case, is legally justified (Article 1583, CC).
On 1981, Fil-Anchor filed with RTC Caloocan a collection suit RULE: Petitioner
failed to establish that it paid for printing paper
against Integrated Packaging of the amount of P766K covered by the delivery invoices on time. Private respondent
representing the unpaid purchase price of printing paper has right to cease delivery, it was not Fil-Anchor, it was
bought by Integrated Packaging on credit. Integrated Packaging who violated order agreement.
II. Order Agreement is Not a Stipulation Pour Autrui Villareal’s Claim

CONTENTION: Petitioner contends private respondent should be It was based on a sale of property on execution pending appeal
held liable for petitioner's breach of contract with Philacor. in a separate case, wherein the civil case is an independent
action for damages by Villareal against Spouses Sevilla
COURT REPLY: This claim is manifestly devoid of credit. (original owners of the disputed property) arising from the
murder of Jose Villareal, father of the respondents. They were
IN THIS CASE: Private
respondent cannot be held liable under the awarded damages and there was a writ of execution pending
contracts entered into by petitioner with Philacor. Private appeal which levied on two parcels of land where the
respondent is not a party to said agreements. It is also not a commercial building is built thereon. It was sold at a public
contract pour autrui. auction but was still in question to the amount of damages.
Aforesaid contracts could not affect third persons like private Bonifacio’s Claim
respondent because of the basic civil law principle of relativity They claim to have purchased the property from the spouses
of contracts which provides that contracts can only bind the Sevilla. Twice they challenged the Villareals’ ownership of the
parties who entered into it, and it cannot favor or prejudice a property. They allegedly bought the property from the spouses
third person, even if he is aware of such contract and has acted Sevilla on 17 June 1986 but were unable to transfer the titles to
with knowledge thereof. their names when they discovered that notice of levy on
execution was already annotated in the TCTs.
Indeed, the order agreement entered into by petitioner and • The first case was dismissed by CA and the sale was
private respondent has not been shown as having a direct made null and void, final and executory.
bearing on the contracts of petitioner with Philacor. As pointed • Second time was dismissed and was denied.
out by private respondent and not refuted by petitioner, the
paper specified in the order agreement between petitioner and A&C MINIMART SUSPENDED PAYMENT: Upon learning of the cases,
private respondent are markedly different from the paper it stopped paying its rentals on the subject property in violation
involved in the contracts of petitioner with Philacor. of the Renewed Lease of Contract.
• Respondent filed a case of Unlawful Detainer and
Furthermore, the demand made by Philacor upon petitioner for Damages against it and also against the Spouses
the latter to comply with its printing contract is dated February Bonifacio for the recovery of advanced rentals.
15, 1984, which is clearly made long after private respondent • The Spouses Bonifacio also filed a separate Unlawful
had filed its complaint on August 14, 1981. This demand Detainer case against A&C Minimart.
relates to contracts with Philacor dated April 12, 1983 and May • RTC found that Spouses Bonifacio did not acquire
13, 1983, which were entered into by petitioner after private ownership over the property and ruled that the
respondent filed the instant case. petitioner had the obligation to pay the rentals for the
use of the subject property and directed petitioner to
On Compensatory Damages deposit it payment to a Landbank account to be held
The trial court erroneously concluded that petitioner could have in trust.
sold books to Philacor at the quoted selling price of
P1,850,750.55 and by deducting the production cost of RTC directed the Spouses Bonifacio to deposit P315K paid by
P1,060,426.20, petitioner could have earned profit of A&C to the Landbank account and also for A&C to deposit
P790,324.30. Admittedly, the evidence relied upon by the trial rental payments and to furnish the Villareals copies of the Lease
court in arriving at the amount are mere estimates prepared by Contract it entered into with Bonifacio’s.
petitioner. There is no legal basis.
RTC MR: It ruled that the rental should accrue in favor of the
respondents only after the turnover of the possession of the
A&C MINIMART v. VILLAREAL (2007) subject property to them sometime on 2 March 1999.
535 SCRA 489 Moreover, it found that petitioner did not act in bad faith when
it refused to pay rentals and, thus, should not be liable for
Facts: The subject property is a one-storey commercial building damages.
constructed on a parcel of land at Paranaque, Metro Manila.
A&C Minimart leased the six stalls from Joaquin Bonifacio Additionally, it also ordered the petitioner to pay 12% interest
under a Lease Agreement on 1992 and which expired on 1997. per annum on the monthly rentals due from its receipt of the
Another Lease Contract dated 22 January 1998 was executed respondents’ demand letter on 25 June 1999, until full payment;
between A&C Minimart and Teresita Bonifacio renewing the to pay respondents’ attorney’s fees in the amount of
earlier contract for another five years. P100,000.00 and the costs of suit; and to vacate the subject
property,
However, ownership of the subject property is under dispute.
Tricia Ann Villareal and Claire Hope Villareal and the Spouses CA: It ordered A&C Minimart t pay a monthly interest of 3% on
Bonifacio claim ownership over the subject property. They have the total amount of rental and other charged not paid on time
conflicting claims over the property. pursuant to the contract of lease.
Issue: In Civil Case No. 90-2551, Branch 63 of the Makati RTC declared
Whether or not the Villareals are entitled to the benefits (rentals that the Deed of Sale, executed on 17 June 1986, between
and interest) of the Contract of Lease entered into A&C the spouses Bonifacio and the spouses Sevilla was a forgery
Minimart and Teresita Bonifacio. and, hence, did not validly transfer ownership to the spouses
Bonifacio. At present, there is a pending appeal before the
COURT: The petitioner is partly meritorious. Supreme Court docketed as G.R. No. 150824, which would
determine who between the respondents and the spouses
Respondents Are Not Successors to Contractual Rights Sevilla are the rightful owners of the property.
CONTENTION: Petitioner argues
that respondents are not entitled
to the 3% penalty stipulated under the Lease Contract dated Since the spouses Bonifacio are not the owners of the
22 January 1998, which becomes payable to the lessor subject property, they cannot unjustly benefit from it by
whenever the petitioner incurs delay in the payment of its collecting rent which should accrue to the rightful owners
rentals. of the same. Hence, the Makati RTC, Branch 132, had set up a
bank account where the rent due on the subject property
COURT REPLY: This argument is well-taken. It is a well-known rule should be deposited and kept in trust for real owners thereto.
that a contractual obligation or liability, or an action ex-
contractu, must be founded upon a contract, oral or written, HELD: The petition is granted. The petitioner A & C Minimart
either express or implied. If there is no contract, there is no Corporation is not obligated to pay the penalty interest of 3%
corresponding liability and no cause of action may arise per month on the total amount of rental and other charges not
therefrom. This is provided for in Article 1311 of the Civil Code: paid on time pursuant to the Contract of Lease dated 22
January 1998.
Article 1311. Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and BORROMEO v. COURT OF APPEALS (2008)
obligations arising from the contract are not transmissible by 550 SCRA 489
their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received from Facts: Spouses Nestor and Maria Ana Borromeo were client-
the decedent. depositors of Equitable PCI Bank for more than 12 years. They
alleged that sometime in 1999, the branch Manager offered a
IN THIS CASE: The Lease Contract dated 22 January 1998, was loan to the petitioner under Own-a-Home Loan Program.
executed between the spouses Bonifacio and petitioner. It is They applied for a loan of P4M and were approved. It was in
undisputed that none of the respondents had taken part, the early part of 2000 that petitioners signed blank loan
directly or indirectly, in the contract in question. documents consisting of the Loan Agreement, PNs, REM
and Disclosure Statements.
Respondents also did not enter into contract with either the
lessee or the lessor, as to an assignment of any right under the They secured the loan with a REM over their land in Loyola
Lease Contract in question. The Lease Contract, including the Grand Villas, Quezon City consisting of 303 sq.m. and the
stipulation for the 3% penalty interest, was bilateral between proposed house that was to be built thereon. Petitioners
petitioner and Teresita Bonifacio. asserted that even if the loan documents were signed in blank,
it was understood that they executed the REM in favor of EPCIB.
Respondents claim ownership over the subject property, but
not as a successor-in-interest of the spouses Bonifacios. They From April 2001 to September 2002, respondent released a
purchased the property in an execution sale from the spouses total amount of P3,600,000.00 in four installments, while the
Sevilla. Thus, respondents cannot succeed to any contractual balance of P400,000.00 was not drawn by petitioners. On the
rights which may accrue to the spouses Bonifacio. other hand, petitioners started to pay their monthly
amortizations on 21 April 2001.
Entitlement of Villareal of Rentals Arose Out from a
Quasi-Contract Not from The Contract Itself: VERBAL REQUESTS AND SUSPENSION OF PAYMENTS: Petitioners made
Although the respondents were adjudged to be entitled to repeated verbal requests to EPCIB to furnish them their copies
rentals accruing from 2 March 1999, until the time the of the loan documents. On 6 August 2003, they sent the
petitioner vacated the premises, the obligation to pay rent was president of EPCIB a letter which reiterated their request for
not derived from the Lease Contract dated 22 January 1998, but copies of the loan documents.
from a quasi-contract by virtue of Article 2142.
In addition, petitioners stated that the interest rate of 14% to
SALE TO BONFACIOS WAS A FORGERY: In the present case, the 17% that was charged against them was more than the interest
spouses Bonifacio, who were named as the lessors in the Lease rate of 11% or 11.5% that the parties agreed upon. They further
Contracts, dated 3 August 1992 and 22 January 1998, are claimed that they purposely did not draw the remaining
already adjudged not to be the real owners of the subject balance of the loan in the amount of P400,000.00 and stopped
property. paying their loan amortizations to protest EPCIBs continued
failure to provide them copies of the loan documents and its
imposition of an interest rate higher than that agreed upon. Issue

From the time they began paying their monthly amortizations Whether or not Equitable Savings Bank is
on 21 April 2001 until the time they stopped, petitioners made the real party-in-interest.
total payments of approximately P500,000.00.
COURT RULING: The petition is meritorious.
REPLY: A letter on 27 August 2003, stating that as a matter of
practice, their clients were given original copies of the loan Right of Extrajudicial Foreclosure and Article 1311
documents only upon full release of the amount loaned. EPCIB A Writ of Preliminary Injunction may be issued only upon clear
clarified that since petitioner’s loan had not been fully released, showing of an actual existing right to be protected during the
the original documents were not yet sent to them. pendency of the principal action. The twin requirements of a
valid injunction are the existence of a right and its actual or
Petitioners were also informed that the applicable interest rate threatened violations. Thus, to be entitled to an injunctive writ,
was set at the time the loan was released, not at the time the the right to be protected and the violation against that right
loan was approved, and that the prevailing interest when the must be shown.
first four installments of the loan were released ranged from
9.5% to 16%. Also, on 13 August 2003, Equitable also sent a IN THIS CASE:Petitioner’s rights to their property is restricted by
letter demanding payment which amount to P4.097M inclusive the REM they executed over it. Upon their default on the
of interest and other charges. mortgage debt, the right to foreclose the property would be
vested upon the creditor-mortgagee. Nevertheless, the right
Finally, on 3 October 2003, petitioners received copies of the of foreclosure cannot be exercised against petitioners by
loan documents which they had earlier signed in blank. any person other than the creditor-mortgagee or its assigns.
According to petitioners, they were surprised to find out that An extrajudicial foreclosure instituted by a third party to the
the Loan Agreement and REM designated respondent Equitable Loan Agreement and the REM would, therefore, be a violation
Savings Bank as lender and mortgagor, instead of EPCIB with of petitioner’s rights over their property.
whom they allegedly entered into the agreement.
CONTENTION: Petitioners assert that their creditor-mortgagee is
However, in contrast to the Loan Agreement and the REM, the Equitable PCI Bank and not respondent Equitable Savings Bank.
four Promissory Notes designated EPCIB as the lender. Respondents argue that petitioners have had transactions with
Petitioners also alleged that instead of the prevailing interest it, particularly the five check payments made in the name of
rates of 8% to 10% annually, which the parties agreed upon. ESB, it fails to categorically state that ESB and not EPCIB is the
real creditor-mortgagor in this loan and mortgage transaction.
When they failed to pay for the loan in full, Equitable Savings
Bank sought to extrajudicially foreclosure the REM. Petitioners COURT REPLY: The position taken of petitioners is more credible.
filed with RTC for Annulment of Mortgage with Damages
against Equitable PCI Bank and Equitable Savings Bank alleging The four PNs designations EPCIB as the lender, in a latter, ECPIB
that the loan documents failed to reflect the true VP Vargas even specified petitioners loan as one of its housing
agreement between the parties. loans for which it sought insurance coverage. Their letter
1. The agreement was between petitioners and EPCIB, was addressed to the President of EPCIB. Of almost three years
respondent had no interest in the REM. amortizations, the checks issued by petitioners with EPCIB,
2. The interest rates reflected in the Promissory Notes except only for five checks which issued in respondent’s name.
were not the interest rates on which the parties had
settled. Equitable Saving Bank, although a wholly-owned subsidiary of
They also averred in their Complaint that EPCIB committed a EPCIB, has an independent and separate juridical personality
breach of contract when it failed to release the fifth and last from its parent company. The fact that a corporation owns all
installment of the loan to petitioners. of the stocks of another corporation, taken alone, is not
sufficient to justify their being treated as one entity.
RTC granted the MR and Preliminary Injunction citing the fact
that the Spouses Borromeo were bound to suffer grave injustice FINDINGS: From a perusal of the records, petitioners did not
if they were deprived of their property before the RTC could enter into a Loan Agreement and REM with respondent.
rule on the validity of the REM constituted on the same and that Respondent, therefore, has no right to foreclose the subject
the property was valued at P12M. property even after default, since this right can only be claimed
by the creditor-mortgagor, EPCIB; and, consequently, the
CA reversed RTC stating that the validity of the REM should be extrajudicial foreclosure of the REM by respondent would be in
presumed. It further ruled that the intended foreclosure of the violation of petitioner’s property rights.
mortgage by respondent was a proper exercise of its right after
petitioners admittedly stopped paying their loan amortizations. HELD: The Court reverses CA and reinstates the issuance of the
And the foreclosure of the REM would not result in any grave order of the issuance of a Writ of Preliminary Injunction. The
and irreparable damage they may redeem or avail themselves trial on the merits on the case shall not be prejudiced by the
of the remedy of claiming damages or nullifying the sale. extrajudicial foreclosure.
HEIRS OF LLENADO v. LLENADO (2009) conveyance, title and damages against Eduardo and the
580 SCRA 546 Register of Deeds. She alleged that the transfer and conveyance
of the subject lot by Cornelio in favor of respondents Eduardo
Facts: The subject of this controversy is a parcel of land and Jorge was fraudulent and in bad faith considering that the
denominated as Lot 249-D-1 off 1,554 sq.m. located in Barrio agreement provided that while the sale was in lease, the subject
Malinta, Valenzuela, Metro Manila and registered in the names lot cannot be sold, transferred or conveyed to any third party.
of Eduardo Llenado (Eduardo) and Jorge Llenado (Jorge)
under a TCT. The subject lot was once formed part of Lot 249- That the period of lease was until December 3, 1987 with the
D owned by and registered in the name of their father Cornelio option to renew granted to Orlando; that the subject lot was
Llenado (Cornelio). transferred and conveyed to respondent when the lease was in
full force and effect making the sale null and void; and that
On December 2, 1975, Cornelio leased the subject lot to his Cornelio verbally promised Orlando that in case he decides to
nephew Romeo Llenado (Romeo), for a period of five years, sell the subject lot, Orland or his heirs shall have first priority
renewable for another five years at the option of Cornelio. On or option to buy the subject lot as not to prejudice business.
March 31, 1978, Cornelio, Romeo and Orlando executed an
Agreement whereby Romeo assigned all his rights to Orlando EDUARDO AND JORGE’S ARGUMENT: They claimed that they bought
over the unexpired portion of the lease contract. the subject lot from their father for value and in good faith; that
the lease agreement and its supplement were not annotated
They further agreed that Orlando shall have the option to renew at the back of the mother title of the subject and do not bind
the lease contract for another three years commencing from them and that the said agreements were only personal to
1980-1983 and renewable for another four years up to 1987 Orlando and Cornelio and that the lease expired upon the
and that during the period, the property cannot be sold, death of Orlando on 1983 and that they were not aware of any
transferred, alienated or conveyed in whatever manner to verbal promise by Cornelio to Orlando and even if there was,
said option to buy must be under the Statute of Frauds.
any third party.
On 1978, Cornelio and Orlando entered into a Supplementary RTC rendered decision in favor of Wenifreda which found that
Agreement wherein Orlando was given an additional option to upon the death of Orlando, his rights under the lease contract
renew the lease contract for an aggregate period of 10 years at were transmitted to his heirs, that since the lease was in full force
and effect at the time the subject lot was sold by Cornelio to his
five-year intervals, 1987-1992 and 1992-1997. The said
sons, the sale violated the prohibitory clause in the said contract.
provision was inserted in order to comply with the
requirements of Mobil Philippines, Inc. for the operation of a
Further, Cornelio’s promise to sell the subject lo was established
gasoline station which was subsequently build on subject lot. by parole evidence and that it is not covered by the Statute of
Upon death of Orlando on November 8 ,1982, his wife Frauds. Hence such is binding to Cornelio and his heirs.
(Wenifreda) took over the operation of the gasoline station.
In 1987, Cornelio sold Lot 249-D to his children through a deed

CA reversed the RTC and dismissed the complaint. It held that
of sale denominated as Kasulatan sa Ganap na Bilihan for the
the death of Orlando did not extinguish the lease agreement
sum of P160,000. As stated earlier, the subject lot, which forms and had the effect of transmitting his lease rights to his heirs.
part of Lot 249-D, was sold to Eduardo and Jorge and titled on However, the breach of the non-alienation clause of the said
their names. Several months on thereafter, Cornelio died. agreement did not nullify the sale between Cornelio and his
sons because the Heirs of Orlando are mere lessees and can
EDUARDO’S ACTION AGAINST WENIFREDA.
In 1993, Eduardo
never claim a superior right of ownership over said lot against
informed Wenifreda of his desire to take over the subject lot, registered owners thereof.
however, Wenifreda refused to vacate the premises despite • It further ruled that petitioner failed to establish by
repeated demands. Thus, on September 24, 1993, Eduardo filed preponderance of evidence that Cornelio made a
a complaint of Unlawful Detainer against Wenifreda. verbal promise to Orlando granting the latter the
right of first refusal.
MTC rendered a decision in favor of Eduardo and ordered
Wenifreda to (1) vacate the leased premises, (2) pay Eduardo Issue
reasonable compensation and (c) costs. RTC reversed the Whether or not CA erred in in not holding the sale and
decision of MTC. conveyance as null and void.
CA reversed RTC and reinstated MTC decisions and it increased COURT RULING: Petitioner lacks merit.
the amount of reasonable compensation for the use of leased
premises. Wenifreda’s appeal to the SC was dismissed. ESTATE OF ORLANDO AND WENIFREDA’S CONTENTIONS: They contend
that the heirs are entitled to the rights of a tenant under RA
WENIFREDA, AS ADMINISTRATRIX COMPLAINT AGAINST EDUARDO. In 1162 as amended by RA 3516. The right of first refusal or
1993, she filed for a complaint for annulment of the deed of
preferential right to buy the leased premises is invoked

pursuant to Section 5 of said law. CONTENTION: Petitioner claims that when Cornelio sold the
subject lot to respondents Eduardo and Jorge the lease was in
According to the case of Mataas na Lupa Tenants Association v. full force and effect, thus, the sale violated the prohibitory
Dimayuga the Court explained that the law authorizes that prior clause rendering it invalid.
to and pending the expropriation, the tenant shall have a
right of first refusal or preferential right to buy the leased In resolving this issue, it is necessary to determine whether the
premises should the landowner sell the same. lease agreement was in force at the time of the subject sale and,
if it was in force, whether the violation of the prohibitory clause
However, compliance with the conditions for the application of invalidated the sale.
the aforesaid law as well as the qualifications of the heirs of
Orlando to be beneficiaries thereunder were never raised Article 1311 on Principle of Relativity and Lease Contracts
before the trial court, or even the Court of Appeals, because Under Article 1311 of the Civil Code, the heirs are bound by the
petitioner solely anchored its claim of ownership over the contracts entered into by their predecessors-in-interest except
subject lot on the alleged violation of the prohibitory clause in when the rights and obligations therein are not transmissible
the lease contract between Cornelio and Orlando, and the by their nature, by stipulation or by provision of law.
alleged non-performance of the right of first refusal given by
Cornelio to Orlando. The rule is settled, impelled by basic A contract of lease is, therefore, generally transmissible to the
requirements of due process, that points of law, theories, issues heirs of the lessor or lessee. It involves a property right and, as
and arguments not adequately brought to the attention of the such, the death of a party does not excuse non-performance
lower court will not be ordinarily considered by a reviewing of the contract. The rights and obligations pass to the heirs
court as they cannot be raised for the first time on appeal. of the deceased and the heir of the deceased lessor is bound
to respect the period of the lease.
As the issue of the applicability of R.A. No. 1162, as amended,
was neither averred in the pleadings nor raised during the trial The same principle applies to the option to renew the lease.
below, the same cannot be raised for the first time on appeal. As a general rule, covenants to renew a lease are not
personal but will run with the land. Consequently, the
At any rate, the allegations in
NON-APPLICABILITY OF CITED LAWS: successors-in-interest of the lessee are entitled to the benefits,
the Complaint and the evidence presented during the trial while that of the lessor are burdened with the duties and
below do not establish that Orlando or his heirs are covered obligations, which said covenants conferred and imposed on
by R.A. No. 1162, as amended. the original parties.
It was not alleged nor shown that the subject lot is part of the Application in this Case
landed estate or haciendas in the City of Manila which were The foregoing principles apply with greater force in this case
authorized to be expropriated under said law; that the Solicitor because the parties expressly stipulated in the March 31, 1978
General has instituted the requisite expropriation proceedings Agreement that Romeo, as lessee, shall transfer all his rights
pursuant to Section 2[21] thereof; and interests under the lease contract with option to renew in
That the subject lot has been actually leased for a period of at favor of the party of the Third Party (Orlando), the latter’s heirs,
least ten (10) years; and that the subject lot has at least forty successors and assigns indicating the clear intent to allow the
(40) families of tenants thereon. transmissibility of all the rights and interests of Orlando under
the lease contract unto his heirs, successors or assigns.
Instead, what was merely established during the trial is that the Accordingly, the rights and obligations under the lease contract
subject lot was leased by Cornelio to Orlando for the operation with option to renew were transmitted from Orlando to his heirs
of a gasoline station, thus, negating petitioners claim that the upon his death on November 7, 1983.
subject lot is covered by the aforesaid law.
It does not follow, however, that the lease subsisted at the time
Issue for Determination of the sale of the subject lot on January 29, 1987. When
In fine, the only issue for our determination is whether the sale Orlando died on November 7, 1983, the lease contract was
of the subject lot by Cornelio to his sons, respondents Eduardo set to expire 26 days later or on December 3, 1983, unless
and Jorge, is invalid for: renewed by Orlando’s heirs for another four years. While the
(1) violating the prohibitory clause in the lease agreement option to renew is an enforceable right, it must necessarily be
between Cornelio, as lessor-owner, and Orlando, as first exercised to be given effect.
lessee; and
(2) contravening the right of first refusal of Orlando over THERE IS NO EXPRESS RENEWAL OF THE CONTRACT OF LEASE: There is
the subject lot. no dispute that in the instant case, the lessees (private
respondents) were granted the option to renew the lease for
It is not disputed that the lease agreement contained an option another five (5) years after the termination of the original period
to renew and a prohibition on the sale of the subject lot in favor of fifteen years. Yet, there was never any positive act on the
of third persons while the lease is in force. part of private respondents before or after the termination
of the original period to show their exercise of such option. heirs, petitioner argues that the sale is in violation of the latters
The silence of the lessees after the termination of the original right of first refusal and is, thus, rescissible.
period cannot be taken to mean that they opted to renew the
contract by virtue of the promise by the lessor, as stated in the A right of first refusal is not among those listed as
original contract of lease, to allow them to renew. Neither can unenforceable under the statute of frauds. Furthermore, the
the exercise of the option to renew be inferred from their application of Article 1403, par. 2(e) of the New Civil Code
persistence to remain in the premises despite petitioners presupposes the existence of a perfected, albeit unwritten,
demand for them to vacate. contract of sale. A right of first refusal, such as the one
involved in the instant case, is not by any means a perfected
Similarly, the election of the option to renew the lease in this contract of sale of real property. At best, it is a contractual grant,
case cannot be inferred from petitioner Wenifredas continued not of the sale of the real property involved, but of the right of
possession of the subject lot and operation of the gasoline first refusal over the property sought to be sold. It is thus
station even after the death of Orlando on November 7, 1983 evident that the statute of frauds does not contemplate cases
and the expiration of the lease contract on December 3, 1983. involving a right of first refusal. As such, a right of first refusal
In the unlawful detainer case against petitioner Wenifreda and need not be written to be enforceable and may be proven by
in the subject complaint for annulment of conveyance, oral evidence.
respondents consistently maintained that after the death of
Orlando, the lease was terminated and that they permitted IN THE CASE: No testimonial evidence was presented to prove the
petitioner Wenifreda and her children to remain in possession existence of said right. The testimony of petitioner Wenifreda
of the subject property out of tolerance and respect for the made no mention of the alleged verbal promise given by
close blood relationship between Cornelio and Orlando. Cornelio to Orlando. Neither was it established that
respondents Eduardo and Jorge were aware of said promise
A NEED TO ESTABLISH BY SOME POSITIVE ACT OF EXERCISE OF OPTION: prior to or at the time of the sale of the subject lot. On the
It was incumbent, therefore, upon petitioner as the plaintiff with contrary, in their answer to the Complaint, respondents denied
the burden of proof during the trial below to establish by some the existence of said promise for lack of knowledge thereof.
positive act that Orlando or his heirs exercised the option Within these parameters, petitioners’ allegations in its
to renew the lease. After going over the records of this case, Complaint cannot substitute for competent proof on such a
we find no evidence, testimonial or documentary, of such crucial factual issue. Necessarily, petitioners’ claims based on
nature was presented before the trial court to prove that this alleged right of first refusal cannot be sustained for its
Orlando or his heirs exercised the option to renew prior to or existence has not been duly established.
at the time of the expiration of the lease on December 3, 1983.
In particular, the testimony of petitioner Wenifreda is wanting HELD: The petition is DENIED. The May 30, 2000 Decision of
in detail as to the events surrounding the implementation of the Court of Appeals in CA-G.R. CV No. 58911 dismissing the
the subject lease agreement after the death of Orlando and any complaint for annulment of deed of conveyance, title and
overt acts to establish the renewal of said lease. damages, and the October 6, 2000 Resolution denying the
motion for reconsideration, are AFFIRMED
CONTRACT OF LEASE HAD LONG BEEN TERMINATED: Given the PNB v. DEE (2014)
foregoing, it becomes unnecessary to resolve the issue on 717 SCRA 14
whether the violation of the prohibitory clause invalidated the
sale and conferred ownership over the subject lot to Orlandos Facts: Sometime in July 1994, respondent Teresita Tan Dee
heirs, who are mere lessees, considering that at the time of said (Dee) bought from respondent Prime East Properties (PEPI) on
sale on January 29, 1987 the lease agreement had long been an installment basis a residential lot in Rizal of 204 sq.m.
terminated for failure of Orlando or his heirs to validly renew Subsequently, PEPI assigned its rights over a 213,093 sq.m.
the same. As a result, there was no obstacle to the sale of the property to AFP-RSBS which included the property of Dee. PEPI
subject lot by Cornelio to respondents Eduardo and Jorge as obtained a P205M loan from PNB secured by a mortgage over
the prohibitory clause under the lease contract was no longer several properties including Dee’s property.
in force.
After Dee’s full payment of the purchase price, a deed of sale
On the Issue of Verbal Promise on Right of First Refusal was executed by respondents PEPI and AFP-RSBS on July 1998
CONTENTION: Petitioner also anchors its claim over the subject in Dee’s favor. Consequently, Dee sought from the petitioner the
lot on the alleged verbal promise of Cornelio to Orlando that delivery of the owner’s duplicate title over the property, to no
should he (Cornelio) sell the same, Orlando would be given the avail.
first opportunity to purchase said property. According to
petitioner, this amounted to a right of first refusal in favor of This prompted her to file a case in HLURB for specific
Orlando which may be proved by parole evidence because it is performance to compel delivery of TCT. HLURB favored Dee.
not one of the contracts covered by the statute of frauds. The HLURB was affirmed by BOC on 2004 and affirmed by OP.
Considering that Cornelio sold the subject lot to respondents CA affirmed OP ruling.
Eduardo and Jorge without first offering the same to Orlandos
PNB’s Claims Based on the final contract of sale between them, the
It has a valid mortgage over Dee’s property, which was part of obligation of PEPI, as owners and vendors of Lot 12, Block 21-
the property mortgaged by PEPI to it to secure its loan A, Village East Executive Homes, is to transfer the ownership of
obligation, and that Dee and PEPI are bound by such mortgage. and to deliver Lot 12, Block 21-A to Dee, who, in turn, shall pay,
The petitioner also argues that it is not privy to the transactions and has in fact paid, the full purchase price of the property.
between the subdivision project buyers and PEPI and has no
obligation to perform any of their respective undertakings There is nothing in the decision of the HLURB, as affirmed by
under their contract. the OP and the CA, which shows that the petitioner is being
ordered to assume the obligation of any of the respondents.
The petitioner also objects to the denomination by the CA of There is also nothing in the HLURB decision, which validates the
the provisions in the Affidavit of Undertaking as stipulations petitioner’s claim that the mortgage has been nullified. The
pour autrui, arguing that the release of the title was conditioned order of cancellation/release of the mortgage is simply a
on Dee’s direct payment to it. consequence of Dee’s full payment of the purchase price,
as mandated by Section 25 of P.D. No. 957
AFP-RSBS Arguments
It cannot be compelled to pay or settle the obligation under the NOTHING MORE THAN A LIEN: it must be stressed that the
mortgage contract between PEPI and the petitioner as it is mortgage contract between PEPI and the petitioner is merely
merely an investor in the subdivision project and is not privy to an accessory contract to the principal three-year loan takeout
the mortgage. from the petitioner by PEPI for its expansion project. It need not
be belaboured that "[a] mortgage is an accessory undertaking
PEPI’s Arguments to secure the fulfillment of a principal obligation," and it does
It claims that the title over the subject property is one of the not affect the ownership of the property as it is nothing
properties due for release by the petitioner as it has already more than a lien thereon serving as security for a debt.
been the subject of a Memorandum of Agreement and dacion
en pago entered into between them. Validity of the Mortgage
Note that at the time PEPI mortgaged the property to the
The agreement was reached after PEPI filed a petition for petitioner, the prevailing contract between respondents PEPI
rehabilitation and contained the stipulation that the petitioner and Dee was still the Contract to Sell, as Dee was yet to fully
agreed to release the mortgage lien on fully paid mortgaged pay the purchase price of the property.
properties upon the issuance of the certificates of title over the
dacioned properties. On this point, PEPI was acting fully well within its right when it
mortgaged the property to the petitioner, for in a contract to sell,
Issue ownership is retained by the seller and is not to pass until full
Whether or not CA erred in ordering the cancellation of payment of the purchase price. In other words, at the time of
mortgage and release of title in favor of Dee the mortgage, PEPI was still the owner of the property.
despite the lack of payment of PEPI/AFP-RSBS Moreover, the mortgage bore the clearance of the HLURB, in
of its existing loan obligations to PNB. compliance with Section 18 of P.D. No. 957, which provides that
"[n]o mortgage on any unit or lot shall be made by the owner
COURT RULING: Petition must be denied. or developer without prior written approval of the [HLURB]."
PNB is Not a Privy to the Contract Nevertheless, despite the apparent validity of the mortgage
The petitioner is correct in arguing that it is not obliged to between the petitioner and PEPI, the PNB is still bound to
perform any of the undertaking of respondent PEPI and AFP- respect the transactions between respondents PEPI and Dee.
RSBS in its transactions with Dee because it is not a privy
thereto. The basic principle of relativity of contracts is that The petitioner was well aware that the properties mortgaged
contracts can only bind the parties who entered into it. But PNB by PEPI were also the subject of existing contracts to sell
is not being tasked to undertake the obligations of PEPI and with other buyers. While it may be that the petitioner is
AFP-RSBS. protected by Act No. 3135, as amended, it cannot claim any
superior right as against the installment buyers. This is because
In this case, there are two phases involved in the transactions the contract between the respondents is protected by P.D. No.
between respondents PEPI and Dee – the first phase is the 957, a social justice measure enacted primarily to protect
contract to sell, which eventually became the second phase, the innocent lot buyers. The contract to sell has already ripened
absolute sale, after Dee’s full payment of the purchase price. into a contract of absolute sale.
In a contract of sale, the parties’ obligations are plain and Execution of MOA as Rehabilitation Plan
simple. The law obliges the vendor to transfer the ownership of They executed a MOA and that the RTC order approved PEPI’s
and to deliver the thing that is the object of sale. On the other modified Rehabilitation Plan, which included the settlement of
hand, the principal obligation of a vendee is to pay the full the latter’s unpaid obligations to its creditors by way of dacion
purchase price at the agreed time. of real properties.
In said order, the RTC also incorporated certain measures that In her Answer, she denied the execution of the Pacto de Retro
were not included in PEPI’s plan, one of which is that "[t]itles to sale in favor of respondent and alleged that she had not sold
the lots which have been fully paid shall be released to the the subject property. She claimed that the document
purchasers within 90 days after the dacion to the secured presented was falsified since the fingerprint appearing therein
creditors has been completed." was not hers and the signature of the notary public was not his.
Consequently, the agreement stipulated that as partial She alleged that she mortgaged the lot with Batangas Savings
settlement of PEPI’s obligation with the petitioner, the former and Loan Bank for P100K when her daughter Violeta Rojales
absolutely and irrevocably conveys by way of "dacion en pago" Rufo needed the money for application of overseas work.
the properties listed therein, which included the lot purchased
by Dee. The petitioner also committed to – After examination by NBI, it was concluded that questioned
thumbmark of original-duplicate copy of the notarized Pacto
[R]elease its mortgage lien on fully paid Mortgaged Properties upon de Retro sale and standard right thumbmark were impressed
issuance of the certificates of title over the Dacioned Properties in the by and belong to the same person, Juana Rojales.
name of the [petitioner]. The request for release of a Mortgaged
Property shall be accompanied with: (i) proof of full payment by the RTC ruled in favor of Rojales stating that it was not filed by the
buyer, together with a certificate of full payment issued by the Borrower
indispensable party (Villamin, the common-law wife who was
x x x. The [petitioner] hereby undertakes to cause the transfer of the
certificates of title over the Dacioned Properties and the release of the
the source of funds), hence the judgment will be void.
Mortgaged Properties with reasonable dispatch.39
CA ruled that Villamin is not an indispensable party. It ruled that
There is nothing on record showing that the Memorandum of the person who provided the funds for the purchase of the
Agreement has been nullified or is the subject of pending property is not considered as an indispensable party in a case
litigation; hence, it carries with it the presumption of validity. of consolidation of title filed by respondent, the vendee, in
Consequently, the execution of the dation in payment whose favor the petitioner sold the subject property under the
effectively extinguished respondent PEPI’s loan obligation to contract of sale con pacto de retro. MR denied.
the petitioner insofar as it covers the value of the property
purchased by Dee. Issue
Whether or not CA erred in ordering the consolidation of
This negates the petitioner’s claim that PEPI must first redeem ownership and title in the name of respondent Dime since his
the property before it can cancel or release the mortgage. As it heirs have filed a motion to dismiss which admitted therein that
now stands, the petitioner already stepped into the shoes of a ruling of the trial court in favor is tantamount to unjust
PEPI and there is no more reason for the petitioner to refuse enrichment considering that Villamin provided the fund for the
the cancellation or release of the mortgage, for, in accepting purchase of the subject property.
the assigned properties as payment of the obligation, "[the
bank] has assumed the risk that some of the assigned COURT RULING: The instant petition is devoid of merit.
properties are covered by contracts to sell which must be
honored under PD 957." CONTENTION: Petitioners insists that the filing of the
manifestation reflected the intention of the heirs of respondent
Whatever claims the petitioner has against PEPI and AFP-RSBS, to enter into a settlement with the petitioner.
monetary or otherwise, should not prejudice the rights and
interests of Dee over the property, which she has already fully COURT REPLY: While we agree with the petitioner that the heirs,
paid for. As between these small lot buyers and the gigantic as the client, has the exclusive control over the subject matter
financial institutions which the developers deal with, it is of litigation and may settle case without attorney's intervention,
obvious that the law—as an instrument of social justice—must we deny the rationale of the filing of the motion to dismiss by
favor the weak. the heirs. It was alleged that they would be unjustly enriched
should the court order the consolidation of the title of Lot 4-A
VDA. DE ROJALES v. DIME (2016) in the name of respondent since the source of the consideration
783 SCRA 575 was Villamin, respondent's common-law wife.
Facts: Petitioner Juana Vda. de Rojales owned a parcel of land EVIDENCE: In the contract of Pacto de Retro sale, petitioner, the
at Barrio Remanente, Nasugbu, Batangas consisting of 2,064 vendor, bound herself to sell the subject property to the nd
sq.m. Respondent Marcelino dime filed a complaint alleging reserved the right to repurchase the same property for the
that on May 16, 1999, Rojales conveyed under a Pacto de Retro same amount within a period of nine (9) months from March
Contract the lot in his favor and in consideration of P2.502M. 24, 1999 to December 24, 1999. Therefore, in an action for the
This is with a right to repurchase the property within nine consolidation of title and ownership in the name of vendee in
months from March 24, 1999 to December 24, 1999. Despite accordance with Article 1616 of the Civil Code, the
repeated verbal and formal demands for repurchase she indispensable parties are the parties to the Pacto de Retro
refused to exercise such right of repurchase the subject Sale - the vendor, the vendee, and their assigns and heirs.
property by her.
Common-Law Wife, Not Privy to Contract On Absence of Intention to Sell: Contradicting Statements
Villamin, as the alleged source of the consideration, is not privy To prove her lack of intention to sell the property, petitioner
to the contract of sale between the petitioner and the maintained that the respondent borrowed the title from her.
respondent. Therefore, she could not maintain an action for She herself took the witness stand and testified during the
consolidation of ownership and title of the subject property in her direct and cross examination.
name since she was not a party to the said contract. • However, her daughter Josefina claimed otherwise.
She averred that her mother has previously
Where there is no privity of contract, there is likewise no mortgaged the property with the bank and that it was
obligation or liability to speak about. This Court, in defining the Barcelon who redeemed the property from the bank.
word "privy" denotes the idea of succession, thus, he who by
succession is placed in the position of one of those who HELD: In light of petitioner's inconsistent and bare allegations
contracted the judicial relation and executed the private and the conflicting testimony of her other witness, we rule that
document and appears to be substituting him in the personal petitioner failed to overcome the presumption of regularity of
rights and obligation is a privy. the notarized contract of Pacto de Retro sale. Moreover, this
Court is unconvinced that petitioner has successfully proven
For not being an heir or an assignee of the respondent, that her agreement with respondent was not a pacto de retro
Villamin did not substitute respondent in the personal sale but a contract of loan secured by a mortgage of the subject
rights and obligation in the pacto de retro sale by property.
succession. Since she is not privy to the contract, she cannot be
considered as indispensable party in the action for consolidation
of title and ownership in favor of respondent. A cursory reading
of the contract reveals that the parties did not clearly and
deliberately confer a favor upon Villamin, a third person.
No Unjust Enrichment Observed

CONTENTION: Petitioner alleges that the consolidation of the title
should not be allowed since the heirs admitted that they would
be unjustly enriched, Villamin being the source of the fund used
for the purchase of the subject property.
This Court notes that the RTC relied on the bare assertions of
the heirs in dismissing the case with prejudice. The records are
bereft of evidence to support the allegation that Villamin
has indeed provided the consideration. Not being a privy to
the pacto de retro sale, Villamin cannot be considered to
have been prejudiced with the consolidation of title in
respondent's name. Assuming arguendo that she was indeed
the source of the consideration, she has a separate cause of
action against respondent. The legal obligation of respondent
to her is separate and distinct from the contract of sale con
pacto de retro, thus, the award of consolidation of title in her
name would be untenable.
On Fingerprint Examination
Petitioner failed to present clear and convincing evidence to
overcome such presumption of regularity of a public document.
Petitioner submitted the specimen signature of the notary
public but the same was never presented during the trial nor
was authenticated.
Records disclose that after she admitted to being bound with

conclusion of the NBI regarding the issue on the thumbmark,
petitioner did not present any evidence to rebut the due
execution of the notarized contract of sale con pacto de retro.
Instead, she presented her testimony and the testimony of her
daughter Josefma Rojales to prove that she never intended to
sell her property. The inconsistencies in petitioner's claims cast
doubt to the credibility of her testimonies.
1315 – 1319. Perfection/Stages/Consensual/Real and Contracts are perfected by mere consent, upon the acceptance
Essential Requisites of Contracts by the offeree of the offer made by the offeror. From that
moment, the parties are bound not only to the fulfillment of
JARDINE DAVIES v. COURT OF APPEALS (2000) what has been expressly stipulated but also to tall
333 SCRA 684 consequences which, according to their nature, may be in
keeping with good faith, usage and law.
Synopsis: This case basically deals about the perfection of contract
based on bidding. Central to this case is the application of Article
1326. This revolves on the issue whether there was a perfected
To produce a contract, the acceptance must not qualify the
contract when Pure Foods sent a reply letter confirming the award terms of the offer. However, the acceptance may be express
of bid to FEMSCO. There was already a perfected contract for the or implied. For a contract to arise, the acceptance must be made
bid proposals were the offers and the letter (and its wordings) reflect known to the offeror. Accordingly, the acceptance can be
a categorical acceptance. Thus, the elements of a contract are all withdrawn or revoked before it is made known to the offer.
present and complete, thus the contract is perfected.
The controversy lies in the consent. Whether there
IN THE CASE:
Facts: In 1992, there was a power crisis, so petitioner Pure was an acceptance of the offer and if so if it was communicated
Foods Corporation decided to install two 1500 KW generators thereby perfecting the contract.
in its food processing plant in San Roque, Marikina City.
What Constituted the Offer and Acceptance?
There was a bidding, several suppliers and dealers were to Pure Foods started the process of entering into the contract by
attend the pre-bidding conference to discuss the condition that conducting a bidding. Article 1326 of the Civil Code provides
would best suit the needs of Pure Foods. Out of the eight that ‘advertisements for bidders are simply invitations to make
prospective bidders in 1992, Pure Foods confirmed the award proposals” applies. Accordingly, the Terms and Conditions of
to FEMSCO. the Bidding disseminated by Pure Foods constitute
advertisement to bid on the project. The bid proposals or
Immediately, FEMSCO submitted the required bond and quotations submitted by the suppliers are the offers. And the
insurance policy and started the project by purchasing the reply of Pure Foods is the acceptance or rejection of such.
necessary materials. However, Pure Foods unilaterally
cancelled the award for there were significant factors were The 1992 Letter of Pure Foods to FEMSCO constituted the
uncovered concerning the review of the project. acceptance of the offer as contemplated by law. The tenor
of the law stating that “this will confirm that Pure Foods has
FEMSCO protested the cancellation of the award and sought a awarded to your firm” could not be more categorical.
meeting, and on 1993, before the matter could be resolved,
PUREFOOD already awarded the project and entered into a Even if arguing that the reply was a conditional counter-offer,
contract wit Jardine Nell which was not one of the bidders. the FEMSCO’s submission of the performance bond and
FEMSCO wrote Pure Foods to honor its contract. contractor’s all-risk insurance was an implied acceptance.
Accordingly, for all intents and purposes, the contract at
RTC ruled in favor of FEMSCO the sum of P2.3M and have it that point has been perfected and the conformity of FEMSCO
perform the obligations. CA affirmed the RTC decision. would only be a mere surplusage.
Pure Food’s Arguments SOLER v. COURT OF APPEALS (2001)

It argues that its 12 December 1992 letter to FEMSCO was not 358 SCRA 57
an acceptance of the latter's bid proposal and award of the
project but more of a qualified acceptance constituting a Synopsis: This case involves a perfected oral contract between an
interior designer Soler and a branch officer Ms. Lopez wherein she
counter-offer which required FEMSCO's express conforme.
insisted to hire the services of Soler for the renovation of the
Since PUREFOODS never received FEMSCO's conforme,
COMBANK Ermita Branch. Soler did not receive payment for her
services, Lopez argued that there was no contract for lack of consent
Jardine also contends that it had no prior knowledge of the from the bank. Court ruled that there was authority of Lopez to make
supposed contract between Pure Foods and FEMSCO. dealings in behalf of the bank and that there was the existence of all
the elements of a contract and it was a perfected oral contract.
Issues
Whether or not there was a perfected contract between Facts: Jasmine Soler was a well known professional interior
Pure Foods and FEMSCO designer, during a meeting with Nida Lopez on November
1986, Soler was reluctant, but Lopez insisted and assured her of
Contract, Concept and Application the compensation of her services of P10K for the renovation of
A contract is defined as "a juridical convention manifested in the COMBANK Ermita Branch.
legal form, by virtue of which one or more persons bind
themselves in favor of another or others, or reciprocally, to the There were discussions of what was to be renovated. After a few
fulfillment of a prestation to give, to do, or not to do." days, Soler requested for the blueprint of the building so that
the proper designs and specification could be given to Ms. PROVINCE OF CEBU v. HEIRS OF MORALES (2008)
Lopez in time for the board meeting. 546 SCRA 315
Synopsis: This case involves an old case of a lease agreement

Soler then asked her draftsman Jackie Barcelon to make
between the Province of Cebu and Rufina Morales. At one point, the
measurements and made research for the design. She hired an Province of Cebu donated the property including the lot leased by
engineer to make electrical lay-outs and architects to do Morales to the City of Cebu.
drafting.
The City of Cebu needed money for infrastructure thus there was
Subsequently, Soler demanded payment, but Lopez ignored sale of the properties in a public auction including the lot leased by
the demands, in February 1987, by chance petitioner and Ms. Morales wherein she was the highest bidder. However, the Province
Lopez saw each other in a concert at the Cultural Center of the of Cebu and the City of Cebu had a compromise agreement to
return certain lots which erroneously included the lot of Morales.
Philippines. Petitioner inquired about the payment for her
services, Ms. Lopez curtly replied that she was not entitled to it The Court held that the public auction was already a perfected
because her designs did not conform to the bank's policy of contract of sale despite the lack of full payment of the purchase
having a standard design, and that there was no agreement price for this was due for the confusion who to pay the amount.
between her and the bank. Thus, the consignation was held proper as payment.
RTC ruled in favor of Soler. CA reversed RTC stating that the Facts: On September 16, 1971, Province of Cebu leased in favor
COMBANK never gave its consent to the contract considering of Rufina Morales a 210 sq.m. lot which formed part of the
that the bidding or question of renovation was deferred for the Banilad Estate. In 1964, Province of Cebu donated several
commercial bank is for sale. parcels of land to the City of Cebu.
Issue The City sold the lot at public auction in order to raise money
Whether or not there was a perfected contract between Soler for infrastructure projects. The highest bidder for the lot of
and COMBANK and Nida Lopez and if Lopez had authority to Morales was Bascon but Morales could match the highest bid
bind the bank in the transaction. for she had a preferential right.
Ms. Lopez has the Authority to Engage Services of Soler In the meantime, Province of Cebu filed a reversion of
Ms. Lopez was aware that petitioner hired the services of people donation against City of Cebu and that they went into a
to help her come up with the designs for the December, 1986 compromise agreement which provided for the return of the
board meeting of the bank. Ms. Lopez even insisted that the donated lots to Province of Cebu including the Morales Lot.
designs be rushed in time for presentation to the bank. With all
these discussion and transactions, it was apparent to petitioner When Morales died, apart from the deposit and downpayment,
that Ms. Lopez indeed had authority to engage the services of she was not able to make any other payments on the balance
petitioner. of the purchase price for the lot.
Stages of Contracts On 1983, one of her nieces wrote to Cebu Governor Gullas
1. Preparation asking for the formal conveyance of the lot to the surviving
2. Perfection heirs. The requests were however, unheeded.
3. Consummation
There is perfection when the parties come to agree on terms The respondents Heirs of Morales argue that the award at
of the contract and consummation if performed. public auction of lot to Morales was a valid and binding
IN THE CASE: There was a Perfected Oral Contract: contract entered into by the City of Cebu and they could not
1. When Ms. Lopez and Soler met in November 1986, pay the balance of the purchase price during pendency due to
and discussed the details of the work, the conception confusion as to whom payment be made.
stage commenced.
2. When they agreed to the payment of P10,000 as RTC ruled in favor of the heirs, stating that there was already a
professional fees and that she should give the designs consummated sale between the City of Cebu and Rufina
before December 1986 board meeting of the bank, Morales. CA affirmed the decision.
then there was perfection of the contract.
3. When Soler gave the designs to Ms. Lopez, the Issue
contract was consummated. Soler believed that once Whether or not there was a valid sale of the subject property
she submitted the designs she would be paid her thereof by virtue of the auction sale.
professional fees and Lopez assured her that.
The Award is Tantamount to a Perfected Contract of Sale
HELD: The designs Soler submitted to Lopez were not returned, When the City of Cebu awarded the lot to Morales, it is assumed
and Lopez as officer of the bank and as branch manager used that she met all qualifications to match the highest bid. The
such designs for presentation to the board of the bank. Thus, Province of Cebu is bound to respect the contract of sale. The
the designs at the time of the deadline set by the board.
City of Cebu was the owner of the lot when it awarded the same GARCIA v. THIO (2007)
to Morales. 518 SCRA 433
Synopsis: This involves a loan between Garcia and Thio. The latter
The award is tantamount to a perfected contract of sale between
obtained two loans from Garcia but were not paid. It was shown that
Moral and the City of Cebu, while partial payment of the the two checks evidencing the amounts were named payable to
purchase price and actual occupation of the property by Morals order to a certain Marilou Santiago. Thio argued that the contract of
effectively transferred ownership of the lot the latter. loan was not between her and Garcia but between Santiago.
A sale by public auction is perfected when the auctioneer The court ruled in this case however that there was a perfected real
announces its perfection by the fall of the hammer or in other loan of contract between Garcia and Thio because the cross-
customary manner. The contract of sale was nevertheless checking was made in favor of Thio who planned to re-lend the
amount to Marilou Santiago thus there was a delivery to a
perfected as to Morales as the highest bidder.
constructive possession of Thio thus a perfected loan was present.
There was a meeting of minds between the City of Cebu and

Facts: Sometime in February 1995, Rica Marie S. Thio received
Morales as to the lot sold and its price such that each party
form Carolyn M. Garcia a cross-check in the amount of
could reciprocally demand performance of the contract of each
US$100,000 payable to order of a certain Marilou Santiago.
other for sale is a consensual contract. All elements of the
Thereafter, Garcia received from Thio every month certain
contract of sale was present in this case.
amounts. There was another cross-check on P500K.
Sale Need Not be in a Formal Document to be Binding
According to Garcia, Thio failed to pay the principal amounts of
CONTENTION: There is no perfected contract of sale because no
the loan which is US$100,000 and the P500,000 when they
Contract of Purchase and Sale was ever executed by the parties.
became due. Thus, on February 1996, Garcia filed a complaint
for the sum of money.
COURT REPLY: There is no merit in this assertion. As previously
stated, a contract of sale is a consensual contract that is
Garcia alleged that on February 24, 1995, Thio borrowed from
perfected upon a meeting of minds as to the object of the
her the amount of US$100,000 with 3%int per month, which
contract and its price.
loan would mature on October 1995 covered by first check.
Subject to the provisions of the Statute of Frauds, a formal
And on June 29, 1995, Thio borrowed from her the amount of
document is not necessary for the sale transaction to acquire
US$100,000 with 4%int per month, which loan would mature on
binding effect. For as long as the essential elements of a
October 1995 covered by second check.
contract of sale are proved to exist in a given transaction, the
contract is deemed perfected regardless of the absence of a
For both loans, no PN was executed since petitioner and
formal deed evidencing the same.
respondent were close friends at the time. Thio paid the
stipulated interest but failed to pay the principal.
• Failure to pay the balance of the purchase price did
not render the sale inexistent but merely gave rise to
Thio denied that she contracted the two loans with Garcia and
the right of specific performance or rescission.
countered that it was Marilou Santiago to whom Garcia lent
the money. She claimed that she was merely asked by Garcia to
PARTIALLY CONSUMMATED: Morales had paid the deposit and
give crossed checks to Santiago.
downpayment for the lot in accordance with the terms of the
bid award. She first occupied as lessee, built a house thereon,
RTC ruled in favor of Garcia but CA reversed stating that there
continued possession of the lot as its owner until her death in
was no contract of loan between the parties.
1969. The heirs also occupied.
Issue
City of Cebu cannot Dispose Morales Lot
Whether or not there was a real contract of loan.
The City of Cebu has sold the property to Morales even though
there remained a balance on the purchase price and a formal
Loan is a Real Contract
contract of sale had yet to be executed.
A loan is a form of a real contract, not consensual, and as such
is perfected only upon the delivery of the object of the contract.
It is no longer the owner of the Morales lot when it cedes the
Upon delivery of the object of the contract of loan (which is the
same to Morales under the Compromise Agreement. Province
money received by the debtor when the checks were encashed)
of Cebu was already aware of the such present situation.
the debtor acquires ownership of such money or loan proceeds
and is bound to pay the creditor an equal amount.
HELD: The tender of the payment of the balance of the
purchase price is proper and that its consignation of the
It is undisputed that the checks were delivered to respondent.
balance of the purchase price before the trial court thus
However, these checks were crossed and payable not to the
operation as full payment, which resulted in the extinguishment
order of Thio but to a certain Marilou Santiago.
of the respondent’s obligation under the contract of sale.
Thus, the main question left to be resolved is that: who Issue

borrowed money from Garcia, is it Thio or Santiago? Was there a perfected contract? If there is, what is then the
nature and what is effect of belated payment?
Garcia argues that it was upon Thio’s instruction that both
checks were made payable to Santiago. Garcia maintains that it There Was a Perfected Contract
was also upon Thio’s instruction that both checks were A thing sold without the consent of all the co-owners does not
delivered to her, so she could in turn deliver the same to invalidate the sale or render it void. The Civil Code recognizes
Santiago. The court agrees with Garcia. the absolute right of a co-owner to freely dispose of his pro
indiviso share as well as the fruits and benefits from that share,
Delivery is the act by which the substance thereof is placed independently of the other co-owners.
within the actual or constructive possession or control of
another. Although Thio did not physically receive the proceeds Thus, when Consuelo agreed to sell to the Perreras the subject
of the checks, the instruments were placed in her control properties, what she sold in fact was her undivided interest which
under an arrangement whereby she actually re-lent the consisted of one-half interest of her conjugal share, and one-sixth
amount to Santiago. interest as her hereditary share.
HEIRS OF PANGAN v. PERRERAS (2009) The presence of consent was evidenced by the payment and
597 SCRA 253 receipt of the P20,000 which was an earnest money. Article
1482 of the Civil Code, provides that whenever earnest money
Synopsis: This involves the sale of a property subject to partition
is given in a contract of sale, it shall be considered as part of
and hereditary shares. Consuelo agreed with Perreras to sell the
subject property in the amount of P580K. The heirs of Cayetano
the price and proof of the perfection of the contract.
Pangan argued that such sale was not perfected because of the
absence of their consent as co-owners to the subject property and All essential elements were present in this case. While the
that the P20K must be returned and the consignation proper. respondents required that the occupants vacate the subject
properties prior to the payment of the second installment, the
The Court held that even though the property is still subject to stipulation does not affect the perfection of the contract, but
partition, the failure of Consuelo to secure the consent of the co- only its execution.
owners to the subject property is does not render the contract void.
It is because the consent is still valid as to the pro indiviso share of
Consuelo as spouse to the conjugal property. DUARTE v. DURAN (2011)
657 SCRA 607
Facts: The Spouses Pangan were the owners of a lot and two- Synopsis: Simply put, this case involves a Contract to Sell a laptop
door apartment in Sampaloc, Manila. Consuelo Pangan agreed between Duarte (buyer) and Duran (seller). They agreed to sell the
to sell to the Perreras the subject properties for the price of laptop for an amount of P15K to be paid on several dates. However,
P540K. Three days later they agreed to increase to P580K. Duarte refused to pay P15K alleging that the amount must be P10K.
Upon filing to the court, Duarte claimed that there was no perfected
contract between Duarte and her and that the laptop was in her
Perreras issued tow checks payable to Consuelo in the amount
possession as mere security and that it should be in a written
of P200K and P250K on June 15, 1989. Consuelo refused to
document to be enforceable following the Statute of Frauds.
accept the checks because the children who are co-owners to
the property did not want to sell the subject properties. Thus, The Court held that there was a perfected contract. Sale is a
she offered to return the P20,000 earnest money she received consensual contract that is perfected by mere consent. The Statute
from the Perreras, but rejected, but filed for consignation. of Frauds is not applicable as to warrant a written form because it
only applies to executory contracts, not to executed or partially
RTC ruled in Perreras favor stating that there was a perfected executed. In this case, the contract to sell was already partially
executed shown by the possession as well as the partial payments
contract of sale, at least insofar the share of Consuelo and that
made by Duarte herself. In addition, the elements essential to a
the receipt of P20K earnest money was manifestation of
contract were present, it is in a form of a perfected oral contract.
perfection. CA found that the payment and receipt of earnest
money was the operative act that gave rise to a perfected
Facts: According to Duran, on February 14, 2002 he offered to
contract and that there was nothing wrong in agreement.
sell a laptop for the sum of P15K to the Duarte through the help
of a common friend, Dy. Since Duarte was still undecided,
Petition
Duran left the laptop to the former for two days.
They alleged that there was no perfected contract. No other
evidence than the finding of receipt of P20K as earnest money,
On February 6, 2002, Duarte told Duran that she was willing to
there is no other evidence to show that there was perfection.
buy the laptop on installment. Duran agreed, Duarte then gave
Duran P5K as initial payment and pay P3K on February 18 and
They insist the Consuelo specifically informed Perreras that the
P7K on March 15. When Dy returned to get the remaining
sale still required the consent of the heirs as co-owners. The
balance, Duarte stated that she offered to pay only P2K
refusal of the petitioner-heirs to sell the subject properties
claiming that the laptop was only worth P2K. Duarte claimed
purportedly amount to the absence of the requisite element of
that there was no contract of sale.
the consent.
They stated that the annotation in the letter is a signification of an

MTCC held in favor of Duran stating that there was a contract acceptance of the offer and leads to perfection of the sale.
of sale. RTC reversed stating that the alleged receipt of Dy was
However, the Court here ruled that there was no perfection of sale.
made in her own handwriting which is fraudulent. CA reinstated
It is clear what Al-Amanah did was an offer to buy and that the
the findings of the MTCC.
amount deposit to them is not earnest money but a mere bid
Issue deposit that would give the opportunity for Al-Amanah to consider
Whether or not there was a valid contract of sale. their bid. There was no agreement as to the price and the receipt,
annotation and phrase on the checks do not show a tacit acceptance
There Was a Contract of Sale Between Parties because it was made known to the PELA that the acceptance of the
CONTENTION: Insisted that the laptop was not sold to Duarte but offer to buy is subject to a suspensive condition of the approval of
was given as a security for Duran’s debt, citing the failure to the Al-Amanah Head Office. Thus, there was no perfected contract
and it only remained at the first stage – negotiation.
present a written contract of sale stating that under the Statute
of Frauds, contract of sale to be enforceable must be in writing.
Facts: Al-Amanah owned a 2000 sq.m. lot located in Magtuod
COURT REPLY:The absence of written contract of sale does not Davao City. In 1992, they asked members of PELA to desist from
mean that there is no contract of sale at all. building their houses on the lot and to vacate the same, unless
they are interested to buy it.
A contract of sale is perfected the moment parties agree upon
the object, price and terms of payment. Once perfected, the The informal settlers expressed their interest to buy the lot for
parties are bund by it whether verbal or in writing because there P100/sq.m. which was turned down by Al-Amanah for being
is no form required. too low for a price, it reiterated its demand to the informal
settlers to vacate the lot.
The Statute of Frauds does not apply to the present case as this
provision only applies to executory and not to completed, In a letter in 1993, the informal settlers together with other
executed or partially executed contracts. members comprising PELA offered to purchase the lot for
P300,000 half of which shall be paid as downpayment and half
IN THIS CASE: The contract of sale had been partially executed paid within one year. In lower portion of the letter, Al-Amanah
because the possession of the laptop was already transferred to made the following annotation:
petitioner and the partial payments made by her. Thus, the
absence of a written contract is not fatal to the case. What was “Subject offer has been acknowledged/received but
processing to take effect upon putting up of the partial
only needed is preponderance of evidence to show that there
amount of P150,000 before April 15, 1993”
was an oral contract of sale, which he did by showing own and
Dy’s affidavit, the receipt and demand letter.
By May 3, 1993, PELA had deposited P150K as evidenced by
four bank receipts. The first three were labelled for partial
HELD: Other than Duarte’s denials, no other evidence was
deposit on the sale of the land while the last one was labeled
submitted by Duarte stating that the laptop was a security. She
as in ‘partial/full payment on deposit”. PELA members remained
did not exert any effort to recover payment for the loan. Her
in the property and introduce further improvements.
inaction leads us to conclude that allegation was a mere
afterthought to save her case.
On November 29, 1993, Al-Amanah, wrote PELA President
Cuizon informing him of that the head office disapproved
ROBERN DEV’T v. PEOPLE’S LANDLESS (2013) PELA’s offer to buy the said land. Stating that they can
693 SCRA 24
withdraw the amount deposited in the name of PELA.They sent
Synopsis: A group called People’ Landless Association or PELA letters demanding the members now to vacate the lot.
stayed in a property in Davao owned by Al-Amanah. The latter
requested them to leave, unless they purchase the property. Indeed, Robern Development
the PELA expressed interest to buy. In 1993, the PELA offered to buy Acting on Robern’s offer, Al-Amanah informed of acceptance
the property for P300K and P150K of which shall be deposited as of its offer of P400K and that it is now Robern’s responsibility
downpayment. The Al-Amanah made an annotation to the letter to eject the occupants in the lot as well as payment of price.
stating that the subject offer has been acknowledged and received.
Robern development sent a letter in 1994 stating its uncertainty

PELA deposited P150K and they were labelled in payment for the
deposit amount. But in November 1993, PELA was informed that the of the status of the lot for the PELA are presenting copies of
Head Office of Al-Amanah disapproved their offer to buy for it was official receipt made by the bank bearing the notation “partial
lower than the price required, thus the deposit was consigned, and payment/deposit”.
they were demanded to leave the subject lot. In the meantime,
Robern Development was informed of the award of the bid for Al-Amanah furnished copies of the rejection letter of the bid,
offering P400K but was reluctant due to the actions of PELA demand letters to vacate, and proof of consignment of the
asserting its right to purchase the property due to them already
P150K. On March 4, 1994, Robern paid the balance of the
having a perfected contract of sale.
purchase price a Deed of Sale was executed. However, PELA
consigned the amount of P150K.
Three months later, as its members were already facing eviction IT WAS NOT EARNEST MONEY BUT A PRACTICE OF SUBMISSION OF BID
and possible demolition of their houses, PELA filed a suit for DEPOSITS BEFORE ACKNOWLEDGEMENT OF OFFERS: The court cannot
Annulment and Cancellation of Void Deed of Sale against agree with the CA’s ratiocination that receipt of the amount,
Al-Amanah insisting that there was already a perfected coupled with the phrase written on the four receipts as "deposit
contract of sale with Al-Amanah. on sale of TCT No. 138914," signified a tacit acceptance by Al-
Amanah of PELA’s offer. For sure, the money PELA gave was not
In its answer, Al-Amanah claimed that the P150K was merely a in the concept of an earnest money. Besides, as testified to by
deposited in connection with the offer and that there was no then OIC Dalig, it is the usual practice of Al-Amanah to require
perfected contract since the price was rejected. submission of a bid deposit which is acknowledged by way
of bank receipts before it entertains offers.
RTC dismissed PELA’s complaint for it was only a mere offer • It was even made clear to PELA that the acceptance of
which was already rejected. CA reversed finding that there was the offer is subject to the approval of Head Office.
a valid contract of sale for that the annotation was construed to
be an acceptance of the offer. Transaction Remained at the Negotiation Stage
The offer never materialized into a perfected sale, for no oral or
Robern Development’s Arguments documentary evidence categorically proves that Al-Amanah
They stress that there was no sale between PELA and Al- expressed amenability of the P300K offer of purchase price and
Amanah for there neither a deed nor any written agreement that it expressly rejected the offer price. There was no double
executed. And that Dalig was a mere OIC who was never vested sale at all.
with authority to sell the lot. They also invoke good faith.
HELD: The petition is partially granted except the award of
People’s Landless Arguments damages of Al-Amanah to PELA due to delayed notice.
They argued the Robern Development is not the proper party
assailing the validity of the sale and that there was a perfected SM INVESTMENTS v. POSADAS (2015)
contract of sale due to annotation stating acceptance of offer. 776 SCRA 219
Synopsis: This involves 27.6 hectare of land of Posadas which was

Issue subject to a contract of Joint Venture. Initiated by SMIC, they sent
Whether or not there was a contract of sale an offer of joint venture with a goodwill money of P70M. The
between PELA and Al-Amanah. Posadas sent a counter-offer of a counter-proposal that the
acceptance is dependent if SMIC increase goodwill money to P80M.
On Robern Development’s Legal Standing The SMIC then indeed sent a third letter accepting the counter offer.
PELA’s contention that Robern cannot assail the alleged sale
between PELA and Al-Amanah is untenable. Robern is one of In compliance with JVA, SMI sent drawings of the planned malls.
However, the Posadas sent a letter that it will not evaluate such for
the parties who claim title to the disputed lot. As such, it is a
there are more lucrative offers and will not continue JVA unless the
real party in interest since it stands to be benefited or injured goodwill money is increased to P140M. SMIC reminded Posadas to
by the judgment. respect the JVA, which latter contended that was never perfected.
Essential Elements of a Contract of Sale The court here ruled that there was a perfected JVA stating that
A contract of sale is perfected at the moment there is a meeting the letters themselves, especially the third letter shows the
of minds upon the thing which is the object of the contract and unqualified acceptance of the SMIC of the counter-offer by the
upon the price. Thus, for a contract of sale to be valid: Posadas to increase the goodwill money. There was perfection of
the contract and that the claim of Posadas can only be construed as
1. Consent or meeting of the minds
a mere offer to amend consideration, but it does not accept the
2. Determinate subject matter perfected JVA at all.
3. Price certain in money or its equivalent
Facts: The Posadas owned a parcel of land of 27.6 hectares in
IN THE CASE: There is no controversy as to the subject matter for
Makati. On 1995, SMIC sent Posadas a written offer for a joint
it is the 2,000 sq.m. What is in issue is the other elements.
venture for the development of the subject property.
Price
In reply the Posadas sent a written counterproposal stating that
Fixing it can never be left to the decision of only one of the
the goodwill money should be not less than P80M and if
contracting parties. "But a price fixed by one of the contracting
acceptable, they will be ready to sign the JVA.
parties, if accepted by the other, gives rise to a perfected sale.
On August 24, 1995, SMIC sent Posadas another letter
Consent
containing its acceptance of the counter offer accepting the
The court held that there is no perfected contract of sale
counter proposal of goodwill money in the amount of P80M.
between PELA and Al-Amanah for want of consent and
agreement on the price. The parties did not agree on the price
On December 02, 1995, SMIC in compliance with what it
and no consent was given, whether express or implied. The
considered as a perfected JVA sent four drawings of the
court finds that March 18, 1993 Letter was an offer to buy.
proposed malls and its location in the Subject Property.
After receiving the drawings, Posadas sent SMIC a letter

informing that they had received several other offers for the
Subject Property demanding that they should better their offers.
On August 21, 1996, SMIC sent a letter reminding them to
respect the JVA for the development of the subject property.
RTC ruled in favor of SMIC on declaring the validity of the JVA

however the CA reversed such findings for it stated that they
were still in the negotiation stage.
Issue
Whether or not the contract for a joint venture between
SMIC and Posadas has been perfected.
COURT RULING: The petition is impressed with merit.

Consensual contracts like sale are perfected by mere consent.
Based on the provisions of the law (1315 on contracts, 1318 on
elements and 1320 on consent) the contract for joint venture
has been perfected.
Letter of August 08, 1995

Embodies a complete offer on the part of SMIC in that it
contained an object certain, which is the joint venture for the
development of the Subject property, there was a consideration
of the goodwill money in the amount of P70M plus a 60/40
sharing.

Embodies a complete counter-offer in that they conveyed
their acceptance of the joint venture subject only to the
counter-proposal to increase the goodwill money from P70
Million to P80 Million.

Embodies an unqualified acceptance on part of SMIC of the
counter-proposal which perfect the contracts of JVA.
Controversial Letter of December 6, 1995

It did not affect the already perfected JVA and that is can only
be construed as a mere proposal to amend JVA consideration.
Stages of the Contract of Joint Venture

In this case, the first and second stage of the contract had been
fulfilled. Negotiations took place when the parties made their
exchange of correspondences until the letter of 24 August
1995. The perfection of the contract came thereafter, when
SMIC, through the letter of 24 August 1995, accepted the
counter-offer of respondents in their letter of 18 August 1995.
HELD: We affirm the finding of the Trial Court that there is a

perfected joint venture agreement between the parties for the
development of the Subject Property. Therefore, the said
perfected joint venture agreement still stands. In this
jurisdiction, obligations arising from contracts have the force of
law between the contracting parties and should be complied
with in good faith.

Unless it appears otherwise, business advertisements of
Civil Code things for sale are not definite offers, but mere invitations to
Articles 1324-1346 make an offer.
ARTICLE 1324 Rule on Business Advertisements

When the offerer has allowed the offeree a certain period to (a) If it appears to be a definite offer containing all the
accept, the offer may be withdrawn at any time before
particulars needed in a contract, it really is a definite
acceptance by communicating such withdrawal, except when
the option is founded upon a consideration, as something offer, and if the object is determinate.
paid or promised. (b) If important details are left out, the advertisement is
not a definite offer, but a mere invitation of make an
General Rule on Options offer.
If the offeror has allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before acceptance by Example: “For Sale: 900 sq. meter lot with a brand new 1-1/2 storey
communicating such withdrawal. house at 1445 Perdigon, Paco, Manila for P10 million cash.” This is a
definite offer, from which the advertiser cannot back out, once it is
accepted by another.
When the option is founded upon a consideration as
EXCEPTION:
something paid or promised. ARTICLE 1326
Advertisements for bidders are simply invitations to make
Illustration: proposals, and the advertiser is not bound to accept the
B, interested in a particular car at a car exchange company, asked S for highest or lowest bidder, unless the contrary appears.
the price. S said: “P3,500,000.” B however could not make up his mind
whether to buy or not. So, S told B, “B, I’ll give you a week to make up Rules on Advertisement for Bidders
your mind. In the meantime, I will reserve this car for you.” Before the When in the advertisement it can be inferred with certainty that
week is over, can S withdraw the offer to sell the car for P3,500,000? he best bid (whether highest or lowest) will be considered as
giving rise to a binding contract, each bid will imply the
Answer: Yes, provided B has not yet signified his acceptance of the offer
to sell, that is, B has not yet bought the car, and provided that S
perfection of a contract, although subject to the condition that
communicates such withdrawal to B. Thus, S may, without liability to B, no better bid is made.
sell to another. • If this is not especially provided in the advertisement,
then each bid is merely an offer, which the advertiser
Illustration of the Exception (Paid or Promised) is free to reject.
If, in the preceding example, S had been given P20,000 by B in • This exception also applies to judicial sales where the
consideration for the option, S cannot withdraw the offer to sell until highest bid must necessarily be accepted.
after the expiration of the one-week period.
ARTICLE 1327
Option Contract The following cannot give consent to a contract:
It is a contract granting a person the privilege to buy or nor to (1) Unemancipated minors;
buy a certain object at any time within the agreed period at a (2) Insane or demented persons, and deaf-mutes who
fixed price. The contract of option is a separate and distinct do not know how to write.
contract from the contract which the parties may enter into
upon the consummation of the contract. Persons Incapacitated to Consent
• Because it is distinct, therefore, an option must have 1. Unemancipated minors
its own cause or consideration. 2. Insane or demented persons, unless they acted during
• It must be a cause distinct from the selling price itself, a lucid interval, drunks and hypnotized.
but it can be of pure liberality. 3. Deaf-mutes who do not know how to write and read.
• The period given is for the decision of acceptance. (If can read, but cannot write, it can be considered
valid for they are capable to understand and
If there is a cause or consideration but there is already capacitated to give consent).
acceptance such as when the debtor says, “I accept the offer
and I will pay you in three days,” this cease to become an option The Contracts They Enter into a VOIDABLE unless:
contract but it becomes a bilateral promise of buy and sell. 1. Upon reaching the age of majority, they ratify the
same.
The cause and consideration for the option contract must be 2. They were entered into thru a guardian, and the court
different from the proposed purchase price, if it was said that having jurisdiction and approved the same.
the consideration was part of the purchase price, the “option 3. They were contract of life insurance in favor of their
consideration” is actually part of the payment, there is no longer parents, spouse, children, brothers, sisters, and
an option contract but a perfected contract of sale. provided, furthermore, that the minor is 18 years old
or above.
NOTE: It might come in the form of forfeiture like when a lessee 4. In the form of saving account, provided that the minor
is given right to construct until end of lease or forfeiture. was at least seven years old.
5. They were contracts for necessities such as food, but Clear and Convincing Evidence, Required
here the people who are legally bound to give them There must be clear and convincing evidence of the presence
support should pay therefor. of vitiated consent. Mere preponderance of evidence on this
6. They were contracts where the minor misrepresented matter is not sufficient.
his age and pretended to be one of major age and is,
thus, in ESTOPPEL. ARTICLE 1331
In order that mistake may invalidate consent, it should refer
NOTE: If both parties are incapable of giving consent, the to the substance of the thing which is the object of the
contract, or to those conditions which have principally
contract ins unenforceable.
moved one or both parties to enter into the contract.
ARTICLE 1328 Mistake as to the identity or qualification of one of the
Contracts entered into during a lucid interval are valid. parties will vitiate consent only when such identity or
Contracts agreed to into a state of drunkenness or during a qualifications have been the principal cause of the contract.
hypnotic spell are voidable.
A simple mistake of account shall give rise to its correction.
Voidable Contracts by Reason of Incapacity
(a) Insane or demented persons (unless they acted during Requisites of Mistake to Vitiate Consent
a lucid interval). 1. The error must be substantial regarding
(b) Those in the state of drunkenness (which temporarily a. The object of the contract
results in complete loss of understanding and may b. The conditions which principally moved or
therefore be equivalent to temporary insanity). induced one of the parties (like error in
(c) Those entered into during a hypnotic spell (induced quality or in quantity).
by drugs, or by deliberate or unintentional hypnotism) c. The identity or qualification (error in
or while a person walks during his sleep, personae) but only if such was the principal
somnambulism, for in these cases, a person is cause of the contract.
incapable of intelligent consent. 2. The error must be excusable (not by negligence)
3. The error must be a mistake of fact and not of law
ARTICLE 1329
The incapacity declared in Article 1327, is subject to the
modifications determined by law, and is understood to be Examples
without prejudice to special disqualification established in 1. A person signed a contract of sale thinking it was only
the laws. a contract of loan.
2. Error in knowledge about the true boundaries of a
Incompetents under the Rules of Court parcel of land offered for sale.
1. Under civil interdiction 3. A person buys a fountain pen thinking it to be made
2. Hospitalized lepers
of solid gold when as a matter of fact, it is merely gold-
3. Prodigals
plated; a person buys a CD record thinking it to be
4. Deaf and dumb who can’t read nor write
5. Unsound mind, even though they have lucid intervals Stateside, but it turns out to be merely a local
6. Those who by reason of age, disease, weak mind, and other imitation, a pirated one.
similar causes, cannot without outside aid, take care of 4. A person desiring to buy land consisting of 100
themselves and manage their property, becoming thereby an hectares discovers that the land has only 60 hectares.
easy prey for deceit and exploitation.
Excusable Error
ARTICLE 1330 The error does not vitiate consent if the party in error was
A contract where consent is given through mistake, violence,
negligent, or if having had an opportunity to ascertain the truth,
intimidation, undue influence, or fraud is voidable.
he did not do so. Moreover, there is no mistake if the party
Vitiation of Consent alleging it knew the doubt, contingency or risk affecting the
Aside from incapacity to give consent the following are called object of the contract.
vices of consent that vitiate consent.
1. Mistake Error of Fact, Not of Law
2. Violence The error must be one of fact, not of law. This is because
3. Intimidation ignorance of the law does not excuse anyone from compliance
4. Undue Influence therewith. Thus, if one sells property, the false belief that
5. Fraud conjugal property could be partitioned during a marriage, the
sale cannot be annulled.
Nature of a Voidable Contract
A voidable contract is binding and valid, unless annulled by a Errors which Do Not Affect Validity of the Contract
proper action in court. It is, however, susceptible of ratification 1. Errors with respect to the accidental qualities of the
before annulment. object of contract.
2. Error in the value of the thing;
3. Error which refers to accessory matters of the contract Distinguished from the Remedy of Transformation
foreign to the determination of the object. This Article must be distinguished from Art. 1361 where the
4. Error in the name of the person, but without error as remedy is reformation, not annulment. Thus, Art. 1361 of the
to the person. Error as to the person will invalidate Civil Code reads: “When a mutual mistake of the parties causes
consent when consideration of the person has been the failure of the instrument to disclose their real agreement, said
the principal cause of contract; instrument may be reformed.”
5. Error as to the solvency;
6. Error as to the motive of the party. Under Art. 1361, the real agreement is not disclosed; in Art.
1334, the error is as to the legal effect of the agreement.
ARTICLE 1332
When one of the parties is unable to read, or if the contract is Example: A and B agreed on a sale, but as written, the document shows
in a language not understood by him, and mistake or fraud is a mortgage. Here, there was a meeting of the minds, but the instrument
alleged, the person enforcing the contract must show that the does not show the real intention. Hence, the remedy is reformation.
terms thereof have been fully explained to the former.
If on the other hand, both agreed on a sale, and as written, the document
Presumption is one of sale, but both parties thought erroneously that it had the same
One always acts with due care and signs with full knowledge of effects as a mortgage, there is no meeting of the minds, and the remedy
all the contents of a document. And this is true even if the mind is annulment.
of the party signing was confused at the time of signing, as long
ARTICLE 1335
as he still knew what he was doing. He, thus, cannot repudiate
There is violence when in order to wrest consent, serious or
the transaction. irresistible force is employed.
When Presumption Does Not Apply There is intimidation when one of the contracting parties is
1. When one of the parties is unable to read (including compelled by a reasonable and well-grounded fear of an
blind person). imminent and grave evil upon his person or property, or
2. Or if the contract is in a language not understood by upon the person or property of his spouse, descendants or
ascendants, to give his consent.
one of the parties.
To determine the degree of intimidation, the age, sex and
REMEDY: In both cases, “the person enforcing the contract must condition of the person shall be borne in mind.
show that the terms thereof have been fully explained to the
former.” A threat to enforce one’s claim through competent authority,
if the claim is just or legal, does not vitiate consent.
ARTICLE 1333
There is no mistake if the party alleging it knew the doubt, Requisites for Violence to Vitiate Consent
contingency or risk affecting the object of the contract. 1. Employment of serious or irresistible force.
2. It must have been the reason why the contract was
Knowledge of Doubt or Risk Does Not Vitiate Consent entered into.
It is to be assumed here that the party was willing to take the
risk. This is particularly true in contracts which are evidently Requisites for Intimidation to Vitiate Consent
aleatory in nature. 1. Reasonable and well-grounded fear
• If the mistake is caused by inexcusable negligence, the 2. Of an imminent and grave evil
contract cannot be annulled. 3. Upon his person, property, or upon the person and
property of his spouses, descendants or ascendants
Example. A bought a fountain pen which was represented as possibly 4. It must have been the reason why the contract was
being able to write even underwater. A also knew that the pen’s ability
entered into (efficient cause)
was questionable, and yet A bought said pen. Here, A cannot allege
5. The threat must be an unjust act, an actionable wrong.
mistake since he knew beforehand of the doubt, risk, or contingency
affecting the object of the contract.
Threat of an Unjust Act or Actionable Wrong
ARTICLE 1334 • A threat to prosecute unless the debtor signs a
Mutual error as to the legal effect of an agreement when the contract is not intimidation.
real purpose of the parties is frustrated may vitiate consent. • The right to enforce one’s claim thru competent
authority must not by itself constitute an unlawful act.
Requisites for Mutual Error to Vitiate Consent
1. There must be mutual error. Example: A witness to a crime threatens to report the criminal
2. The error must refer to legal effect of the agreement. to the police unless said criminal gives money to him. This is a
3. The real purpose of the parties is frustrated. clear case of blackmail.
Example. A and B entered into a contract, which they intended should

• If by the reason of reverential fear, he contract is still
result in a co-ownership between them, but which turned out later to
be a mortgage, as a result of their mutual error as to the legal effect of valid, for by itself reverential fear is not wrong.
the agreement. Here the contract is voidable.
ARTICLE 1336 Dolo Causante, Requisites

Violence or intimidation shall annul the obligation, although 1. The fraud must be material and serious, that is, it really
it may have been employed by a third person who did not induced the consent.
take part in the contract.
2. The fraud must have been employed by only one of
the contracting parties, because if both committed
Duress by Third Person
fraud, the contract would remain valid (in pari delicto)
Even if the intimidation or threat had been employed by a third
3. There must be deliberate intent to deceive or to
person who was not a party to the contract, the agreement is
induce; therefore, misrepresentation in good faith is
voidable. This is because the consent is still vitiated.
not fraud.
ARTICLE 1337 4. The other party must have relied on the untrue
There is undue influence when a person takes improper statement and must himself not be guilty of
advantage of his power over the will of another, depriving negligence in ascertaining the truth.
the latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family, ARTICLE 1339
spiritual and other relations between the parties, or the fact Failure to disclose facts, when there is a duty to reveal them,
that the person alleged to have been unduly influenced was as when the parties are bound by confidential relations,
suffering from mental weakness, or was ignorant or in constitutes fraud.
financial distress.
Failure to Disclose Facts or Concealment
Requisites for Undue Influence to Vitiate Consent It exists where the party who obtains the consent does so by
1. Improper advantage means of concealing or omitting to state material facts, with
2. Power over the will of another intent to deceive.
3. Deprivation over the latter’s will of a reasonable
freedom of choice Example. If the principal authorizes the agent to sell the property for
P100,000 and was able to sell it, the agent is bound to disclose such
Circumstances to be Considered fact because of the confidential relation, otherwise it is fraud.
1. Confidential, family, spiritual and other relations
2. Mental weakness ARTICLE 1340
The usual exaggerations in trade, when the other party had
3. Ignorance
an opportunity to know the facts, are not in themselves
4. Financial distress fraudulent.
NOTE: Undue influence caused by third person vitiates consent
just like in the case of violence and intimidation. Usual Exaggerations in Trade, Caveat Emptor
The maxim “caveat emptor” simply means that a buyer must be
ARTICLE 1337 on his guard. It is his duty to check the title of the seller,
There is fraud when, through insidious words or otherwise the buyer gets the object at his own risk.
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. Tolerated Fraud. The “usual exaggerations in trade” (dealer’s
talk) constitute tolerated fraud, when the other party had an
Kinds of Fraud opportunity to know the facts.
1. Fraud in the celebration of the contract, fraud proper
a. Dolo Causante (causal fraud) – were it not for ARTICLE 1341
the fraud, the other party would not have A mere expression of opinion does not signify fraud, unless
made by an expert and the other party has relied on the
consented.
former’s special knowledge.
b. Dolo Incidente (incidental fraud) - even
without the fraud the parties would have Mere Expression of Opinion
agreed just the same, hence the fraud was A, on buying a watch, was assured by the seller that it was a
only incidental in causing consent. Contract good watch, and could run without rewinding for one week, in
is still valid, but there can be an action of the the opinion of the seller. This is a mere expression of opinion
damages. that is not fraudulent.
2. Fraud in the performance of the obligations stipulated
in the contract. Made by Expert
But if the seller was a watch expert, and the only reason why A
Requisites of Fraud (Tolentino) bought the watch was this opinion of the seller, the contract is
1. It must have been employed by one contracting party voidable on the ground of fraud.
upon the other, not against a co-party.
2. It must have induced the other party to enter into the EXCEPTION TO THE EXCEPTION: When the expert however, was
contract. employed by the party who was misled, he cannot ask for
3. It must have been serious. annulment, because he is chargeable with the acts and
4. It must have resulted in damage or injury to the party declarations of his employee.
seeking annulment.
ARTICLE 1342 Requisites for Simulation

Misrepresentation by a third person does not vitiate consent, 1. An outward declaration of will different from the will
unless such misrepresentation has created substantial of the parties.
mistake and the same is mutual.
2. The false appearance must have been intended by
mutual agreement.
Note on Participation by Third Person
3. That the purpose is to deceive third persons.
(a) Force or intimidation by a third person makes the
contract voidable.
ARTICLE 1346
(b) Fraud by a third person does not make the contract
An absolutely simulated or fictitious contract is void. A
voidable, unless relative simulation, when it does not prejudice a third
a. The representation has created a substantial person and is not intended for any purpose contrary to law,
mistake. morals, good customs, public order, or public policy binds
b. The mistake is mutual. the parties to their real agreement.
In this case, the contract may be annulled, not principally on the Kinds of Simulated Contracts
ground of fraud, but on the ground of error or mistake. (a) Absolutely simulated fictitious contract (simulados)
a. Here the parties do not intend to be bound
ARTICLE 1343 b. The contract is void.
Misrepresentation made in good faith is not fraudulent but
may constitute error. (b) Relatively simulated (disimulados) disguised contracts
a. Here parties conceal their true agreement
Misrepresentation Made in Good Faith b. The parties are bound to the real or true
A bought a certain article from B. The article was needed for A’s agreement except
radio. B honestly but mistakenly assured A that the article was i. If the contract should prejudice a
the proper object. May the contract be annulled? third person;
ii. Or if the purpose is contrary to law,
Yes, not on the ground of fraud, for the misrepresentation was morals, good customs, public order
honest, but on the ground of substantial error. or public policy.
ARTICLE 1344
Example of Absolutely Simulated Contract
In order that fraud may make a contract voidable, it should
be serious and should not have been employed by both As a joke, A and B executed a deed of sale although they did
contracting parties. not intend to be bound at all by the contract.
Incidental fraud only obliges the person employing it to pay Example of Relatively Simulated Contract
damages. Although a deed of sale was made, the parties really intended
a donation, but they wanted to conceal the existence of the
Requisites of Fraud to Vitiate Consent (Paras) donation (simulation of the NATURE of the contract); or a true
1. The fraud must be serious. sale at a different price had really been agreed upon (simulation
2. The parties must not be in pari delicto; otherwise there of the CONTENT or TERMS of the contract).
can be no fulfillment.
Absolutely Simulated Contracts vs Illegal Contracts
Incidental fraud does not cause for annulment, only damage in simulation, the contract is not really desired to produce an
can be recovered. illegal effect or in any way alter the juridical situation of the
parties; whereas an illegal contract is intended to be real and
ARTICLE 1345
effective, and entered to circumvent a prohibited act.
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 Absolute Simulation Fraudulent Alienation
agreement. Implies there is no existing Means that there is a true
contract; and existing transfer of
Simulation of Contract, Defined contract;
It is the process of intentionally deceiving others by producing Can be attacked by any Can be assailed only by the
the appearance of a contract that really does not exist (absolute creditor including one creditors before the
simulation) or which is different from the true agreement subsequent to the contract; alienation;
(relative simulation). Effects are: The insolvency of the The action to rescind
• If absolute simulation, the contract is void for they did debtor making the (accion pauliana) requires
not intend to be bound by the agreement. simulated transfer is not a that the creditor cannot
• If relative, if shall bind the parties provided that no pre-requisite to nullity; recover in any manner
third persons shall be prejudiced by such relative Imprescriptible Prescribes in four years
simulation.
OBLIGATIONS AND CONTRACTS Future Object of Contracts

Civil Code Future things may be the object of contracts, they are
understood to be those which do not belong to the debtor at
Articles 1347-1358
the time the contract is made, they may be made, raised or
SECTION 2 acquired by the debtor after perfection of the contract.
OBJECT OF CONTRACTS • This does not only include material object but also
future rights.
ARTICLE 1347 • It can either be (a) conditional or (b) aleatory.
All things which are not outside the commerce of men,
including future things, may be the object of a contract. All Future inheritance as object of contracts cannot be considered
rights which are not intransmissible may also be the object
as objects of contracts. Subject to the following exceptions:
of contracts.
1. In case of marriage settlements;
No contract may be entered into upon future inheritance 2. In case of partitions of property inter vivos by the
except in cases expressly authorized by law. deceased;
3. When one’s rights over the property is not as an heir
All services which are not contrary to law, morals, good but as a creditor subordinated to the death of debtor.
customs, public order or public policy may likewise be the
object of a contract.
Illustration of Future Inheritance
Q. When his father died, but before delivery of the property to him, a
Object of a Contract son sold his share of the property inherited. Is the sale valid?
It is the subject matter, the thing, right or service which is the
subject matter of the obligation arising from the contract. A. Yes, the sale is valid. The inheritance here is not future inheritance,
Hence, it is said that under the Code, the object of the contract but existing inheritance, although yet undelivered. Ownership is
and object create thereby are identical. transferred automatically to the heir upon the death of the decedent.
Requisites of an Object of a Contract Q2. While his father was still alive, A sold to B the property A expected
to receive from his father. Is the contract valid?
a. The thing or service must be within the commerce of
man. A2. No, because the object of the contract here is future inheritance,
b. It must be transmissible. and the contract in this case is not one of those authorized by law
c. It must not be contrary to law, morals, good customs, regarding inheritance.
public order, or public policy.
d. It must not be impossible (1348). Q3. Is the sale of hope a valid object?
e. It must be determinate as to its kind or determinable
without the need of a new agreement. Q4. Yes, provided that the hope is not vain. The sale of vain hope is not
allowed (such a losing sweepstakes ticket).
Outside the Commerce of Man ARTICLE 1348

These are all kinds of things and interest whose alienation or Impossible things or services cannot be the object of
free exchange are restricted by law or stipulation. This are contracts.
things which are not susceptible to appropriation or private
ownership which are not transmissible. Nature of Impossibility
1. Nature of transaction or because of law.
Some examples that are outside the commerce of man: 2. Absolute (objectively) impossible, no one can do it.
1. Services which imply an absolute submission by those 3. Relative (subjectively impossible, here the particular
rendering them, sacrificing their liberty, such as debtor cannot comply.
perpetual servitude or slavery.
2. Personal rights such as patria potestas or marital NOTE: The impossibility must exist at the time of the contract.
authority, the status and capacity of persons, and It must exist at the time of constitution of the contract.
honorary titles and distinctions.
3. Public offices and political rights like suffrage. ARTICLE 1348
4. Property while they pertain to the public dominion The object of every contract must be determinate as to its
such as those roads, plazas, squares and rivers. kind. The fact that the quantity is not determinate shall not
be obstacle to the existence of the contract, provided it is
5. Sacred things, or common things, like the air and the
possible to determinate the same, without the need of a new
sea, and res nullius as long as they have not been contract between the parties.
appropriated.
Determinate or Determinable
Existence of the Object The object must be determinate or determinable, without need
It is essential that the object must be in existence at the time of of a new agreement. If the object is not determinate or
the perfection of contract, or that it has the possibility or determinable, the contract is void for want of an essential
potentiality of coming to existence at some future time requisite – the object of the contract.
therefore future things can be object of contracts.
SECTION 3 Illustration: In the purchase of a thing, the thing itself is the

CAUSE OF CONTRACTS consideration with respect to the vendee, but the purchaser’s
motive may be his desire to use the thing for a particular
ARTICLE 1350
purpose, or the perfection or beauty of the things.
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 renumeratory ones, the service or Illegal Cause from Illegal Motive
benefit which is remunerated; and in contracts of pure An illegal cause makes a contract void; an illegal motive does
beneficence, the mere liberality of the benefactor. not necessarily render the transaction void. Example: If I buy a
knife to kill X, the purchase is still valid.
Cause of a Contract
It is the why of the contract, the immediate and most proximate ARTICLE 1352
purpose of the contract, the essential reason which impels the Contracts without cause, or with unlawful cause, produce no
contracting parties to enter into it and which explains and effect whatsoever. The cause is unlawful if it is contrary to
justifies the creation of the obligation and the contract. law, moral, good customs, public order or public policy.
Requisites for Cause (Paras)

Cause Distinguished from Object
1. It must be present at the time the contract was
The difference is only a matter of viewpoint in some way,
entered into.
because what may be the subject matter for one party will be
2. It must be true and not false.
the cause or consideration for the other party.
3. It must be lawful, not contrary to law, morals, good
• Consideration is the reason, motive or inducement by
customs, public order or public policy.
which a man is moved to bind himself by an
agreement.
NOTE: While it may be true that the cause is not stated in the
contract, it is presumed that the cause exists and that the cause
Requisites of Cause (Tolentino)
is lawful unless the debtor proves the contrary.
1. It must exist.
2. It must be true.
Illustration
3. It must be licit.
X, an employee of a business establishment and was found out
that she was stealing money. When she was about to be
Classification of Contracts as to Cause
prosecuted, the father and the husband of X executed a
a. Onerous – here the cause is, for each contracting party,
promissory note covering the value of what was lost by reason
the prestation or promise of a thing or service by the
by stealing. But X was not made as a signatory to the
other, like in a contract of sale.
promissory note. The promissory note remained as it is. Now
b. Renumeratory – the past service or benefit which by
the employer filed an action to collect the amount in the PN.
itself is a recoverable debt.
• The case was dismissed because the cause was to the
c. Gratuitous or contracts of pure beneficence – here the
stifling of the prosecution of X, cause is void.
cause is the mere liberality of the benefactor.
Modified Illustration. A was given money by B to buy palay

The cause of accessory contracts likes personal guaranty or
within a certain period but if unable to secure palay by that
mortgage is the same as the cause for the principal loan.
time, he has to return the money to B. No palay was bought, no
• The moral obligation may be cause of a civil obligation
money was returned. So, B filed case.
must be present and existing.
ARTICLE 1351 Before hearing a friend entered in behalf of A, with B seeking

The particular motives of the parties entering into a contract consideration that the cause be dismissed because he will try
are different from the cause thereof. to convince A to issue a PN to cover the amount that was not
returned. A executed a PN, but the amount was not paid. So, B
Motive and Cause, Distinguished (Tolentino) filed an action to recover, A moved for dismissal because it was
Cause Motive to stifle a criminal prosecution.
The essential reason for the It is the particular reason for • The motion was denied because there was an
contract. It is always the a contracting party which admission on the part of A that he really owed B
same. does not affect the other money.
and which does not impede
the existence of a true or Rule on Accommodation Parties
valid cause. Where one of the signers and several promissory note affixes
Always known to the May be unknown to the his signature thereto for the accommodation of a co-maker and
parties. other party. a third person advances the face value of the note to the
Absence renders contract Presence does not cure accommodated party at the time of the creation of the note,
void. absence of cause. the consideration for the note, as regards both makers, is the
money so advanced to the accommodated party.
It cannot be said that the note is lacking in consideration as to CHAPTER 3

the accommodating party because he himself received none of FORM OF CONTRACTS
the money. It is enough that value that was given for the note
at the time of its creation (Tolentino, p. 533). Forms of Contracts
The law looks more into the spirit rather than in the form.
ARTICLE 1353 However, in contracts, there are certain exceptions, like if you
The statement of a false cause in contracts shall render them were the one who prepared the contract, then the contract
void, if it should not be proved that they were founded upon should be construed strictly against the one who person who
another cause which is true and lawful.
prepared it, and liberally in favor of the person who merely
affixed his signature and did not participate in making.
State of a False Cause
Just because the cause stated is false does not necessarily mean
As long as the elements of the contract is present the contract
that the contract is void. The parties are given a chance to show
is presumed valid. There is certain contract which would require
that a cause really exists, and that said cause is true and lawful.
that they be in a certain form. “The faintest ink is better than the
sharpest memory.”
ARTICLE 1354
Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless debtor proves ARTICLE 1356
the contrary. Contracts shall be obligatory, in whatever form they may
have been entered into, provided that all the essential
Presumption of Lawful Cause requisites for their validity are present. However, when the
law requires that a contract be in some form in order that it
It is necessary that the cause must exist, but it is not necessary
may be valid or enforceable, or that a contract be proved in a
to state the cause in the contract. Reason: It is presumed that certain way, that requirement is absolute and indispensable.
the cause exists and lawful, unless proven the contrary. No In such cases, the rights of the parties stated in the following
matter how inadequate the consideration is, the presumption article cannot be exercised.
is that the contract is valid.
Generally, Form is Not Required
ARTICLE 1355 In general, form does not matter for the validity of a contract.
Except in cases specified by law, lesion or inadequacy of It is enough that there be consent, subject matter, and cause.
cause shall not invalidate a contract, unless there has been This rule applies, however to consensual contracts.
fraud, mistake or undue influence. • Formal Contracts – requires a certain specified form.
• Real Contracts – requires delivery to be valid.
Lesion – it is an inadequacy of cause, like an insufficient price
for a thing sold.
When Form is Important
(a) Validity – this is true in formal or solemn contracts.
Rules on Lesion
(b) Enforceability – enumerated in Statute of Frauds
GENERAL RULE: Lesion or inadequacy of price does not invalidate
(c) Convenience – true for contracts under Article 1385.
a contract.
EXCEPTIONS:
Contracts Requiring Certain Formalities to be Valid
(a) When, together with lesion, there has been: 1. Donations of real property
a. Fraud 2. Donations of personal property in excess of P5000
b. Mistake 3. Negotiable instruments under the Negotiable
c. Undue Influence Instruments Law.
4. Interests must be expressly stipulated in writing.
(b) In cases expressly provided by law (rescissible): 5. Sale or transfer of large cattle and certificate of
a. Those which are entered in to by guardians transfer.
whenever the wards they represent suffer 6. Contracts of partnership.
lesion by more than one-fourth of the value 7. Chattel Mortgage must be in public instrument.
of things which are the objects thereof
(Article 1381, par. 1). NOTE: Natural elements are essentially included in the contract
b. Those agreed upon in representation of because the law presumes their existence. What are only agreed
absentees if the latter suffer lesion stated in upon are the accidental elements
the preceding number (1381, par. 2).
c. Partition among co-heirs, when anyone of ARTICLE 1357
If the law requires a document or other special form, as in
them received things with a value less by at
the acts and contracts enumerated in the following article,
least one-fourth the share to which he is the contracting parties may compel each other to observe
entitled. that form, once the contract has been perfected. This right
may be exercised simultaneously with the action upon the
NOTE: Gross inadequacy naturally suggests lesion, but a hard contract.
bargain is not sufficient ground for cancellation.
Compliance with Formality DISCUSSION NOTES

The Article applies only when form is needed only for
convenience, not for validity or enforceability. In other words,
before the contracting parties may be compelled to execute the
needed form, it is essential that the contract be:
a. Perfected (valid)
b. Enforceable under the Statute of Frauds
ARTICLE 1358
The following must appear in a public document:
(1) Acts and contracts which have for their object the
creation, transmission, modification or
extinguishment of real rights over immovable
property;
(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.
Form for Convenience

The necessity for the public document in the contracts
enumerated here is only for convenience, not for validity or
enforceability.
Writing Not for Validity

This article enumerates certain contracts that must appear in
public or private documents. This provision does not require
such form in order to validate the act or contract but to insure
its efficacy. It is limited to an enumeration of the acts and
contract which should be reduced to writing in a public or
private instrument.
The reduction to writing in a public or private document,

required by this article, is not an essential requisite for the
existence of the contract but simply a coercive power given to
the contracting party which they can compel the observance of
these formal requisites. They are still valid even when they have
not been reduced to public or private writings.
• Except when certain cases where it is required for the
validity of the contract itself.
• The legalization of a contract by means of a public
instrument and it entry in the register are not essential
solemnities or requisites for the validity of the contract
between the contracting parties but are required for
the purpose of making it effective as against third
persons.
OBLIGATIONS AND CONTRACTS Action Already Prescribed

Articles 1324-1332 However, the Deed of Option did not provide for a period
within which the performance be made. The failure of either
JURISPRUDENCE NOTES
parties to demand performance of the obligation of the other
for an unreasonable length of time renders the contract
1324. Option Contract
ineffective. And that Article 1144 on prescriptions provides
action arising from written contracts prescribes in 10 years.
VILLAMOR v. COURT OF APPEALS (1991)
• The Deed of Option was executed in 1971 but the
202 SCRA 607
complaint was filed on 1987, 17 years from the time
Synopsis: This case basically deals about the nature of an option of the execution of the contract. Hence the right of
contract. In this case, Reyes offered to sell the property to he action has already prescribed.
Spouses Villamor with a deed of option that half of the property will
be sold to them and that they also stipulated that the property is LIMSON v. COURT OF APPEALS (2001)
also subject to an offer to sell by Reyes. However, despite the validity 357 SCRA 209
seventeen (17) years had already passed and the action has already
prescribed thus the action cannot be made. Synopsis: The Spouses De Vera offered to sell to Limson a parcel of
land and Limson agreed to buy, she gave the sum of P20K as
Facts: Macaria Labingisa Reyes was the owner of a 600 sq.m. “earnest money” and she was given a 10-day period to purchase the
lot located at Baesa, Caloocan City. In 1971, she sold 300 sq.m. property. Limson was surprised that the Spouses De Vera are already
negotiating with Sunvar Realty and subsequently executed a Deed
of the lot to Spouses Villamor for P21K. Earlier, Macaria
of Sale. Limson argued that there is a perfected contract to sell, while
borrowed P2K from the spouses which amount was deducted
the Spouses De Vera argue that it was only an option contract.
from the total purchase price of the property sold.
It held that the P20K “earnest money” was not earnest money but
On November 11, 1971, Macaria executed a Deed of Option in option money. The court gave three distinctions of option money
favor of Villamor in which the remaining 300 sq.m. of the lot from earnest money. The receipt did not show that the amount was
would be sold to Villamor under certain conditions. part of the purchase price. Thus, the agreement was an option
contract. It was then ruled that the option has expired and that the
subsequent negotiations does not mean the option contract
When Reyes offered to repurchase, the lot sold by them Villamor
remained but mere consideration of De Vera’s preference, but it no
refused and reminded them instead that the Deed of Option in
longer precluded them from dealing with Sunvar Realty.
fact gave them the option to purchase the remaining option.
RTC ruled in favor of Villamor spouses. CA reverses trial court.
Facts: Lourdes Limson alleged that Spouses De Vera offered
to sell to Limson a parcel of land consisting of 48,260 sq.m. in
Issue
Manila and informed her that they were the owners of the
Whether or not the Deed of Option is valid.
subject property. On July 1978 Limson agreed to buy the
property at the price of P34/sq.m. and gave the sum of P20K
Contract of Option, Concept
as earnest money and respondent De Vera issued a receipt and
Ordinarily, an optional contract is a privilege existing in one
gave her a 10-day option period to purchase the property.
person, for which he had paid a consideration, and which gives
him the right to buy, for example, certain merchandise or
On 23 August 1978 Limson allegedly gave respondent Lorenzo
certain specified property, from another person, if he chooses,
de Vera three (3) checks in the total amount of P36,170.00 for
at any time within the agreed period at a fixed price.
the settlement of the back taxes of the property and for the
IN THE CASE:The Court noted here the unique features of their payment of the quitclaims of the three (3) tenants of subject land.
optional contract. The amount was purportedly considered part of purchase price
and respondent Lorenzo de Vera signed the receipts therefor.
1. It covered the sale of 300 sq.m. portion of the lot to
Limson was surprised to learn that the property was subject to
the spouses at the price of P70/sq.m.
negotiation for the sale to Sunvar Realty.
2. Reyes agreed to sell to the Villamor to other half of the
land.
A Deed of Sale between De Vera and Sunvar was made on
3. The sale of the other held was also be made whenever
September 26, 1978. Limson claimed that the Spouses de Vera
the need of such sale arises on part of vendees or on
ignored her right to purchase the property.
the vendors themselves.
In their Answer, the Spouses De Vera stated that the option to

In other words, it was not only the Villamors who were granted
buy the property had long expired and that there was no
an option to buy for which they paid a consideration.
perfected contract to sell.
• The Reyeses as well were granted an option to sell
should the need for such sale on their part arise.
RTC ordered the annulment and rescission of the Deed of
• The option offered as well as the promise was
Absolute Sale between De Vera and Sunvar. CA reversed.
accepted by Spouses Villamor in the same document.
However, a careful examination of the words used indicated

Issue that the money is not earnest money but option money.
Whether or not the contract was a contract of option or a Earnest Money Option Money
contract to sell. Nature of the Payment
Part of the purchase price Money given as a distinct
CONTENTION: Limson argues that there was a perfected contract consideration for an option
to sell between her and De Vera meanwhile the respondents contract
argued that what was contract was merely an option contract. When Given
Given only where there is Applies to sale not yet
COURT REPLY: A scrutiny of the facts as well as the evidence of already a sale perfected
the parties overwhelmingly leads to the conclusion that the Consequences
agreement between the parties was a contract of option and When given, buyer is bound When given, would-be buyer
not a contract to sell. to pay the balance. is not required to buy.
Option Contract, Definition IN THE CASE:There was nothing in the receipt stating that the
It is also sometimes called an "unaccepted offer." An option is amount was part of the purchase. The receipt did not reveal
not itself a purchase, but merely secures the privilege to buy. that she was bound to pay the balance of the purchase price.
It is not a sale of property but a sale of right to purchase. It is
simply a contract by which the owner of property agrees with The Option Already Expired
another person that he shall have the right to buy his property The option period having expired, and acceptance was not
at a fixed price within a certain time. effectively made by petitioner, the purchase of subject property
by respondent SUNVAR was perfectly valid and entered into in
He does not sell his land; he does not then agree to sell it; but good faith.
he does not sell something, i.e., the right or privilege to buy at
the election or option of the other party. On 11 August 1978 the option period expired and the exclusive
right of petitioner to buy the property of respondent spouses
Its distinguishing characteristic is that it imposes no binding ceased.
obligation on the person holding the option, aside from the
consideration for the offer. Until acceptance, it is not, properly The subsequent meetings and negotiations, specifically on 11
speaking, a contract, and does not vest, transfer, or agree to and 23 August 1978, between the parties only showed the desire
transfer, any title to, or any interest or right in the subject of respondent spouses to sell their property to petitioner. Also, on
matter, but is merely a contract by which the owner of the 14 September 1978 when respondent spouses sent a telegram
property gives the optionee the right or privilege of accepting to petitioner demanding full payment of the purchase price on
the offer and buying the property on certain terms. even date simply demonstrated an inclination to give her
preference to buy subject property.
Contract
Involves the meeting of the minds between two persons Collectively, these instances did not indicate that petitioner
whereby one binds himself, with respect to the other, to give still had the exclusive right to purchase subject property.
something or to render some service. They are generally Verily, the commencement of negotiations between spouses
perfected by mere consent manifested by the meeting of the and respondent SUNVAR clearly manifested that their offer to
offer and the acceptance upon the thing and the cause which sell subject property to petitioner was no longer exclusive to her.
are to constitute the contract. The offer must be certain and
acceptance absolute. TAYAG v. LACSON (2004)
426 SCRA 282
IN THE CASE: The receipt shows that they only entered into a
contract of option. A contract by which Spouses De Vera and Facts: Angelica Lacson and her children were owners of three
Limson agreed that Limson shall have the right to buy the parcels of land which were tenanted agricultural lands. On 1996,
property at a fixed price within 10 days. a group of original farmers/tillers executed in favor of Tayag
Deeds of Assignments assigning their respective rights as
Respondent spouses did not sell their property; they did not tenants/tillers of the landholdings possessed and tilled by
also agree to sell it; but they sold something, i.e., the privilege them. Tayag was also given exclusive right to buy property
to buy at the election or option of petitioner. The agreement when they agree to sell.
imposed no binding obligation on petitioner, aside from the
consideration for the offer. Defendant-tenant however instead of attending meeting gave
notice of their collective decision to sell all their rights and
The Amount is Not Earnest Money but Option Money interests over the landholding to Lacson.
The consideration of P20,000.00 paid by petitioner to
respondent spouses was referred to as "earnest money."
Tayag filed with the RTC for the court to fix a period on payment tenants could not legally grant to the petitioner the option,
of purchase price to the defendants-tillers as provided in the much less the "exclusive right" to buy the property. As the Latin
Deed of Assignment. Lacson sought for injunction. saying goes, "NEMO DAT QUOD NON HABET."
Under Article 1306 of the New Civil Code, the respondents may ABALOS v. MACATANGAY (2004)
enter into contracts covering their property with another under 426 SCRA 282
such terms and conditions as they may deem beneficial
provided they are not contrary to law, morals, good conduct, Facts: Spouses Abalos are the registered owners of a parcel of
public order or public policy. land with improvements located in Makati consisting of 327
sq.m. Armed with an SPA purportedly issued by his wife, Arturo
The respondents cannot be enjoined from selling or executed a RMOA in favor of Macatangay binding himself to
encumbering their property simply and merely because they sell to respondent the subject property and not to offer the
had executed Deeds of Assignment in favor of the petitioner, same to any other party within 30 days from date.
obliging themselves to assign and transfer their rights or
interests as agricultural farmers/laborers/sub-tenants over the Arturo acknowledged receipt of a check from Macatangay of
landholding, and granting the petitioner the exclusive right to P5000 representing earnest money for the subject property,
buy the property subject to the occurrence of certain the amount of which would be deducted from the purchase
conditions. price of P1.3M. Further, the RMOA stated that full payment
would be affected as soon as possession of the property shall
The respondents were not parties to the said deeds. There is no have been turned over to the respondent.
evidence that the respondents agreed, expressly or impliedly,
to the said deeds or to the terms and conditions set forth In 1989, Macatangay sent a letter to the spouses informing
therein. Indeed, they assailed the validity of the said deeds on them of his readiness and willingness to pay the full amount of
their claim that the same were contrary to the letter and spirit the purchase price. The letter contained a demand upon the
of P.D. No. 27 and Rep. Act No. 6657. spouses to comply with obligation to turn over possession of
property to him. Despite repeated demands, the Spouses
The petitioner even admitted when he testified that he did not Abalos did not deliver the property.
know any of the respondents, and that he had not met any of
them before he filed his complaint in the RTC. He did not even RTC dismissed stating that the SPA issued by Esther for Arturo
know that one of those whom he had impleaded as defendant, to executed RMOA was void for being falsified and that it had
Angelica Vda. de Lacson, was already dead. no legal effects. CA reversed the decision.
Option Contract Cannot be Exercised by Tenants Issue

An option is a contract by which the owner of the property Whether or not the Spouses Abalos may be compelled to convey
agrees with another person that he shall have the right to buy the property to Macatangay under the terms of the RMOA and
his property at a fixed price within a certain time. the Contract to Sell.
It is a condition offered or contract by which the owner RMOA is in a Nature of an Option Contract
stipulates with another that the latter shall have the right to buy The RMOA signifies a unilateral offer of Arturo to sell the
the property at a fixed price within a certain time, or under, or property to respondent for a price certain within 30 days. The
in compliance with certain terms and conditions, or which gives RMOA does not impose upon respondent an obligation to buy
to the owner of the property the right to sell or demand a sale. petitioner’s property, as in fact it does not even bear his
signature thereon. It is quite clear that after the lapse of the
It imposes no binding obligation on the person holding the thirty-day period, without respondent having exercised his
option, aside from the consideration for the offer. Until option, Arturo is free to sell the property of another.
accepted, it is not, properly speaking, treated as a contract.
As a rule, the holder of the option is not bound to buy. But in
The second party gets in praesenti, not lands, not an agreement order to reach to a point of a perfected contract of sale, he must
that he shall have the lands, but the right to call for and receive have to pay or at least make a valid tender of payment for the
lands if he elects. An option contract is a separate and distinct price for only then could he exact compliance with the
contract from which the parties may enter into upon the undertaking of the other party.
conjunction of the option.
IN THE CASE:Macatangay failed to do so, by his own admission
IN THE CASE: The defendants-tenants-subtenants, under the he merely informed respondent spouses of his readiness and
deeds of assignment, granted to the petitioner not only an willingness to pay. The fact that he had set aside a check
option but the exclusive right to buy the landholding. But the representing the balance could not help his cause. The tender
grantors were merely the defendants-tenants, and not the of payment must be in a legal tender.
respondents, the registered owners of the property. Not being
the registered owners of the property, the defendants-
The nullity of the RMOA as a contract of sale emanates from contract cannot be enforced. Actual cash need not be
the lack of consent and want of consideration and absence of exchanged for the option.
Macatangay’s signature thereon. Such nullity cannot be
obliterated by Esther’s subsequent confirmation of the putative IN THE CASE: There was no consideration for the option contract.
transaction as expressed in Contract to Sell. The only consideration agreed upon by the parties in the
EULOGIO v. APELES (2009) Contract is the supposed purchase price for the property.
576 SCRA 561 In the present case, it is indubitable that no consideration was
given by Enrico to the spouses Apeles for the option contract.
Facts: In 1979 the Spouses Apeles leased the subject property The absence of monetary or any material consideration keeps
to Arturo Eulogio. Upon the latter’s death Enrico Eulogio used this Court from enforcing rights of parties under the said option
the subject property for residence and place of business of contract.
selling imported cards.
PHILIPPINE NATIONAL OIL v. KEPPEL HOLDINGS (2016)
On 1987, Spouses Apeles and Enrico allegedly entered into a 798 SCRA 65
Contract of Lease with Option to Purchase involving the
subject property. The contract purportedly afforded Enrico, Facts: Almost 40 years ago or on August 6, 1976, Keppel
before the expiration of the three-year lease period, to Holdings (Keppel) entered into a Lease Agreement with
purchase the subject property for a price not exceeding P1.5M. Lusteveco covering 11 hectares of land Batangas. The lease was
for a period of 25 years for a consideration of P2.1M. At the
Before expiration, Enrico Eulogio exercised his option to option of Lusteveco, the rental fee could be totally or partially
purchase the subject property by communicating verbally and converted into equity shares in Keppel.
in writing his willingness to pay agreed purchase price. But the
spouses ignored his manifestation. In a letter dated 26 January At the end of the 25-year period, Keppel was given the “firm
1997, the Spouses Apeles demanded that Enrico Eulogio pay and absolute option to purchase” the land for P4.09M
the rental arrears and that he vacate property. provided that it had acquired the necessary qualification to
own land under Philippine laws at the time the option is
RTC ruled in favor of Enrico. Sine none of the parties exercised. When the lease agreement was executed, less than
represented a handwriting expert and found similarity of Luz 60% of the shareholding was Filipino-owned thus, it was not yet
Apeles’ genuine signatures and in the documents in the constitutionally qualified to acquire private lands.
Contract of Lease with Option to Purchase. CA granted the
appeal and overturning the decision of RTC. At the end of the 25-year lease period or in 2001, Keppel
remained unqualified to own private lands, the agreement
Issue provided that the lease would be automatically renewed for
Whether or not the Contract was valid and whether the option another 25 years. Keppel was further allowed to exercise the
contract is enforceable. option to purchase the land up to the 30th year of lease or in
2006, also on the condition that, by then, it would have acquired
On Invalidity of the Contract of Lease the requisite qualification to own land in the Philippines. PNOC
In the case at bar, the spouses Apeles were able to overcome acquired the land from Lusteveco.
the burden of proof and prove by preponderant evidence in
disputing the authenticity and due execution of the Contract of On 2000, Keppel wrote PNOC infirming that at least 60% of its
Lease with Option to Purchase. In contrast, Enrico seemed to shares were now Filipino-owned and expressed its readiness to
rely only on his own self-serving declarations, without asserting exercise its option to purchase the land. PNOC did not favorably
any proof of corroborating testimony or circumstantial respond to Keppel’s repeated demands. Keppel then filed a
evidence to buttress his claim. complaint for specific performance.
Option Contract, Concept RTC ruled in favor of Keppel and ordered PNOC to execute a
An option is a contract by which the owner of the property deed of absolute sale upon payment by Keppel of the P4.09M
agrees with another person that the latter shall have the right purchase price. CA affirmed RTC ruling.
to buy the former’s property at a fixed price within a certain
time. It is a condition offered or contract by which the owner Issues
stipulates with another that the latter shall have the right to buy (1) Is the agreement constitutional?
the property at a fixed price within a certain time or in (2) Is the option contract valid and supported by a valuable
compliance with certain terms and conditions. consideration?
Unaccepted Offer under Article 1479 The Agreement is Constitutional

The doctrine requiring the payment of consideration in an The agreement executed was to enable Keppel to use the land
option contract applies, for without consideration that is for its shipbuilding and ship repair business, this commercial
separate and distinct from the purchase price, and option purpose behind the agreement differentiates it from the case
of Lui She where it was devoted for residential use for 99 years
which was a virtual transfer thus unconstitutional. COURT RULE: Given our finding that the Agreement did not
categorically refer to any consideration to support Keppel’s
Lusteveco was not completely denied its ownership rights, it option to buy and for Keppel’s failure to present evidence in
could dispose of the lands or assigns rights provided that it this regard, we cannot uphold the existence of an option
secures Keppel holding’s consent. The Lusteveco was able to contract in this case.
convey the land to PNOC during the pendency of the lease.
An Option Contract Must be Supported by a Separate An Option, Though Unsupported by a Separate
Consideration that is Either Clearly Specified Such in the Consideration, Remains an Offer, that if Duly Accepted
Contract or Duly Proven by the Offeree/Promisee Generates into a Contract to Sell
An option contract is a contract where one-person (the offeror)
grants to another person (offeree) the right or privilege to buy The absence of a consideration supporting the option contract,
or to sell a determinate thing at a fixed price, if he or she however, does not invalidate an offer to buy. An option
chooses to do so within an agreed period. unsupported by a separate consideration stands as an
unaccepted offer to buy (or to sell) which when properly
As a contract it must necessarily have the essential elements of accepted ripens into a contract of sale.
subject matter, consent and consideration. Even though it is
deemed as a preparatory contract to the principal contract of Reconciling the Provisions of Article 1324 and 1479
sale, it is separate and distinct therefrom. Article 1324. When the offerer has allowed the offeree a certain period
to accept, the offer may be withdrawn at any time before acceptance
by communicating such withdrawal, except when the option is founded
Option Contract Sale
upon a consideration, as something paid or promised.
Subject Matter
Right or privilege to buy or The determinate thing itself. Article 1479. A promise to buy and sell a determinate thing for a price
to sell a determinate thing certain is reciprocally demandable.
for a price certain
Consent An accepted unilateral promise to buy or to sell a determinate thing for
Acceptance by the offeree Acceptance of the offer itself a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.
of the offeror’s promise to constitutes as consent to the
sell or to buy a determinate sales contract.
The Court en banc held that there is no distinction between the
thing.
two provisions.
Consideration
Anything of value Purchase price; money or its I. Thus, when an offer is supported by a separate
equivalent. consideration, a valid option contract exists,
there is a contracted offer which the offeror
Paragraph 5 of the agreement provided that should
IN THE CASE:
cannot withdraw from without incurring liability
Keppel exercise its option to buy, Lusteveco could opt to in damages.
convert the purchase price into equity shares in Keppel. II. On the other hand, when the offer is not
supported by a separate consideration, the offer
The consideration for an option contract does not need to be stands but, in the absence of a binding contract,
monetary and may be anything of value. However, when the the offeror may withdraw it anytime.
consideration is not monetary, the consideration must be
clearly specified as such in the option contract. In both cases, once the acceptance of the offer is duly
• When the written agreement itself does not state the communicated before withdrawal of offer, a bilateral conduct
consideration for the option contract, the offeree or to buy and sell is generated.
promisee bears the burden of proving existence of a
separate consideration for the option. Offer to Buy Land was Timely Accepted by Keppel
As early as 1994, Keppel expressed its desire to exercise its
There is nothing in the Agreement indicating that the grant of option to buy the land. By 2000 upon meeting the proportion
Lusteveco of the option to convert purchase price for Keppel but PNOC backtracked. When Keppel communicated its
shares was intended as consideration. acceptance, the offer to purchase Bauan stood, the offer was
accepted, a contract to the sell the land can be demanded.
• For uniformity and consistency, the better rule to
follow is that the consideration for the option
contract should be clearly specified as such in the
option contract or clause.
• Otherwise the offeree must bear the burden of

proving that a separate consideration for the option
contract exist.
1330-1332. Defects of the Will The Spouses Tan appear to be literate and of above-average
means, who may not be so easily deceived into parting with a
FONTANA RESORT v. TAN (2012) substantial amount of money. What is apparent to us is that
664 SCRA 382 respondents knowingly and willingly consented to buying but
were later on disappointed with the actual facilities and benefits.
Facts: Respondent Spouses Tan bought from RN Development
Corporation Two Class D shares of stock in petitioner Fontana DELA CRUZ v. DELA CRUZ (2004)
Resort worth P387K enticed by the agents that they would 419 SCRA 648
construct a park with first class leisure facilities in the Clark Field
and that these Class D shareholders would be admitted to one Facts: Pacencia dela Cruz, the original plaint in Civil Case, was
membership in the country club entitling them to use park the owner of a parcel of land with an area of two (2) ares (1 are
facilities and stay at a two-bedroom villa for five ordinary – 100 sq.m.) and 90 centares (1 centare – 1 sq.m.) This is located
weekdays and two weekend every year for free. at Lolomboy, Bocaue, Bulacan It was registered in her name. A
flea market (talipapa) with fifty or so vendors were located on
Two years later, respondents filed before SEC a complaint for the property and Panencia collected from them their daily stall
refund of the P387K they spent to purchase shares of stock rentals. Panencia had six children.
from Fontana. Respondents alleged that they have been
deceived into buying the Fontana shares because of the On September 25, 1980, Pacencia allegedly executed a Deed of
“fraudulent misrepresentations”. The construction of the park Sale whereby for an inconsideration of P21,000, she conveyed
turned out to be still unfinished and the policies, rules and said parcel in favor of her son, Fortunato dela Cruz and a TCT
regulation of the club were obscure. was issued in his name. Sometime in 1985-1988, Fortunato
mortgaged the property three times to one Erlinda De
The Spouses Tan were able to secure one free accommodation Guzman for the sums of P25K, P50K and P100K. Fortunato
at the villa, but the succeeding reservations were refused. was unable to pay these loans.
Petitioners argued that Tan was informed and that they were
provided in the promotional materials. On January 11, 1989, Fortunato executed a “Kasulatan ng
Bilihang Patuluyan” in favor of Clark and Divina Gutierrez the
SEC Hearing Officer rendered a decision in favor of Spouses Tan children of Claudio and Adoracion Gutierrez, to whom
and they appealed decision before SEC en banc but was denied. Fortunato earlier offered to sell the property. The Kasulatan
CA denied as well as MR. alleged the purchase price to be at P58K only but the amount
actually paid by Gutierrez to Fortunato was P600K evidenced
Issue by a receipt showing the true consideration of the sale. That
Whether or not there was fraud of their promises that would same day the sale was registered. Thereafter, the Gutierrez took
justify annulment or rescission of their contract of sale. possession of the property, had the talipapa repaired and
collected daily stall rentals.
COURT RULING: The petitioners did not commit fraud or default
on their promises as would justify the annulment or rescission On January 20, 1989, Pacencia instituted an action for
of their contract of sale with the respondents. reconveyance of property with preliminary injunction
against Fortunato and the Gutierrez.
Fraud as to Affect Contracts
There is fraud when one party is induced by the other to enter Pacencia’s Allegations
into a contract through and solely because of the latter’s Pacencia allaged that sometime in 1980, her son Fortunato, took
insidious words or machinations. But not all forms of fraud can advantage of his close ties with her to induce her to sign an
vitiate consent. instrument which appeared to be a Deed of sale. She alleged that
Fortunato assured her that she would remain as owner of the
Under Article 1330, fraud refers to dolo causante or causal property while Fortunato would hold the property in trust for her
fraud in which prior to or simultaneous with the execution of a and upon her death all children would share in the property.
Fortunato allegedly did not pay her for any consideration for such
contract, one party secures the consent of the other using
sale.
deception without which such consent would not have been
given. Simply stated, the fraud must be the determining cause
She also claimed that she continued to collect daily rentals until she
of the contract or must have caused the consent to be given.
fell ill and hospitalized. As a result, Fortunato took over but was
remiss in remitting the collections to Pacencia.
Spouses Tan have failed to prove how petitioners
IN THIS CASE:
employed fraud to induce respondent buy shares. It can only On December 1988, she was shocked to learn that Fortunato was
be expected that Fontana Resort presented the FLP and the offering the property for sale. She then demanded reconveyance to
country club in the most positive light in order to attract her, but Fortunato refused to do so. Upon learning of the
investor-members. There is no showing that in their sales talk to negotiations, she sent her daughter Erlinda dela Cruz, to warn them
respondents, they actually used insidious words or that Pacienca owned the property but the Gutierrez still insisted on
machinations, without which shares weren’t bought. buying and registered the same in favor of their children Divina and
Clark. Consequently, the Gutierrez took over the collection of stall intention to be bound at all, the purported contract is
rentals from the tenants of the subject property. absolutely simulated and void. Hence, the parties may recover
what they gave under the simulated contract. If, on the other
In sum, Paciencia alleged that the sale of the property to the hand, the parties state a false cause in the contract to conceal
Gutierrez was null and void and fraudulently made as their real agreement, the contract is relatively simulated, and
Fortunato had neither the right or authority from her to sell or the party’s real agreement may be held binding between them.
convey the subject property, as he held it only in trust for her.
FORTUNATO’S ANSWER: Averred that he lawfully acquired the CONTENTION: Petitioners insist that the said document does not
subject property from Pacencia who absolutely conveyed the reflect the true intention and agreement of the parties.
same to him, delivered to him the owner’s duplicate of the title, According to petitioners, Fortunato was to merely hold the
and upon her instructions caused the registration to his name. property in trust for their mother and that ownership thereof
would remain with the mother.
CLARK AND DIVINA’S ALLEGATIONS:
1. The subject property was entitled under Fortunato dela Cruz.
COURT REPLY: Petitioners, however, failed to produce even one
2. Fortunato was also the one collecting the daily rentals from
the market vendors;
credible witness who could categorically testify that such was the
3. Fortunato feared he would lose the property due to his intent of Paciencia and Fortunato. There is nothing on record
inability to pay his mortgage indebtedness to Erlinda. to support sufficiently petitioner’s contention. Instead, the
4. He pleaded with them to help him, as a result they turned to evidence is unclear on whether Paciencia in her lifetime, or
heir parents who withdrew their lifetime savings to be able later the petitioners themselves, actually asserted or attempted
to buy the property. to assert rights of ownership over the subject property after the
alleged sale thereof to Fortunato. The lot in dispute was thrice
RTC Bulacan dismissed the case and declared Clark and Divina mortgaged by Fortunato without protest. When they learned
lawful owns of t he subject property. MR denied. CA appeal, that Fortunato mortgaged the property to Erlinda de Guzman
during the proceedings Paciencia died and was substituted by on three occasions: August 26, 1985, April 6, 1987 and
her children. The appellate court affirmed RTC. September 7, 1988, they refused to redeem the property.
Issue Indeed, how could Fortunato have thrice obtained a mortgage

Whether or not the Deed of Absolute sale executed by Pacienca, over the property, without having dominion over it? Fortunato
the mother, in favor of her son, Fortunato is simulated and must declared the property in his name for taxation purposes
be declared void. and paid the realty taxes, without any protest from Paciencia
or petitioners. Tax receipts and declaration of ownership for
PETITIONER’S CONTENTION: CA erred in holding that Pacienca
taxation purposes are strong evidence of ownership. It has been
voluntarily executed the Deed of Absolute Sale for failing to appreciate
the fact that the Deed was entirely and completely written in English,
ruled that although tax declarations or realty tax payments are
a language neither known or understood by her mother, Pacienca. not conclusive evidence of ownership, nevertheless, they are
Thus, it went against the dictates of Article 1330 and 1332 of the Civil good indicia of possession in the concept of owner for no one
Code. That there is no showing that the terms of the Deed had been in his right mind will be paying taxes for a property that is not
fully explained by Pacienca who allegedly executed the document. in his actual or constructive possession.
And that Clark and Divina are not buyers in good faith.
For 9 years, Paciencia allowed Fortunato to benefit from the
RESPONDENT’S CONTENTION: Nothing was amiss in the Deed and that
property. It was only when she learned of its impending sale to
the Gutierrez were innocent purchasers in good faith entitled to the full
the Gutierrez spouses, that she acted to forestall the transfer of
protection of the law. The Gutierrez examined the title which was
sufficient and that they have reason to believe that the title was free
the property to a third person. She then caused the annotation
from flaws and defects upon learning that the latter was the one of her adverse claim on the certificate of title on the same day
collecting the daily installments of rentals and mortgaged the property the deed in favor of the Gutierrez children was registered. This
for three times to Erlinda. was rather belated, for the deed was already done.
COURT RULING:The court finds for the respondents. Petitioners’ Application of Article 1332
arguments are less than persuasive. CONTENTION: Petitioners harp on the fact that the assailed Deed
was in English and that it was not explained to Paciencia.
Rule on Simulated Contracts and Interpretation
As a rule, when the terms of a contract are clear and COURT REPLY: But we find that the petitioners failed to prove their
unambiguous as to the intention of the contracting parties, the allegation that Pacencia could not speak, read, or understand
literal meaning of its stipulations shall control. It is only when English. Moreover, Paciencia bare testimony on this point is
the words appear to contravene the evident intention of the uncorroborated.
parties that the latter shall prevail over the former.
For Article 1332 to apply, it must first be convincingly
The real nature of a contract may be determined from the established that the illiterate or disadvantaged party could not
express terms of the agreement and from the contemporaneous read or understand the language in which the contract was
and subsequent acts of the parties thereto. When they have no
written, or that the contract was left unexplained to said party. IN THE CASE:The presumption is that Remegia, considering her
Petitioners failed to discharge this burden. limited education attainment, did not understand the full
import of the joint affidavit of confirmation of sale and
NOTARIZED DOCUMENTS HAVE PRESUMPTION OF REGULARITY. The consequently fraud or mistake attended its execution.
Deed of Absolute Sale was duly acknowledged before a notary • The burden is on the Spouses Zaldivar to rebut
public. As a notarized document, it has in its favor the presumption on this part.
presumption of regularity and it carries the evidentiary
weight conferred upon it with respect to its due execution. The bare statement Atty. Velez that he read and interpreted
It is admissible in evidence without further proof of its the document to the affiants and that he asked them as to the
authenticity and is entitled to full faith and credit upon its face. correctness of its contents does not necessarily establish that
Remegia actually comprehended or understood the import of
HELD: The petition of Pacienca as substituted by her children is the joint affidavit of confirmation of sale. Nowhere is it stated
denied for lack of merit. in the affidavit itself that its contents were fully explained to
Remegia in a language that she understood before she signed
FELICIANO v. ZALDIVAR (2006) the same. The presumption was not sufficiently overcome.
503 SCRA 182
GEORG v. HOLY TRINITY COLLEGE (2016)
Facts: Feliciano filed against Spouses Zaldivar a complaint for 797 SCRA 550
nullity of TCT and reconveyance of the subject property in CDO
and that such was registered in the name of Aurelio Zaldivar. In Brief Facts: The Holy Trinity College Grand Choral and Dance
her complaint, she alleged that she was the registered owner of Company was slated to perform in Greece, Italy, Spain and
a parcel of land covered by a TCT and that sometime in 1974, Germany. Enriquez contacted Georg to seek assistance for
Aurelio, allegedly through fraud, was able to obtain TCT of payment of the international airplane tickets for she owns a
Feliciano’s lot as described in TCT. German travel agency.
Remegia denied that she sold the subject lot either Gil or On April 24, 2001, a MOA with Deed of Assignment was
Dalman. She likewise impugned as falsified the joint affidavit of executed between petitioner. Under such, Georg will advance
confirmation of sale that she and her uncle purportedly the payment of international airplane tickets amounting to
executed before a notary public where Remegia appears to P4.2M from the foundation-grantor SC Roque Foundation.
have confirmed the sale of the subject property to Gil. She
alleged that she never parted with the title and was never lost. Georg claimed that the second-party assignor and the
foundation-grantor have not paid and refused to pay their
RTC ruled in favor of Remegia. CA reversed the decision of RTC obligation under the MOA.
and ruled in favor of Zaldivar.
RTC ruled in favor of petitioner ordering the assignors and Holy
Issue Trinity College to pay the amount. During trial at the RTC they
Whether or not the Court of Appeals erred. alleged that the thumbmark in the MOA was of Sister Medalle,
President of Holy Trinity and that she was the one who initiated
TCT Under Aurelio’s Name Properly Nullified; Article 1332 the European Tour.
It was procured through fraud and that he cannot raise the
defense of indefeasibility of the title because the indefeasibility CA held that record is bereft of any showing that Sister Medalle
of a Torrens title does not furnish a shield for fraud. As such, participated in the negotiation, perfection and partial
title issued on void documents may be annulled. consummation of the contract whereby Georg advance
payment of international and domestic tickets required for the
The joint affidavit of confirmation of sale executed by European tour.
Remegia is not proper. In the first place, it is not a mode of
acquiring ownership and it was entirely written in English. Issue
Whether or not Holy Trinity College under the MOA.
Article 1332. When one of the parties is unable to read, or if the contract a. Whether Sr. Medalle freely gave her full consent
is in a language not understood by him, and mistake or fraud is alleged, to the MOA by affixing her thumbmark.
the person enforcing the contract must show that the terms thereof b. Whether she is authorized by Holy Trinity College
have been fully explained to the former.
to enter into a MOA.
The principle that a party is presumed to know the import of a
The case revolves around the validity of the MOA for being
document upon fixing signatures is modified by Article 1332.
assailed for a defect in consent. Under Article 1330 of the Civil
When one is unable to read or if the contract is in a language
Code consent may be vitiated by mistake, violence,
not understood by the party and mistake or fraud is alleged,
intimidation, undue influence and fraud. Under the same
the obligation to show that the terms are fully explained
provision the contract is becomes voidable or valid until it is
devolves to the party seeking to enforce the contract if fails
annulled or ratified.
to discharge, presumption of mistake is unrebutted.
Fraud, Concept and Application

There is fraud when one party is induced by the other to enter
into a contract, through and solely because of the latter's
insidious words or machinations. But not all forms of fraud can
vitiate consent. Under Article 1330, fraud refers to dolo
causante or causal fraud, in which, prior to or simultaneous with
execution of a contract, one party secures the consent of the
other by using deception, without which such consent would
not have been given.
IN THE CASE:Sister Medalle is presumed to know the import of

the thumbmark in the MOA. While she was indeed confined in
the UST Hospital at that time, Holy Trinity failed to prove that
Sister Medalle was too ill to comprehend the terms of the
contract. While it may be true that Sister Medalle suffered a
stroke, but Holy Trinity did not present evidence that her
mental faculty was impaired by her illness.
As intended, the affixing of her thumbmark in fact caused the

immediate release of the loan. It simply defies logic that Atty.
Belarmino would employ fraud just so Sr. Medalle could affix
her thumbmark to facilitate the release of the loan coming from
Atty. Belarmino himself. Notarized documents enjoy
presumption of regularity and is conclusive as to its truthfulness
of its contents absent any clear and convincing proof to the
contrary.
HELD: Finding that Sr. Medalle possessed full mental faculty in

affixing her thumbmark in the MOA and that respondent is
hereby bound by her actions, we reverse the ruling of CA.
OBLIGATIONS AND CONTRACTS VILLACERAN v. DE GUZMAN (2012)

666 SCRA 454
Articles 1345-1358
JURISPRUDENCE NOTES
Facts: Josephine De Guzman filed a complaint against Spouses
Villaceran and FEBTC. She alleged that she is the registered
1345-1346. Simulation of Contracts owner of a parcel of land in Isabela which she mortgaged to
PNB. In order to secure a bigger loan, she asked Milagros
VILLEGAS v. RURAL BANK OF TANJAY (2009) Villaceran to obtain addition loan on her behalf.
588 SCRA 436
She executed a SPA in favor of Milagros. Considering De

Facts: Spouses Villegas obtained an agricultural loan of P350K
Guzman’s unsatisfactory loan record with the PNB, Milagros
from Rural Bank of Tanjay secured by a REM on a residential
suggested that the title of the property be transferred to her
house in Dumaguete. For failure to pay the mortgage was
and Jose Villaceran and they would obtain a bigger loan.
extrajudicially foreclosed.
In 1996, De Guzman executed a simulated Deed of Absolute
In 1987, Joaquin Villegas entered into an agreement
Sale in favor of the Spouses Villaceran and went to the PNB and
denominated as Promise to Sell, where Rural Bank promised
secured TCT. Thereafter they wen to the FEBTC to secure a loan
to sell to Villegas the foreclose properties for P713K for a period
of P1.48M. However, the Spouses Villaceran concealed the
of five years. Upon signing of the agreement, Villegas gave
loan release from De Guzman.
Rural Bank the sum of P250K as downpayment but failed to pay
the first yearly installment prompting Rural Bank to consolidate
When De Guzman learned of the loan release she asked for the
title and take possession.
loan proceeds less the amount advanced by the Villaceran to
pay the PNB loan. However, the spouses Villaceran refused to
RTC dismissed complaint of declaration of nullity loan and
give money stating that they are already the registered owner
mortgage and recovery of possession. CA modified the
of the property and only reconvey upon return of P721K they
decision entitling Villegas to reimbursement.
paid to the PNB.
Issue
De Guzman offered to pay P350K provided that the Spouses
Whether the petitioners may recover possession of the
Villaceran would executed a Deed of Reconveyance. In view of
mortgaged properties.
the simulated character of their transaction, they executed
another Deed of Absolute Sale.
Contention of the Spouses Villegas
They stated that the loan was made to appear as several sugar
They also promised to pay their mortgage debt to FEBTC.
crop loans not exceeding P50K each stating that they never
However, Villaceran failed to settle the loan and property was
planted sugar cane, the lot was residential. In short, petitioners
foreclosed.
aver that the sugar crop loans were merely simulated
contracts and therefore void.
De Guzman asserted that the spouses Villaceran should be
compelled to redeem the mortgage so as not to prejudice her
Articles 1345 and 1346 on Simulation of Contracts
as the real owner of the property.
Article 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. RTC ruled that the Deed of Sale of 1996 executed by De
Guzman in favor of the spouses Villaceran covering the
Article 1346. An absolutely simulated or fictitious contract is void. A property in Isabela was valid and binding for being relatively
relative simulation, when it does not prejudice a third person and is not simulated only as to the purchase price. CA affirmed the
intended for any purpose contrary to law, morals, good customs, public decision. The purpose was for agency to secure higher loan.
order or public policy binds the parties to their real agreement.
Issue
IN THE CASE: It is obvious that the sugar crop loans were relatively
Whether or not there was relatively simulated contract.
simulated contracts and the both parties intended to be bound
thereby. In a relatively simulated contract, it involves an
CONTENTION: Petitioners contend that the previous loans they
ostensible act (pretended to be executed) and hidden act
extended to De Guzman in the amounts of P300,000, P600,000
(true agreement). To determine the enforceability the hidden
and P200,000 should have been considered by the CA. When
act must be discerned if it is lawful.
added to the P721,891.67 used to settle the PNB loan, De
Guzmans total loan obtained from them would amount to
Although these loan and mortgage contracts were concealed
P1,821,891.67.
and made to appear as sugar crop loans to make them fall
within the purview of the Rural Banks Act, all the requisites of
Thus, it would clearly show that the Deed of Sale dated June 19,
contract were present. However, the purpose is illicit,
1996, being supported by a valuable consideration, is not a
intending to circumvent the Rural Banks requirement in the
simulated contract.
procurement of loans thus void and inexistent.
COURT REPLY:No. Article 1345 of the Civil Code provides that the The RTC declared the deeds dated March 5, 1975 and October
simulation of a contract may either be absolute or relative. 8, 1996 null and void. On appeal, the CA partially granted the
petition and deleted the RTCs decision declaring the October 8,
Simulation of Contracts, Concept 1996 null and void.
In absolute simulation, there is a colorable contract, but it has
no substance as the parties have no intention to be bound by Issue
it. The main characteristic of an absolute simulation is that the 1) Whether the Deed of Sale of Undivided Parcel of Land
apparent contract is not really desired or intended to produce covering the 9,000 square meter property executed by
legal effect or in any way alter the juridical situation of the Domingo in favor of Laureano Cabalu on March 5,
parties. As a result, an absolutely simulated or fictitious contract 1975, is valid; and
is void, and the parties may recover from each other what they 2) whether the Deed of Sale, dated October 8, 1996,
may have given under the contract. covering the 4,500 square meter portion of the 9,000
square meter property, executed by Domingo in favor
However, if the parties state a false cause in the contract to of Renato Tabu, is null and void.
conceal their real agreement, the contract is only relatively
simulated, and the parties are still bound by their real Arguments
agreement. Hence, where the essential requisites of a contract The first Deed of Sale was valid because it enjoyed presumption
are present, and the simulation refers only to the content or of regularity for it was a public instrument. They alleged second
terms of the contract, the agreement is absolutely binding and Deed of Sale be voided because at the time of the execution of
enforceable between the parties and successors in interest. The the instrument, the seller Domingo was already dead.
primary consideration in determining the true nature of a
contract is the intention of the parties. Deed of Sale Between Domingo and Cabalu
is Absolutely Simulated Thus Void
IN THE CASE: There is a relative simulation of contract as the Deed Both lower court found that the March 5, 1975 Deed of Sale of
of Absolute Sale dated June 19, 1996 executed by De Guzman Undivided Parcel of Land by Domingo to Cabalu was a fictitious
in favor of petitioners did not reflect the true intention of the and simulated document. As found by the CA:
parties. It was shown that the aforesaid document of sale was
executed only to enable petitioners to use the property as There are discrepancies in the signature of the notary public, his PTR
collateral for a bigger loan, by way of accommodating De and the document number on the lower-most portion of the document,
Guzman. as well as the said deed of sale being found only after the plaintiffs-
appellants were ejected by the defendants-appellants; that they were
allegedly not aware that the said property was bought by their father,
CABALU v. TABU (2012) and that they never questioned the other half of the property not
681 SCRA 625
occupied by them, it is apparent that the sale dated March 5, 1975 had
Facts: A property is registered in the name of late Faustina the earmarks of a simulated deed written all over it.
Maslum. On December 8, 1941, Faustina died without any
children. She left a holographic will assigning the property to Assuming that Deed Was Not Simulated, Deed of Sale Still
nephews and nieces, such was no probated. One of the heirs Not Valid for Domingo was Not the Owner of the Property
was the father of Domingo Laxamana. Domingo allegedly There is no dispute that the original and registered owner of
executed a Deed of Sale of Undivided Parcel of land. the subject property, from which the subject 9,000 square
meter lot came from, was Faustina, who during her lifetime had
In 1994, the heirs executed a Deed of Extra-Judicial Succession executed a will. In the said will, the name of Benjamin, father of
with Partition. The said deed imparted 9000 sq.m. of the land Domingo, appeared as one of the heirs. Thus, and as correctly
to Domingo. On August 4, 1996, Domingo died. even if Benjamin died sometime in 1960, Domingo in 1975
could not yet validly dispose of the whole or even a portion
On October 8, 1996, or two (2) months after Domingos death, thereof for the reason that he was not the sole heir of Benjamin,
Domingo purportedly executed a Deed of Sale of TCT No. as his mother only died sometime in 1980.
281353 in favor of Renato Tabu (Tabu). Tabu and his wife
Dolores Laxamana subdivided the lot into two which resulted Article 1347 provides that no contract may be entered into
to TCT Nos. 291338 and 291339. upon future inheritance except in cases expressly authorized by
law. In short, save for the exceptions, contract concerning
Consequently, petitioners Milagros de Belen Vda. De Cabalu, future inheritance shall be void. It applies when
Meliton Cabalu, Spouses Angela Cabalu and Rodolfo Talavera, 1. The succession has not yet been opened;
and Patricio Abus filed a complaint before the RTC seeking to 2. The object of contract forms part of the inheritance;
declare TCT Nos. 291338 and 291339 as null and void. 3. Promissor, has only an expectancy of a right which is
purely hereditary right therein.
They averred that they were the lawful owners of the subject
property because it was sold to their father, Laureano Cabalu, IN THE CASE:At the time the deed was executed, Faustina’s will
by Domingo, through a Deed of Absolute Sale, dated March 5, has not yet been probated; the object is still part of Domingo’s
1975. part of inheritance thus inchoate right.
HEIRS OF INTAC v. COURT OF APPEALS (2012) PHILIPPINE BANKING CORP. v. DY (2012)

684 SCRA 88 685 SCRA 567
Facts: Ireneo Mendoza was the owner of the subject property Facts: Cirpiana and Respondent Jose Delagado entered into an
in Quezon, which he purchased in 1954. Ireneo who had two agreement with a certain Cecilia Tan for the sale of the said
children. In 1977, Ireneo executed a Deed of absolute Sale in property for P10/sq.m. At the time of the sale, Tan was already
favor of Spouses Intac. Despite the sale, they continued to stay occupying a portion of the property where she operates a bihon
in the property and paid the realty taxes. After Ireneo’s death, factory while the rest was occupied by Spouses Delgado. After
his widow and respondents remained in the premises. Up to the paying the amount Tan demanded the execution of the Deed
present, they are in the premises, paying the real estate taxes of Sale which was refused.
thereon, leasing out portion of the property, collecting rentals.
Tan discovered that the property was sold to Dy and
The controversy arose when Mendoza sought the cancellation mortgaged to PhilBank prompting the filing of complaint. The
of the TCT claiming that the sale was simulated thus void. Intac Spouses Delgado claimed that there was no perfected sale
resisted stating that it was a valid sale for a consideration. because Tan was not willing to pay their asking price of P17/sq.
And also stated that the Deeds of Absolute sale made in favor
RTC ruled against the of the Spouses Intac stating that the to Dy to enable Dy to use property as collateral and that it was
property was not sold but more of an equitable mortgage. CA not a sale.
reversed such ruling.
Dy denied that they knew of the alleged transaction between
Issue Spouses Delgado and Tan ad that they claimed to have validly
Whether or not the Deed of Absolute Sale was a simulated acquired the subject property. PhilBank also claimed that it is
contract or a valid agreement. an innocent mortgagee. RTC dismissed claims against Dy and
PhilBank and no sufficient proof of the simulation.
The Deed of Sale was Absolutely Simulated
There was no consideration and there was no intention to sell CA reversed the decision finding that there was no perfected
it. Aside from their plain denial, petitioners failed to present any contract of sale between Delgado and Dy for it was simulated
concrete evidence to disprove Marietto’s testimony. They due to the admission that the deeds of sale were purportedly
claimed that they paid P150,000.00 for the subject property. executed to facilitate the loan application with PhilBank.
They, however, failed to adduce proof, even by circumstantial
evidence, that they did, in fact, pay it. Their failure to prove their Issue
payment only strengthened Marietto’s story that there was no Whether or not CA erred in its decision to
payment made because Ireneo had no intention to sell the nullity the sale between Delgado and Dy.
subject property.
NOTE: The CA decision nullifying the questioned contracts of
Thus, the Court agrees with the courts below that the sale between Delgado and Dy had become final and executory.
questioned contract of sale was only for the purpose of lending
the title of the property to Spouses Intac to enable them to Simulated Sale and Mortgage Rights
secure a loan. Their arrangement was only temporary and could However, the mortgage rights of PhilBank shall be maintained.
not give rise to a valid sale. Where there is no consideration, the While it is settled that a simulated deed of sale is null and void
sale is null and void ab initio. and does not convey any right, it has been equally ruled for
reasons of public policy, that the subsequent nullification of
Ireneo and his family continued to be in physical possession title to a property is not a ground to annul the contractual right
of the subject property after the sale in 1977 up to the present which may have been derived by a purchaser, mortgagee or
and even paid for the realty taxes. other transferee who acted in good faith.
CONTENTION: The presumption of regularity of the issuance of PHILBANK IS IN GOOD FAITH: The simulated sale was intended to
the TCT in favor of the Spouses Intac. mislead PhilBank into granting the application. Thus, no amout
of diligence would have led to the discovery of such simiulation.
COURT REPLY: They did not become the owners of the subject Accordingly, in the interest of public policy, fair dealing, good
property even after a TCT had been issued in their names. After faith and justice, the Court accords Philbank the rights of a
all, registration does not vest title. Certificates of title merely mortgagee in good faith whose lien to the securities posted
confirm or record title already existing and vested. They cannot must be respected and protected. In this regard, Philbank is
be used to protect a usurper from the true owner, nor can they entitled to have its mortgage carried over or annotated on the
be used as a shield for the commission of fraud, or to permit titles of Cipriana Delgado over the said properties.
one to enrich oneself at the expense of others. Hence,
reconveyance of the subject property is warranted. HELD: The decision of CA is affirmed with the modification
upholding the mortgage rights of Petitioner Philippibe
NOTE: The right to reconveyance to quiet the title of the Banking Corporation over the subject properties
property does not prescribe.
CLEMENTE v. COURT OF APPEALS (2015) In determining the true value of the contract, the intention of
772 SCRA 339 the parties is tested. If words of the contract contravene
intention, intention prevails. Such intention is determined not
Facts: Adela owned three parcels of land in Quezon. During her only from the express terms of their agreement but also
lifetime, she allowed her children to use and possess such. from the contemporaneous and subsequent acts of the
Sometime in 1985 and 1987 Adela simulated the transfer of parties. This is especially true in a claim of absolute simulation
Lots 32 and 34 to her two grandsons Carlos and Dennis, thus a where a colorable contract is executed.
TCT was issued.
IN THE CASE: The lower courts
considered the totality of the prior,
It is undisputed that the transfers were never intended to vest contemporaneous and subsequent acts of the parties.
title to Carlos and Dennis who shall return such to Adela upon 1. No indication of alienation of properties;
request. 2. Adela continued exercising acts of dominion;
3. SPA appoints Clemente as administratix;
Prior to Clemente and Adela’s departure for US. Adela 4. The previous sales with Carlos and Dennis were
requested the both to execute a Deed of Reconveyance. In simulated.
1989, Adela executed a Deed of Absolute Sale in favor of There were letters supporting that indeed Adela still executed
Clemente and on the same day an SPA in favor of Clemente dominion over her property.
giving her to power to administer and manage all her real and
personal properties in the Philippines. No Consideration for the Sale
Although on their face, the Deeds of Absolute Sale appear to
Adela died in the United States and was succeeded by her four be supported by valuable consideration, the RTC and the CA
children. Clemente sought to eject private respondents who found that there was no money involved in the sale. The
were staying in the properties. consideration in the Deeds of Absolute Sale was superimposed
on the spaces therein, bearing a font type different from that
The private respondents averred that Adela only wanted to help used in the rest of the document. The lower courts also found
Clemente travel to the US by making it appear that Clemente that the duplicate originals of the Deeds of Absolute Sale bear
has ownership of the Properties. They further alleged that a different entry with regard to the price.
similar to the previous simulated transfers to Carlos Jr. and
Dennis, petitioner also undertook and warranted to execute a REYES v. ASUNCION (2015)
deed of reconveyance in favor of the deceased over the 774 SCRA 615
Properties, if and when Adela should demand the same. They Facts: Reyes claimed that since the 80s they were the owners a
finally alleged that no consideration was given by petitioner to parcel of land which was also a sugarcane plantation with an
Adela in exchange for the simulated conveyances. area of 3.5 hectares in Tarlac and forms part of a US Military
Reservation and that sometime in 1986, Reyes hired Asuncion
RTC ruled in favor of the private respondents. CA affirmed that as a caretaker for such property.
the Deeds were simulated and without consideration and no
intention to have legal effect because the contemporaneous and According to Reyes, in order to prevent BVDA from converting
subsequent acts of Clemente are enough to render conveyances her property into a resettlement she and Asuncion executed a
null and void of being simulated for Adela retained dominion. contract transferring her rights over the subject land to the
respondent.
Issue
Whether or not the CA was wrong in finding that the Deed of Petitioner claimed to have remained the absolute owner and
Absolute Sale between Clemente and Adela was simulated and possessor of the subject land and presently occupies the same
without consideration, hence void and inexistent. as a sugarcane plantation and even mills the sugarcane
harvested at the Central Azucarera de Tarlac for her own
COURT RULING: The court denies the petition. The Deeds of benefit. She also stated that the respondent continued working
Absolute Sale between the late Adela Shot well and clement are for her but was severed when petitioner discovered that
null and void for lack of consent and consideration. respondent sold the former's pigs and cows.
No Valid Contract of Sale Due to Absence of Issue

Consent for it was a Mere Simulation Whether or not the Contract was simulated.
There is simulation when arties do not really want the contract
they have executed to produce the legal effects expressed by Absolute Simulation of Contracts
its wordings. Where a person, in order to place his property beyond the reach
of his creditors, simulates a transfer of it to another, he does
In short, in absolute simulation there appears to be a valid
not really intend to divest himself of his title and control of the
contract but there is actually none because the element of
property; hence, the deed of transfer is but a sham. The burden
consent is lacking. This is so because the parties do not actually
of proving the alleged simulation of a contract falls on those
intend to be bound by the terms of the contract.
who impugn its regularity and validity.
The primary consideration in determining whether a contract is COURT RULING: The petition is meritorious.
simulated is the intention of the parties as manifested by the
express terms of the agreement itself, as well as the Absolute Simulation of Contracts
contemporaneous and subsequent actions of the parties. The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce
The most striking index of simulation is not the filial relationship legal effect or in any way alter the juridical situation of the
between the purported seller and buyer, but the complete parties. As a result, an absolutely simulated or fictitious contract
absence of any attempt in any manner on the part of the latter is void, and the parties may recover from each other what they
to assert rights of dominion over the disputed property. may have given under the contract.
COURT RULING: There was insufficient evidence showing that IN THE CASE:The Court agrees with RTC that the subject deed
there is a simulation of contract. was absolutely simulated. The parties never intended to be
bound by any sale agreement. Instead the subject deed was
IN THE CASE: Reyes failed to present evidence to prove that executed merely as a front to show the public that the Spouses
Asuncion acted in bad faith in procuring her signature or that Tanchuling were the owners of the properties in order to deter
he violated their real intention. the group of John Mercado from illegally selling the same.
The allegation of simulation of contract as well as lack of On Absence of Consideration

consent and/or vitiated consent remains to be proven. As it Although the subject deed between Sps. Tanchuling and
stands, we perceive that the contract by its very terms and Cantela stipulated29 a consideration of P400,000.00, there was
conditions, on June 15, 1993, appellant simply intended to actually no exchange of money between them. This was
transfer the subject land to appellee. It is a cardinal rule that if revealed in the testimony of Vicente.
the terms of a contract are clear and leave no doubt as to the • Failure to secure a title in his name likewise indicates
intention of the contracting parties, the literal meaning of its simulation.
stipulation shall control. • Failure to take possession of the properties which
according to Cruz, is a clear indication of simulation.
Reyes insist that the contract is in the nature of a donation,
and in this case, it seems that the donation was in the nature of On the Undated Deed as Evidence of Simulation
a renumeratory donation in return for the services of The undated deed of reconveyance, which serves as a counter-
Asuncion as the caretaker for 10 years of faithful service. agreement to, and which was simultaneously executed with, the
subject deed, unmistakably evinces absolute simulation.
TANCHULING v. CANTELA (2015)
774 SCRA 406
VICTORIA v. PIDLAOAN (2016)
Facts: Tanchuling and Cantela executed deed covering two 791 SCRA 16
parcels of land. On the face of the deed the sum of P400K Facts: Elma bought a parcel of land in Lucena. When Rosario
appears as the consideration for the purported purchase of the Victoria came home she cause the construction a house and lot
properties. When Tanchuling tried to recover the TCTs from and left again after the house was built.
Cantela, the latter refused despite demands. They alleged:
1. There was no actual consideration paid by Cantela Elma allegedly mortgaged the house to a certain Villanueva in
2. The Deed was to show to their neighbors that they are 1989. When the properties were about to be foreclosed, Elma
the true owner; allegedly asked for help from her sister-in-law, Pidlaoan to
3. Undated deed was executed in their favor. redeem the property.
Cantela insisted that the sale of properties to him was valid as In 1993, Elma executed a Deed of Sale entitled Panananto ng
he bought the same from the spouses Tanchuling for P400K Pagkatanggap ng Kahustuhang Bayad transferring the
and that the undated deed of reconveyance was surreptitious ownership of the lot to Normita. The last provision in the deed
inserted upon presentation for signing. of sale provides that Elma shall eject the person who erected
the house and deliver the lot to Normita. It was signed by Elma,
RTC nullified the deed for being absolutely simulated for they Normita and two witnesses but was not notarized.
never intended to be bound by the contract evident from the
undated deed of conveyance. When they were about to have the document notarized, the
notary public advised them to donate the lot instead to avoid
CA reversed the RTC ruling finding that the contemporaneous capital gains tax. Elma executed a Deed of Donation in favor
and subsequent acts of the parties, especially Cantela who tired of Normita and had it notarized.
to assert dominion over the property negate simulation.
Since then, Normita had been paying the real property taxes
Issue over the lot but Elma continued to occupy the house. Rosario
Whether or not the Subject deed is simulated thus null and void. found out when she returned to the country after a year or two.
In 1997, Rosario Victoria filed a complaint for reformation and Deed of Sale is Not an Equitable Mortgage
cancellation. She argued that: An equitable mortgage is one which, although lacking in some
1. She and Elma co-owned the lot for both of them formality or other requisites demanded by statute, nevertheless
contribute the money intended to purchase it; reveals the intention of the parties to charge real property as
2. Normita entered in to an equitable mortgage because security for a debt and contains nothing contrary to law.
they intended to constitute a mortgage over the lot to 1. The parties entered into a contract denominated as a
secure Elma’s loan, but they executed a Deed of Sale; contract of sale; and
3. The deed of donation was simulated because Elma 2. Their intention was to secure an existing debt by way
executed it upon the notary public’s advice. of mortgage.
RTC ruled that they are co-owners, thus Elma can only donate IN THE CASE:In the present case, the unnotarized contract of sale
her share in the lot. CA held that Elma and Normita entered into between Elma and Normita is denominated as "Panananto ng
two agreements: a loan and a sale. Pagkatanggap ng Kahustuhang Bayad."Its contents show an
• Loan – when Elma had to pay Villanueva to redeem unconditional sale of property between Elma and Normita. The
the property; document shows no intention to secure a debt or to grant a
• Sale – the sale of the property to her. right to repurchase. Thus, there is no evidence that the parties
It held that the Deed of Donation is not simulated for it was agreed to mortgage the property as contemplated in Article
executed in gratitude to Normita who rescued her by 1602 of the Civil Code. Clearly, the contract is not one of
preventing foreclosure of the lot. equitable mortgage.
Issues HELD: The parties entered into a contract of sale, not a

1. Whether Rosario is a co-owner; donation, and that Elma sold the whole property to Normita.
2. Whether the deed of donation was simulated; and
3. Whether the transaction was a sale, donation or an SANTA FE REALTY v. SISON (2016)
equitable mortgage. 802 SCRA 1
Facts: Santa Fe Realty agreed to sell to Sison the south easter

There is No Co-ownership; Elma Transferred
portion of the land. On October 19, 1989, Santa Fe Realty
Ownership of the Entire Lot to Normita not Half
executed a Deed of Sale over the subject property to Fabregas
Petitioners failed to present proof of Rosario's contributions in
for P10,918. Fabregas then executed another Deed of Sale over
purchasing the lot from its previous owners. The execution of
the in favor of Sison for the same amount.
the transfer documents solely in Elma's name alone militate
against their claim of co-ownership. Thus, we find no merit in
Sison caused the segregation of the portion of land and took
the petitioners' claim of co-ownership over the lot.
possession of such and introduced improvements thereon,
such as fencing the property, fishpond and resort. However, he
The mere construction of a house on another’s land does
was not able to secure title because Santa Fe Realty refused to
not create a co-ownership. Verily, a house and a lot are
pay realty taxes and capital gains tax as well as to turn over.
separately identifiable properties and can pertain to different
They still refused to surrender the mother title that would help
owners, as in this case: the house belongs to Rosario and the
to the transfer of title in name of Sison name.
lot to Elma regardless of the value of the house.
In 1991, a subdivision of the entire property and was divided
The Deed of Donation was Simulated,
into four lots. SFRI sold one of such lot titled as I-B-3-C to a
the Real Intent was One of Sale
certain Orosa. However, Sison claimed that Lot I-B-3-C was the
In the present case, Elma and Normita's contemporaneous and
same one that was sold to him by Fabregas.
subsequent acts show that they were about to have the contract
of sale notarized but the notary public ill-advised them to execute
Santa Fe realty stated that not same property. They argued that
a deed of donation instead. Following this advice, they returned
Sison persuaded Fabregas and contended that they merely
the next day to have a deed of donation notarized.
accommodated Sison's request to sign another set of deeds of
sale over the subject property with a reduced price of ₱10,918.00
Clearly, Elma and Normita intended to enter into a sale that
so that the capital gains tax would be reduced. They also
would transfer the ownership of the subject matter of their
asserted that Sison did not pay the consideration agreed upon
contract but disguised it as a donation. Thus, the deed of
for the sale of the subject property which was actually P700K.
donation subsequently executed by them was only relatively
simulated.
RTC ruled in favor of Sison as owner and reconveyance. CA
affirmed such ruling.
Considering that the deed of donation was relatively simulated,
the parties are bound to their real agreement. The records show
Issue
that the parties intended to transfer the ownership of the
Whether or not the CA erred in affirming the decision of the
property to Normita by absolute sale.
RTC reconveying the subject property to Sison.
COURT RULING: The petition lacks merit. The bone of contention 1356-1358. Forms of Contract
is whether the deeds of absolute sale between Santa Fe and
Fabregas, and subsequently by Fabregas and Sison are valid Article 1356. Contracts shall be obligatory, in whatever form
and enforceable. they may have been entered into, provided all the essential
requisites for their validity are present. However, when the law
Deed of Sale Valid as to Both Transactions requires that a contract be in some form in order that it may be
CONTENTION: They argued that the deeds of sale were simulated valid or enforceable, or that a contract be proved in a certain
for failure to reflect the real purchase price of P700K, and that way, that requirement is absolute and indispensable. In such
this was done to reduce the payment of capital gains tax. cases, the right of the parties stated in the following article
cannot be exercised.
COURT REPLY: The deeds of sale were voluntarily executed, and
that Santa Fe Realty and Fabregas clearly admitted that the Article 1357. If the law requires a document or other special
intention was to sell the property to Sison and were form, as in the acts and contracts enumerated in the following
acknowledge before a notary public. There judicial admissions article, the contracting parties may compel each other to
that the deeds of sale which were signed and executed by them observe that form, once the contract has been perfected. This
bar from denying their acts. right may be exercised simultaneously with the action upon the
contract.
All the elements of contract are present. A perfected contract
of absolute sale exists between SFRI and Fabregas and then Article 1358. The following must appear in a public document:
Fabregas and Sison. (1) Acts and contracts which have for their object the
creation, transmission, modification or
There was meeting of the minds between the parties when they extinguishment of real rights over immovable
agreed on the sale of a determinate subject matter, which is the property; sales of real property or of an interest
south eastern portion of Lot 1-B with an area of 15,598 sq m, therein a governed by Articles 1403, No. 2, and 1405;
and the price is certain, without any condition or reservation of (2) The cession, repudiation or renunciation of hereditary
title on the part of the petitioners. rights or of those of the conjugal partnership of gains;
(3) The power to administer property, or any other power
Gross Inadequacy Does Not Affect the Contract of Sale which has for its object an act appearing or which
CONTENTION: They argue that the disproportionate price should appear in a public document, or should
between the value and the subject property leads to show the prejudice a third person;
fact that the sale was void. (4) The cession of actions or rights proceeding from an
act appearing in a public document. All other
COURT REPLY: e Court, however, ruled that gross inadequacy of contracts where the amount involved exceeds five
price by itself will not result in a void contract. Gross inadequacy hundred pesos must appear in writing, even a private
of price does not even affect the validity of a contract of sale, one. But sales of goods, chattels or things in action are
unless it signifies a defect in the consent or that the parties governed by Articles, 1403, No. 2 and 1405.
actually intended a donation or some other contract.
Inadequacy of cause will not invalidate a contract unless there MARTINEZ v. COURT OF APPEALS (2001)
has been fraud, mistake or undue influence. 358 SCRA 38
Facts: In 1981, De La Paz entered into an oral contract with

CONTENTION: The deeds of sale are absolutely simulated and that
petitioner Fr. Dante Martinez for the sale of a lot in Villa Fe
they are of inadequate price.
Subdivision in Cabanatuan City for the sum of P15K at the time
of the sale it was still registered in the name of the mother of
COURT REPLY: If there exists an actual consideration for transfer
private respondents Claudia De La Paz.
evidenced by the alleged act of sale, no matter how inadequate
it be, the transaction could not be a simulated sale.
Manuela subsequently registered the property sold to her by
Claudia on October 1981. When the land offered for sale to
Nonetheless, the fact remains that the petitioners have failed to
Martinez. He was assured by them that the lot belonged to
prove that the assailed deeds of sale were simulated. The legal
Manuela De la Paz.
presumption is in favor of the validity of contracts and the party
who impugns its regularity has the burden of proving its
It was agreed that petitioner would give a downpayment of
simulation.
P3,000.00 to private respondents De la Paz and that the balance
would be payable by installment.
Since the petitioners failed to discharge the burden of proving
their allegation that the deeds of sale were simulated, the
After giving the P3,000.00 downpayment, petitioner started the
presumption of regularity and validity of the contract stands.
construction of a house on the lot after securing a building
permit the written consent of the then registered owner,
NOTE: Orosa was not considered buyer in good faith due to
Claudia de la Paz.
the structures erected by Sison during such time.
On 1983, Martinez completed payment of the lot for which 1. Private respondents Veneracion never took actual
private respondent executed two documents. However, private possession of the three lots;
respondents never delivered the Deed of Sale they promised 2. Private respondents De la Paz remained in possession
to petitioner. of the Melencio lot which was co-owned by them and
where they resided;
In the meantime, in a Deed of Sale with a right to repurchase 3. During the period between the first sale and the
on three parcels of land was made to Spouses Veneracion for second sale to private respondents Veneracion, they
P150K. One of the lots sold was already sold to Martinez. The never made any effort to take possession of the
Veneracion did not actually take actual possession but all titles properties; and
to the lots were in their possession. 4. When the period of redemption had expired and
private respondents Veneracion were informed by the
Martinez discovered that the lot he was occupying with his De la Pazes that they are offering the lots for sale to
family had been sold to the spouses Veneracion after receiving another person for P200,000.00, they never objected.
letter from the Veneracion after receiving a letter from
Veneracion claiming ownership of the land and demanding that Contract of Sale of a Realty Need Not
they vacate property and remove their improvements thereon. Be Executed in a Public Document
Art. 1357 and Art. 1358 in relation to Art. 1403(2) of the Civil
Issues Code, requires that the sale of real property must be in writing
Whether or not private Respondent Veneracion for it to be enforceable. It need not be notarized. If the sale
are buyers in good faith of the lot in dispute has not been put in writing, either of the contracting parties can
as to make them absolute owners thereof. compel the other to observe such requirement.
First Contract of Sale was In Fact an Equitable Mortgage This is what petitioner did when he repeatedly demanded that
The Court of Appeals failed to determine the nature of the first a Deed of Absolute Sale be executed in his favor by private
contract of sale between the private respondents by respondents De la Paz.
considering their contemporaneous and subsequent acts.
There is nothing in the above provisions which require that a
More specifically, it overlooked the fact that the first contract of contract of sale of realty must be executed in a public
sale between the private respondents shows that it is in fact an document. In any event, it has been shown that private
equitable mortgage. respondents Veneracion had knowledge of facts which would
put them on inquiry as to the nature of petitioner's occupancy
The requisites for considering a contract of sale with a right of of the disputed lot.
repurchase as an equitable mortgage are:
(1) that the parties entered into a contract denominated HELD: Deed of Sale between Spouses Veneracion and De La
as a contract of sale and Paz is void and ordering the De La Paz execute a deed of
(2) that their intention was to secure an existing debt by absolute sale in favor of Martinez.
way of mortgage
TEOCO v. METROBANK (2008)
Cases where A Contract of Sale with a Right to Repurchase 575 SCRA 82
is Presumed that it is an Equitable Mortgage
Facts: Lydia T. Co, married to Ramon Co, was the registered
1. When the price of a sale with the right to repurchase
owner of two parcels of land. Ramon co mortgaged the said
is unusually inadequate;
parcels of land to Metrobank for a sum of P200K. They were
2. When the vendor remains in possession as lessee or
sold to Metrobank in an extrajudicial foreclosure sale. One year
otherwise;
after the registration of the Certificates of Sale, the titles of the
3. When, upon or after the expiration of the right to
properties were consolidation in the name of Metrobank for
repurchase, another instrument extending the period
failure to redeem within one year.
of redemption or granting a new period is executed;
4. When the purchaser retains for himself a part of the
The brothers Teoco intervened alleging that they are successors
purchase price;
in interest of the Spouses co, and that they had duly and validly
5. When the vendor binds himself to pay the taxes on the
redeemed the subject properties within the reglementary
things sold;
period provided by law. They deposited the amount of P356K
6. In any other case where it may be fairly intended that
to the RTC Clerk of Court. Metrobank refused to accept the
the real intention of the parties is that the transaction
amount alleging that they pay the spouses.
shall secure the payment of a debt or the performance
of any other obligation.
RTC rendered its decision in favor of Teoco for their tender of
payment of P356K was well within the reglementary period of
IN THE CASE: The following circumstances indicate that the
redemption of the foreclosed property which had legally and
private respondents intended the transaction to be an
effectively redeemed the subject properties from Metrobank.
equitable mortgage and not a contract of sale:
CA decided in favor of Metrobank, held that the brothers Teoco SPILLE v. NICORP (2015)
were not able to effectively redeem the subject properties, 773 SCRA 67
because the amount tendered was insufficient, and the brothers
Facts: On June 20, 1966, Petitioner Florentina Spille and Harold
Teoco have not sufficiently shown that the spouses Co’s right
E. Spille executed a document denominated as General Power
of redemption was properly transferred to them.
of Attorney in favor of her brother Benjamin authorizing him
to administer all her businesses and properties in the PH. The
Issue
said document was notarized.
Whether or not the CA erred in holding that the petitioners
have not sufficiently shown that the right of redemption was
On August 13, 2004, Benjamin and NICORP entered into a
properly transferred to them.
contract to sell and agreed amount of P15M. In the said
contract, NICORP agreed to give a downpayment and at the
Sufficiency of Amount Tendered
receipt of such the TCT would be deposited with the IE Bank
We find that neither petitioners, the brothers Teoco, nor
and placed in escrow and that it would only be released upon
respondent, Metrobank, were able to present sufficient
payment upon full payment.
evidence to prove whether the additional loans granted to the
spouses Co by Metrobank were covered by the mortgage
Benjamin was required to submit a special power of attorney
agreement between them.
(SPA) covering the sale, otherwise the payment of the
payment shall be suspended and penalty of P15K monthly shall
In order to prevent any injustice to, or unjust enrichment of, any
be imposed.
of the parties, this Court holds that the fairest resolution is to
allow the brothers Teoco to redeem the foreclosed properties
When Spille discovered the sale, demand letters were sent
based on the amount for which it was foreclosed (P255,441.14
informing her opposing the sale of the property and that
plus interest). Subject to the right of Metrobank to foreclose the
Benjamin was not clothed with authority to enter into a contract
same property to satisfy other loans made by Spouses Co.
to sell and demanding the return of the title to her.
Transfer of Right of Redemption

RTC declared the contract to sell null and void. It explained that
The assignment of the right of redemption only stated that the
the GPA only pertained to acts of administration and did not
spouses Co are transferring the right of redemption to their
include authority to sell the subject property. CA reversed the
parents, brothers, and sisters, but did not specifically include
RTC decision and held that the GPA covered disposition.
the brothers Teoco, who are just brothers-in-law of Ramon Co.
Furthermore, the spouses Co no longer reside in the
Issue
Philippines, and the assignment of the right of redemption was
Whether or not Benjamin was authorized to sell the property.
not properly executed and/or authenticated.
Rules on Agency, Properties and Documents
But, they are also the brothers of Lydia Teoco Co, who is
Article 1874 and 1878 of the Civil Code provides the well-
actually the registered owner of the properties covered.
established rule is when a sale of a parcel of land or any interest
therein is through an agent, the authority of the latter shall be in
Q. Would the exercise by the brothers Teoco of the right to
writing, otherwise the sale is void.
redeem the properties in question be precluded by the fact that
the assignment of right of redemption was not contained in a
It is clear that an SPA in the conveyance of real rights over
public document?
immovable property is necessary. A special power of attorney
is necessary to enter into any contract by which the ownership
COURT REPLY: No. Metrobank never challenged either the
of an immovable is transmitted or acquired either gratuitously
content, the execution or the genuineness of the Assignment
or for a valuable consideration.
of the Right of Redemption, which they are deemed to admit
the same.
Such authority must be conferred in writing and must express
the powers of the agent in clear and unmistakable language in
True it is that the Civil Code requires certain transactions to
order for the principal to confer the right upon an agent to sell
appear in public documents. However, the necessity of a public
the real property.
document for contracts which transmit or extinguish real rights
over immovable property, as mandated by Article 1358 of the
It is a general rule that a power of attorney must be strictly
Civil Code, is only for convenience; it is not essential for validity
construed, and courts will not infer or presume broad
or enforceability.
powers from deeds which do not sufficiently include property
or subject under which the agent is to deal.
HELD: Metrobank would not be prejudiced by the assignment
by. As conceded by Metrobank, the assignees, the brothers
NOTE: Thus, when the authority is couched in general terms,
Teoco, would merely step into the shoes of the assignors.
without mentioning any specific power to sell or mortgage or
Metrobank would not lose any security for the satisfaction of
to do other specific acts of strict dominion, then only acts of
any loan obtained from it by the spouses Co.
administration are deemed conferred.
IN THE CASE: The only evidence adduced by NICORP to prove BITTE v. JONAS (2015)
authority to sell was the General Power of Attorney dated June 777 SCRA 489
20, 1996. The pertinent portions of the document read:
Facts: On 1985, before Rosa Elsa went to Australia, she had
executed a SPA authorizing her mother Andrea to sell the
KNOW ALL MEN BY THESE PRESENTS:
property. Sometime in May 1996, Cipriano (son of Andrea,
THAT I/WE FLORENTINA B. SPILLE, of legal age, single/married to HAROLD E. brother of Rosa Elsa) offered for sale to Spouses Bitte showing
SPILLE and residents of x x x do hereby appoint, name and constitute BENJAMIN them the authority of Andrea.
G. BAUTISTA resident(s) of x x x to be my/our true, lawful and attorney(s), to
administer and conduct all my/our affairs and for that purpose in my/our name(s)
and on my/our behalf, to do and execute any or all of the following acts, deeds On September 1996, Cipriano received from Spouses Bitte the
and things to wit: amount of P200K as advance payment for the property.
1.To exercise administration, general control and supervision over my/our
business and property in the Philippines, and to act as my/our general On October 10, 1996, shortly after her arrival here in the
representative(s) and agent(s) with full authority to buy, sell, negotiate and Philippines, Rosa Elsa revoked the SPA, through an instrument
contract for me/us and my/our behalf; of even date, and handed a copy thereof to Andrea. The next
2. To ask, demand, sue for, recover and receive all sums of money, debts, dues,
day, Spouses Bitte withdrew from the transaction.
goods, wares, merchandise, chattels, effects and thing of whatsoever nature or
description, which now or hereafter shall be or become due, owing, payable or On October 17, 1996, the Spouses Bitte filed before RTC a
belonging to me/us in or by any right, title, ways or means howsoever, and upon
complaint for Specific Performance seeking transfer the
receipt thereof or any part thereof, to make, sign, execute and deliver such
receipts, releases or other discharges ; property. While case pending, Andrea sold the property to the
Spouses Bitte. When Rosa Elsa asked about the sale, her please
No Perfected Contract to Sell Between Spille and NICORP for cancellation and restoration were disregarded.
Nowhere in the General Power of Attorney was Benjamin
granted, expressly or impliedly, any power to sell the subject It was shown that property was earlier mortgaged by Rosa Elsa
property or a portion thereof. The authority expressed in the to the Mindanao Development bank. Upon failure to pay the
General Power of Attorney was couched in very broad terms loan when it matured, the mortgage was foreclosed and sold at
covering petitioner's businesses and properties. a public auction. Armed with the deed of absolute sale executed
by Andrea, Spouses Bitte were able to redeem the property on
Time and again, this Court has stressed that the power of September 14, 1998 from the highest bidder, Thelma Jean
administration does not include acts of disposition, which Salvana, for P1.6 Million Pesos. Bitte sold the property to Yap.
are acts of strict ownership. As such, an authority to dispose
cannot proceed from an authority to administer, and vice versa, RTC dismissed the case directing the Spouses Bitte to pay Rosa
for the two powers may only be exercised by an agent by Elsa. CA reversed for it found that the Deed of Sale void and
following the provisions on agency of the Civil Code. unenforceable for the SPA had already been revoked.
NICORP Not a Purchaser in Good Faith Issue

The well-settled rule is that a person dealing with an assumed Whether or not the transaction by Andrea was valid.
agent is bound to ascertain not only the fact of agency but also
the nature and extent of the agent's authority. The law requires Doubt as to Notarization
higher a degree of prudence from one who buys from a person The National Records Management Office certified that it had
who is not the registered owner. He is expected to examine all no copy on file of the Deed of Sale. Their record shows that,
factual circumstances necessary for him to determine if there instead, the document executed on said date with exactly the
are any flaws in the title of the transferor, or in his capacity to same notarial entries pertained to a Deed of Assignment of
transfer the land. Foreign Letter of Credit in favor of Allied Banking Corporation.
Such irrefutable fact rendered doubtful that the subject deed of
IN THE CASE: NICORP was fully aware that Benjamin was not absolute sale was notarized.
properly authorized to enter into any transaction regarding the
sale of petitioner's property. Titleholder
Article 1358 of Civil Code requires form of contract transmitting
In fact, in the contract to sell, NICORP required Benjamin to or extinguishing real rights over immovable property should be
secure the SPA from petitioner within ninety (90) days from the in a public document. Not having been properly and validly
execution of the contract and even imposed a substantial amount notarized, the deed of sale cannot be considered a public
of penalty in the amount of P150,000.00 a month in case of non- document. It is an accepted, that the failure to observe the
compliance plus suspension of payment of the balance of the proper form does not render the transaction invalid.
contract price.
It has been settled that a sale of real property, though not
HELD: The petition is granted the decision of the Court of consigned in a public instrument or formal writing is,
Appeals is reversed and set aside. The sale engaged by nevertheless, valid and binding among the parties, for the time-
Benjamin to NICORP was held outside the powers in the GPA. honored rule is that even a verbal contract of sale or real estate
produces legal effects between the parties.
Not being considered as a public document, the deed is subject

to the requirement of proof under Rule 132, Section 20 on
proof of private documents, wherein the document offered as
authentic is received in evidence be proved either:
(a) By anyone who saw the document executed or written;
(b) By evidence of the genuineness of the signature or
handwriting of the maker.
Unfortunately, Spouses Bitte were declared as in default and,

for said reason, they failed to discharge such burden in the
court below. Thus, the Court agrees with the CA that the RTC
erred in applying the presumption of regularity that attaches
only to duly notarized documents as distinguished from private
documents. Without the presumption of regularity accorded to
the deed coupled with the default of the party relying much on
the same, the purported sale cannot be considered. It is as if there
was no deed of sale between Spouses Bitte and Spouses Jonas.
Granting Arguendo that the Deed of Sale May Still be

Considered, the Transaction is Still Unenforceable
Basic is the rule that the revocation of an agency becomes
operative, as to the agent, from the time it is made known to
him. Third parties dealing bona fide with one who has been
accredited to them as an agent, however,are not affected by the
revocation of the agency, unless notified of such revocation.
Doctrine of Apparent Authority

Under the said doctrine, acts and contracts of the agent within
the apparent scope of the authority conferred on him, although
no actual authority to do such acts or has been beforehand
withdrawn, revoked or terminated, bind the principal.
IN THE CASE:Records show that Spouses Bitte initially transacted

with Andrea as Rosa Elsa’s agent on the basis of the SPA, dated
July 19, 1985. Thereafter, however, Rosa Elsa returned to the
Philippines and directly negotiated with them on October 11,
1996. Rosa Elsa’s act of taking over in the actual negotiation for
the sale of the property only shows that Andrea’s authority to
act has been revoked pursuant to Article 1924.
At that point, Spouses Bitte had information sufficient enough

to make them believe that Andrea was no longer an agent or
should have compelled them to make further inquiries. No
attempt was shown that Spouses Bitte took the necessary steps
to inquire if Andrea was still authorized to act at that time.
Despite their direct negotiation with Rosa Elsa, they still entered
into a contract with Andrea on February 25, 1997.
Considering that the deed of absolute sale was executed at a

time when Spouses Bitte were deemed notified of the
termination of the agency, the sale must be treated as having
been entered into by Andrea in her personal capacity. One can
sell only what one owns or is authorized to sell, and the buyer
can acquire no more right than what the seller can transfer
legally. Accordingly, Spouses Bitte acquired no better title than
what Andrea had over the property, which was nil. In sum, the
deed of absolute sale executed by Andrea in favor of Spouses
Bitte is unenforceable against Rosa Elsa because of their notice
of the revocation of the agency.
OBLIGATIONS AND CONTRACTS Or the parties may have erroneously given to certain words
Civil Code meaning they do not really have using foreign language
(Tolentino).
Articles 1359-1379
CHAPTER 4 Requisites of Reformation (Paras)

REFORMATION OF INSTRUMENTS 1. There must have been meeting of the minds;
2. The true intention is not expressed in the instrument;
Reformation of Instruments 3. There must be clear and convincing proof thereof;
Reformation is that remedy in equity by means of which a 4. It must be brought within the proper prescriptive
written instrument is made or construed to express or conform period;
to the real intention of the parties when some error or mistake 5. The document must not refer to a simple
has been committed. unconditional donation inter vivos, or to wills, or to a
contract where the real agreement is void.
Reason for Reformation
Equity orders the reformation of an instrument in order that the Requisites of Reformation (Tolentino)
true intention of the contracting parties may be expressed. The 1. There must have been meeting of the minds;
courts do not attempt to make another contract for the parties. 2. The instrument or document evidencing the contract
does not express the true agreement between the
The rationale of the doctrine is that it would be unjust and parties;
inequitable to allow the enforcement of a written instrument 3. The failure of the instrument to express the agreement
which does not reflect or disclose the real meeting of the minds must be due to mistake, fraud, inequitable conduct, or
of the parties. accident.
The rigor of the legalistic rule that a written instrument should Reformation and Annulment, Distinguished
be the final and inflexible criterion and measure of the rights If any of the vices of consent have prevented the meeting of the
and obligations of the contracting parties is thus tempered to minds of the parties, then there is no reformation but rather
forestall the effects of mistake, fraud, inequitable conduct or annulment.
accident (Code Commission).
So here is there was failure on the part of the parties to express
ARTICLE 1359 their intention, so reformation shall be proper.
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 Reformation Annulment
reason of mistake, fraud, inequitable conduct or accident, Presupposes that there is a Minds of the parties did not
one of the parties may ask for the reformation of the valid existing contract meet, or if consent of either
instrument to the end that such true intention may be between the parties, and one was vitiated by
expressed. only the document or violence, intimidation, or
instrument does not mistake so that no real or
If mistake, fraud, inequitable conduct, or accident has
correctly express the terms valid contract was made.
prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment of their agreement.
of the contract. Gives life to the contract Complete nullification of the
upon certain corrections. contract.
Basis of Reformation Tolentino, p. 549
Once the minds of the contracting parties meet, a valid contract Operation and Effect
exists, whether the agreement is reduced to writing or not. The general rule is that it relates back to and takes effect from
the time of its original execution, especially as between the
There are instances where in reducing their agreement to parties.
writing, the true intentions of the contracting parties are not
correctly expressed in the document, either by reason of Accordingly, upon the correction by the court of a deed, the
mistake, fraud, inequitable conduct or accident. equitable title to which is in the vendee, his legal title related
back to its execution and delivery (Tolentino, p. 550).
It is in such cases reformation of instruments is proper. The
ARTICLE 1360
action for such relief rests on the theory that parties came to an
The principles of the general law on the reformation of
understanding but in reducing it into writing, some provisions instrument are hereby adopted insofar as they are not in
was omitted or mistakenly inserted, and the action is to change conflict with the provisions of this Code.
the instrument to make it conform to the contract agreed upon.
NOTE: In case of conflict between the Civil Code and the
The error may consist in that the parties did not intend their principles of the general law on reformation, the former
agreement in the form that it took. For instance, they use the prevails, the latter will only have a suppletory effect (Paras).
word “kilo” instead of “pound.”

When a mutual mistake of the parties causes the failure of When through ignorance, lack of skill, negligence or bad faith
the instrument to disclose their real agreement, said on the part of the person drafting the instrument or of the
instrument may be reformed. clerk or typist, the instrument does not express the true
intention of the parties, the court may order that the
When Reformation Asked Due to Mutual Mistake instrument must be reformed.
1. Mistake should be of a fact;
2. The mistake should be proved by clear and convincing Mistake of the Draftsman
evidence; and The court may order the reformation of the instrument if the
3. That the mistake should be common to both parties instrument does not convey the true intention of the parties
to the instrument. because of the:
a. Ignorance
NOTE: There can be unilateral mistake under the conditions set b. Lack of skill
by Articles 1362 and 1363 of the Civil Code. c. Bad faith of
a. The drafter of the instrument
Illustration b. Or the clerk
A sold to B orally a house at 16 San Isidro, Malate. In the written c. Or the typist
public document, both forgot the true number of the house and
instead wrote on the contract “No. 18 San Isidro, Malate.” Here, ARTICLE 1365
If two parties agree upon the mortgage or pledge of real or
reformation of the instrument is proper.
personal property, but the instrument states that the
property is sold absolutely or with a right of repurchase,
ARTICLE 1362 reformation of the instrument is proper.
If one party was mistaken and the other acted fraudulently
or inequitably in such a way that the instrument does not
Deed Held to be a Mortgage
show their true intention, the former may ask for the
When the intention of the contracting parties was to enter into
reformation of the instrument.
a contract of mortgage, said intention shall prevail although the
Mistake by One Party deed executed seem to be one of sale or sale with a right to
To be a ground for reformation, the fraud or inequitable repurchase. The intention of the parties may be inferred from
conduct of the other party must be clearly shown and must be their simultaneous or subsequent acts, as well as from the
at the time of the execution of the instrument; it may be actual stipulations themselves in the contract.
or constructive.
Thus, the act of the owner of the realty transferred having
Inequitable conduct has been held to consist doing acts or bound himself to return the principal and interest shows that it
omitting to do acts, which the court unconscionable. Like taking was not a sale. The use of the word “debt” in an agreement helps
advantage of one party’s illiteracy (Tolentino). to point out that the transaction of the parties was a loan with
a mortgage because the term implies the existence of a
Illustration creditor-debtor relationship which is not in accord with the
Q. A agreed with B that A would be loaned P10,000,000 by B. In the transaction or sale for it should be vendor-vendee.
contract signed by A and B, it was stated that A was selling his
house to B for said amount. A signed the contract in the belief that ARTICLE 1366
it was really a contract of loan. Who, if any, may ask for the There shall be no reformation in the following cases:
reformation of the instrument if B had acted fraudulently? (1) Simple donations inter vivos wherein no condition
is imposed;
(2) Will;
A. A may ask for the reformation of the instrument because after
(3) When the real agreement is void.
the meeting of the minds, one party (B) acted fraudulently or
inequitably in such a way that the contract does not show their real
When Reformation is Not Allowed
intention.
1. Unconditional simple donations inter vivos
2. Wills
In such a case, the law provides that the person who acted by
mistake may ask for the reformation of the instrument. 3. When real agreement is void
4. One is asking for enforcement of instrument (1367)
ARTICLE 1363 5. Action for reformation has prescribed (1368)
When one party was mistaken, and the other party knew or
believed that the instrument did not state their real Simple Donations
agreement, but concealed the fact from the former, the Donations are essentially acts of pure liberality. However, if the
instrument may be reformed. donation is conditional, reformation may be resorted to so that
the real or true conditions intended by the donor might be
Unilateral Mistake brought out. In case the donation is an onerous one,
(a) Here again, the mistake is unilateral, but the other reformation is very much in order inasmuch as in this case, said
party is guilty of concealment. donation would partake very much of the nature of contracts.
(b) Only the party in good faith can ask for reformation.
Wills CHAPTER 5
The making of a will is strictly a personal act which is free. INTERPRETATION OF CONTRACTS
Moreover, a will may be revoked at any time.
Reason for Interpretation of Contracts
Void Agreement It is true we must apply the terms of the contract, but only
Reformation is not allowed in case the real agreement is void when they are so clear that there is no doubt regarding the
because such a procedure would be useless. Once reformation intention of the contracting parties. But in other cases, we
is made, the new instrument would be void precisely because should apply the rules of interpretation.
the true agreement and intention are void.
ARTICLE 1370
ARTICLE 1367 If the terms of a contract are clear and leave no doubt upon
When one of the parties has brought an action to enforce the the intention of the contracting parties, the literal meaning
instrument he cannot subsequently ask for its reformation. of its stipulations shall control.
Effect of An Action to Enforce the Instrument If the words appear to be contrary to the evident intention of
the parties, the latter shall prevail of the former.
The basis of this article is estoppel, waiver or ratification. One
cannot ask for reformation and at the same time ask for
Rules in Case of Conflict
reformation of the instrument. One is inconsistent with the
In case of conflict between the words of the contract and the
other. One cannot allege that the instrument does not express
evident intention of the parties, the intention must prevail. If
the true intention of the parties and at the same time enforce
there is no conflict, then the literal meaning. It is basic however,
its performance.
that a contract is what the law defines it to be and not what it
is called by the contracting parties. The title of a contract does
Illustration
not necessarily determine its nature.
A sold B a house. A fraudulently made the contract one of mortgage
instead of sale. Both signed the contract of mortgage, with B believing
Intent of the Parties
all the time that it was a contract of sale. B, therefore, has the right to
In the construction of an instrument, the intention of the parties
bring an action for the reformation of the instrument; but if B brings an
action to foreclose the mortgage, he is by said action enforcing the
must be pursued. The true agreement of the parties must be
instrument. He cannot, therefore, subsequently ask for the reformation proved as against the terms and stipulations appearing in a
of the instrument to make it one of sale. written contract where a mistake or imperfection is put in issue.
When the true agreement is established, it must be given effect
ARTICLE 1368 and prevail over the bare words of the written contracts.
Reformation may be ordered at the instance of either party
or his successors in interest, if the mistake was mutual, Proof of Intention
otherwise, upon petition of the injured party, or his heirs and
Such intention must be clear or in other words, besides the fact
assigns.
that such intention should be proved by competent evidence,
Plaintiffs in Action for Reformation the latter must be of such character as to carry the mind of the
(a) If the mistake is mutual, either party or his successors judge in an unequivocal conviction.
in interest;
(b) In all other cases: REFORMATION: Where due to mistake, fraud, inequitable conduct
a. The injured party; or accident, the language used in an instrument does not fully
b. His heirs and assigns; or accurately express the agreement or intention of the parties,
the court will order a reformation.
Prescriptive Period for Reformation is 10 Years
ARTICLE 1371
The period of prescription for the reformation of a contract
In order to judge the intention of the contracting parties,
(such as one ostensibly an absolute sale but a mortgage) is ten
their contemporaneous and subsequent acts shall be
(10) years. principally considered.
ARTICLE 1368 Determining Intent

Reformation may be ordered at the instance of either party The circumstances under which it was made, including the
or his successors in interest, if the mistake was mutual,
situation of the subject thereof and of the parties to it, may be
otherwise, upon petition of the injured party, or his heirs and
assigns. shown, so that the judge may be placed in the position of those
whose language he is to interpret.
Plaintiffs in Action for Reformation
These procedural rules are supposed to be promulgated by the The court may take into consideration the relations existing
Supreme Court. between the parties, their respective situations, the surrounding
circumstances and the purpose and tenor of he whole contract.
When contract is contained in several documents, all of them

must be taken together (Tolentino, 561-562).
ARTICLE 1372 Certain stipulations cannot be segregated and then made to

However general the terms of a contract may be, they shall control; neither do particular words or phrases necessarily
be understood to comprehend things that are distinct and determine the character of the contract. The legal effect of the
cases that are different from those upon which the parties
contract is not to be determined alone by any particular
intended to agree.
provision disconnected from all others, but in the ruling
Scope of General Terms intention of the parties as gathered from all the language they
In the construction of an instrument, when a general and a have used and from their contemporaneous and subsequent
particular provision are inconsistent, the latter is paramount to acts (Tolentino, p.563-564).
the former. A particular intent will control a general one that is
ARTICLE 1375
inconsistent with it. Special intent prevails over a general one.
Words which may have different significations shall be
understood in that which is most in keeping with the nature
The contract cannot be construed so as to include matters and object of the contract.
distinct from those with respect to which the parties intended
to contract. One cannot include a subject matter in Purpose of the Contract
interpretation which is clearly not covered by the parties' When there is doubt as to the meaning of any particular
agreement in a contract (Tolentino, 562). language, it should be determined by a consideration of a
general scope and purpose of the instrument in which it occurs.
Illustration
Q. A sold B his house including “all the furniture therein.” Suppose part Q. If authority is given “to exact payment by legal means,” does
of the furniture belonged to a relative of A who had asked him (A) for this include authority to file actions in court for the recovery of
permission to leave them there temporarily, should such furniture be
sums of money?
included?
A. No, such furniture should not be included, because although the A. Yes. The clause in question means “the power to exact
term “all” is general, still it should “not be understood to comprehend payment of debts due the concerned by means of the
things that are distinct and cases that are different from those upon institution of suits for their recovery. If there could be any doubt
which the parties intended to agree.” as to the meaning of this language taken by itself, it would be
removed by a consideration of the general scope and purpose
ARTICLE 1373 of the instrument in which it concurs
If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import
ARTICLE 1376
which is most adequate to render it effectual.
The usage or custom of the place shall be borne in mind in
the interpretation of the ambiguities of a contract, and shall
Validity, Favored fill the omission of stipulations which are ordinarily
Where the instrument is susceptible of two interpretations, one established.
which will make in invalid and illegal, and another which will
make it valid and legal, latter interpretation should be adopted. Usages or Customs
An instrument may be construed according to usage, in order
Illustration to determine its true character. Where a contract for the lease
Q. A wife exchanged “her house” for a diamond ring. Now the wife had of services did not provide for the amount of the compensation
a house which was her paraphernal property, and another house, which, to be paid this was determined by the rate customarily paid in
however, belonged to the conjugal partnership. The contract entered
the place where the services were rendered (Tolentino, p.565).
into by the wife was against the consent of the husband. To which
house should “her house” refer?
Pleading and Proof of Customs and Usage
A. It should refer to her paraphernal house, because this would validate If the customs and usages are general, they need not be
the contract. If the other interpretation would be followed, the pleaded. Hence, even without previously being alleged, they
exchange would not be valid since the husband had not given consent. may be proved in court.
• If the customs and the usages are merely local, then
ARTICLE 1374 they have to be both alleged (pleaded) and proved.
If the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which
ARTICLE 1377
may result from all of them taken jointly.
The interpretation of obscure words or stipulations in a
contract shall not favor the party who cause the obscurity.
Contract Taken as a Whole
In a construction of an instrument where there are several Obscure Terms Construed
provisions, a construction to be adopted as will give effect to The party who draws up a contract with obscure terms its
all. A contract cannot be construed by parts, but its clauses interpretation shall be against him. In contracts of adhesion
should be interpreted in relation to one another. The whole the doubt must always be resolved against the party who
contract must be interpreted or read together in order to arrive prepared the contract and in favor of the one who merely
at its true meaning (Tolentino, p.563). adhered to it. Contracts of insurance are liberally in favor of the
insured and strictly against insurer (Tolentino, p.566).
ARTICLE 1378
When it is absolutely impossible to settle doubt by the rules
established in the preceding articles, and the doubts refer to
incidental circumstances of a gratuitous contract, the lease
transmission or rights and interest shall prevail. If the
contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.
If the doubts are case 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.
Doubts that Impossible to Settle by Preceding Articles

1. The principal object.
2. Or the incidental circumstances
Doubts as to the Principal Object

Here, the contract is void. If the doubt is in such a way that it
cannot be known what may have been intention or will of the
parties, the contract is null and void.
Doubts as to the Incidental Circumstances

(a) If gratuitous, apply the rule of “least transmission of
rights and interests.”
(b) If onerous, apply the rule of the “greatest reciprocity
of interests.”
Example. If A needs a fountain pen and B gives it to him freely

and gratuitously, is this a donation or commodatum? It is
construed to be of commodatum because it would transmit
lesser rights than a donation.
ARTICLE 1378
The principles of interpretation stated in Rule 123 of the
Rules of Court shall likewise be observed in the construction
of contracts.
NOTE: Rule 123 as stated in the Article should be construed

to refer to Rule 130 of the New Rules on Evidence.
Meaning of Words Used (Rule 130, Section 12)

The terms of a writing are presumed to have been used in their
primary and general acceptation, but evidence is admissible to
show that they have a local, technical, or otherwise peculiar
signification, and were so used and understood in the particular
instance, in which case, the agreement must be construed
accordingly.
Conflict Between Printed and Written Words

When an instrument consists partly of written words and partly
of a printed form, and the two are inconsistent, the former
controls the latter (Section 13).
OBLIGATIONS AND CONTRACTS (4) causes of action of the complaint must have been
Articles 1359-1379 deliberated upon before that court acted hastily in dismissing
this case.
JURISPRUDENCE NOTES
CA: After finding no error in the questioned order nor grave
1359-1369. Reformation of Instruments
abuse of discretion on the part of the trial court that would
amount to lack, or in excess of jurisdiction, denied the petition
BENTIR v. LEANDA (2000)
and affirmed the questioned order. A reconsideration of said
330 SCRA 591
decision was, likewise, denied.
Reformation of an instrument is that remedy in equity by means of
which a written instrument is made or construed so as to express or Issue:
conform to the real intention of the parties when some error or mistake Whether the complaint for reformation has prescribed. (YES)
has been committed. It is predicated on the equitable maxim that
equity treats as done that which ought to be done. The rationale of the Right of Reformation, Concept
doctrine is that it would be unjust and unequitable to allow the The remedy of reformation of an instrument is grounded on the
enforcement of written instrument which does not reflect or disclose
principle of equity where, in order to express the true intention
the real meeting of the minds of the parties.
of the contracting parties, an instrument already executed is
However, an action for reformation must be brought within the period allowed by law to be reformed. The right of reformation is
prescribed by law, otherwise, it will be barred by the mere lapse of time. necessarily an invasion or limitation of the parol evidence rule
The issue in this case is whether or not the complaint for reformation since, when a writing is reformed, the result is that an oral
filed by respondent Leyte Gulf Traders, Inc. has prescribed and in the agreement is by court decree made legally effective.
negative, whether or not it is entitled to the remedy of reformation Consequently, the courts, as the agencies authorized by law to
sought. exercise the power to reform an instrument, must necessarily
exercise that power sparingly and with great caution and
Facts: On May 15, 1992, respondent Leyte Gulf Traders, Inc. zealous care. Moreover, the remedy, being an extraordinary
(private respondent) filed a complaint for reformation of one, must be subject to limitations as may be provided by law.
instrument, specific performance, an annulment of conditional Our law and jurisprudence set such limitations, among which
sale against petitioners Yolanda Bentir and the Spouses is laches.
Pormida.
Prescriptive Period for Reformation is 10 Years
RESPONDENT’s ALLEGATIONS: Leyte Gulf Traders allege that it A suit for reformation of an instrument may be barred by lapse
entered into a contract of lease of a parcel of land with petitioner of time. The prescriptive period for actions based upon a
Bentir for a period of 20 years starting May 5, 1968. According written contract and for reformation of an instrument is ten
to them, the lease was extended for another 4 years or until (10) years under Article 1144 of the Civil Code.
May 31, 1992.
Prescription is intended to suppress stale and fraudulent claims
On May 5, 1989, Bentir sold the leased premises to spouses arising from transactions like the one at bar which facts had
Pormida. Leyte Gulf Traders questioned the sale alleging that it become so obscure from the lapse of time or defective memory.
had a right of first refusal. They sought the reformation of the
expired contract of lease on the ground that its lawyer IN THE CASE: Respondent corporation had ten (10) years from
inadvertently omitted to incorporation in the contract of lease 1968, the time when the contract of lease was executed, to file
of 1968. The verbal agreement of understanding that in the an action for reformation. Sadly, it did so only on May 15, 1992
event Bentir leases or sells the lot after the expiration of the or twenty-four (24) years after the cause of action accrued,
lease, Leyte Gulf trades has the right to equal the highest hence, its cause of action has become stale, hence, time-barred.
offer.
Reckoning Point for Prescription; Question of Extension
PETITIONER’S REPLY: They allege that the Inadvertence of the ASSAILED DECISIONS: CA upholding the RTC held that the 10-year
lawyer who prepared the lease contract is not a ground for prescriptive period should be reckoned not from the execution
reformation. They further contended that respondent of the contract of lease in 1968, but from the date of the alleged
corporation is guilty of laches for not bringing the case for 4-year extension of the lease contract after it expired in 1988.
reformation of the lease contract within the prescriptive period Consequently, when the action for reformation of instrument
of ten (10) years from its execution. was filed in 1992 it was within ten (10) years from the extended
period of the lease. Private respondent theorized, and the Court
RTC: Dismissed the complaint of Leyte Gulf Traders finding that of Appeals agreed, that the extended period of lease was an
the action for reformation had already prescribed. MR was "implied new lease" within the contemplation of Article 1670
granted, reversing the dismissal, stating that the action for of the Civil Code, under which provision, the other terms of the
reformation had not yet prescribed and the dismissal was original contract were deemed revived in the implied new lease.
"premature and precipitate", denying respondent corporation
of its right to procedural due process. The other remaining four
COURT RULE: The court does not agree. The prescriptive period COURT RULING: Although both parties agreed to transfer one-
of ten (10) years provided for in Art. 1144 applies by operation hectare real property, they failed to include in the written
of law, not by the will of the parties. Therefore, the right of document a sufficient description of the property to convey.
action for reformation accrued from the date of execution This error is not one for nullification of the instrument but only
of the contract of lease in 1968. for reformation.
Rules of Court on Reformation of Instrument Reformation of Instruments

Even if we were to assume for the sake of argument that the When, there having been a meeting of the minds of the parties
instant action for reformation is not time-barred, respondent to a contract, their true intention is not expressed in the
corporations action will still not prosper. Under Section 1, Rule instrument purporting to embody the agreement by reason of
64 of the New Rules of Court, an action for the reformation of mistake, fraud, inequitable conduct or accident, one of the
an instrument is instituted as a special civil action for parties may ask for the reformation of the instrument to the
declaratory relief. Since the purpose of an action for declaratory end that such true intention may be expressed.
relief is to secure an authoritative statement of the rights and
obligations of the parties for their guidance in the enforcement If mistake, fraud, inequitable conduct, or accident has prevented
thereof, or compliance therewith, and not to settle issues a meeting of the minds of the parties, the proper remedy is not
arising from an alleged breach thereof, it may be entertained reformation of the instrument but annulment of the contract.
only before the breach or violation of the law or contract to
which it refers. Reformation is a remedy in equity whereby a written instrument
is made or construed so as to express or conform to the real
Here, respondent corporation brought the present action for intention of the parties where some error or mistake has been
reformation after an alleged breach or violation of the contract committed. In granting reformation, the remedy in equity is not
was already committed by petitioner Bentir. Consequently, the making a new contract for the parties but establishing and
remedy of reformation no longer lies. perpetuating the real contract between the parties which, under
the technical rules of law, could not be enforced but for such
HELD: The petition is hereby GRANTED. The Decision of the reformation.
Court of Appeals dated January 17, 1997 is REVERSED and SET
ASIDE. The Order of the Regional Trial Court of Tacloban City, Requisites of Reformation
Branch 7, dated December 15, 1995 dismissing the action for 1. There must have been a meeting of minds of the
reformation is REINSTATED. parties to the contract;
2. The instrument does not express the true intention of
VILLEGAS v. ARJONA (2004) the parties; and
425 SCRA 57 3. The failure of the instrument to express the true
intention of the parties due to mistake, fraud,
Facts: In December 1996, Quiros and Villegas filed with the inequitable conduct or accident.
office of the Barangay Captain of Labney, Pangasinan, a
complaint for recovery of ownership and possession of a parcel IN THE CASE:The inability of the municipal court to identify the
of land. exact location of the inherited property did not negate the
principal object of the contract.
Petitioners sought to recover from their uncle Marcelo Arjona,
one of the respondents herein, their lawful share of the This is an error occasioned by the failure of the parties to
inheritance from their late grandmother Rosa Arjona Quiros. describe the subject property, which is correctible by
reformation and does not indicate the absence of the principal
In 1997, an amicable settlement was reached between the object as to render the contract void. It cannot be disputed that
parties. By reason thereof, respondent Arjona executed a the object is determinable as to its kind and can be determined
document denominated as "PAKNAAN" ("Agreement", in without need of a new contract or agreement.
Pangasinan dialect). Petitioners filed a complaint with the MCTC
with prayer for the issuance of a writ of execution of the MARTIRES v. CHUA (2013)
compromise agreement which was denied because the subject 694 SCRA 38
property cannot be determined with certainty.
Facts: Subject of the controversy are twenty-four memorial lots
The RTC reversed the decision of the municipal court on appeal at Holy Cross Memorial Park in Quezon. Respondent Chua
and ordered the issuance of the writ of execution. Respondents together with her mother, Florencia R. Calagos own the
appealed to the CA, which reversed the decision of the RTC and disputed property. In 1995, the respondent borrowed from
reinstated the decision of the MCTC Spouses Martires P150K secured by a REM. They failed to settle
the obligation. Subsequently, without foreclosure of the
Issue mortgage, ownership of the subject lots were transferred in the
Whether failure to include in Paknaan a sufficient description of name of petitioners via a Deed of Transfer. A case was filed for
the property to convey calls for reformation. (YES). the interest rates were unjust and exorbitant.
RTC ruled in favor of the Spouses. CA ruled that respondent SBC filed a claim with LIC based on its existing insurance policy.
voluntarily entered into a contract of loan and that the LIC denied the claim for indemnification on August 5, 1992, on
execution of the Deed of Transfer is sufficient evidence of the ground that the loss suffered by SBC fell under the general
petitioners' acquisition of ownership of the subject property. exceptions to the policy, in view of the alleged involvement of
CA MR ruled that the Deed of Transfer was in fact an equitable PISA’s two security guards.
mortgage.
Issue
Issue What is the proper interpretation of Paragraph 5(e) of their
Whether or not the Deed of Transfer is an equitable mortgage. Post-Robbery Agreement (PRA)?
It was an Equitable Mortgage The paragraph provides:

An equitable mortgage is one which, although lacking in some The parties hereto further agree that this agreement and/or payment
formality, or form or words, or other requisites, reveals the of the whole amount of P3,027,728.01, shall not affect or prejudice,
intention of the parties to charge real property as security for directly or indirectly, whatever cause of action SBC may have against
PISA and whatever claim or defense the latter may have against SBC, if
a debt, there being no impossibility nor unlawful.
the maximum recoverable proceeds of the insurance covering the loss
suffered by SBC could not be recovered from the insurer.
One of the circumstances provided under Article 1602 is that
“where it may be fairly inferred that the real intention of the Indeed, the clear import of paragraph 5(e) of the PRA is that
parties is that transaction shall secure the payment of a debt or recovery of the insurance proceeds would affect or prejudice
the performance of any other obligation.” SBC’s claim against PISA. If LIC had granted SBC’s claim for
indemnity, then SBC could no longer claim the same amount
IN THIS CASE: It has been established that the intent of both from PISA. As a corollary, it is only upon LIC’s denial of SBC’s
petitioners and respondent is that the subject property shall claim that SBC’s right of action against PISA could accrue. To
serve as security for the latter's obligation to the former. As rule otherwise would be to countenance SBC’s double recovery
correctly pointed out by the CA, the circumstances surrounding from its loss and lead to its unjust enrichment.
the execution of the disputed Deed of Transfer would show
that the said document was executed to circumvent the terms Words Presumed in their Primary and General Acceptance
of the original agreement and deprive respondent of her We hold that reading the clause as requiring a final judgment
mortgaged property without the requisite foreclosure. is a strained interpretation and contrary to settled rules of
interpretation of contracts. Paragraph 5(e) only requires that
The original transaction between the parties was a mortgage, the proceeds “could not be recovered from the insurer,” and
the subsequent assignment of ownership of the subject lots to does not state that it should be so declared by a court, or even
petitioners without the benefit of foreclosure proceedings, with finality.
partakes of the nature of a pactum commissorium.
In determining the signification of terms, words are presumed
1370-1379. Interpretation of Contracts to have been used in their primary and general acceptance, and
there was no evidence presented to show that the words used
SECURITY BANK v. COURT OF APPEALS (2007) signified a judicial adjudication. Indeed, if the parties had
515 SCRA 63
intended the non-recovery to be through a judicial and final
adjudication, they should have stated so. In its primary and
Facts: SBC and PISA entered into a Contract of Security
general meaning, paragraph 5(e) would cover LIC’s extrajudicial
Services whereby PISA undertook to secure, guard and protect
denial of SBC’s claim.
the personnel and property of SBC through deployment of
qualified guards. Whereby the negligence shall make them
INTERPRETATION: The express inclusion of these provisions—
liable for the loss, damage or injury.
particularly those relating to the liability of PISA for the willful
or negligent acts of its guards, or its failure to exercise diligence,
On 1992, the Taytay Branch Office was robbed of P12M among
and the right of SBC to hold PISA liable— speaks of SBC’s
the suspects were the two regular security guards of PISA. At the
diligence in ensuring that notwithstanding the PRA and the
time SBC Taytay Branch was covered by insurance by Liberty
partial payment by PISA, SBC’s right of action against PISA for
Insurance Corporation (LIC) whereby it would reimburse to a
its liabilities under the CSS is preserved.
maximum of P9.9M.
SBC may have agreed to delay the suit against PISA until after
On June 23, 1992, SBC and PISA entered into a Post-Robbery
the former’s claim for indemnity against LIC has been decided,
Agreement (PRA) whereby PISA paid PHP3, 027,728.01, which
but it is far-fetched to believe that SBC agreed to hold such
was the difference between the total amount lost and the
right of action in abeyance until after a legal claim against LIC
maximum amount insured. PISA made the payment in the
had been adjudicated. This conclusion is further bolstered by
interest of maintaining good relations, without necessarily
the following material events: robbery, SBC demand, PRA
admitting its liability for the loss suffered by SBC by reason of
execution, denial of letter and claim of indemnity.
the Taytay robbery.
FORTUNE MEDICARE v. AMORIN (2014) For its part, Fortune Care argued that the Health Care Contract
719 SCRA 133 did not cover hospitalization costs and professional fees
incurred in foreign countries, as the contract’s operation was
FACTS: David Robert U. Amorin (Amorin) was a confined to Philippine territory. Further, it argued that its
cardholder/member of Fortune Medicare, Inc. (Fortune liability to Amorin was extinguished upon the latter’s
Care), a corporation engaged in providing health maintenance acceptance from the company of the amount of P12,151.36.
services to its members. The terms of Amorin’s medical
coverage were provided in a Corporate Health Program ISSUE: Whether the CA gravely erred in concluding that the
Contract (Health Care Contract). which was executed on phrase “approved standard charges” is subject to
January 6, 2000 by Fortune Care and the House of interpretation, and that it did not automatically mean
Representatives, where Amorin was a permanent employee. “Philippine Standard”
While on vacation in Honolulu, Hawaii, United States of America HELD: The Court denies the Petition of Fortune Medicare.
(U.S.A.) in May 1999, Amorin underwent an emergency The Court finds no cogent reason to disturb the CA’s finding
surgery, specifically appendectomy, at the St. Francis Medical that Fortune Care’s liability to Amorin under the subject Health
Center, causing him to incur professional and hospitalization Care Contract should be based on the expenses for hospital and
expenses of US$7,242.35 and US$1,777.79, respectively. professional fees which he actually incurred, and should not be
limited by the amount that he would have incurred had his
He attempted to recover from Fortune Care the full amount emergency treatment been performed in an accredited hospital
thereof upon his return to Manila, but the company merely in the Philippines.
approved a reimbursement of P12,151.36, an amount that was
based on the average cost of appendectomy, net of medicare When the terms of insurance contract contain limitations
deduction, if the procedure were performed in an accredited on liability, courts should construe them in such a way as to
hospital in Metro Manila. preclude the insurer from noncompliance with his
obligation. Being a contract of adhesion, the terms of an
Amorin received under protest the approved amount, but insurance contract are to be construed strictly against the
asked for its adjustment to cover the total amount of party which prepared the contract — the insurer.
professional fees which he had paid, and eighty percent (80%)
of the approved standard charges based on “American By reason of the exclusive control of the insurance company
standard,” considering that the emergency procedure occurred over the terms and phraseology of the insurance contract,
in the U.S.A. ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture.
To support his claim, Amorin cited Section 3, Article V on
Benefits and Coverages of the Health Care Contract, to wit: This is equally applicable to Health Care Agreements. The
A. EMERGENCY CARE IN ACCREDITED HOSPITAL. Whether as an phraseology used in medical or hospital service contracts,
in-patient or out-patient, the member shall be entitled to full
such as the one at bar, must be liberally construed in favor
coverage under the benefits provisions of the Contract at any
of the subscriber, and if doubtful or reasonably susceptible
FortuneCare accredited hospitals subject only to the pertinent
provision of Article VII (Exclusions/Limitations) hereof. For of two interpretations the construction conferring
emergency care attended by non-affiliated physician (MSU), the coverage is to be adopted, and exclusionary clauses of
member shall be reimbursed 80% of the professional fee which doubtful import should be strictly construed against the
should have been paid, had the member been treated by an provider.
affiliated physician. The availment of emergency care from an
unaffiliated physician shall not invalidate or diminish any claim In the case; the extent of Fortune Care’s liability to Amorin
if it shall be shown to have been reasonably impossible to obtain
under the attendant circumstances was governed by Section
such emergency care from an affiliated physician.
3(B), Article V of the subject Health Care Contract, considering
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
i. Whether as an in-patient or out-patient, Fortune Care shall that the appendectomy which the member had to undergo
reimburse the total hospitalization cost including the qualified as an emergency care, but the treatment was
professional fee (based on the total approved charges) to a performed at St. Francis Medical Center in Honolulu, Hawaii,
member who receives emergency care in a nonaccredited U.S.A., a nonaccredited hospital. We restate the pertinent
hospital. The above coverage applies only to Emergency portions of Section 3(B):
confinement within Philippine Territory. However, if the “However, if the emergency confinement occurs in foreign territory,
emergency confinement occurs in a foreign territory, Fortune Care will be obligated to reimburse or pay eighty (80%)
Fortune Care will be obligated to reimburse or pay eighty percent of the approved standard charges which shall cover the
(80%) percent of the approved standard charges which hospitalization costs and professional fees. x x x”
shall cover the hospitalization costs and professional
fees. x x x
The point of dispute now concerns the proper interpretation of
the phrase “approved standard charges,” which shall be the
Still, Fortune Care denied Amorin’s request, prompting the
base for the allowable 80% benefit.
latter to file a complaint for breach of contract with
damages with the Regional Trial Court (RTC) of Makati City.
The RTC ruled that the phrase should be interpreted in light of Philippines, the amount payable by Fortune Care should not be
the provisions of Section 3(A), i.e., to the extent that may be limited to the cost of treatment in the Philippines, as to do so
allowed for treatments performed by accredited physicians in would result in the clear disadvantage of its member.
accredited hospitals. As the appellate court however held,
this must be interpreted in its literal sense, guided by the rule Hence when Fortune Care found updated its new health care
that any ambiguity shall be strictly construed against Fortune agreement with the House of Representatives, particularly in
Care, and liberally in favor of Amorin. their 2006 agreement, the provision on emergency care in
nonaccredited hospitals was modified to read as follows:
The Court agrees with the CA. As may be gleaned from the
Health Care Contract, the parties thereto contemplated the “However, if the emergency confinement occurs in a
possibility of emergency care in a foreign country. As the foreign territory, Fortunecare will be obligated to
contract recognized Fortune Care’s liability for emergency reimburse or pay one hundred (100%) percent under
treatments even in foreign territories, it expressly limited its approved Philippine Standard covered charges for
liability only insofar as the percentage of hospitalization and hospitalization costs and professional fee x x x”
professional fees that must be paid or reimbursed was
concerned, pegged at a mere 80% of the approved charges. Settled is the rule that ambiguities in a contract are
interpreted against the party that caused the ambiguity.
The word “standard” as used in the cited stipulation was “Any ambiguity in a contract whose terms are suspectible
vague and ambiguous, as it could be susceptible of of different interpretations must be read against the party
different meanings. Plainly, the term “standard charges” could who drafted it."
be read as referring to the “hospitalization costs and
professional fees” which were specifically cited as compensable The Petition of Fortune Medicare is denied.
even when incurred in a foreign country. Contrary to Fortune
Care’s argument, from nowhere in the Health Care Contract ST. RAPHAEL MONTESSORI SCHOOL v. BPI (2015)
773 SCRA 419
could it be reasonably deduced that these “standard charges”
referred to the “Philippine standard,” or that cost which would Facts: Spouses Andaya are the President and Vice-President of
have been incurred if the medical services were performed in St. Raphael Montessori. From 1994-1998, St. Raphael
an accredited hospital situated in the Philippines. Montessori and as security for the loan, they executed real
estate mortgages over a parcel of land. They defaulted, and BPI
The RTC ruling that the use of the “Philippine standard” could foreclosed the property. A Certificate of Sale was issued.
be inferred from the provisions of Section 3(A), which covered
emergency care in an accredited hospital, was misplaced. When they failed to redeem the mortgaged property, BPI
Evidently, the parties to the Health Care Contract made a clear executed an Affidavit of Consolidation and Writ of
distinction between emergency care in an accredited hospital, Possession ordering the sheriff to place and subject property
and that obtained from a nonaccredited hospital. and all its improvement under possession of BPI.
The proper interpretation of the phrase “standard charges” Spouses Andaya asked for deferment of implement and
could instead be correlated with and reasonably inferred executed an Undertaking wherein they:
from the other provisions of Section 3(B), considering that 1. Acknowledged BPI ownership of property;
Amorin’s case fell under the second case, i.e., emergency 2. Promised to vacate all premises and remove all the
care in a nonaccredited hospital. Rather than a determination movables from the same on or before 25 September
of Philippine or American standards, the first part of the 2005;
provision speaks of the full reimbursement of “the total 3. Voluntarily and peacefully surrender property without
hospitalization cost including the professional fee (based on necessity of demand on or 23 September 2005
the total approved charges) to a member who receives 4. Promised to not take advantage of the
emergency care in a nonaccredited hospital” within the accommodation extended to them to secure any
Philippines. remedy from the courts.
Thus, for emergency care in nonaccredited hospitals, this cited However, the Spouses Andaya failed to vacate such subject
clause declared the standard in the determination of the property, despite BPI’s reminder to their commitment. They
amount to be paid, without any reference to and regardless of refused to turn over its possession. St. Raphael filed a Motion
the amounts that would have been payable if the treatment was to Quash the Writ of Possession. It was granted.
done by an affiliated physician or in an affiliated hospital. For
treatments in foreign territories, the only qualification was only BPI then filed to the CA stating that there is grave abuse of
as to the percentage, or 80% of that payable for treatments discretion amounting to lack or excess of jurisdiction when it
performed in nonaccredited hospital. issued the assailed Order. CA reversed the RTC decisions and
denied, it declared that the Writ of Possession is valid and
All told, in the absence of any qualifying word that clearly enforceable.
limited Fortune Care’s liability to costs that are applicable in the
Issue Real Estate Mortgage is Law Between Parties;

Whether a writ of possession that was issued ex-parte as a Literal Meaning Shall Control
result of the foreclosure of the mortgages executed by the Suffice it to say that in all of the real mortgage agreements27
Spouses Andaya on the subject property can be enforced and executed by BPI and the Spouses Andaya in favor of St. Raphael,
utilized by BPI to oust St. Raphael from the physical possession it was clearly and commonly stipulated that the parties intend
of its school buildings built on the same subject property. to include the improvements or buildings erected or to be
erected in the subject lot, to wit:
COURT RULING: We rule in the affirmative.
x x x the MORTGAGOR does hereby transfer and convey by way of
Writ of Possession is a Matter of Right mortgage unto to MORTGAGEE, its successors or assigns, the parcel of
Jurisprudence is replete with cases holding that the issuance of land which are described in the list inserted on the back of this
document and/or appended hereto, together with all the buildings
a writ of possession to a purchaser in a public auction is a
and improvements now existing or which may hereafter be erected
ministerial function of the court which cannot be enjoined or or constructed thereon, of which the MORTGAGOR declares that he/it
restrained. Once title to a property has been consolidated in the is the absolute owner free from lien and encumbrances. x x x
buyer’s name upon failure of the mortgagor to redeem the
property within the one-year redemption period, the writ of It is a cardinal rule in the interpretation of a contract that if its
possession becomes a matter of right belonging to the buyer. terms are clear and leave no doubt on the intention of the
contracting parties, the literal meaning of its stipulation shall
Its right to possession has then ripened into the right of a control. In the absence of proof that the parties intended
confirmed absolute owner and the issuance of the writ otherwise, we will not delve to interpret the terms of the contract
becomes a ministerial function that does not admit of the which are unequivocal as to the intention of the parties.
exercise of the court’s discretion. The court, acting on an
application for its issuance, should issue the writ as a matter of HELD: Petition is denied the decision of the court of appeals
course and without any delay. finding the validity of the Writ of Possession is affirmed.
IN THE CASE: In the case, after consolidation, issuance of TCT, has CENTURY PROPERTIES, INC. v. BABIANO
the right to possession as incident to ownership. The right to 795 SCRA 671
possess a property merely follows the right of ownership, and
it would be illogical to hold that a person having ownership of Facts: Babiano was hired by Century as Director of Sales and
a parcel of land is barred from seeking possession thereof. eventually as VP for Sale. Babiano was remunerated with the
following benefits of such:
Mortgage and Foreclosure Shall Cover Not Only a. Monthly salary of P70,000
Hypothecated Property but All its b. 0.5% override commission for complete sales.
Accessions and Accessories as Well
CONTENTION: St. Raphael argues that they were not a party to His employment contract contained a Confidentiality of
the real estate mortgage nor its claim that the mortgage does Documents and Non-Compete Clause which barred him from
not include the building allegedly owned by it. disclosing confidential information, and from working in any
business enterprise that is in direct competition with CPI "while
COURT REPLY: It has no leg to stand on. When the principal [he is] employed and for a period of one year from date of
property is mortgaged, the mortgage shall include all resignation or termination from [CPI]." Should Babiano breach
natural or civil fruits and improvements found thereon. any of the terms thereof, his "forms of compensation, including
Consequently, in case of non-payment of the secured debt, commissions and incentives will be forfeited.
foreclosure proceedings shall cover not only the hypothecated
property but all its accessions and accessories as well. During the same period, Concepcion was initially hired as Sales
Agent by CPI and promoted as Project Director. She signed an
Thus, improvements constructed by the mortgagor on the employment agreement which provided that:
subject lot covered by the real estate mortgage contract with • She would directly report to Babiano;
the mortgagee bank are included in the foreclosure proceedings • Receive monthly subsidy of P60,000;
instituted by the latter. • 0.5% commission and cash incentives
It was stipulated that no employer-employee relationship exists
Exception: It need not only be possessed by a third party, but between Concepcion and CPI.
also held by the third party adversely to the judgment obligor.
After receiving reports that Babiano provided a competitor
IN THIS CASE:St. Raphael could not be considered as an adverse with information regarding CPFs marketing strategies, spread
claimant in the absence of proof showing any adverse title or false information regarding CPI and its projects, recruited CPI's
claim of ownership on the subject lot. There absence proving personnel to join the competitor, and for being absent without
such ownership and it appears that Spouses Andaya were the official leave (AWOL) for five (5) days, CPI, through its Executive
original incorporators. Vice President for Marketing and Development, Jose Marco R.
Antonio (Antonio), sent Babiano a Notice to Explain.
However, in 2009, Babiano tendered resignation and revealed HELD: The Court thus holds that the commissions of Babiano
that he had been accepted as Vice President of First Global BYO were properly forfeited for violating the "Confidentiality of
Development Corporation (First Global), a competitor of CPI.19 Documents and Non-Compete Clause."
On March 3, 2009, Babiano was served a Notice of Termination.
RODRIGUEZ v. SIOSON (2016)
Century Properties maintained that the withholding of his 798 SCRA 526
commission and forfeiting them was because Babiano was in
violation of the confidentiality clause. Issue at Hand: The resolution of this case basically rests on the
determination of whether the transaction between Neri and
Labor Arbiter (LA) ruled in favor of CPI. NLRC reversed and set Thelma is a contract of sale or a contract to sell. There exist two
aside and it ruled that the confidentiality clause is unreasonable deeds of absolute sale, thought identically worded:
and contrary to law. CA affirmed NLRC ruling. 1. The first contract was undated, not notarized, signed
only by Neri, and was presented in Civil Case No. 7394
Issue for Injunction
Whether or not the Confidentiality of Documents and 2. The second deed was dated April 10, 1997, notarized
Non-Compete Clause is valid. on September 5, 1997, signed by both Neri and
Thelma, and was presented in Civil Case No. 7664 for
Interpretation of Contract, Article 1370 Declaration of Nullity of Deed of Sale and Title.
Article 1370. If the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal Documents are Contract to Sell
meaning of its stipulations shall control. The two documents, coupled with Thelma’s own admissions
that contracts were contracts to sell. Thelma explained the
If the words appear to be contrary to the evident intention of apparent disparity between the two (2) "deeds of absolute sale"
the parties, the latter shall prevail over the former. by testifying that the undated and unnotarized deed of sale
served only as a "receipt" which was signed by Neri when the
In the interpretation of contracts, the Courts must first latter received the downpayment for the lot. The dated and
determine whether a provision or stipulation therein is notarized deed of sale, on the other hand, was signed by both
ambiguous. Absent such, literal meaning is binding. Thelma and Neri upon Thelma's alleged full payment.
IN THE CASE: CPI primarily invoked the "Confidentiality of Despite the denomination of their agreement as one of sale,
Documents and Non-Compete Clause" found in Babiano's the circumstances tend to show that Neri agreed to sell the
employment contract to justify forfeiture of his commissions. subject property to Thelma on the condition that title and
The pertinent portion reads in part: ownership would pass or be transferred upon the full payment of
the purchase price. [Article 1371 of the Civil Code; subsequent
X X X And in order to ensure strict compliance herewith, you shall not and contemporaneous acts show the intent of contract to sell.]
work for whatsoever capacity, either as an employee, agent or
consultant with any person whose business is in direct competition with This is the very nature of a contract to sell, which is a "bilateral
the company while you are employed and for a period of one year from contract whereby the prospective seller, while expressly reserving
date of resignation or termination from the company. X X X
the ownership of the property despite delivery thereof to the
prospective buyer, binds himself to sell the property exclusively
Here the clause is not only clear and ambiguous, but it also
to the prospective buyer upon fulfillment of the condition agreed
expressly provided in no uncertain terms that breach shall result
upon, i.e., the full payment of the purchase price.
of forfeiture.
PNB v. ALONDAY (2016)
Babiano held a highly sensitive and confidential managerial 805 SCRA 657
position as he "was tasked, among others, to guarantee the
achievement of agreed sales targets for a project and to ensure Facts: In 1974, the Spouses Alonday obtained an agricultural
that his team has a qualified and competent manpower loan of P28K from PNB at its Digos, Davao del Sur Branch and
resources by conducting recruitment activities, training secured by REM over a property in Sta. Cruz, Davao Del Sur.
sessions, sales rallies, motivational activities, and evaluation
programs." In 1980, the Spouses Alonday obtained a commercial loan for
P16.7K from PNB Davao Branch and constituted a REM over
Hence, to allow Babiano to freely move to direct competitors the lot in Ulas, Davao City. They fully paid this loan.
during and soon after his employment with CPI would make the
latter's trade secrets vulnerable to exposure, especially in a Thus, the children of the Spouses demanded the release of the
highly competitive marketing environment. As such, it is only mortgage of the Davao Property but PNB informed them that
reasonable that CPI and Babiano agree on such stipulation in because the agricultural loan was not paid the Davao del Sur
the latter's employment contract in order to afford a fair and Property was foreclosed and that it had deficiency thus PNB
reasonable protection to CPI. applied for foreclosure on the Davao Property.
The Davao Property was sold on September 28, 1984 to the To reiterate, in order for the all-embracing or dragnet clauses
petitioner in the amount of P29,900.00. Since the Alondays to secure future and other loans, the loans thereby secured
were unable to redeem the property, the petitioner must be sufficiently described in the mortgage contract.
consolidated its ownership.
Considering that the agricultural loan had been pre-existing
According to PNB, the deed of mortgage related to Davao when the mortgage was constituted on the Davao property, it
Property included an all-embracing clause (Dragnet Clause) would have been easy for the petitioner to have expressly
whereby the mortgage secured not only commercial loan but incorporated the reference to such agricultural loan in the
also the agricultural loan. mortgage contract covering the commercial loan. But the
petitioner did not.
CA ruled that the second mortgage was a contract of
adhesion which should be construed strictly against the Being the party that had prepared the contract of
petitioner as the party who drafted the same. mortgage, its failure to do so should be construed that it
did not at all contemplate the earlier loan when it entered
Issue into the subsequent mortgage [Article 1377, Civil Code].
What is the scope of the dragnet clause in second mortgage?
COURT RULING: Appeal lacks merit.
The Dragnet Clause; Applicability to Future Loans

The mortgage provision relied upon by appellant is known in
American jurisprudence as a "dragnet" clause, which is
specifically phrased to subsume all debts of past or future origin
which must be carefully scrutinized and strictly construed.
There is no question, indeed, that all-embracing or dragnet

clauses have been recognized as valid means to secure debts of
both future and past origins. Even so, we have likewise
emphasized that such clauses were an exceptional mode of
securing obligations and have held that obligations could only
be deemed secured by the mortgage if they came fairly within
the terms of the mortgage contract.
For the all-embracing or dragnet clauses to secure future

loans, therefore, such loans must be sufficiently described in
the mortgage contract.
If the requirement could be imposed on a future loan that was

uncertain to materialize, there is a greater reason that it should
be applicable to a past loan, which is already subsisting and
known to the parties.
IN THE CASE: It was undeniable that the petitioner had the

opportunity to include some form of acknowledgement of the
previously subsisting agricultural loan in the terms of the second
mortgage contract.
The mere fact that the mortgage constituted on Davao Property

made no mention of the pre-existing loan could only
strongly indicate that each of the loans of the Spouses
Alonday had been treated separately by the parties
themselves, and this sufficiently explained why the loans had
been secured by different mortgages.
Another indication that the second mortgage did not extend to

the agricultural loan was the fact that the second mortgage was
entered into in connection only with the commercial loan.
OBLIGATIONS AND CONTRACTS Distinction of Rescission from Articles 1191 and 1381
Civil Code Rescission (1381) Rescission (1191)
Articles 1380-1389 Similarities
Both presuppose contracts validly entered into and existing,
CHAPTER 6 which makes it different from voidable contracts due to the
RESCISSIBLE CONTRACTS defect which vitiates contracts.
Both require mutual restitution when declared proper.
Four Kinds of Defective Contracts
Differences
There are four kinds of defective contracts, by defective
Based on lesion or fraud Based on breach of faith of
meaning by which they can be invalidated:
upon creditors. fulfillment of obligation.
1. Rescissible Contract – it is valid until rescinded; there
is sort of extrinsic defect consisting of an economic
A subsidiary remedy. A principal remedy.
damage or lesion.
May be demanded by a third May be demanded only by a
2. Voidable Contract – it is valid until it is annulled. It
party prejudiced by the party to the contract.
can be annulled. It cannot be annulled, however, if
contract.
there has been a ratification. The defect is more or less
Such reason does not affect It may denied by the court
intrinsic, as in the case of vitiated consent.
the right to ask rescission when there is sufficient
3. Unenforceable Contract – it cannot be sued upon or
under this chapter reason to justify the
enforced unless ratified. In a way, it may be considered
extension of time to the
as a validable transaction, that is, it has no effect now,
defendant in which to
but it may be effective upon ratification.
perform
4. Void Contract – It is one that has no effect all, it
There are various reasons of Non-performance is the
cannot be ratified or validated.
equity provided as grounds only ground for the right to
for rescission. rescission under Article
Rescissible Contracts
1191.
They are valid contracts, of the four defective kinds of contracts,
rescissible contracts occupy the highest echelon. The contracts
Non-performance by the Non-performance by the
are valid but by reason of economic injury caused to either one
other party is immaterial. other party is important.
of the parties, or to a third person, the contract has to be
Rescission under this Applies only to reciprocal
rescinded. Unlike 1191, the ground here is economic injury
chapter applies whether the where one party has not
rather breach of performance.
contract produces unilateral performed.
ARTICLE 1380 or reciprocal obligations.
Contracts validly agreed upon ay be rescinded in the cases
established by law. Requisites for Rescission (Paras)
1. There must be at the beginning either a valid or a
Rescission, Concept voidable contract (not a void one);
Rescission is a remedy granted by law to the contracting parties 2. But there is an economic or financial prejudice to
and even to third persons, to secure the reparation of damages someone (a party or a third person);
caused to them by a contract, even if this should be valid, by 3. Requires mutual rescission.
means of restoration of thing to their condition at the moment
prior to the celebration of the said contract. Requisites for Rescission (Tolentino)
1. The contract must be a rescissible contract, such as
It is a relief for the protection of one of the contracting parties those mentioned under Articles 1381 and 1382;
and third persons from all injury and damage the contract may 2. The party asking for rescission must have no legal
cause, or to protect some incompatible and preferent created means to obtain reparation for damage suffered by
by the contract. him (1383);
3. The person demanding rescission must be able to
It implies a contract which, even if initially valid, produces a return whatever he may be obliged to restore if
lesion or pecuniary damage to someone. It sets aside the act or rescission is granted (1385);
contract for justifiable reasons of equity. 4. The things which are the object of the contract must
not have passed legally to the possession of a third
Nature of a Rescissible Contract person acting in good faith (1385);
The present article means that even if a contract is valid, it can 5. The action for rescission must be brought within the
be rescinded, but does not limit rescission to valid contracts. prescriptive period of four years (1389).
Rescission is perfectly compatible with the validity of the
contract, but it does not require such validity as an essential NOTE: A rescissible contract is not void, thus in the meantime
condition. Hence, a voidable contract may also be rescinded. it can convey a title. However, a fictitious contract cannot be
They are rescissible due to extrinsic factors such as lesion or rescinded.
economic injury.
ARTICLE 1381 4. That the act being impugned is fraudulent and under;
The following contracts are rescissible: 5. That the third person who received the property
(1) Those which are entered into by the guardians conveyed, if it is by onerous title, has been an
whenever the wards whom they represent suffer
accomplice in the fraud (existence of bad faith).
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, Instance. To defraud his creditor, A sold his house to X. When
if the latter suffer the lesion stated in the preceding however, the creditor wanted to collect his credit, somebody
number; lent A enough money. It cannot rescinded because here the
(3) Those undertaken in fraud of creditors when the creditor can still collect the claim due him.
latter cannot in any manner collect the claims due
them;
Nature of Transfer, Important Dimension
(4) Those which refer to things under litigation if they
have been entered into by the defendant without It would be important to note the nature if it is onerous or
the knowledge and approval of the litigant or of gratuitous and if the transfer is in good faith or bad faith.
competent judicial authority;
(5) All other contracts specially declared by law to be (a) If an onerous transfer, it would then matter if there is
subject to rescission. good faith or bad faith.
Rescission on Legal Grounds a. If onerous and in good faith, then the

A valid contract can be rescinded for legal cause. This article creditor prejudiced could no longer ask for
enumerates the various contracts that may be rescinded. the rescission due to the transfer in good
faith, his only recourse is to ask damages.
I. Contracts with Lesion in Behalf of Wards
Modern legislation does not favor rescission on account of i. Exception: Even if first transferee
lesion because goods do not have a fixed true value. Such acted in good faith but subsequent
lesion then merely raises presumption of undue influence that transferee was in bad faith and
vitiates consent and renders contract voidable when the lesion there is collusion with original
is coupled with exploitation of others. transferor and the second
transferee using the first transferee
Effects of Contracts Entered into in Behalf of Ward as bridge then there can be
1. If an act of ownership, court approval is required, rescission in this case.
otherwise the contracts is unenforceable whether
there is lesion or not (1403); 1. But if no collusion on the
2. If merely an act of administration, then there are two transferor and the second
instances to observe; transferee will cleanse the
a. If with court approval – valid regardless of transfer, hence there can
lesion or not (1386). no longer be rescission,
b. If without court approval – rescissible, if lesion even if the subsequent
is more than one-fourth (1381[1]). transfer is in bad faith. The
good faith in the first
II. Contracts in Lesion in Representation of Absentees transfer cures the bad faith
Same comment as first case. Note however, another contract in the second transfer.
which may rescinded under the ground of lesion is a partition
of inheritance, when the lesion is ¼ or more for one heir (1098). b. If onerous and in bad faith from the
transferor to the second transferee,
III. Contracts in Fraud of Creditors rescission is proper.
The creditor cannot ask for annulment precisely because he is
not a party to the contract. He can only ask rescission since there i. Exception: If there have been
are certain requisites to be complied with. several transfers of bad faith ad the
last transferee is in good faith,
Accion Pauliana, Requisites rescission cannot be availed due to
This is the action to rescind contract made in fraud of creditors. the good faith then the defrauded
But for such accion pauliana to allow, there are requisites: creditor can ask damages from the
1. That the plaintiff asking for rescission has a credit prior previous transferees in bad faith
to the alienation, although demandable later; until the transferor himself.
2. That the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; (b) If a gratuitous transfer, then good faith or bad faith
3. That the creditor has no other legal remedy to satisfy is immaterial, the contracts has to be rescinded for the
his claim but would benefit by rescission of the there is no consideration given by the transferee, he
conveyance to the third person. cannot be prejudiced by the rescission.
Badges of Fraud ARTICLE 1383

In the consideration of whether or not certain transfers were The action for rescission is subsidiary; it cannot be instituted
fraudulent, courts have laid down certain rules by which the except when the party suffering damage has no other legal
means to obtain reparation for the same.
fraudulent transfer character may be determined. The following
are some of the circumstances attending sales which have been
No Other Remedy
denominated by the courts as badges of fraud:
The plaintiff asking for rescission must prove that he has no
1. The fact that the consideration of the conveyance is
other legal course to obtain reparation or satisfaction of his
inadequate;
claim, if he cannot show such he cannot be entitled to rescission
2. A transfer made by a debtor after suit has been begun
asked. The action for rescission is but a subsidiary remedy,
and while it is pending against him;
available only when the aggrieved party has no other legal
3. A sale upon credit by an insolvent debtor;
means to obtain reparation for damage suffered.
4. Evidence of large indebtedness or complete
insolvency; ARTICLE 1384
5. The transfer of all or nearly all of his property by a Rescission shall be only to the extent necessary to cover the
debtor, especially when he is insolvent or greatly damages caused.
embarrassed financially, especially if the transfer is
gratuitous in nature; Partial Rescission
6. The fact that the transfer between father and son, The purpose of rescission is to repair or cover the damages
when there are present any of the above caused. Complete rescission will not therefore be allowed if it
circumstances; cannot be justified by the circumstances of the case. As a rule,
7. The failure of the vendee to take exclusive possession only the creditor who asked for rescission and not the other
of all the property. creditors, benefits from the rescission.
If any of these is found, the presumption arises, especially when ARTICLE 1385
the transfer is made after incurring obligation and it can be Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and
shown that the debtor has no other property to answer for the
the price with its interest; consequently, it an be carried out
obligation except those transferred. only when he who demands rescission can return whatever
he may be obliged to restore.
IV. Things in Litigation
The fourth paragraph of this articles refers to a contract Neither shall rescission take place when the things which are
executed by a defendant in a suit involving the ownership or the object of the contract are legally in possession of third
possession of a thing, when such contract is made without the persons who did not act in bad faith.
knowledge and approval of the plaintiff or the court.
In this case, indemnity for damages may be demanded from
the person causing the loss.
V. Other Contracts Specifically Declared by Law
Those referred to in agreements under Article 1089 (partition), Mutual Rescission
1189 (result of deterioration), and 1526,1534, and 1539 of the The obligation of restitution does not obviously apply to
Civil Code. creditors who seek to impugn fraudulent transactions of their
debtors. The obligation of mutual restitution applies to others
ARTICLE 1382 so that status quo may be restored.
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. Requisites Before the Action for Rescission Be Brought
(a) Generally, the plaintiff must be able to return what
Premature Payments Made in a State of Insolvency has been received by virtue of the rescissible contract.
Where a debtor transfers property to a creditor allegedly in (b) The thing object of the contract is not in the legal
payment of a debt which has not yet matured, at a tie when the possession of third persons in good faith.
debtor is insolvent, and when the consideration for the transfer (c) There must be no other legal remedy.
is gross inadequate the transfer is fraudulent. (d) The action must be brought within the proper
prescriptive period.
Requirements for Article 1382 to Apply
1. The debtor-payor must have been insolvent, no need What Must be Returned?
for judicial declaration. The object of the contract, the fruits, the price and the interest.
2. The debt was not yet due and demandable. If you cannot return, then you cannot ask for rescission.
Rescission cannot take place when the object of the contract is
NOTE: Both conditions are required otherwise, this article in the possession of a third party in good faith. Restoration
cannot apply. This does not exactly speak of a contract; it refers applies to Article 1381, No, 1, 2, and 3, exception if such
to a payment, hence it is not included under Article 1381 in such onerous in good faith, and in No. 4, exception if the
cases provided. Thus, this merely involves premature payments complainant did not annotated and the third person had no
made in a state of insolvency. knowledge of litigation.
ARTICLE 1386 Subsequent Transfers

Rescission referred to in Nos. 1 and 2 of Article 1381 shall not (a) If the first transferee is in good faith, the good or bad
take place with respect to contracts approved by the courts. faith of the next transferee is not important.
(b) If the first transferee is in bad faith, the next transferee
ARTICLE 1387
All contracts by virtue of which the debtor alienates property is liable only if he is also in bad faith.
by gratuitous title are presumed to have been entered into in
fraud of creditors, when the donor did not reserve sufficient ARTICLE 1389
property to pay all debts contracted before the donation. The action to claim rescission must be commenced within
four years.
Alienations by onerous title are also presumed fraudulent
when made by persons against whom some judgment has For persons under guardianship and for absentees, the
been rendered in any instance or some writ of attachment period of four years shall not begin until the termination of
has been issued. The decision or attachment need not refer the former’s incapacity, or until the domicile of the later is
to the property alienated, and need not have been obtained known.
by the party seeking the rescission.
Prescriptive Period for Rescission
In addition to these presumptions, the design to defraud GENERAL RULE: Four years from the date the contract was entered
creditors may be proved in any other manner recognized by into.
the law of evidence.
EXCEPTION:(1) Persons under guardianship – four years from
Presumption of Fraud
termination of capacity; (2) Absentees – four years from the
This article establishes presumption of fraud in the cases of:
time the domicile is known.
(a) Gratuitous alienations;
(b) Onerous alienations.
Who Can Bring the Action?
(a) The injured party (or defrauded creditor);
Gratuitous Alienations
(b) His heir or successor-in-interest.
(a) Presumed fraudulent – when the debtor did not
(c) Creditors of (a) and (b) by virtue of Article 1177 of the
reserve sufficient property to pay all debts contracted
Civil Code (accion subrogatoria).
before the donation.
Who May be Defendants?
Instance. A made a donation to B. Later A contracted several
Article 1388.
debts. What A has left as assets are much less than his present
liabilities. May the donation to B be rescinded?
No, because the debts here of A were incurred after the

donation and the presumption of fraud did not arise. But under
the doctrine of anticipatory fraud, if it can be shown that the
donation had been made beforehand to avoid payment, then it
can be rescinded.
Onerous Alienations
(a) Presumed fraudulent – when made by persons:
1. Against whom some judgement has been
rendered in any instance (even if not yet a final
judgment);
2. Or against whom some writ of attachment has
been issued.
ARTICLE 1388
Whoever acquires in bad faith the things alienated in fraud
of creditors, shall indemnify the latter for damage suffered
by them on account of 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.
Effect of Bad Faith

The acquirer must return or indemnify. The word “due to any
cause” includes a fortuitous event. If the return, then is
impossible he shall be liable for damages to the creditors for
such object.
OBLIGATIONS AND CONTRACTS However, both Carmelo and Equatorial questioned the
Articles 1380-1389 authenticity of the second letter.
JURISPRUDENCE NOTES
Four years later, on July 30, 1978, Carmelo sold its entire C.M.
Recto Avenue land and building, which included the leased
1380-1389. Rescissible Contracts
premises housing the ‘Maxim’ and ‘Miramar’ theatres, to
Equatorial by virtue of a Deed of Absolute Sale, for the total
EQUATORIAL REALTY v. MAYFAIR (1996)
sum of P11,300,000.00.
264 SCRA 483
Action. Mayfair instituted the action for specific performance

Facts: Carmelo owned a parcel of land with two storey building
and annulment of the sale of the leased premises to Equatorial.
constructed in Manila. In 1967, Carmelo entered into a Contract
of Lease with Mayfair to lease a portion of Carmelo’s property.
Carmelo alleged that it had informed Mayfair of its desire to sell
‘A PORTION OF THE SECOND FLOOR of the two-storey building, situated at and offered the same to Mayfair, but the latter answered that it
C.M. Recto Avenue, Manila, with a floor area of 1,610 square meters. was interested only in buying the areas under lease, which was
impossible, since it was not a condominium.
THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated
at C.M. Recto Avenue, Manila, with a floor area of 150 square meters,’ for use
• That the option to purchase invoked by Mayfair is lack
by Mayfair as a motion picture theater and for a term of twenty (20) years. and void for the lack of consideration.
Mayfair constructed on the leased property a movie house Equatorial pleaded that the option is void for lack of
known as ‘Maxim Theatre.’ Two years later, on March 31, 1969, consideration and is unenforceable by reason of its
Mayfair entered into a second contract of lease with Carmelo impossibility of performance because the leased premises
for the lease of another portion of Carmelo’s property, to wit: could not be sold separately from the other portions of the land
and building.
‘A PORTION OF THE SECOND FLOOR of the two-storey building, situated at
C.M. Recto Avenue, Manila, with a floor area of 1,064 square meters.
Pre-Trial Stipulations
THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the 1. That there was a deed of sale of the contested premises by
two-storey building situated at C.M. Recto Avenue, Manila, with a floor area Carmelo to Equatorial.
of 300 square meters and bearing street numbers 1871 and 1875,’ for similar 2. In both contracts the stipulation granting the plaintiff
use as a movie theater and for a similar term of twenty (20) years. Mayfair put exclusive option to purchase the leased premises should the
up another movie house known as ‘Miramar Theatre’ on this leased property.
lessor desire to sell the same.
3. That the two buildings are not condominium.
Both contract of lease provides identically worded paragraph 4. That the amounts stipulated
8 which states that: 5. xxx
6. That there was no consideration specified in the option to
That if the lessor should desire to sell the leased premises, the lessee shall be buy embodied in the contract
given 30-days exclusive option to purchase the same. 7. That Carmelo owned the land
8. The leased premises are the portions occupied by the
In the event, however, that the leased premise is sold to someone other than
theaters.
the lessee, the lessor is bound ad obligated, as it hereby binds and obligates
itself, to stipulate in the Deed of Sale thereof that the purchaser shall 9. That what was sold by Carmelo to Equatorial is the land and
recognize this lease and be bound by all the terms and conditions thereof. the two buildings erected thereon.
Sometime in August 1974, Mr. Henry Pascal of Carmelo TRIAL COURT DECISION: After assessing the evidence, the court
informed Mr. Henry Yang, President of Mayfair, through a decided to dismiss the complaint and ordering Mayfair to pay
telephone conversation that Carmelo was desirous of selling Equatorial P35,000 per month for the use of areas not covered
the entire Claro M. Recto property. Mr. Pascal told Mr. Yang that by the contract. P70K and P55K and dismissing crossclaim.
a certain Jose Araneta was offering to buy the whole property
for US$1,200,000 and Mr. Pascal asked Mr. Yang if the latter was The trial court adjudged the identically worded paragraph 8
willing to buy the property for P6-7 Million Pesos. found in both aforecited lease contracts to be an option clause
which however cannot be deemed to be binding on Carmelo
Mr. Yang replied that he would let Mr. Pascal know his decision. because of lack of distinct consideration therefor.
On August 23, 1974, Mayfair replied through a letter:
The plaintiff cannot compel defendant Carmelo to comply with
It appears that on August 19, 1974 your Mr. Henry Pascal informed our clients’ the promise unless the former establishes the existence of a
Mr. Henry Yang through the telephone that your company desires to sell the
distinct consideration. In other words, the promisee has the
above-mentioned CM Recto Avenue property. (Attach paragraph 8)
burden of proving the consideration.
Carmelo did not reply to this letter. On September 18, 1974,
It follows that plaintiff cannot compel defendant Carmelo &
Mayfair sent another letter to Carmelo purporting to express
Bauermann to sell the C.M. Recto property to the former.
interest in acquiring not only the leased premises but ‘the entire
building and other improvements if the price is reasonable.
COURT OF APPEALS. It reversed the decision directing Mayfair to What Was Agreed and What was Violated?
pay and return to Equatorial the amount of P11.3M. Court of What Carmelo and Mayfair agreed to, by executing the two
Appeals differentiated between Article 1324 and Article 1479 of lease contracts, was that Mayfair will have the right of first
the Civil Code, analyzed their application to the facts of this refusal in the event Carmelo sells the leased premises. It is
case, and concluded that since paragraph 8 of the two lease undisputed that Carmelo did recognize this right of Mayfair, for
contracts does not state a fixed price for the purchase of the it informed the latter of its intention to sell the said property
leased premises, which is an essential element for a contract of in 1974. There was an exchange of letters evidencing the offer
sale to be perfected, what paragraph 8 is, must be a right of first and counter-offers made by both parties.
refusal and not an option contract.
Carmelo, however, did not pursue the exercise to its logical end.
Issue While it initially recognized Mayfair’s right of first refusal,
1. Define the nature, scope and efficacy of paragraph 8 Carmelo violated such right when without affording its
stipulated in the two contracts of lease. negotiations with Mayfair the full process to ripen to at least an
2. Determine the rights and obligations of Carmelo and interface of a definite offer and a possible corresponding
Mayfair, as well as Equatorial in the aftermath of the acceptance within the “30 day exclusive option” time granted
sale by Carmelo of the entire property to Equatorial. Mayfair, Carmelo abandoned negotiations, kept a low profile
for some time, and then sold, without prior notice to Mayfair
It is Not an Option Clause but a the entire CM Recto property to Equatorial.
Contract of A Right of First Refusal
Where a period is given to the offeree within which to accept Buyer in Bad Faith; Rescissible
the offer, the following rules generally govern: Since Equatorial is a buyer in bad faith, this finding renders the
sale to it of the property in question rescissible. Equatorial was
1. If the period is not itself founded upon or supported by a aware of the lease contracts because its lawyers had, prior to
consideration, the offeror is still free and has the right to the sale, studied the said contracts. As such, Equatorial cannot
withdraw the offer before its acceptance, or if an acceptance tenably claim to be a purchaser in good faith, and, therefore,
has been made, before the offeror knew he communicated the rescission lies.
withdrawal to the offeree.
While it may be true that the acquisition by third person in
2. If the period has a separate consideration, a contract of lawful possession is an obstacle for an action for rescission. The
option is deemed perfected, and it would be a breach of that rule however is nor applicable for Equatorial here is in bad
contract to withdraw the offer during the agreed period. The faith because it was aware of the lease and the right to first
option however, is an independent contract by itself, and itis to refusal of Mayfair. It also cannot state that it was not aware,
be distinguished from the projected main agreement which is because if it had studied the Contracts of Lease then it would
yet to concluded. If in fact, the optioner-offeror withdraws the have stumbled upon paragraph 8.
offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific Carmelo acted in bad faith when it sold the entire property to
performance on the proposed contract (‘object’ of the option) Equatorial without informing Mayfair, a clear violation of
since it has failed to reach its own stage of perfection. The Mayfair’s rights. While there was a series of exchanges of letters
optioner-offeror, however, renders himself liable for damages evidencing the offer and counter-offers between the parties,
for breach of the option. Carmelo abandoned the negotiations without giving Mayfair
full opportunity to negotiate within the 30-day period.
IN THE CASE:There is nothing in the identical Paragraphs “8” of
the June 1, 1967 and March 31, 1969 contracts which would Accordingly, even as it recognizes the right of first refusal, this
bring them into the ambit of the usual offer or option requiring Court should also order that Mayfair be authorized to
an independent consideration. exercise its right of first refusal under the contract to
include the entirety of the indivisible property. The
The Court of Appeals is correct in stating that Paragraph 8 was boundaries of the property sold should be the boundaries of
incorporated into the contracts of lease for the benefit of the offer under the right of first refusal.
Mayfair which wanted to be assured that it shall be given the
first crack or the first option to buy the property at the price As also earlier emphasized, the contract of sale between
which Carmelo is willing to accept. It is not also correct to say Equatorial and Carmelo is characterized by bad faith, since it
that there is no consideration in an agreement of right of first was knowingly entered into in violation of the rights of and to
refusal. The stipulation is part and parcel of the entire contract the prejudice of Mayfair. Equatorial admitted that its lawyers
of lease. The consideration for the lease includes the had studied the contract of lease prior to the sale. Equatorial’s
consideration for the right of first refusal. knowledge of the stipulations therein should have cautioned it
to look further into the agreement to determine if it involved
The respondent Court of Appeals was correct in ascertaining stipulations that would prejudice its own interests.
the true nature of the aforecited paragraph 8 to be that of a
contractual grant of the right of first refusal to Mayfair.
Since Mayfair has a right of first refusal, it can exercise the right P2,000,000.00. x x x. The lessees offered to buy the property
only if the fraudulent sale is first set aside or rescinded. The from de Leon for the amount of P1,000,000.00. De Leon told
facts of case and considerations of justice and equity them that she will be submitting the offer to the other heirs.
require that we order rescission here and now. Since then, no answer was given by de Leon as to their offer to
buy the property. However, in November 1990, Rene Joaquin
The sale of the subject real property by Carmelo to Equatorial came to the leased premises introducing himself as its new
should now be rescinded considering that Mayfair, which had owner.
substantial interest over the subject property, was prejudiced
by the sale of the subject property to Equatorial without In January 1991, the lessees again received another letter from
Carmelo conferring to Mayfair every opportunity to negotiate Atty. Aguila demanding that they vacate the premises. A month
within the 30-day stipulated period. thereafter, the lessees received a letter from de Leon advising
them that the heirs of the late spouses Tiangcos have already
The damages which Mayfair suffered are in terms of actual sold the property to Rosencor.
injury and lost opportunities. The fairest solution would be to
allow Mayfair to exercise its right of first refusal at the price The following month Atty. Aguila wrote them another letter
which it was entitled to accept or reject which is P11,300,000.00. demanding the rental payment and introducing herself as
This is clear from the records. counsel for Rosencor/Rene Joaquin, the new owners of the
premises. The lessees offered to tender their rental payment to
According to Law Not on Human Relations de Leon but she refused to accept the same.
It is Paragraph 8 on the right of first refusal which created the
obligation. It should be enforced according to the law on In April 1992 before the demolition can be undertaken by the
contracts instead of the panoramic and indefinite rule on Buiding Official, the barangay interceded between the parties
human relations. herein after which Rosencor raised the issue as to the rental
payment of the premises.
HELD: The petition is denied and the Deed of Absolute Sale
between Equatorial and Carmelo is hereby rescinded. Carmelo It was also at this instance that the lessees were furnished with
is ordered to return to Equatorial Realty the purchase price. a copy of the Deed of Sale and discovered that they were
deceived by de Leon since the sale between her and Rene
ROSENCOR v. INQUING (2001) Joaquin/Rosencor took place in September 4, 1990 while de
354 SCRA 119 Leon made the offer to them only in October 1990 or after the
sale with Rosencor had been consummated. The lessees also
Facts: The plaintiff averred that they are the lessees since 1971 noted that the property was sold only for P726,000.00. This
of a two-story residential apartment in Quezon and owned by prompted them to file an action for (a) rescission and (b)
Tiangco. The lease was not covered by any contract. The lessees reconvey property to de Leon.
were renting the premises then for P150.00 a month and were
allegedly verbally granted by the lessors the pre-emptive right RTC rendered a decision dismissing the complaint, it held that
to purchase the property if ever they decide to sell the same. the right of redemption on which the complaint was based was
merely an oral one and as such was unenforceable under law.
Upon the death of the spouses Tiangcos in 1975, the
management of the property was adjudicated to their heirs who CA reversed the decision and ordered the rescission of the
were represented by Eufrocina de Leon. The lessees were absolute sale between Rosencor.
allegedly promised the same preemptive right by the heirs of
Tiangcos since the latter had knowledge that this right was The trial court, in denying the petition for reconveyance, held
extended to the former by the late spouses Tiangcos. The that right of first refusal relied upon by petitioners was not
lessees continued to stay in the premises and allegedly spent reduced to writing and as such, is unenforceable by virtue of
their own money amounting from P50,000.00 to P100,000.00 the said article.
for its upkeep. These expenses were never deducted from the
rentals which already increased to P1,000.00. The Court of Appeals, on the other hand, also held that the
statute of frauds governs the “right of first refusal” claimed by
In June 1990, the lessees received a letter from Atty. Erlinda respondents.
Aguila demanding that they vacate the premises so that the
demolition of the building be undertaken. They refused to However, the appellate court ruled that respondents had duly
leave the premises. proven the same by reason of petitioners’ waiver of the
protection of the statute by reason of their failure to object to
In that same month, de Leon refused to accept the lessees’ the presentation of oral evidence of the said right. Both the
rental payment claiming that they have run out of receipts and appellate court and the trial court failed to discuss, however,
that a new collector has been assigned to receive the payments. the threshold issue of whether or not a right of first refusal is
Thereafter, they received a letter from Eufrocina de Leon indeed covered by the provisions of the New Civil Code on the
offering to sell to them the property they were leasing for statute of frauds.
The resolution of the issue on the applicability of the statute of by its sale to Equatorial without Carmelo conferring to Mayfair
frauds is important as it will determine the type of evidence every opportunity to negotiate within the 30-day stipulated
which may be considered by the trial court as proof of the period. There is however, a circumstance in this case which
alleged right of first refusal. prevents the application of this doctrine in the case at bench.
Whether a right of first refusal is among those enumerated in In the cases cited above, the Court ordered the rescission of
the list of contracts covered by the Statute of Frauds sales made in violation of a right of first refusal precisely
because the vendees therein could not have acted in good faith
More specifically, is a right of first refusal akin to an agreement as they were aware or should have been aware of the right of
for the leasing of a longer period than one year or for the sale first refusal granted to another person by the vendors therein.
of property or interest therein. The rationale for this is found in the provisions of the New Civil
Code on rescissible contracts.
We have previously held that not all agreements “affecting
land” must be put into writing to attain enforceability. Thus, we Under Article 1381 of the New Civil Code, paragraph 3, a
have held that the setting up of boundaries, the oral partition contract validly agreed upon may be rescinded if it is
of real property, and an agreement creating a right of way are “undertaken in fraud of creditors when the latter cannot in any
not covered by the provisions of the statute of frauds. The manner collect the claim due them.” Moreover, under Article
reason simply is that these agreements are not among those 1385, rescission shall not take place “when the things which are
enumerated in Article 1403 of the New Civil Code. the object of the contract are legally in the possession of third
persons who did not act in bad faith.”
Right of First Refusal is not Yet a Perfected Contract
A right of first refusal is not among those listed as ORAL AGREEMENT: It must be borne in mind that, unlike the cases
unenforceable under the statute of frauds. Furthermore, the cited above, the right of first refusal involved in the instant case
application of Article 1403, par. 2(e) of the New Civil Code was an oral one given to respondents by the deceased spouses
presupposes the existence of a perfected, albeit unwritten, Tiangco and subsequently recognized by their heirs. As such, in
contract of sale. order to hold that petitioners were in bad faith, there must
be clear and convincing proof that petitioners were made
A right of first refusal, such as the one involved in the instant aware of the said right of first refusal either by the
case, is not by any means a perfected contract of sale of real respondents or by the heirs of the spouses Tiangco.
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 PRESUMPTION OF GOOD FAITH: It is axiomatic that good faith is
property sought to be sold. always presumed unless contrary evidence is adduced. A
purchaser in good faith is one who buys the property of another
It is thus evident that the statute of frauds does not without notice that some other person has a right or interest in
contemplate cases involving a right of first refusal. As such, a such a property and pays a full and fair price at the time of the
right of first refusal need not be written to be enforceable and purchase or before he has notice of the claim or interest of
may be proven by oral evidence. Indeed, the existence of the some other person in the property.
right of first refusal was established by evidence.
In this regard, the rule on constructive notice would be
Having ruled upon the question as to the existence of inapplicable as it is undisputed that the right of first refusal was
respondents’ right of first refusal, the next issue to be answered an oral one and that the same was never reduced to writing,
is whether or not the Court of Appeals erred in ordering the much less registered with the Registry of Deeds. In fact, even
rescission of the Deed of Absolute Sale dated September 4, the lease respondents derive their right to possess the property
1990 between Rosencor and Eufrocina de Leon and in involved was an oral one.
decreeing that the heirs of the spouses Tiangco should afford
respondents the exercise of their right of first refusal. In other There is a failure to show that petitioners acted in bad faith
words, may a contract of sale entered into in violation of a third in entering into the deed of sale over the disputed property
party’s right of first refusal be rescinded in order that such third with the heirs of the spouses Tiangco. Respondents failed to
party can exercise said right. present any evidence that prior to the sale of the property, that
the petitioners were aware or had notice of the oral right of first
EQUITORIAL REALTY v. MAYFAIR: Violation of a right of first refusal, refusal. The evidence presented were insufficient:
the Court decreed that since respondent therein had a right of • No mention of the right of first refusal was in the letter
first refusal over the said property, it could only exercise the of Atty. Aguila; and
said right if the fraudulent sale is first set aside or rescinded. • The receipt of the letter, there was no showing of the
information was made to the right of refusal.
This court upheld the right of first refusal of the lessee Mayfair Absent clear and convincing evidence to the contrary,
and rescinded the sale of the property by the lessor Carmelo to petitioner Rosencor will be presumed to have acted in good
Equatorial Realty considering that Mayfair, which had faith in entering into the Deed of Absolute Sale over the
substantial interest over the subject property, was prejudiced disputed property.
Considering that there is no showing of bad faith on the part donations were executed the aforesaid deeds in fraud of his
of the petitioners, the CA thus erred in ordering the rescission creditors, including Philam.
of the Deed of Absolute Sale between Rosencor and Tiangco.
The acquisition by Rosencor of the property subject of the right Answer. They moved for dismissal on the ground that the
of first refusal is an obstacle for its rescission where, as in this action had already prescribed. They posited that the
case for Rosencor is in lawful possession of the subject of registration of the deeds of donation on 1989 constituted
the contract and it did not act in bad faith, constructive notice and since the complaint was filed only in
February 1997 or more than 4 years after said registration, the
This does not mean however that respondents are left without action was already barred by prescription.
any remedy for the unjustified violation of their right of first
refusal. Their remedy however is not an action for the rescission RTC dismissed the complaint stating prescriptive period began
of the Deed of Absolute Sale but an action for damages to run only from December 1993, the date of decision.
against the heirs of the spouses Tiangco for the unjustified
disregard of their right of first refusal. CA affirmed decision, the four year period began to run began
only in 1997 and not in 1993 for it was when it first learned.
KHE HONG CHENG v. COURT OF APPEALS (2001) Issue
355 SCRA 701 When did the four-year prescriptive period as provided under
Article 1389 of the Civil Code for respondent
Facts: Petitioner Khe Hong Cheng, is the owner of Butuan Philam to file its action for rescission
Shipping Lines. It appears that on October 1985, the Philippine of the subject deeds of donation commence to run?
Agricultural Trading Corporation shipped on board the vessel
M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 Article 1389 and Reckoning of Prescriptive Period
bags of copra at Masbate, Masbate, for delivery to Dipolog Article 1389 simply provides that, “The action to claim rescission
City, Zamboanga del Norte. must be commenced within four years.” Since this provision of
law is silent as to when the prescriptive period would
The said shipment of copra was covered by a marine insurance commence, the general rule is from the moment the cause
policy issued by American Home Insurance Company (Philam).
of action accrues, therefore applies (Article 1150).
MV Prince Eric however sank resulting in the total loss of the
shipment. Because of the loss, the insurer paid the amount of It is the legal possibility of bringing the action which
P354K (value of the copra) to the consignee. determines the starting point for the computation of the
prescriptive period.
Having been subrogated to the rights of the consignee,
American Home instituted a case for recovery of the money Accion Pauliana or Action to Rescind
based on the breach of contract of carriage. It is thus apparent this action must be of last resort availed of
only after all other legal remedies have been exhausted and
While the case was still pending or on December 1989, have been proven futile. The following requisites must concur:
petitioner Khe Hong Cheng executed deeds of donations of 1. That the plaintiff asking for rescission has a credit
parcels of land in favor of his children. prior to the alienation, although demandable later;
2. That the debtor has made a subsequent contract
Trial court. In 1993, The judgment was made four years after conveying a patrimonial benefit to a third person;
the donations were made and the TCT were registered in 3. That the creditor has no other legal remedy to satisfy
the donees’ names. The decision ordered Khe Hong Cheng to his claim, but would benefit by rescission of the
pay P354K the insurer to the PATC. conveyance to the third person;
4. That the act being impugned is fraudulent;
After the said decision became final and executory, a writ of 5. That the third person who received the property
execution was issued on 1995. Said writ of execution was not conveyed, if by onerous title has been an accomplice
served, so an alias writ was applied for granted in 1996. Despite in the fraud.
earnest efforts, the sheriff found no property under Butuan
Shipping Lines or he Hong Cheng to levy or garnish for the Indeed, an accion pauliana presuppose a judgment and the
satisfaction of the trial court’s decision. issuance by the trial court of a writ of execution for the
satisfaction of the judgment and the failure of the Sheriff to
When the sheriff, accompanied by counsel of respondent enforce and satisfy the judgment of the court.
Philam, went to Butuan City on January 17, 1997, to enforce the
alias writ of execution, they discovered that petitioner Khe It presupposes that the creditor has exhausted the property of
Hong Cheng no longer had any property and that he had the debtor. The date of the decision of the trial court against
conveyed the subject properties to his children. the debts is immaterial. What is important is that the credit of
the plaintiff antedates that of the fraudulent alienation by the
Complaint. In 1997, Philam filed with a complaint with RTC for debtor of his property. After all, the decision of the trial court
the rescission of the deeds of donation alleging that the
against the debtor will retroact to the time when the debtor UNION BANK v. ONG (2006)
became indebted to the creditor. 491 SCRA 581
CONTENTION: They maintain that the cause of action of Facts: Spouses Ong own majority of the capital stock of Baliwag
respondent against them for the rescission accrued on 1989 Mahogany Corporation (BMC). On October 1990, the spouses
when the registration was effected and there was registration executed a Continuing Surety Agreement in favor of Union Bank
thus there constructive knowledge on the execution of deeds. to secure a P40M credit line facility for BMC.
COURT REPLY: This argument is misplaced, to count the four-year On October 1991, after the execution of the surety agreement,
prescriptive period shall accrue for an accion pauliana when: the Spouses Ong, sold a lot in Greenhills for P12.5M together
1. There is a judgment; with the house and other improvements standing thereon to
2. The issuance by the trial court of a writ of execution Jackson Lee. The following day, the transfer was registered. At
for the satisfaction of the judgment; and about this time, BMC had already availed itself of the credit
3. The failure of the sheriff to enforce and satisfy the facilities, and had in fact executed a total of twenty-two (22)
judgment of the court. promissory notes in favor of Union Bank.
It requires that the debtor has exhausted property.
The date of the decision of the trial court is immaterial. What is On November 1991, BMC filed a Petition for Rehabilitation and
important is that the credit of the plaintiff, antedates that of the for Declaration of Suspension of Payments with the SEC. To
fraudulent alienation by the debtor of his property. After all, the protect its interest, Union Bank lost no time and file an action
decision of the trial court against the debtor will retroact to the for rescission of the sale between the Spouses Ong and Jackson
time when the debtor became indebted to the creditor. Lee for being in fraud of creditors.
IN THE CASE: Even if respondent Philam was aware, as of 1989, Complaint. Union Bank assailed the validity of the sale, alleging
that petitioner Khe Hong Cheng had executed the deeds of that the Spouses Ong and Lee entered into the transaction in
donation in favor of his children, the complaint was still pending question for the lone purpose of fraudulent removing the
before the trial court. property from the reach of Union Bank and other creditors.
Respondent Philam had no inkling at the time, that the trial Answer. Both contracts of sale and lease over the Greenhills
court’s judgment would not be satisfied due to the deeds of property were founded on good and valid consideration and
donation executed by petitioner Khe Hong Cheng during the executed in good faith.
pendency of the case.
RTC. It rendered judgment in favor of Union Bank declaring the
If it was filed by Philam on 1989 it would have been considered Deed of Sale null and void.
for being premature, not only were all other legal remedies for
the enforcement of respondent Philam’s claims not yet CA reversed and set aide the ruling, observing that the sale is
exhausted at the time the deeds of donation were executed and clothed with prima facie presumption of regularity and legality.
registered. Khe Hong Cheng even expressly declared and
represented that he had reserved himself sufficient property. Issue
Whether or not the sale of between Ong and Lee was done in
Philam only learned about the unlawful conveyances made by fraud of creditors thus rescissible.
Khe Hong Cheng in January 1997, when its counsel
accompanied the sheriff to Butuan City to attach the properties Sale was Valid
of Khe Hong Cheng. There they found that he no longer had The foregoing testimony readily proves that money indeed
nay properties under his name. changed hands in connection with the sale of the subject
property. Respondent Lee, as purchaser, paid the stipulated
It was only then that respondent Philam’s action for rescission contract price to the spouses Ong, as vendors. Receipts
of the deeds of donation accrued because then it could be said presented in evidence covered and proved such payment.
that respondent Philam had exhausted all the legal means to
satisfy the court’s judgment in its favor. Badges of Fraud
CONTENTION: Petitioner raises the issue of inadequate
Since Philam filed its complaint for accion pauliana Philam filed consideration, alleging in this regard that only P12,500,000.00
its complaint for accion pauliana against petitioners on was paid for property having, during the period material, a fair
February 25, 1997, barely a month from its discovery that market value of P14,500,000.00.
petitioner Khe Hong Cheng had no other property to satisfy the
judgment award against him, its action for rescission of the COURT REPLY: The existence of fraud or the intent to defraud
subject deeds clearly had not yet prescribed. creditors cannot plausibly be presumed from the fact that the
price paid for a piece of real estate is perceived to be slightly
lower, if that really be the case, than its market value. To be sure,
HELD: The dismissal of rescission is deemed correct. it is logical, to negotiate on the price.
Lest it be overlooked, the disparity between price appearing in In their Contract of Sale, Sofia Quirong waived any guarantee
the conveying deed and what petitioner regarded as real value against eviction. The contract provided that the DBP did not
of the property is not as gross to support a conclusion of fraud. guarantee possession of the property and that it would not be
liable for any lien or encumbrance on the same.
Propriety of Accion Pauliana
Nonetheless, for purposes of recovering what the eventually Two months after that sale on 1983, the Dalopes filed an action
insolvent BMC owed the bank, it behooved the petitioner to for partition and declaration of nullity of documents with
show that it had exhausted all the properties of the spouses damages against the DBP and the Funcions.
Ong. It does not appear in this case that the petitioner sought
other properties of the spouses other than the subject On December 27, 1984, notwithstanding the suit, the DBP
Greenhills property. The CA categorically said so. executed a deed of absolute sale of the subject lot in Sofia
Quirong’s favor. The deed of sale carried substantially the same
Absent proof, therefore, that the spouses Ong had no other waiver of warranty against eviction and of any adverse lien or
property except their Greenhills home, the sale thereof to encumbrance.
respondent Lee cannot simplistically be considered as one in
fraud of creditors. RTC declared the DBP sale to Quirong valid only with respect
to the shares of Felicia and Rosa Funcion. It declared Felisa’s
For a contract to be rescinded for being in fraud of creditors, sale to the Funcions, and the mortgage to the DBP and sale to
both contracting parties must be shown to have acted Quirong void insofar as they prejudiced the shares of the eight
maliciously so as to prejudice the creditors who were prevented other children who where entitled to a tenth share in lot.
from collecting their claims.
When RTC judgment final and the court issued a Writ of
Again, in this case, there is no evidence tending to prove that Execution, the DBP resisted the writ by motion to quash by
the spouses Ong and Lee were conniving cheats. In fact, the claiming that the decision could not be enforced because it
petitioner did not even attempt to prove the existence of failed to state by metes and bounds the portions of the lot that
personal closeness or business and professional would be assigned to different parties in the case.
interdependence between the spouses Ong and Lee as to cast
doubt on their true intent in executing the contract of sale. Quirong heirs filed for the rescission of contract of sale
between Quirong. The heirs alleged that they were entitled to
It cannot be overemphasized that rescission is generally the rescission of the sale because the decision stripped them
unavailing should a third person, acting in good faith, is in the whole lot that Sofia bought from DBP.
lawful possession of the property, that is to say, he is protected
by law against a suit for rescission by the registration of the RTC rescinded the sale between Quirong and DBP. On the CA
transfer to him in the registry. reversed the RTC decision and dismissed the heirs’ action on
the ground of prescription. The CA concluded that, reckoned
The Continuing Surety Agreement, it ought to be particularly from the finality of the December 16, 1992 decision in Civil
pointed out, was never recorded nor annotated on the title Case D-7159, the complaint filed on June 10, 1998 was already
of spouses Ong. There is no evidence extant in the records to barred by the four-year prescriptive period under Article 1389.
show that Lee had knowledge, prior to the subject sale, of the
surety agreement adverted to. Here, the existence of fraud Issues
cannot be presumed, or, at the very least, what were perceived 1. Whether or not the Quirong heirs’ action for rescission
to be badges of fraud have been proven to be otherwise. of respondent DBP’s sale of the subject property to
Sofia Quirong was already barred by prescription; and
HELD: Rescission denied. 2. Whether or not the heirs of Quirong were entitled to
the rescission of the DBP’s sale of the subject lot to
HEIRS OF QUIRONG v. DBP (2009) Sofia Quirong as a consequence of her heirs having
606 SCRA 543 been evicted from it.
Facts: When the late Emilio Dalope died, he left a 589-sq.m. Discussion: The prescriptive period remained to be reckoned
untitled lot in Pangasinan to his wide and nine children, one of from January 28, 1993, the date of such finality.
whom was Rosa Dalope-Funcion. To enable Rosa and her
husband get a loan from the DBP. Felisa sold the whole lot to CONTENTION: The DBP claims that it should be four years as
the Funcions. With the deed of sale in their favor and the tax provided under Article 1389 of the Civil Code of four years. The
declaration transferred in their names, the Funcions mortgaged Quirong heirs, on the other hand, claim that it should be 10
the lot with the DBP. years under Article 1144 for a written contract.
When the Funcions failed to pay their loan, DBP foreclosed the COURT REPLY: The action was clearly one for rescission, the
mortgage on the lot and consolidated ownership in its name. remedy of rescission is not confined to the rescissible contracts
Four years later, DBP conditionally sold lot to Quirong. enumerated under Article 1381.
Article 1191 gives the party in reciprocal obligations, the option After the death of Spouses Baylon, they claimed that Rita took
to choose between fulfillment and rescission. possession of the said parcels of land and appropriated for
herself the income from the same. Using the income
Article 1191 and Article 1381 produced by the said parcels of land, Rita allegedly purchased
As an action based on the binding force of a written contract, two parcels of land, Lot No. 4709 and half of Lot No. 4706,
therefore, rescission (resolution) under Article 1191 situated in Canda-uay, Dumaguete City. The petitioners averred
prescribes in 10 years. Ten years is the period of prescription that Rita refused to effect a partition of the said parcels of land.
of actions based on a written contract under Article 1144.
Answer. Florante, Rita and Panfila asserted that they and the
The heirs alleged in their complaint that they were
IN THE CASE: petitioners co-owned 22 out of the 43 parcels of land
entitled to the rescission of the contract of sale of the lot mentioned in the latter’s complaint, whereas Rita actually
between the DBP and Sofia because the decision in the RTC owned 10 parcels of land out of the 43 parcels which the
case deprived the heirs of nearly the whole of the lot. petitioners sought to partition, while the 11 parcels of land were
owned by Petra Cafino Adanza, Florante, Meliton Adalia,
But what was the status of the contract at the time of the filing Consorcia Adanza, Lilia and Santiago Mendez.
of the contract for rescission?
Further, they claimed that Lot No. 4709 and half of Lot No. 4706
Apparently, that contract of sale had been fully performed were acquired by Rita using her own money. They denied that
when Sofia Quirong paid the full price for the lot and when in Rita appropriated solely for herself the income of the estate of
exchange the DBP executed the deed of absolute sale in her Spouses Baylon, and expressed no objection to the partition of
favor. There was a turnover of control of the property from DBP the estate of Spouses Baylon, but only with respect to the co-
to Sofia Quirong since she assumed under their contract, the owned parcels of land.
ejectment of squatters or occupants on the lot at her expense.
During the pendency of the partition case, Rita through a Deed
The cause of action of the Quirong heirs stems from their of Donation conveyed Lot 4709 and half of Lot 4706 to
having been ousted by final judgment from the ownership of Florante. On July 2000, Rita died intestate and without issue.
the lot that the DBP sold to Quirong their predecessor, in
violation of the warranty against eviction that commune with ARTICLE 1381(4)
every sale of property or thing. Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigant or
of competent judicial authority;
With the loss of 80% of the subject lot to the Dalopes by reason
of the judgment of the RTC the Quirong heirs had the right to
Supplemental Pleading. Learning of the said donation inter
file an action for rescission against the DBP and that action for
vivos in favor of Florante, the petitioners filed a Supplemental
rescission which is based on the subsequent economic loss
Pleading praying that the said donation in favor of Florante be
suffered by the buyer, was precisely the action that took
rescinded in accordance with Article 1381(4) of the Civil
the Quirong heirs against the DBP.
Code. Alleging that she was already sick and very weak
when the Deed of Donation was supposedly executed and
Consequently, it prescribed as Article 1389 provides in four
thus could have not validly given her consent thereto.
years from the time of action accrued. Since it accrued on
January 28, 1993 when the decision of 80% sale was final and
Opposition. Florante and Panfila opposed the rescission of said
executory, but they filed the action on June 10, 1998 they did
donation asserting that Article 1381(4) applies only when
so beyond the four-year period.
there is a prior judicial decree on who between the contending
parties actually owned the properties under litigation.
ADA v. BAYLON (2012)
678 SCRA 293
RTC declared the donation inter vivos rescinded without
Facts: This case involves the Estate of Spouses Baylon who prejudice to the shares of Florante and Rita Baylon and included
died on November 7, 1961 and May 5, 1974, respectively. At the the parcels of land in the division of property as of Rita Baylon
time of their death, they survived by their legitimate children among her heirs; the parties in this case.
Rita, Victoria, Dolores, Panfila, Ramon and Lilia Ada.
• Dolores died intestate and without issued on 1976 The RTC held that the death of Rita during the pendency of the
• Victoria died in 1981 and was survived by Luz case, having died intestate and without any issue, had rendered
• Ramon died and survived by Florante, Flora, Ramon the issue of ownership insofar as parcels of land which she
Jr, Remo, Jose, Eric, and Ma. Ruby claims as her own moot since the parties below are the heirs to
her estate. Thus, the RTC regarded Rita as the owner of the said
Complaint. Petitioners filed a complaint with the RTC for 10 parcels of land and, accordingly, directed that the same be
partition, accounting and damages against Florante, Rita and partitioned among her heirs. RTC rescinded the donation inter
Panfila. They alleged that Spouses Baylon, during their lifetime, vivos of Lot No. 4709 and half of Lot No. 4706 in favor of
owned 43 parcels of land all situated in Negros Oriental. Florante. In rescinding said donation inter vivos, RTC explained
Issue
However [,] with respect to lot [nos.] 4709 and 4706 which [Rita] had Whether or not the Court of Appeals erred in ruling that the
conveyed to Florante Baylon by way of donation inter vivos, the donation inter vivos of Lot No, 4709 and a half of Lot No. 4706
plaintiffs in their supplemental pleadings (sic) assailed the same to in favor of Florante may only be rescinded if there is already a
be rescissible on the ground that it was entered into by the
judicial determination that the same actually belonged to the
defendant Rita Baylon without the knowledge and approval of the
litigants [or] of competent judicial authority.
estate of Spouses Baylon.
The subject parcels of lands are involved in the case for which COURT RULING: The petition is partly granted.
plaintiffs have ask[ed] the Court to partition the same among the
heirs of Florentino Baylon and Maximina Elnas. Petitioner’s Arguments: The petitioners assert that the Court
of Appeals erred in remanding the case to the RTC for the for
Clearly, the donation inter vivos in favor of Florante Baylon was the determination of ownership of the two lots. They maintain
executed to prejudice the plaintiffs [’] right to succeed to the estate
that the RTC aptly rescinded the said donation inter vivos of the
of Rita Baylon in case of death considering that as testified by
Florante Baylon, Rita Baylon was very weak, and he tried to give her
lots pursuant to Article 1381 (4) of the Civil Code.
vitamins x x x. The donation inter vivos executed by Rita Baylon in
favor of Florante Baylon is rescissible for the reason that it refers to Florante’s Comment: Florante asserts that before the
the parcels of land in litigation x x x without the knowledge and petitioners may file an action for rescission, they must first
approval of the plaintiffs or of this Court. However[,] the rescission obtain a favorable judicial ruling that Lot No. 4709 and half of
shall not affect the share of Florante Baylon to the estate of Rita Lot No. 4706 actually belonged to the estate of Spouses Baylon.
Baylon. Until then, Florante avers that an action for rescission would be
premature.
Florante sought for a reconsideration, arguing that at the time
of Rita’s death on July 1, 2000, the two lots were no longer part
COURT REPLY: The petitioners’ contention are well-taken. The
of her estate as the same had already been conveyed him
resolution of the instant dispute is fundamentally contingent
through a donation inter vivos three years earlier. Thus,
upon a determination of whether the donation inter vivos of Lot
Florante maintained that Lot No. 4709 and half of Lot No. 4706
No. 4709 and half of lot 4706 in favor of Florante may be
should not be included in the properties that should be
rescinded pursuant to Article 1381(4) of the Civil Code on the
partitioned among the heirs of Rita. RTC denied MR.
ground that the same was made during the pendency of the
action for partition with the RTC.
CA reversed and set aside concerning the Deed of Donation.
The CA held that before they can filed for rescission they must
Rescission is a Remedy to Address the Damage or Injury
first obtain a favorable judicial ruling that the two lots
Cause to the Contracting Parties or Third Persons
belonged to the Spouses Baylon and not to Rita. Remanded
Rescission is a remedy granted by law to the contracting
parties, and even to third persons, to secure the reparation of
If [Lot No. 4709 and half of Lot No. 4706] belonged to the Spouses’
estate, then Rita Baylon’s donation thereof in favor of Florante
damages caused to them by a contract, even if it should be
Baylon, in excess of her undivided share therein as co-heir, is void. valid, by means of restoration of the things to their condition at
Surely, she could not have validly disposed of something she did the moment prior to the celebration of the contract.
not own.
In such a case, an action for rescission of the donation may, Rescission is a remedy to make ineffective a contract validly
therefore, prosper. If the lots, however, are found to have belonged entered into and therefore obligatory under normal conditions,
exclusively to Rita Baylon, during her lifetime, her donation thereof by reason of external causes resulting in a pecuniary
in favor of Florante Baylon is valid. For then, she merely exercised
prejudice to one of the contracting parties or their creditors.
her ownership right to dispose of what legally belonged to her.
Upon her death, the lots no longer form part of her estate as their
ownership now pertains to Florante Baylon. On this score, an action Contracts which are rescissible are valid contracts having all the
for rescission against such donation will not prosper. x x x. essential requisites of a contract, but by reason of injury or
damage caused to either of the parties therein or to third
Verily, before plaintiffs-appellees may file an action for rescission, persons are considered defective and, thus, may be rescinded.
they must first obtain a favorable judicial ruling that lot no. 4709
and half of lot no. 4706 actually belonged to the estate of Spouses The kinds of rescissible contracts according to the reason for
Florentino and Maximina Baylon, and not to Rita Baylon during her
their susceptibility to rescission, are the following:
lifetime. Until then, an action for rescission is premature. For this
matter, the applicability of Article 1381, paragraph 4, of the New
Civil Code must likewise await the trial court’s resolution of the issue 1. Those which are rescissible because of lesion or
of ownership. Be that as it may, an action for rescission should be prejudice;
filed by the parties concerned independent of the proceedings 2. Those which are rescissible on account of fraud or bad
below. The first cannot simply be lumped up with the second faith; and
through a mere supplemental pleading. 3. Those which, by special provisions of law, are
susceptible to rescission.
The petitioners sought reconsideration of the Decision dated
October 26, 2007 but it was denied by the CA.
Contracts Which Refer to Things Subject of Litigation is Rita’s failure to inform and seek the approval of the petitioners
Rescissible Pursuant to Article 1381(4) of Civil Code or the RTC regarding the conveyance gave the petitioners the
Contracts which are rescissible due to fraud or bad faith include right to have the said donation rescinded pursuant to Article
those which involve things under litigation if they have been 1381(4) of the Civil Code.
entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority. To Rescission under 1381(4) of the Civil Code is Not
be applicable the requisites are: Preconditioned upon Judicial Determination as to the
1. The defendant, during the pendency of the case, Ownership of the Thing Subject of Litigation
enters into a contract which refers to the thing subject The petitioners’ right to institute the action for rescission
of litigation; pursuant to Article 1381(4) of the Civil Code is not
2. The said contract was entered into without the preconditioned upon the RTC’s determination as to the
knowledge and approval of the litigants or of a ownership of the said parcels of land.
competent judicial authority.
It bears stressing that the right to ask for the rescission of a
As long as the foregoing requisites concur, it becomes the duty contract under Article 1381(4) of the Civil Code is not
of the court to order the rescission of the said contract. Article contingent upon the final determination of the ownership of
1381(4) seeks to remedy the presence of bad faith among the the thing subject of litigation.
parties to a case and/or any fraudulent act which they may
commit with respect to the thing subject of litigation. The primordial purpose of Article 1381(4) of the Civil Code is to
secure the possible effectivity of the impending judgment by a
When a thing is the subject of a judicial controversy, it should court with respect to the thing subject of litigation.
ultimately be bound by whatever disposition the court shall
render. The parties to the case are therefore expected, in It seeks to protect the binding effect of a court’s impending
deference to the court’s exercise of jurisdiction over the case, adjudication vis-à-vis the thing subject of litigation regardless
to refrain from doing acts which would dissipate or debase the of which among the contending claims therein would
thing subject of the litigation or otherwise render the subsequently be upheld.
impending decision therein ineffectual.
Accordingly, a definitive judicial determination with respect to
There is then a restriction on the disposition the parties of the the thing subject of litigation is not a condition sine qua non
thing that is the subject of the litigation. Article 1381(4) of the before the rescissory action contemplated under Article 1381(4)
Civil Code requires that any contract entered into by a of the Civil Code may be instituted.
defendant in a case which refers to things under litigation
should be with the knowledge and approval of the litigants or Assuming arguendo that a rescissory action under Article
of a competent judicial authority. Doing otherwise is indicative 1381(4) of the Civil Code could only be instituted after the
of bad faith for it undermines the authority of the court to lay dispute with respect to the thing subject of litigation is judicially
down the respective rights of the parties in a case relative to determined, there is the possibility that the same may had
the thing subject of litigation. already been conveyed to third persons acting in good faith,
rendering any judicial determination with regard to the thing
IN THE CASE: The RTC aptly ordered the rescission of the subject of litigation illusory. Surely, this paradoxical eventuality
donation inter vivos of Lot 4709 and half of Lot 4706 by Rita in is not what the law had envisioned.
favor of Florante.
The petitioners had sufficiently established the presence of Even if Donation Inter Vivos is Validly Rescinded, A
the requisites for the rescission of a contract pursuant to Determination as to the Ownership of the
Article 1381(4) of the Civil Code. Subject Parcels of Land is Still Necessary
Having established that the RTC had aptly ordered the
It is undisputed that, at the time they were gratuitously rescission of the said donation inter vivos in favor of Florante,
conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are the issue that has to be resolved by this Court is whether there
among the properties that were the subject of the partition is still a need to determine the ownership of Lot No. 4709 and
case then pending with the RTC. half of Lot No. 4706.
It is undisputed that Rita, one of the defendants in the partition RTC RULE: In opting not to decide as to the ownership of Lot No.
case with the RTC, did not inform nor sought the approval 4709 and half of Lot No. 4706, the RTC reasoned that the parties
from the petitioners or of the RTC with regard to the in the proceedings before it constitute not only the surviving
donation inter vivos of the said parcels of land to Florante. heirs of Spouses Baylon but the surviving heirs of Rita as well.
As intimated earlier, Rita died intestate during the pendency of
Although the gratuitous conveyance of the said parcels of land the proceedings with the RTC without any issue, leaving the
in favor of Florante was valid, the donation inter vivos of the parties in the proceedings before the RTC as her surviving heirs.
same being merely an exercise of ownership, Thus, the RTC insinuated, a definitive determination as to the
ownership of the said parcels of land is unnecessary since, in
any case, the said parcels of land would ultimately be CA considering the subsidiary nature of the act of rescission, it
adjudicated to the parties in the proceedings before it. found that the ASB had not yet prescribed, but was premature.
It stated that it has not even accrued in the first place,
COURT REPLY: The court disagrees. Admittedly, whoever may be enumerating the requisites for accion pauliana.
adjudicated as the owner of Lot No. 4709 and half of Lot No.
4706, be it Rita or Spouses Baylon, the same would ultimately Issue
be transmitted to the parties in the proceedings before the RTC Is the cause of action for rescission arose?
as they are the only surviving heirs of both Spouses Baylon and
Rita. In relation to an action for rescission, it should be noted that
the remedy of rescission is subsidiary in nature; it cannot be
However, the RTC failed to realize that a definitive adjudication instituted except when the party suffering damage has not
as to the ownership of Lot No. 4709 and half of Lot No. 4706 is other legal means to obtain reparation of the same.
essential in this case as it affects the authority of the RTC to
direct the partition of the said parcels of land. When Is There Cause of Action for Rescission
Consequently, following the subsidiary nature of the remedy of
Simply put, the RTC cannot properly direct the partition of Lot rescission, a creditor would have a cause of action to bring for
No. 4709 and half of Lot No. 4706 until and unless it determines rescission is alleged following successive measure are taken:
that the said parcels of land indeed form part of the estate of 1. Exhaust the properties of the debtor through levying
Spouses Baylon. It should be stressed that the partition by attachment and execution upon all the property of
proceedings before the RTC only covers the properties co- the debtor, except such as are exempt by law from
owned by the parties therein in their respective capacity as the execution;
surviving heirs of Spouses Baylon. 2. Exercise all the rights and actions of the debtor, save
those personal to him (accion subrogatoria)
Hence, the authority of the RTC to issue an order of partition in 3. Seek rescission of the contracts executed by the
the proceedings before it only affects those properties which debtor in fraud of their rights (accion pauliana)
actually belonged to the estate of Spouses Baylon. In this
regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly Requisites for Accion Pauliana
claimed by Florante, are indeed exclusively owned by Rita, then 1. That the plaintiff asking for rescission, has credit prior
the said parcels of land may not be partitioned simultaneously to the alienation, although demandable later;
with the other properties subject of the partition case before 2. That the debtor has made a subsequent contract
the RTC. conveying a patrimonial benefit to a third person;
3. That the creditor has no other legal remedy to satisfy
In such case, although the parties in the case before the RTC his claim, but would benefit by rescission of the
are still co-owners of the said parcels of land, the RTC would conveyance to the third person;
not have the authority to direct the partition of the said parcels 4. That act being impugned is fraudulent; and
of land as the proceedings before it is only concerned with the 5. That the third person who received the property
estate of Spouses Baylon. conveyed, if by onerous title, has been an accomplice
in the fraud.
HELD: Petition partially granted, CA decision modified and
reinstated the decision of RTC on the Deed and Remanded for A cursory reading of the allegations of ASB’s complaint would
the determination of ownership. show that if failed to allege the ultimate facts constituting its
cause of action and prerequisites are complied before the same
ANCHOR SAVINGS v. FURIGAY may be instituted.
693 SCRA 384
ASB without availing first and second remedies that is
Facts: On April 21, 1999, ASB filed a verified complaint for sum exhausting the properties of the Furigay or their transmissible
of money and damages with application for replevin against rights and actions, and they simply undertook the third
Ciudad Transport Services, Inc, President Furigay. RTC decided measure and filed an action for annulment of the donation.
in favor of ASB. This cannot be done (Citing the case of Khe Hong Cheng).
While Civil Case was pending, the Furigay donated their In all, it is incorrect for ASB to argue that a complaint need not
registered properties to their minor children. Claiming that the allege all the elements constituting its cause of action since it
donation of these properties was made in fraud of creditors, would simply adduce proof of the same during trial. It is
ASB filed a Complaint for Rescission of Deed of Donation, Title dismissed for failure to state a cause of action. Unfortunately
and Damages, against respondent spouses and children. for ASB, the Court finds the allegations of its complaint
insufficient in establishing its cause of action and in apprising
Instead of filing an answer, respondents sought the dismissal of the respondents of the same so that they could defend
the complaint, principally arguing that the RTC failed to acquire themselves intelligently and effectively pursuant to their right
jurisdiction over their persons as well as subject matter. to due process.

The action for annulment shall be brought within four years.
Civil Code This period shall begin:
Articles 1390-1402
In cases of intimidation, violence or undue influence, from
CHAPTER 7 the time the defect of the consent ceases.
VOIDABLE CONTRACTS
In case of mistake or fraud, from the time of the discovery of
ARTICLE 1390 the same.
The following contracts are voidable or annullable, even
though there may have been no damage to the contracting And when the action refers to contracts entered into by
parties: minors or other incapacitated person, from the time the
(1) Those where one of the parties is incapable of giving guardianship ceases.
consent to a contract;
(2) Those where the consent is vitiated by mistake, Effect of Prescription
violence, intimidation, undue influence or fraud.
If the action has already prescribed, the contract can no longer
These contracts are binding, unless they are annulled by a be set aside (Villanueva v. Villanueva).
proper action in court. They are susceptible of ratification.
NOTE: The guardian can also bring an action for annulment.
Concept of Voidable Contracts But if it were the minor, then upon reaching the age of majority,
They are existent, valid, and binding, although they can be if the incapacitated, then from the time of cessation of
annulled because of want of capacity or vitiated consent of one guardianship.
of the parties; but before annulment, they are effective and
obligatory between the parties. Hence, it is valid until it is set Illustrative Question
aside, and its validity may be assailed only in an action for that Q. On June 1, 2005, A entered into a contract with B. On Jan. 4, 2006, A
discovered that fraud had been present at the time he entered into the
purpose. They can be confirmed or ratified.
contract. Such a fraud vitiated his consent. Within what time must A
bring the action for annulment?
Distinctions Between a Rescissible and a Voidable Contract
Rescission Annulment A. Within 4 years from Jan. 4, 2006 A must bring action for annulment;
The basis is lesion or The basis here is vitiated otherwise, his right to sue for said annulment will have prescribed. Jan.
economic injury. consent or incapacity to 4, 2006 should be the starting point because it was on this date that the
consent. fraud was discovered.
The defect here is external The defect here is intrinsic
ARTICLE 1392
or intrinsic. in the meeting of the minds. Ratification extinguishes the action to annul a voidable
The action is subsidiary. The action is principal. contract.
This is a remedy. This is a sanction.
Private interest governs. Public interest governs. Confirmation, Ratification and Acknowledgment
Equity predominates. Law predominates. The present Civil Code makes no more distinction between
Plaintiff may be a party or a Plaintiff must be a party to confirmation and ratification. Technically and properly, the
third person. the contract. following terms are used:
There must be damage to Damage to the plaintiff is • Confirmation – to cure a defect in a voidable contract.
the plaintiff. immaterial. • Ratification – the cure the defect the lack of authority
If plaintiff is indemnified, Indemnity here is no bar to in an authorized contract entered by another.
rescission cannot prosper. the prosecution of the • Acknowledgment – to remedy a deficiency of proof.
action.
Compatible with the perfect Here, a defect is Effect of Ratification
validity of the contract. presupposed. (a) The action to annul is extinguished thus, the contract
To prevent rescission, To prevent annulment, becomes a completely valid one.
ratification is not required. ratification is required. (b) The contract is cleansed of its defect from the
beginning. [retroactive effect from inception]
Voidable Contract is Not Void Ab Initio
A contract where consent is vitiated, such as violence of Requisites of Ratification
intimidation, is not void ab initio, but only voidable, and is 1. The contract must be voidable;
binding upon the parties unless annulled by proper action. 2. The person ratifying must know the reason for the
contract being voidable (the cause must be known);
Grounds for Annulment 3. The cause must not exist or continue to exist anymore
1. Where on of the parties is incapable of giving consent at the time of ratification.
to the contract; 4. The ratification must have been made expressly or by
2. Where the consent is vitiated by mistake, violence, an act implying a waiver of the action to annul.
intimidation, undue influence or fraud. 5. Person ratifying must be injured party.

Ratification may be effected expressly or tacitly. It is Ratification cleanses the contract from defects from the
understood that there is a tacit ratification if, with moment that it was constituted.
knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has Retroactive Effect of Ratification
a right to invoke it should execute an act which necessarily After a contract has been validly ratified, no action to annul the
implies an intention to waive his right.
same can be maintained based upon defects relating to its
original validity. It is a declaratory waiver of the right to ask for
Express Ratification
annulment. Hence, its effects retroact from the moment when
It may be oral or written manifestation of the person entitled to
the contract is entered into.
ask for annulment that he agrees to be bound by the contract
• Although there is a retroactive effect, the rights of
or that he will not seeks its annulment.
innocent third persons must not be prejudiced.
Implied Ratification
Illustration
The ratification can be implied from the conduct or acts of the
Q. A minor sold his land to X. When he became 22 years old, he became
party of the contract entitled to ask for annulment. Any act indebted to Y. To avoid paying Y, the former minor decided to ratify the
evincing an intent to abide by the contract is evidence of the sale of the land. He then had no other property. May Y still rescind the
affirmance of the contract and a waiver to the right to ask for sale although at the time it was made he was not yet a creditor?
annulment.
A. Yes. Although ratification has a retroactive effect, still his rights as an
Examples of Implied Ratification innocent third person must not be prejudiced.
• When a minor buys a piece of land and upon reaching
ARTICLE 1397
majority, transfers such land to a third person.
The action for annulment of contracts may be instituted by
all who are thereby obliged principally or subsidiarily.
• Where a minor entered into a contract of sale, upon However, persons who are capable cannot allege the
reaching majority and knowing the defect, spends the incapacity of those with whom they contracted; nor can those
greater part of the proceeds from the same or that he who exerted intimidation, violence, or undue influence, or
proceeds to collect the balance of the purchase price. employed fraud, or caused mistake base their action upon
these flaws of the contract.
• There is confirmation of the contract where, with the
knowledge of the true transaction, the party alleging Persons who May Ask for Annulment
to be defrauded performs his part of the contract. The victim (principal or subsidiary party) may ask for annulment,
not the guilty person or his successor. Reason: He who comes
ARTICLE 1394 to equity must come with clean hands.
Ratification may be effected by the guardian of the
incapacitated person. Personal Requisites
Two different requisites are necessary to confer the capacity for
Exercise of Ratification the exercise of the action for annulment of contracts:
The right to ratify pertains to the incapacitated persons; hence, 1. Plaintiff must have an interest in the contract;
during the existence of the incapacity, it may be exercised by 2. The victim and not the party responsible for the defect
the guardian for him. is the person who assert the same.
ARTICLE 1395 Thus, by virtue of the first requisite, a person who is not
Ratification does not require the conformity of the principally or subsidiarily bound cannot attack the validity of an
contracting party who has no right to bring the action for
annullable contract; he has no legal capacity to challenge the
annulment.
validity of such contract.
Who may or may not Ask for Annulment?
And by virtue of the second requisite, the successor-in-interest
Ratification can be made by the injured party himself, provided
of one who has contracted with a minor cannot subsequently
he is capacitated, or has become capacitated. If he is not yet
avoid the contract on the ground of the minority of the latter.
capacitated, the guardian can ratify for him.
He who has capacity to contract may not invoke the incapacity

However, Article 1395 clearly provides that the conformity of
of the party with whom based on the principle that he who
the other party not injured or not vitiated is not essential. Those
comes to court must come with clean hands.
capable cannot ask for the annulment on the ground that the
other party is incapacitated.
Creditors of the Victim
The creditors of the victim cannot ask for annulment for the
EXCEPTION: When there is active misrepresentation. This means
simple reason because they are not bound by the contract. The
that the incapacitated has made it show that he is capable such
creditor cannot ask for annulment because he is not obliged by
as faking the status of attaining age of majority.
the terms of contract, principally or subsidiarily.
Estoppel if the Incapacitated Person at Fault ARTICLE 1399

If a minor misrepresents his age and the other party is misled When the defect of the contract consists in the incapacity of
as to his age, may the minor later on sue for annulment? No, one of the parties, the incapacitated person is not obliged to
make any restitution except insofar as he has been benefited
because of the estoppel.
by the thing or price received by him.
ARTICLE 1398
Generally, No Restitution by Incapacitated Party
An obligation having been annulled, the contracting parties
shall restore to each other the things which have been the A person entering into a contract must see to it that the other
subject matter of the contract, with their fruits, and the price party has sufficient capacity to bind himself. For while as a
with its interest, except in cases provided by law. In general rule, if the contract is declared null, the parties are
obligations to render service, the value thereof shall be the bound to have mutual restitution, if the nullity is on the account
basis for damages. of the incapacity of one of the contracting parties; the party
suffering from such incapacity is only bound to return what he
Effects of Annulment has profited by the thing sold or by the price received (only to
(a) If the contract has not yet been complied with, the the extent of enrichment).
parties are excused from their obligation. • Article 1241 reads: “Payment to a person who is
(b) If the contract has already been performed, there must incapacitated to administer his property shall be valid if he
be mutual restitution, of the has kept the thing delivered, or insofar as the payment has
a. The thing, with fruits; been beneficial to him.
b. The price, with interests.
Profit by Incapacitated
Mutual Restitution The profit or benefit by received by the incapacitated, which
The effect if annulment of the contract is to wipe it out of obliges him to make restitution, is not necessarily a material
existence, and to restore to the parties, in so far as legally and and permanent increase in fortune, but any prudent and
equitably possible, to their original situation before the contract beneficial use by the incapacitated of the thing received.
was entered into.
Thus, there is benefit, even without increase of fortune, if the
If there has been no performance by either party, the contract thing received is used for food, clothing, dwelling, health and
simply ceases to have force and effect. others. The proof is on the capacitated party and in absence of
such, there is no presumption of enrichment.
But if one or both parties have already performed, each party
must return to the other whatever he may have received by Capacitated Person Must Restored, Exception (1427)
reason of the contract. Art. 1427 reads: “When a minor between 18 and 21 years of age who
has entered into a contract without the consent of the parent or
Example. When a sale of land was declared void, it was held that guardian voluntarily pays a sum of money or delivers a fungible thing
in fulfillment of the obligation (natural obligation), there shall be no
the vendor must return the purchase price with interest, the
right to recover the same from the obligee who has spent or consumed
vendee must return to the vendor the land sold together with it in good faith.”
the fruits. Unless estoppel is established, the registration of the
land does not extinguish the obligation of restitution. ARTICLE 1400
Whenever the person obliged by the decree of annulment to
Who May Invoke Restitution return the thing cannot do so because it has been lost
When an obligation is adjudged void, the contracting parties through his fault, he shall return the fruits received and the
shall restore to each other the subject matter contracted about, value of the thing at the time of the loss, with interest from
but only between parties who are in privity with the contract. A the same date.
stranger to the actual contractual relation cannot invoke the
benefit of this provision. Value May be Substituted for Thing Itself
In the duty of mutual restitution, the value of the thing with
Liability for Damages interest substitutes for the thing itself that was lost thru the
As a rule, the annulment of the contract, and the resulting party’s fault.
mutual restitution, eliminates the possibility of damage
suffered by the injured party. But, there are cases where losses Example. A forced B to sell him (A) the house of B. B brought an action
to annul the contract. The contract was annulled on the ground of fraud.
occasioned by the contract cannot be erased or compensated
A was asked by the court to return to B whatever he (A) has received.
by annulment alone, thus damages are allowed: But the house had been destroyed through the fault of A. What should
1. Expenses incurred in the execution of contract; A now give? A should give the following:
2. Reasonable disbursements made by the injured party (a) The fruits or rentals received from the time the house was
in connection with the contract after its execution, given to the time of its loss;
such as for preparations to carry out the contract; (b) The value of the house at the time of the loss;
3. Damage suffered by the thing which must be returned (c) Interest of 6% per annum on the value of the house from the
time the housed was destroyed.
to the plaintiff, when imputable to the defendant;
This is a clear application of Article 1400 in this situation.
4. Losses suffered by possession of the thing.

The action for annulment of contracts shall be extinguished As long as one of the contracting parties does not restore
when the thing which is the object thereof is lost through the what in virtue of the decree of annulment he is bound to
fraud or fault of the person who has a right to institute the return, the other cannot be compelled to comply with what
proceedings. is incumbent upon him.
If the right of action is based upon the incapacity of any one Reciprocal Obligation of Mutual Restitution
of the contracting parties, the loss of the thing shall not be an The reciprocal obligation is best illustrated in this instance:
obstacle to the success of the action, unless said loss took
place through the fraud or fault of the plaintiff.
A forced B to take A’s car in exchange for B’s ring. B asked for
annulment, and the court gave the decree of annulment
Object is Lost by Party with Right to Institute Annulment
ordering each to return what had been received. B refused to
If lost through the fault or fraud of the person who has the right
give A the car. May A be compelled to give back the ring? No,
to institute the action, then the petition for annulment is hereby
due to Article 1402.
deemed extinguished even still incapacitated.
If the Loss is Fortuitous

BY PLAINTIFF WITH RIGHT OF ACTION: If loss is fortuitous, then the
action will prosper, because the law says through the fault or
fraud. So, if it were lost through fortuitous event, the defendant
cannot be compelled to restore what he is obliged to restore
because the essence of mutual obligation becomes untenable.
Until the annulment of the contract happens, it is valid and of

legal effect, hence the plaintiff, who was in possession was the
owner at the time of the loss and must bear the loss himself
due to the fortuitous event; res perit domino.
If defendant is made to restore to him, that would be unjust

enrichment on the part of the plaintiff. Thus, Article 1402,
applies then that the defendant cannot be compelled to make
restitution.
But annulment can still prosper, if the person who has the right
to institute the action offers to pay the value of the thing that he
has lost, the defendant is now obliged to make restitution,
applying Article 1400, except interest because it was not due
to his fault. The value is reckoned at the time of the loss of the
object.
BY DEFENDANT: If the defendant loses the object of the contract

through a fortuitous event and a petition of annulment is filed,
he is still obliged to pay the value only but not the interests
and fruits. He is in good faith for the loss and the loss is not due
to his fault or fraud employed by him. Defendant must still
suffer the loss for he is the owner but only for the value for the
loss was not due to his fault.
Loss of the Thing is Not an Obstacle to the Proceedings

when the Right of Action is Based Upon Incapacity
If the thing is lost, such loss shall not affect the proceedings in
any manner unless the loss took place through the fraud or fault
of the plaintiff.
As stated in Article 1399, the incapacitated is only to restitute

what he benefited or profited from. Suppose that at the time,
the insane squandered the object in a state of insanity, he is still
not bound to return it. In addition to Article 1401, it shall not
be an obstacle to the action, unless there is fraud or fault, which
clearly does not exist for he was insane at the incurring of loss.
OBLIGATIONS AND CONTRACTS COURT RULING: The petition is bereft of merit. It is not disputed
Articles 1390-1402 that Ignacio Atupan cased the fraudulent cancellation of OCT
by misrepresenting himself as the sole heir of Abao and that
JURISPRUDENCE NOTES
his affidavit was tainted with fraud because he falsely claimed
that he was the sole heir of Abao when in fact, he merely lived
1390-1402. Voidable Contracts
and grew up with her and that Jadol knew about this fact. And
that despite this knowledge they still presented the affidavit
SAMONTE v. COURT OF APPEALS (2001)
before the Register of Deeds when causing cancellation.
361 SCRA 473
Based on the foregoing facts, the CA, on appeal, ruled that the
Facts: The parcel of land subject of this dispute is in Agusan,
cancellation of OCT No. RO-238(555) and the consequent
issued in the names of Apolonia Abao and her daughter Tolero
issuance of TCT No. RT-476 in its place in the name of the Jadol
with an area of 12,735. Two cases were separately filed in the
spouses were effected through fraudulent means and that they
RTC involving the entire lot. Both cases were filed by the
(spouses Jadol) not only had actual knowledge of the fraud but
surviving heirs of Abao and Tolero they are respondents.
were also guilty of bad faith.
The first case was an action for quieting of title and recovery
Prescriptive Period for Voidable Contracts
of possession of parcel of land which formed part of property.
CONTENTION: Petitioner contends that the action had already
The defendants named are Spouses Lacho. The second case is
prescribed. Generally, an action for reconveyance of real
the same action, but it sought the annulment of several
property based on the fraud may be barred by the statute of
certificates of title. The controversy arose from this second case.
limitations which require that the action must be commenced
within four years from the discovery of the fraud and in case of
Civil Case 1816
registered land, such discovery is deemed to have to have taken
Plaintiffs claim ownership of the entire lot as one half was
place from the date of the registration of title.
registered in the name of their mother Tolero and the other was
in the name of their grandmother Abao.
Petitioner argues that that the respondents' action for
reconveyance, filed only in 1975, had long prescribed
After Abao died during the Japanese occupation and Ireneo
considering that the Jadol spouses caused the registration of a
Tolero died in 1945, they inherited and became owners Lot 216.
portion of the subject lot in their names way back in August 8,
Thus, they question the series of the cancellation of the
1957. It is petitioner's contention that since eighteen years had
certificate and Deed of Extrajudicial Settlement and
already lapsed from the issuance of TCT No. RT-476 until the
Confirmation of Sale executed by Alupan adjudicating one-half
time when respondents filed the action in the court a quo in
of the area of Lot 216.
1975, the same was time-barred.
Plaintiffs maintain that Ignacio Atupan is not a son of Abao, but
COURT REPLY: The defense of prescription is untenable. The
he only grew up while living with Abao. That when lot 216 was
general rule that the discovery of fraud is deemed to have taken
subdivided into two lots, the plaintiffs or their predecessors-in-
place upon the registration of real property because it is
interest did not sign any document agreeing as to the manner
considered as constructive notice to all persons does not apply
how Lot 216 was divided into two, nor they have consented to
to this case. Instead, the CA correctly applied the ruling in
the partition of the same.
Adille v. CA which applies in this case.
Defendant Samonte claim that he bought portions of the Lot
In Adille, petitioner executed a deed of extrajudicial partition
216 in good faith as he was made to believe that all the papers
misrepresenting himself as the sole heir his mother when in fact
in possession of his vendors were all in order. e has been in
she had other children. As a consequence, petitioner therein
open, continuous, adverse and exclusive possession of the
was able to secure title to the land in his name alone. His sibling
portions of Lot 216 he bought for more than 20 years and have
then filed a case for partition on the ground that he was only a
declared the land for taxation purposes.
trustee on an implied trust of the property.
Judgment is in favor of the plaintiff and against the defendants,
In has discussed on the area of prescription:
declaring the heirs as co-owners of the entire lot being the
It is true that registration under the Torrens system is constructive notice of
surviving heirs of Abao and Tolero and directing the title, but it has likewise been our holding that the Torrens title does not
reinstatement of OCT and cancellation of TCT and all furnish a shield for fraud. It is therefore no argument to say that the act of
subsequent certificate derived therefrom. Defendants were registration is equivalent to notice of repudiation, assuming there was one,
notwithstanding the longstanding rule that registration operates as a
ordered to vacate premises and remove improvements. universal notice of title.
Issue For the same reason, we cannot dismiss private respondents' claims
Whether or not the CA erred in departing from the prevailing commenced in 1974 over the estate registered in 1955. While actions to
enforce a constructive trust prescribes in ten years, reckoned from the date
doctrine that the “the discovery of the fraud is deemed to have
of the registration of the property, we, as we said, are not prepared to count
taken place at the time of registration and that not holding the period from such a date in this case.
Samonte as a buyer in good faith for value and protected.
We note the petitioner's sub rosa efforts to get hold of the property Answer, respondents opposed of claim of ownership of the
exclusively for himself beginning with his fraudulent misrepresentation in
Lahug property and alleged that the titles issued in the
his unilateral affidavit of extrajudicial settlement that he is "the only heir and
child of his mother Feliza with the consequence that he was able to secure petitioner’s names are defective and illegal, and the ownership
title in his name [alone]." Accordingly, we hold that the right of the private of the said property was acquired in bad faith and without value
respondents commenced from the time they actually discovered the inasmuch as the consideration for the sale is grossly
petitioner's act of defraudation. According to the respondent Court of
Appeals, they "came to know [of it] apparently only during the progress of inadequate and unconscionable.
the litigation." Hence, prescription is not a bar.
Respondents further alleged that at the time of the sale on April
IN THE CASE: Thus, the CA correctly reckoned prescriptive period 28, 1989 Carmen Ozamiz was already ailing and not in full
from the time respondent had actually discovered the possession of her mental faculties; and that her properties
fraudulent act of Atupan which has found out during the trial having been placed in administration, she was in effect
of the case, thus the action has not yet prescribed. incapacitated to contract with petitioners.
Petitioner is a Buyer in Bad Faith Atty. Asuncion Bernades he notary public who notarized the
It was established during the trial by the court a quo that he said document, testified that on the day of execution of the said
knew that respondents were the only surviving heirs of Irenea contract that Carmen Ozamiz was of sound mind and that she
Tolero. Despite this knowledge, petitioner still bought a portion voluntarily and knowingly executed the said deed of sale.
of the subject lot from the Jadol spouses on July 20, 1957, when
the same was still registered under OCT No. RO-238(555) in the RTC ruled in favor of the petitioners finding that the sale was
name of Abao and Tolero. With respect to this particular lot valid and voluntarily and deliberately entered into while she was
therefore, petitioner cannot pretend to be a purchaser in good of sound mind, for sufficient and good consideration, and
faith. It is axiomatic that one who buys from a person who is not without fraud, force, undue influence or intimidation having
a registered owner is not a purchaser in good faith. been exercised upon her, and consequently, the Court orders
the defendants herein to acknowledge and recognize the
plaintiffs’ title to the aforecited property and to refrain from
MENDEZONA v. OZAMIZ (2002) further clouding the same.
376 SCRA 482
CA reversed and ruled that the Deed of Absolute Sale was a

Facts: Petitioner spouses Mario J. Mendezona and Teresita M.
simulated contract since the petitioners failed to prove that the
Mendezona and petitioner spouses Luis J. Mendezona and
consideration was actually paid, and, furthermore, that at the
Maricar L. Mendezona, and petitioner Teresita Adad Vda. de
time of the execution of the contract the mental faculties of
Mendezona own a parcel of land each in the Banilad Estate,
Carmen Ozamiz were already seriously impaired.
Lahug, Cebu City with almost similar area.
Presumption of Regularity of Notarized Documents
The petitioners ultimately traced their titles of ownership over
Contrary to the erroneous conclusions of the appellate court, a
their respective properties from a notarized Deed of Absolute
simulated contract cannot be inferred from the mere non-
Sale7 dated April 28, 1989 executed in their favor by Carmen
production of the checks. It was not the burden of the
Ozamiz for and in consideration of the sum of One Million Forty
petitioners to prove so. It is significant to note that the Deed of
Thousand Pesos (₱1,040,000.00). There was an annotation of lis
Absolute Sale dated April 28, 1989 is a notarized document duly
pendens for guardianship, they wanted to quiet the title.
acknowledged before a notary public. As such, it has in its favor
the presumption of regularity, and it carries the evidentiary
It appears that on January 15, 1991, the respondents instituted
weight conferred upon it with respect to its due execution. It is
the petition for guardianship with the Regional Trial Court of
admissible in evidence without further proof of its authenticity
Oroquieta City, alleging therein that Carmen Ozamiz, then years
and is entitled to full faith and credit upon its face.
old, after an illness in July 1987, had become disoriented and
could not recognize most of her friends; that she could no longer
Therefore, with this well-recognized statutory presumption, the
take care of herself nor manage her properties by reason of her
burden fell upon the respondents to prove their allegations
failing health, weak mind and absent-mindedness.
attacking the validity and due execution of the said Deed of
Absolute Sale. Respondents failed to discharge that burden;
Mario Mendezona and Luis Mendezona, herein petitioners who
hence, the presumption in favor of the said deed stands. But
are nephews of Carmen Ozamiz, and Pilar Mendezona, a sister
more importantly, that notarized deed shows on its face that
of Carmen Ozamiz, filed an opposition to the guardianship
the consideration of One Million Forty Thousand Pesos
petition. They opposed that Carmen needed guardian. It was
(₱1,040,000.00) was acknowledged to have been received by
shown that Carmen needed a guardian.
Carmen Ozamiz. Simulation cannot be inferred from the alleged
absence of payment based on the testimonies of Concepcion
As guardians Roberto J. Montalvan filed on 1991 with
Agacac, assistant of Carmen Ozamiz, and Nelfa Perdido, part-
guardianship court their inventories and accounts which
time bookkeeper of Carmen Ozamiz. The testimonies of these
included the Lahug which was the Deed of Sale executed in
two (2) witnesses are unreliable and inconsistent.
favor of petitioners.
Reason Not Sufficient Ground to Annul Contract Due to such condition he was repatriated to the Philippines. He
Furthermore, the appellate court erred in ruling that at the time doctors declared that Famanila cannot go back to sea duty and
of the execution of the Deed of Absolute Sale on April 28, 1989 has been observe for 120 and declared permanently, totally
the mental faculties of Carmen Ozamiz were already seriously disabled. Thereafter, representatives of Barbership and NFD
impaired. It placed too much reliance upon the testimonies of convinced his to settle his claim amicably by accepting the
the respondents’ witnesses. However, after a thorough scrutiny amount of $13,200.
of the transcripts of the testimonies of the witnesses, we find
that the respondents’ core witnesses all made sweeping He accepted the offer as evidenced in by his signature in the
statements which failed to show the true state of mind of Receipt and Release on 1991, and his wife and one Richard
Carmen Ozamiz at the time of the execution of the disputed Famanila acted as witnesses in the signing of the release.
document. The testimonies of the respondents’ witnesses on
the mental capacity of Carmen Ozamiz are far from being clear NLRC Complaint. However, there was a complaint at the NLRC
and convincing, to say the least. praying for the award of disability benefits, share in the
insurance proceeds, moral damages. But was dismissed. CA
Carolina Lagura, a house helper of Carmen Ozamiz, testified dismissed the appeal.
that when Carmen Ozamiz was confronted by Paz O. Montalvan
in January 1989 with the sale of the Lahug property, Carmen Issues
Ozamiz denied the same. She testified that Carmen Ozamiz Whether or not Famanila’s consent was vitiated thus making
understood the question then. However, this declaration is the Receipt and Release void and unenforceable.
inconsistent with her (Carolina’s) statement that since 1988
Carmen Ozamiz could not fully understand the things around CONTENTION: Petitioner claims that he did not sign the Receipt
her, that she was physically fit but mentally could not carry a and Release voluntarily or freely because he was permanently
conversation or recognize persons who visited her. disabled and in financial constraints, which allegedly vitiated his
Furthermore, the disputed sale occurred on April 28, 1989 or consent which makes the Receipt and Release void and
three (3) months after this alleged confrontation in January unenforceable.
1989. This inconsistency was not explained by the respondents.
COURT REPLY: The petition lacks merit. A vitiated consent does
It has been held that a person is not incapacitated to make a contract void and unenforceable, it only gives rise to a
contract merely because of advanced years or by reason of voidable agreement. A voidable contract is binding unless
physical infirmities. Only when such age or infirmities annulled by a proper action in court.
impair her mental faculties to such extent as to prevent her
from properly, intelligently, and fairly protecting her Disability is Not Among Vices of Consent
property rights, is she considered incapacitated. The However, disability is not among the factors that may vitiate
respondents utterly failed to show adequate proof that at consent. Besides, save for petitioner’s self-serving allegations,
the time of the sale on April 28, 1989 Carmen Ozamiz had there is no proof on record that his consent was vitiated on
allegedly lost control of her mental faculties. account of his disability. In the absence of such proof of vitiated
consent, the validity of the Receipt and Release must be upheld.
We note that the respondents sought to impugn only one
document, namely, the Deed of Absolute Sale dated April 28, There is nothing in the records to show that petitioner’s consent
1989, executed by Carmen Ozamiz. However, there are nine (9) was vitiated when he signed the agreement. Granting that
other important documents that were, signed by Carmen petitioner has not fully recovered his health at the time he
Ozamiz either before or after April 28, 1989 which were not signed the subject document the same cannot still lead to the
assailed by the respondents. conclusive that he did not voluntarily accept the agreement, for
his wife and another relative witnessed his signing. And on its
FAMANILA v. COURT OF APPEALS (2006) face, the Receipt and Release did not show any violation of law
500 SCRA 76 or public policy.
Facts: NFD hired the services of Roberto Famanila as Messman A Clear and Equivocal Waiver or Quitclaim is Lawful
for Hansa Riga a vessel owned Principal and co-respondent To be valid and effective, waivers must be couched in clear and
Barbership Management Limited. While Hansa Riga was docked unequivocal terms, leaving no doubt as to the intention of
in California, and while petitioner was assisting in the loading those giving up a right or a benefit that legally pertains to them.
operation, he complained of a headache. Petitioner We have reviewed the terms and conditions contained in the
experienced dizziness and he subsequently collapsed. Receipt and Release and we find the same to be clear and
unambiguous. The signing was even witnessed by petitioner’s
Upon examination, it was determined that he had a sudden wife, Gloria T. Famanila and one Richard T. Famanila. It is
attack of left cerebral hemorrhage from a ruptured cerebral elementary that is contract is perfected by mere consent thus
aneurysm he underwent a rain operation and he was confined dire necessity is not an acceptable ground for annulling the
at Oregon where he went for another brain operation for such Receipt and Release unless shown that force was employed to
condition. take the consent.
Article 291 of Labor Code on Prescriptive Period BPI alleged that the Deed of Absolute Donation to Mercedes
Regarding prescription, the applicable prescriptive period for was void ab initio, as Feliciano never donated the property to
the money claims against the respondents is the three-year Mercedes. In addition, BPI averred that even if Feliciano had
period pursuant to Article 291 of the Labor Code which truly intended for such, it will still be void as he was not of
provides that: sound mind and therefore incapable of giving valid consent. In
August 1997, Feliciano died.
Article 291: Money Claims. – All money claims arising from employer-
employee relations accruing during the effectivity of this Code shall be RTC found that the evidence presented by the complainants
filed within three (3) years from the time the cause of action accrued; was insufficient to overcome the presumption that Feliciano
otherwise they shall be forever barred.
was sane and competent at the time he executed the deed of
donation in favor of Mercedes Catalan. Thus, the court declared,
Since petitioner’s demand for an award of disability benefits is
the presumption of sanity or competency not having been duly
a money claim arising from his employment, Article 291 of the
impugned, the presumption of due execution of the donation
Labor Code applies. From the time petitioner was declared
in question must be upheld.
permanently and totally disabled on August 21, 1990 which
gave rise to his entitlement to disability benefits up to the time
CA affirmed the decision and stated that the 1951 donation
that he filed the complaint on June 11, 1997, more than three
coupled with compliance with certain solemnities required by
years have elapsed thereby effectively barring his claim.
the Civil Code in donation inter vivos of real property.
HELD: WHEREFORE, the petition is DENIED. The Decision of the

Issues
Court of Appeals dated March 30, 2001 in CA-G.R. SP No. 50615
1. Whether or not the CA erred in upholding the trial
which affirmed the Decision of the National Labor Relations
court did not commit any reversible error.
Commission dismissing petitioner’s complaint for disability and
2. Whether the certificate of disability for discharge and
other benefits for lack of merit, and the Resolution dated
the report of board of officers are admissible.
October 5, 2001 denying the motion for reconsideration, are
3. Whether or not Ca erred in upholding the subsequent
AFFIRMED.
sale of the property by Mercedes to her children.
4. Whether or not the case is barred by laches.
CATALAN v. BASA (2007)
528 SCRA 645
Donation, Concept and Requisites
A donation is an act of liberality whereby a person disposes
Facts: Feliciano Catalan was discharged from military service.
gratuitously a thing or right in favor of another, who accepts it.
The Board of Medical Officers of the Department of Veteran
Like any other contract, an agreement of the parties is essential.
affairs for that he was unfit to render military service due to his
Consent in contract presupposes the following requisites:
schizophrenic reaction, catatonic type which incapacitates
1. It should be intelligent or with an exact notion on the
him because of flattening of mood and affect, preoccupation
matter to which it refers;
with worries, withdrawal, and sparse and pointless speech.
2. It should be free; and
3. It should be spontaneous.
On 1951, an Absolute Deed of Donation wherein Feliciano
allegedly donated to his sister Mercedes Catalan one half of
The parties’ intention must be clear and the attendance of a
the property in Pangasinan of 801 square meters. The donation
vice of consent like any contract, renders the donation voidable.
was registered with ROD. The BIR issued a new tax declaration
For donation to be valid, what is crucial is the donor’s capacity
to Mercedes for the 400.5 square meters donated to her. The
to give consent at the time of donation.
remaining half of the property remained in Feliciano’s name.
IN THE CASE: It shows that the evidence presented by the

In 1954, PBTC filed before CFI Pangasinan to declare Feliciano
petitioners was insufficient to overcome the presumption that
incompetent. On December 22, 1953, the trial court issued an
Feliciano was competent when he donated the property in
Order for Adjudication for Appointing Guardian for the Estate
question to Mercedes.
and Fixing Allowance of Feliciano. PBTC now BPI became
Feliciano’s guardian.
Petitioners aver that as early as 1948, Feliciano had been found
to be suffering from schizophrenia by the Board of Medical
On 1979, Mercedes sold the property in issue in favor of her
Officers of the DVA. By itself, the allegation cannot prove the
children Delia and Jesus Basa. The Deed of Absolute Sale was
incompetence of Feliciano.
registered with the ROD Pangasinan on 1992. On 1983, the
Cerezo donated Lot 2 of the property to their children Alex
Nature of Schizophrenia. Feliciano could still be presumed
Catalan and Librada and Zenaida.
capable of attending to his property rights. From these scientific
studies it can be deduced that a person suffering from
In 1997, BPI filed a case for Declaration of Nullity of Documents,
schizophrenia does not necessarily lose his competence to
Recovery of Possession and Ownership as well as damages
intelligently dispose his property.
against respondents.
By merely alleging the existence of schizophrenia, petitioners It was then alleged that respondent Maxima is a co-owner of a
failed to show substantial proof that at the date of the parcel of land with a ¼ share and that sometime in 1955, Felix
donation, Feliciano Catalan had lost total control of his mental Paragas failed to account for P3,000. It was agreed that
faculties. Thus, the presumption of sound mind was not respondent Felix would pay the said amount by installment to
overthrown during the 1951 Donation. the Dagupan Colleges. Pursuant to that agreement, Blas F.
Rayos and Amado Ll. Ayson, then both occupying high
He was only decided as mentally infirm on 1953. Sufficient positions in the said institution, required respondent-spouses
proof of his infirmity to give consent to contracts was only to sign, without explaining to them, a Deed of Absolute Sale on
established when the Court of First Instance of Pangasinan April 13, 1955 over respondent Maxima’s real property under
declared him an incompetent on December 22, 1953. threat that respondent Felix would be incarcerated for
misappropriation if they refused to do so.
It is interesting to note that the petitioners questioned
Feliciano’s capacity at the time he donated the property yet did It further alleged that spouses to their promise to reimburse the
not see fit to question his mental competence when he entered defalcated amount, took pains to pay their obligation in
into a contract of marriage with Corazon Cerezo or when he installments regularly deducted from the salaries received by
executed deeds of donation of his other properties in their respondent Felix from Dagupan Colleges, however they did not
favor. The presumption that Feliciano remained competent to cancel the Deed of Sale and received a copy of the complaint
execute contracts, despite his illness, is bolstered by the for ejectment filed by petitioner.
existence of these other contracts. Competency and freedom
from undue influence, shown to have existed in the other acts RTC rendered in favor of spouses declaring the Deed of
done or contracts executed, are presumed to continue until the Absolute Sale as an equitable mortgage, annulling the Deed of
contrary is shown. Sale. CA affirmed the decision and the MR was denied.
HELD: Thus, the sale by Mercedes was valid and that it is not Issue
barred by laches. Whether or not the CA has acted in excess of abuse of discretion
amounting to lack of jurisdiction in dismissing the appeal in
AYSON v. PARAGAS (2008) violation of the laws on sale, equitable mortgage, prescription,
557 SCRA 50 laches and estoppel as well as property registration.
Facts: The subject of this case is the ¼ portion of share of Petitioner contends that spouses are bound by the judicial
Maxima Paragas in Dagupan. There was an ejectment admission they made both in the ejectment case and in the case
complaint by Amado Ayson against the Paragas. Petitioners for declaration of nullity of the Deed of Absolute Sale.
allege that they are the owner of the properties occupied by
the Paragas and it was only through tolerance and that they With respect to the ejectment case, he posits that respondent-
executed an Affidavit which declared that: spouses cannot renege on the effects of their admission that
1. They are occupants of the land owned by Ayson petitioner is the registered owner of the disputed property; that
2. That they occupant the land by tolerance without rent they were occupying the same by mere tolerance without rent.
3. That they agree to vacate the land within three months • Petitioner further argues that the action has
and remove and transfer our house to another place; prescribed because the registration was constructive
4. That in consideration of vacating they will receive notice of the fraud to the whole world which was done
P20,000. 38 years ago. It argued that there was good faith.
But despite the receipt of the P10,000 upon the execution of COURT RULING: The arguments do not persuade the court.
the Affidavit they refuse to leave and despite demands they still
refused to vacate such land. On the Admissions
It is worthy to note that as early as the submission of position
In their Answer, they alleged that Zareno had no personality and papers before the MTCC, they already question sale and
authority to file the case and the filing of the complaint was asserted ownership pointing the possession, however, the
made in bad faith. During the preliminary conference there MTCC held them bound by the admission made by their
were admission. counsel holding that petitioner had a better right to possess.
MTCC decided in favor of Ayson ordering Paragas to vacate the Nevertheless, it must be remembered that in ejectment suits,
land in question and to deliver the physical and peaceful the issue to be resolved is merely the physical possession over
possession of the land. RTC affirmed the decision. CA dismissed the property, possession de facto and not possession de jure,
their petitioner. independent of the claim of ownership. The judgment rendered
in such an action shall be conclusive only with respect to
Meanwhile in 1993, there was a complaint for a declaration of physical possession and shall in no wise bind title to the realty
the nullity of deed of sale, transactions, documents, and titles thus such judgment shall not bar an action between the same
with a prayer for injunction and damages. parties respecting title of ownership.
The Deed of Absolute Sale was an Equitable Mortgage KINGS PROPERTIES v. GALIDO (2009)
The evidence establishes that the possession of the subject 606 SCRA 137
property remained with respondent-spouses despite the
execution of the Deed of Sale on April 13, 1955. In fact, Facts: In 1996, the heirs of Domingo Eniceo were awarded with
testimonies during the trial showed that petitioner and his a Homestead Patent consisting of four parcels of land in Rizal.
predecessors never disturbed the possession of spouses. The Antipolo property was registered to the OCT subject to the
following conditions:
Moreover, the evidence presented by respondent-spouses
To have and to hold the said tract of land, with the appurtenances thereunto
indubitably reveals that they signed the contract under threat
of right belonging unto the said Heirs of Domingo Eniceo and to his heir or
of prosecution with the view to secure the payment of the heirs and assigns forever, subject to the provisions of sections 118, 121, 122
payment of P3,000 defalcated by Felix Paragas. Ayson obviously and 124 of Commonwealth Act No. 141, as amended, which provide that
exerted undue influence on Felix taking advantage of the except in favor of the Government or any of its branches, units or institutions,
the land hereby acquired shall be inalienable and shall not be subject to
latter’s lack of educate and understanding of the legal effect of incumbrance for a period of five (5) years next following the date of this
his signing the deed. patent, and shall not be liable for the satisfaction of any debt contracted prior
to the expiration of that period; that it shall not be alienated, transferred or
conveyed after five (5) years and before twenty-five (25) years next following
They have clearly proven that they have already paid the
the issuance of title, without the approval of the Secretary of Agriculture and
aforesaid amount. That the obligation was in installments Natural Resources; that it shall not be incumbered, alienated, or transferred
through salary deduction over a period of 10 years from the to any person, corporation, association, or partnership not qualified to
signing of the Deed of Absolute Sale is of no moment. acquire public lands under the said Act and its amendments;
It is safe assume that this repayment scheme was an easy On September 1973, a Deed of Sale covering the Antipolo
payment plan based on the respondent-spouses’ capacity to property was executed between Rufina Eniceo and Maria
pay. Also noteworthy is the deductions amount to a total of Eniceo as vendors and Galido as vendee. Petitioner alleges that
P5,791 or almost double his obligation of P3,000. It cannot be when Maria Eniceo died in June 1975, Rufina Eniceo and the
denied that petitioner failed to adduce countervailing proof heirs of Maria Eniceo (Eniceo heirs), who continued to occupy
that the payment was for some other obligation. That the realty the Antipolo property as owners, thought that the owner’s
taxes were paid for the house. duplicate copy of OCT No. 535 was lost. They registered a
Notice of Loss of title and filed a petition for the issuance of a
An Equitable Mortgage is a Voidable Contract; new owner’s duplicate copy of the OCT.
Threat and Undue Influence Reckoned from Cessation
As a voidable contract, it may be annulled within 4 years from RTC rendered a decision that the certified true copy of the OCT
the time cause of action accrues. This case, however, not only contained no annotation in favor of any person, corporation or
involves a contract resulting from fraud, but covers a entity. RTC ordered ROD to issue a new owner’s copy of OCT in
transaction ridden with threat, intimidation and continuing favor of the Eniceo heirs.
undue influence which started practically when they bullied the
spouses into signing the Deed of Absolute Sale under threat of Petitioners states that as early as 1991, Galido knew of the RTC
incarceration. Thus, the four-year period should be reckoned decision because he filed a criminal case against Eniceo and
from the time the defect in the consent ceases. Bolinas for giving false testimony of a material fact during trial.
While in first glance, the defect in the consent ceased from Petitioner alleges that sometime in 1995, Bolinas came to the
payment of obligation through salary deduction or from the office of Tronio, Jr. and offered to sell the Antipolo property.
death of Ayson and Rayos. It is apparent that such defect in the During an on-site inspection, Tronio saw a house and
consent never ceased up to the time of signing of the ascertained that the occupants were Bolinas’ relatives and when
Affidavit when in 1992 caused respondent Felix to be to the ROD and verified records ascertaining that the OCT was
brought to him and taking advantaged of the latter being clean and had no lien or encumbrances. After verification
unlettered, unduly influenced Felix into executing the said petitioner decided to buy the Antipolo property.
Affidavit for a fee of P10,000. The complaint praying for the
nullity of the Deed of Absolute Sale was filed on within the four- In 1995, Galido caused the annotation of his adverse claim. The
year prescriptive period. Eniceo heirs executed a deed of absolute sale in favor of
petitioner covering lots 3 and 4 of the Antipolo property for
Regarding the finality of the adjudication of physical possession P500,000. On the same date, TCTs for lot 1 and 5 were recorded
in favor of petitioner, it may be reiterated that the right of in the names of Eniceos. TCT for Lots 3 and 4 of the Antipolo
possession is a necessary incident of ownership. This property were issued in the name of Kings Properties.
adjudication of ownership of the property to respondent-
spouses must include the delivery of possession to them since On August 1995, the Secretary of the DENR approved the
petitioner has not shown a superior right to retain possession deed of sale between the Eniceo heirs and respondent. On
of the land independent of his claim of ownership which is 1996, Galido filed a complaint against Eniceo heirs and King
herein rejected. Properties for cancellation of certificate of titles and registration
of the Deed of Sale and title in his favor.
RTC Ruling Issues

The trial stated that although respondent claims that the Eniceo 1. Whether the adverse claim of respondent over the
heirs sold to him the Antipolo property, respondent did not Antipolo property should be barred by laches; and
testify in court as to the existence, validity and genuineness of 2. Whether the deed of sale delivered to respondent
the deed of sale and his possession of the duplicate owner’s should be presumed an equitable mortgage.
copy of the OCT. The trial court stated that as owner of a
property consisting hectares of land, respondent should have On Validity of the Sale
come to court to substantiate his claim and show that the The contract between the Eniceo heirs and respondent
allegation of the Eniceo heirs and Kings Properties are mere executed in 1973 was a perfected contract of a sale. A contract
fabrications. is perfected once there is consent of the contracting parties on
the object certain and on the cause of the obligation. In this
The trial court noticed that respondent did not register the case, the object of the sale is the Antipolo property and the
deed of sale with ROD immediately after its execution in 1973. price certain is P250K.
Further, Galido waited for 22 long years before he had the
sale approved by the DENR secretary. The trial court declared The execution of the notarized deed of sale and the delivery
the Galido slept on his rights. His failure to register sale and of the owner’s duplicate copy of OCT No. 535 to respondent
secure cancellation OCT militates against his claim of is tantamount to a constructive delivery of the object of the
ownership. Thus, he was not able to prove preponderance of sale. In Navera v. Court of Appeals, the Court ruled that since
evidence to justify complaint. the sale was made in a public instrument, it was clearly
tantamount to a delivery of the land resulting in the symbolic
They noted the Kings Properties is a buyer in good faith and possession thereof being transferred to the buyer.
for value because it had exercised due diligence in inspecting
the property and verifying title with ROD. Petitioner alleges that the deed of sale is a forgery claiming that
it was fake and spurious. However, as CA held, it cannot be
The trial court held that even if the deed of sale was genuine it presumed. Kings Properties and Eniceo heirs failed to prove
was an equitable mortgage. The trial court stated that such forgery.
respondent never obtained possession of property.
Petitioner then invokes the belated approval by the DENR
CA Ruling Secretary, made within 25 years from the issuance of the
It ruled in favor Galido finding the presumption of regularity of homestead, to nullify the sale of the Antipolo Property. The sale
the Deed of Sale and that whoever asserts forgery has the of the Antipolo property cannot be annulled claiming the
burden of proving it by clear, positive and convincing evidence DENR Secretary gave his approval after 21 years from the
because forgery can never be presumed. The CA found that date of deed of sale.
Kings Properties and Eniceo heirs have not substantiated the
allegation of forgery. The failure to secure the approval of the Secretary does not
ipso facto make a sale void. The absence of approval by
The Ca ruled that laches set in. The contention regarding Secretary does not void a sale after the expiration of the 5-year
validity of the deed for it was without the approval of the DENR period, for in such event he requirement of Section 118 of the
Secretary is untenable. The requirement for the approval is Public Land Act becomes merely directory or a formality.
merely directory and its absence does not invalidate nay
alienate of homestead after 5 years. The approval may be secured later, producing the effect of
ratifying and adopting the transaction as if the sale had been
The CA ruled that petitioner is a buyer in bad faith because it previously authorized.
purchased the disputed properties from the Eniceo heirs after
respondent had caused the inscription on OCT No. 535 of an On Equitable Mortgage
adverse claim. Registration of the adverse claim serves as a Petitioner claims that an equitable mortgage can be presumed
constructive notice to the whole world. Petitioner cannot feign because the Eniceo heirs remained in possession of the
ignorance of facts which should have put it on guard and then Antipolo property. Apart from the fact that the Eniceo heirs
claim that it acted under the honest belief that there was no remained in possession of the Antipolo property, petitioner has
defect in the title of the vendors. Knowing that an adverse claim failed to substantiate its claim that the contract of sale was
was annotated in the certificates of title of the Eniceo heirs, intended to secure an existing debt by way of mortgage. In fact,
petitioner was forewarned that someone is claiming an interest mere tolerated possession is not enough to prove that the
in the disputed properties. transaction was an equitable mortgage.
It was not an equitable mortgage, one must first satisfy the Although petitioner raised the defense of equitable mortgage
requirement that the parties entered into a contract in the lower court, he cannot claim that the deed was an
denominated as contract of sale and that their intention was to equitable mortgage because petitioner was not a privy to the
secure debt by way of mortgage. The CA reversed the decision deed of sale dated 10 September 1973.
of the trial court.
Petitioner merely stepped into the shoes of the Eniceo heirs.

Petitioner, who merely acquired all the rights of its
predecessors, cannot espouse a theory that is contrary to the
theory of the case claimed by the Eniceo heirs.
Petitioner is Not Buyer in Good Faith

Petitioner does not dispute that respondent registered his
adverse claim with the Registry of Deeds on 14 March 1995. The
registration of the adverse claim constituted, by operation of
law, notice to the whole world. From that date onwards,
subsequent buyers were deemed to have constructive notice of
respondent’s adverse claim.
Petitioner purchased the Antipolo property only on 20 March

1995 and 5 April 1995 as shown by the dates in the deeds of
sale. On the same dates, the Registry of Deeds issued new TCTs
in favor of petitioner with the annotated adverse claim.
Consequently, the adverse claim registered prior to the second

sale charged petitioner with constructive notice of the defect in
the title of Eniceo heirs. Therefore, petitioner cannot be deemed
as a purchaser in good faith when they bought and registered
the Antipolo property.
Laches
Respondent discovered in 1991 that a new owner’s copy of OCT
No. 535 was issued to the Eniceo heirs. Respondent filed a
criminal case against the Eniceo heirs for false testimony. When
respondent learned that the Eniceo heirs were planning to sell
the Antipolo property, respondent caused the annotation of an
adverse claim.
On 16 January 1996, when respondent learned that OCT No.

535 was cancelled and new TCTs were issued, respondent filed
a civil complaint with the trial court against the Eniceo heirs and
petitioner. Respondent’s actions negate petitioner’s argument
that respondent is guilty of laches. True, unrecorded sales of
land brought under Presidential Decree No. 1529 or the
Property Registration Decree (PD 1529) are effective between
and binding only upon the immediate parties.
The registration required in Section 51 of PD 1529 is intended

to protect innocent third persons, that is, persons who, without
knowledge of the sale and in good faith, acquire rights to the
property. Petitioner, however, is not an innocent purchaser for
value.
HELD: Petition is denied, the Decision of CA is affirmed.

OBLIGATIONS AND CONTRACTS Kinds of Unenforceable Contracts

Civil Code 1. Unauthorized contracts
2. Those that fail to comply with the Statute of Frauds
Articles 1403-1408
3. Those where both parties are incapable of giving
CHAPTER 8 consent to a contract
UNENFORCEABLE CONTRACTS
NOTE: Mere lapse of time, no matter how long, is not the
Concept and Distinction ratification required by law of an unenforceable contract.
An unenforceable contract is one which cannot be enforced be Without the ratification the “agent” assumes personal liablity.
enforced unless it is first ratified in the manner provided by law.
Unenforceable contracts are nearer absolute nullity than the The first two kinds cannot be enforced through court action.
other two. There can be no compulsion through specific performance.
Here, specific performance will not lie, unless the unenforceable
It is distinguished from rescissible contracts and annullable contracts are ratified.
contract in that the latter two contracts produce legal effects
unless they are set aside by a competent court, while the Unenforceable contracts are valid contracts only that because
unenforceable contract does not produce any legal effects unless they are still in the stage where there is no performance yet by
it is ratified. It is in an intermediate ground between the either of the parties, there can be no action that can be
voidable and the void contract. maintained before the court precisely because the agreement
is still in its executory stage that is why it cannot be proved by
ARTICLE 1403 parol or oral evidence.
The following contracts are unenforceable, unless they are
ratified: Instance. Suppose A and B would enter into an agreement, where A
(1) Those entered into in the name of another person says to B that A is selling his house for P500,000, and B says to A that
by one who has been given no authority or legal he will buy the house. This is an oral agreement.
representation or who has acted beyond his
powers; The agreement is valid, because contracts are valid in whatever form
(2) Those that do not comply with the Statute of Frauds they are entered into unless forms are necessary for its validity or
as set forth in this number. In the following cases an enforceability. This is executory, there is an offer and an unqualified
agreement hereafter made shall be unenforceable acceptance, thus a perfected contract only that there is no execution
by action, unless the same, or some note or yet by the parties.
memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent; Suppose A now would change his mind and later on sell it to C, can B
evidence, therefore, of the agreement cannot be sue A for breach of contract? Can B go to court and compel A to
received without the writing, or a secondary perform? In that case oral evidence is not allowed to prove the existence
evidence of its contents: of the agreement, for this is a purely executory agreement involving a
(a) An agreement that by its terms is not to be sale of real property.
performed within a year from the making
thereof;
Modified Instance. If there is P50,000 as an earnest money, even if A
(b) A special promise to answer for the debt,
does not issue a receipt, the agreement is removed from the ambit of
default, or miscarriage of another;
purely executory contracts. There is now partial fulfillment or partial
(c) An agreement made in consideration of
execution.
marriage, other than a mutual promise to
marry;
So, in case A changes his mind and sells to C, B now can go to court
(d) An agreement for the sale of goods, chattels or
and prove before the court the agreement and there can be oral proof
things in action, at a price not less than five
as to the agreement because of this partial payment.
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 1403(1). UNAUTHORIZED CONTRACTS
action or pay at the time some part of the These are those entered into in the name of another person by
purchase money; but when a sale is made by one who has been given authority or legal representation or
auction and entry is made by the auctioneer in who has acted beyond his powers.
his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale,
So, when a person enters into a contract for and in the name of
price, names of the purchasers and person on
whose account the sale is made, it is a sufficient another, without authority to do so, the contract does not bind
memorandum; the latter, unless he ratifies the same.
(e) An agreement for the leasing for a longer
period than one year, or for the sale of real Instance. A compromise agreement signed in behalf of the client by
property or of an interest therein; his lawyer who did so without authorization of said client is merely
(f) A representation as to the credit of a third unenforceable (not void) and may, therefore, be ratified by said party
person. expressly or implicitly. Before the ratification the injured party cannot
(3) Those where both parties are incapable of giving ask to compel the principal to execute the action because the agent
consent to a contract. was not under authority to enter such contracts.
1403(2). NON-COMPLIANCE OF STATUTE OF FRAUDS Hence, the statute is not applicable, where the verbal contract
The enumeration under 1403(2) are exclusive what is not found is adduced, not for the purpose of enforcing performance
there are not considered and are excluded. thereof, but as the basis of the lawful possession of the
applicants entitling them to have land sold orally to them
Statute of Frauds registered in their names.
The term is descriptive of statutes which require certain classes • Thus, where the buyers have already paid part of the
of contracts to be in writing. This statute does not deprive the purchase price, the heirs of the vendor cannot invoke the
statute in the proceedings where the vendees seek to have
parties of the right to contract with respect to the matters
the land registered in their names.
therein involved, but merely regulates the formalities of the
• Neither can the buyers invoke the statute in an action for the
contract necessary to render it enforceable. recovery of the balance of the purchase price of the land
actually conveyed where the said buyers accepted a deed
Purpose of the Statute of Frauds signed by the vendor although not signed by them and paid
It is to prevent fraud and perjury in the enforcement of two-thirds of the purchase price of the said land.
obligations depending on their evidence upon the unassisted • Nor can the lessor invoke the statute in an action filed by the
memory of witnesses by requiring certain contracts and lessee, who is in possession of the land leased, to recover
damages against the lessor for having gathered and sold
transactions to be evidenced by a writing singed by the party
crop to the lessee.
to be charged.
It is not applicable to contract which are totally or partially
Since memory is many times unreliable, oral agreements may
performed. However, it is not enough for a party to allege
sometimes result in injustice. To aid human memory, to prevent
partial performance in order to render the Statute of Frauds
the commission of injustices due to faulty memory, to
inapplicable; such partial performance must be duly proved.
discourage intentional misrepresentations, are the principal
aims of the Statute of Frauds (Facturan v. Sabanal, 81 Phil. 512).
General Rules of Application of the Statute of Frauds
1. The Statute of Frauds applies only to executory
Validity of Contract
contracts where no performance has been made and
A contract falling under the statute of frauds cannot be proved
not to partially or completely executed contracts.
without the writing or a memorandum thereof. Hence, an oral
contract of sale of real property cannot be enforced, even if at
2. The Statute of Frauds cannot apply if the action is
the time of the sale supposed sale the vendor had delivered to
neither for damages because of the violation of an
the vendee the possessory information title covering the
agreement nor for the specific performance of said
property. Neither can such an oral contract be made basis of an
agreement.
action for damage caused by the non-performance thereof.
3. The Statute of Frauds is exclusive, that is, it applies
The statue of frauds, however, simply provides for the manner
only to the agreements or contracts enumerated.
in which contracts under it shall be proved. It does not attempt
to make such contracts invalid if not executed in writing but
4. The defense of the Statute of Frauds may be waived.
only makes ineffective the action for specific performance.
5. The Statute of Frauds is a personal defense, that is, a
The contract exists and is valid thought it may not be clothed
contract infringing it cannot be assailed by third
in the necessary form, and the effect of noncompliance with the
persons (Article 1408).
noncompliance of the statute is simply that no action can be
proved unless the requirement is complied with.
6. Contracts infringing the Statute of Frauds are void;
• Oral evidence of the contract will be excluded upon
they are merely unenforceable.
timely objection.
7. The Statute of Frauds is a Rule of Exclusion, i.e., oral
• But if the parties to the action, during trial, make no
evidence might be relevant to the agreements
objection to the admissibility of the oral evidence to
enumerated therein and might therefore be
support the contract covered by the statute, and
admissible were it not for the fact that the law or the
thereby permit such contract to be proved orally, it will
statute excludes said oral evidence.
be just as binding upon the parties as if it had been
reduced into writing.
8. The Statute of Frauds does not determine the
credibility of weight of evidence, it merely concerns
Action to Enforce
itself with the admissibility thereof.
The statute of frauds has been uniformly interpreted to be
applicable to executory and not to executed or completed
9. The Statute of Frauds does not apply if it is claimed
contracts. Performance of the contract takes it out of the
that the contract does not express the true agreement
operation of the statute. When the contract becomes partially
of the parties. As long as the true or real agreement is
executed or is fully completed, then it is taken out from the
not covered by the Statute of Frauds, it is provable by
ambit of the statute of frauds.
oral evidence.
SIX SPECIFIC AGREEMENTS UNDER STATUTE OF FRAUDS Q. A asked B to purchase certain properties from C who was orally
assured by A that he (A) would pay for them. Later C sued A, who
A. pleaded in defense the Statute of Frauds. Decide.
An agreement by its terms is not to be performed
A. The promise is enforceable even if orally made, for A was not
within a year from the making thereof. guaranteeing another’s debt. He merely promised to pay his own debt.
Agreement of Non-Performance Within One Year Test of Guaranty

The making of the agreement for the purpose of whether or not The question is whether or not the promise is an original or
the period for performance brings the agreement within the collateral one. If the promise is an original or independent one,
statute of fraud means the day that the contract is made, and that is if the promisor becomes thereby primarily liable for the
the time begins to run from the day the contract is entered into, payment, the promise is outside the Statute of Frauds.
and not from the time that performance of it is entered upon.
But on the other hand, if the promise is collateral to the
Simply put, the agreement must not be performed within a year agreement of another and the promise becomes merely a
from the time of its constitution. No part of it shall be surety, the promise must be in writing. Just what the character
performed within the one-year period. of the promise is a question of law.
Illustration C.
Q. A and B, neighbors, orally agreed that A would sell, and B would buy
An agreement made in consideration of marriage other
A’s transistor radio for P200 three years from the date of the agreement.
than a mutual promise to marry.
At the end of three years, A refused to hand over the radio although B
was willing to pay. Is the agreement enforceable under the Statute of Agreements Made in Consideration of Marriage
Frauds? It is well-settled that any verbal executory promise or
agreement other than mutual promises to marry, made in
A: No, because under the terms of the contract, the sale was to be consideration of marriage, is embraced in the provisions of the
performed at the end of three years. It should have been, therefore, Statute of Frauds requiring that agreements made in
made in writing. The Statute recognizes the frailty of man’s memory,
consideration of marriage should be in writing, and signed by
and apparently only 1 year is the limit. Had the agreement been that
performance would be made within three months, the agreement, even
the party charged therewith.
if oral, would have been enforceable.
Marriage must not be a mere incident, otherwise is not within
NOTE: Always note that the performance must be done after the ambit of the Statute. The provision also applies to promises
the one-year period, any partial performance would take the made by third person in consideration of the marriage.
contract away from the Statute of Frauds under this number.
NOTE: What would fall under this are antenuptial agreements
B. and requires three requirements; (1) in writing; (2) signed by the
A special promise to answer for the debt, parties; and (3) executed by the parties before the celebration
default, or miscarriage of another. of the marriage. It does not require to be in public document.
Special Promise of Guaranty of Another’s Debt When the law says, “in consideration of marriage,” it really
A promise to answer for the debt, default or miscarriage of means “by reason of the marriage.” Thus, the cause of the
another has been defined as an undertaking by a person, who donation propter nuptias is not the marriage but the liberality
was not liable before, for purpose of securing or performing the or the generosity of the giver.
same duty for which the original debtor continues to be liable.
Note that the law says, “other than a mutual promise to marry.”
There need not be a statement of consideration, the law Hence, an oral mutual promise to marry is not embraced by the
presumes that there is such consideration. The term special Statute of Frauds.
promise refers to a subsidiary or collateral promise to pay like a
contract of guaranty. The injured party may present oral evidence of the promise in
an action to obtain actual damages for breach thereof.
Illustration
Q. A was having his house repaired by B, who needed certain materials. Example of the Exception: A and B mutually promised to marry
So, A told storeowner (of materials), “Give B the materials. I shall be each other. The promise need not be in writing unless the
responsible. I shall stand good.” This was orally made. Is this a special marriage be deferred till after the lapse of one year from the
promise? Is this oral agreement enforceable? agreement.
A. This is not a special promise. This is not a guaranty. Only A obligated
himself. Since this is not a guaranty, the contract is enforceable, so that
For breach of a mutual promise to marry, the groom may sue
the seller can properly sue A and prove the oral agreement by parol the bride for actual damages and oral evidence of such mutual
evidence, over and above A’s objection. promise is admissible.
D. Rules in Auction Sale Entry to Constitute Memorandum

An agreement for the sale of goods, chattels or things in When a sale is made by auction, and entry is made by the
action, at a price not less than five hundred pesos, unless auctioneer in his sales books at the time of the sale of the:
the buyer accept and receive part of such goods and 1. Amount and kind of property sold;
chattels, or the evidences, or some of them, of such things 2. Terms of the sale;
in action, or pay at the time some part of the purchase 3. Price; and
money; but when a sale is made by auction, and entry is 4. Names of the purchasers and persons on whose
made by the auctioneer in his sales book, at the time of the account the sale is made.
sale, of the amount and kind of property sold, terms of sale, If all of these are present during such auction sale, it is
price, names of the purchasers and person on who account considered sufficient memorandum, even if not signed.
the sale is made, it is a sufficient memorandum.
E.
Agreement for Sale of Personal or Real Property An agreement for the leasing for a longer period
The breakdown of Article 1403(2)(d) is presented below: than one year, or for the sale of real property
1. Agreement for the sale goods, chattels or things in or of an interest therein;
action at a price not less than five hundred pesos.
2. When sale is in auction entry of auctioneer is sufficient Lease or Sale of a Real Property
memorandum. There are two kinds of agreement being referred under this:
1. Lease of real property for more than one year.
Note or Memorandum 2. Sale of real property or interest therein, regardless of
A note or memorandum is evidence of the agreement and is the price.
used to show the intention of the parties. No particular form of
language or instrument is necessary to constitute such under The two agreements must be in writing for it to be enforceable.
the Statute of Frauds. It can be any kind of writing, from a If lease of real property is exactly one year, the contract may be
solemn deed to a mere hasty note in boos or papers, ink or oral, since here the period does not exceed one year. “Interest”
pencil; typed or printed. It meets the requirement of the Statute in real property may include easement or usufruct.
of Frauds if it contains:
1. Name of the parties; Illustration
2. Terms and conditions of the agreement; Q. A verbal agreement was made between A and B whereby A
3. Description of the subject matter sufficient to render agreed to sell, and B agreed to buy A’s farm for P100,000. The
it capable of identification; price was paid. Possession was not given nor was the deed
4. Date and place of making the agreement; and delivered, both being refused. B comes to you and wants to
5. Signature of the party assuming the obligation. know if he can compel A to give him the deed and possession.
What would you advise?
Rules Governing the Fourth Agreement
In terms of separable contracts: A. I would advise B to sue for specific performance and also ask
• If the contract is entire or inseparable and the total A to execute the deed of conveyance. The Statute of Frauds
price exceeds P500, the statute applies even if there refers only to purely executory contracts; hence the Statute will
are articles priced less than P500. not apply in this case.
• If the contract is separable, then each article is taken
separately, and the application of the statute to it Since the contract is valid and enforceable, we can now apply
depends upon the price. Art. 1357 of the new Civil Code which states that: “If the law
requires a document or other special form, as in the acts and
In terms of partial delivery or payment: contracts enumerated in the following article, the contracting
A contract for the sale of goods, chattels or things in action at parties may compel each other to observe that form, once the
a price less than P500 is removed from the Statute where the contract has been perfected. This right may be exercised
buyer accepts and receives part of such goods and chattels. simultaneously with the action upon the contract.’’
Neither will the statute of frauds apply where there has been
partial payment of the purchase price. F.
A representation to the credit of a third person.
Sale of Personal Property
The requirement of a written instrument or a memorandum for Representation as to Credit
sale of personal property for a price not less than P500, covers A representation made by a stranger to the contract, with the
both tangible and intangible (things in action) personal intent that the person for whom it is made should obtain credit
property. It also covers assignment. Thus, when such is P500 or thereby, must be in writing in order to be a basis of an action
above, it is governed by the provision of the statute of frauds. for damage against the party who made the representation, if
Where a contract for the sale of goods is at a greater price of this turns out to be false or incorrect. Thus, it applies when such
P500 and is oral, it is unenforceable because it is in violation of representation as to credit of a third person happens.
Article 1402(2)(d) of the Civil Code.
Representation as to Credit is Not Similar to Guaranty ARTICLE 1406

Suppose A was borrowing money from B; and gave C as his When a contract is enforceable under the Statute of Frauds,
reference. When C was asked regarding A’s credit, C said: “You and a public document is necessary for its registration in the
Registry of Deeds, the parties may avail themselves of the
can safely lend money to A because A is the owner of a parcel
right under Article 1357.
of land and I have the title deeds in my possession.” This was
made orally. Right of One Party to Compel the
Other to Execute the Needed Instrument
Incidentally, A was C’s client, C being a lawyer. Representation It must be stressed here that the right of one party to have the
by C is not enforceable against him because it is not in writing. other execute the public document needed for convenience in
Article 1403(2)(f) clearly requires that a representation as to the registration, is given only when the contract is both valid and
credit of a third person must be in writing to be enforceable. enforceable.
Distinction. This must not be confused with a guaranty. Here no ARTICLE 1407
promise to answer for another’s debt is made; there is merely In a contract where both parties are incapable of giving
an assurance that somebody has a certain amount of credit, consent, express or implied ratification by the parent, or
made with the intention of enabling the person in whose favor guardian, as the case may be, of one of the contracting parties
it is made to obtain credit by virtue of such assurance or shall give the contract the same effect as if only one of them
were incapacitated.
representation.
If ratification is made by the parents or guardians, as the case
The person making the representation does not take part in the may be, of both contracting parties, the contract shall be
contract proper. However, his assurance to the person about to validated from the inception.
give credit may be considered some form of agreement.
Example. A and B, both 15 years old, entered into a contract.
1403(3). BOTH PARTIES INCAPACITATED The contract is unenforceable because both parties cannot give
The third kind of unenforceable contract is one where both consent. Now if the guardian or parent of A ratifies expressly or
parties are incapacitated to give consent. Where both parties impliedly the contract, it becomes voidable, valid unless
do not have capacity to consent, the contract is unenforceable. annulled by the guardian or parent of B. However, if the
guardian or parent of B also ratifies, the contract is validated
• If it is ratified by one of the parties, it converts the right from the time it was first entered into.
contract into a voidable contract – voidable at the
option of the party who has not ratified, the latter can ARTICLE 1408
enforce the contract against the party who has already Unenforceable contracts cannot be assailed by third persons.
ratified.
Defense is Personal
• If it is ratified by both parties, then the contract Just as strangers cannot attack the validity of voidable
becomes valid and enforceable. contracts, so also, they cannot attack a contract because of its
unenforceability. Indeed, the Statute of Frauds cannot be set up
ARTICLE 1404 as a defense by strangers to the transaction.
Unauthorized contracts are governed by Article 1317 and
the principles of agency in Title X of this Book.
Ratification Validates Contracts

The sale of property made by a person without authority of the
owner is null and void in the beginning, but afterwards it
becomes perfectly valid and is cured of the defects of nullity
which it bore at its execution by the ratification solemnly made
by the said owner upon his stating under oath in court that he
himself consented to the former’s making the sale.
ARTICLE 1405
Contracts infringing the Statute of Frauds, referred to in No.
2 of Article 1403, are ratified by the failure to object to the
presentation of oral evidence to prove the same, or by the
acceptance of benefits under them.
Ratification of Contracts Infringing Statute of Frauds

Two ways of ratifying those contracting infringing 1403(2):
1. Failure to object to the presentation of the oral
evidence which is deemed a waiver;
2. Acceptance of benefits under them.
OBLIGATIONS AND CONTRACTS Compromise Agreement; Rejected and Unenforceable

Articles 1403-1408 A compromise is an agreement between two or more persons,
for preventing or putting an end to a lawsuit, adjust their
JURISPRUDENCE NOTES
respective positions by mutual consent in the way they feel they
can live with. Reciprocal concessions are the very heart and life
1403-1408. Unenforceable Contracts
of every compromise agreement, where each party
approximates and concedes in the hope of gaining balance by
REGAL FILMS v. CONCEPCION (2001)
the danger of losing, it is, a contract. Thus, the elements of
362 SCRA 504
consent, object and cause is essential.
Facts: In 1991, Gabriel Concepcion, through his manager Lolita
IN THE CASE: The addendum was flatly rejected by respondent
Solis entered into a contract with petitioner Regal Films for
on the reason that (a) he did not give consent thereto nor
services to be rendered by respondent in motion pictures, in
authorized anyone to enter into the agreement, and (b) that it
turn it undertook to give two parcels of land to land to
contained provisions gross disadvantageous to him. The
respondent one in Marikina and other in Cavite together with
outright rejection of the addendum made known to the
other talents fees.
other ended the offer. When Concepcion made Manifestation
stating that he was willing to honor the addendum, there was
In 1993, the parties renewed contract, with same undertaking
nothing to accept.
on the part of petitioner to give respondent two parcels of land
mentioned in the first agreement, but Regal Films failed to
By his own admission, the addendum was then entered
comply with its promise to convey to respondent the lots.
without his knowledge and consent. A contract entered in the
name of another by one who ostensibly might have but who
In 1994, Concepcion and his manager file an action for
had no real authority or legal representation, or who, having
rescission of contract with damages. Regal Films contended
such authority, acted beyond his powers, would be
that he was entitled to rescind the contract, plus damages, and
unenforceable.
to be released from further commitment to work.
Assuming for argument’s sake that the addendum resulted in
Petitioner moved for its dismissal stating that there was already
an unenforceable contract, it can be ratified before revocation.
amicable settlement and executed an agreement operating as
But the adamant refusal of Concepcion to accept the terms of
addendum to the 1991 and 1993 contracts between them and
the addendum thereby operated to reject the addendum. The
was signed by a representative of the Regal Films and Solis
subsequent attempt to ratify the addendum came much too
allegedly acting in representation of Concepcion.
late, the addendum has already been deemed revoked.
However, in September 1994, Concepcion himself opposed to

HELD: The petition of Regal Films is granted; the CA decision is
the motion to dismiss contending that the addendum was
set aside, and case is remanded for further proceedings.
grossly disadvantageous to him and was executed without his
knowledge and consent and that Solis ceased to be his
VALENCIA v. LOCQUIAO (2003)
manager and had no authority to sign addendum. 412 SCRA 600
Petitioner intimated to Concepcion and his counsel its Facts: Both cases involve a parcel of land consisting of 4,878
willingness to allow release from his contracts rather than to sq.m. in Pangasinan and were originally owned by spouses
further pursue with the addendum. Herminigildo and Raymunda Locquiao. In 1944, executed a
Deed of Donation propter nuptias in Ilocano dialect in favor of
Thus in 1995, Concepcion stated that he was now willing to their son respondent Benito Locquiao and his prospective bride
honor the addendum of the 1991 and 1993 contract. The trial denominated as Inventario Ti Sagut.
court issued an order rendering judgment on compromise
based on the addendum. By the terms of the deed the donees were gifted four parcels
of land including the land, including the land in question, as
Regal Films moved for reconsideration arguing that the trial well as a male cow and 1/3 of the conjugal house of donor
court erred in treating the addendum of 1994 as being a parents in consideration of the impending marriage. They took
compromise agreement depriving its right to due process. CA vows and the fact of marriage was inscribed in the back of OCT
ruled that the addendum/compromise agreement was 13833 (subject lot).
perfected and is binding for it is a perfected contract.
Herminigildo and Raymunda died in 1962 and 1968
Issues respectively leaving as heirs their six children including
Whether or not the subject addendum could not be the basis of respondent Benito and petitioner Romana Valencia. With the
the compromise judgment. permission of Benito and wife, Romana Valencia took
possession and cultivated subject land. When Romana’s
COURT RULING:The court agrees. The petitioners assert that the husband got sick, her daughter took possession.
Court of Appeals in affirming the trial court.
Benito and his wife Tomasa registered the Inventario Ti Sagut To buttress their claim that the document was falsified, the
with the ROD Pangasinan in 1970. In due course, the OCT were petitioners rely mainly on the Certification dated July 9, 1984 of
cancelled in lieu of the TCT in their names. the Records Management and Archives Office that there was
no notarial record for the year 1944 of Cipriano V. Abenojar
In 1973, the heirs of the Locquiao spouses, including Benito and who notarized the document on May 22, 1944 and that
Romana, executed a Deed of Partition with Recognition of therefore a copy of the document was not available.
Rights wherein they distributed among three of them the 12
parcels of land left, excluding the lot in question and other lots COURT REPLY: The certification is not sufficient to prove the
disposed. Contained in the dee was a statement stating Benito alleged inexistence or spuriousness of the challenged
and Marciano Locquiao and heirs of Lucio Locquiao “have document. The CA is correct in pointing out that the mere
already received our shares in the estates of our parents, by virtue absence of the notarial record does not prove that the notary
of previous donations and conveyances,” and for that the heirs public does not have a valid notarial commission and neither
of Lucio were not made part of the deed, all the living children does the absence of a file copy of the document with the
confirmed the previous dispositions and waived their rights to archives effect falsification of document.
whomsoever the properties covered were adjudicated.
This Court ruled that the failure of the notary public to furnish
Later on disagreement among the five group of heirs including a copy of the deed to the appropriate office is a ground for
Romana concerning about the distribution of the two lots disciplining him, but certainly not for invalidating the document
covered by the deed of partition, after settling they executed a or for setting aside the transaction therein involved.
Deed of Compromise Agreement in 1976, which provided for
the redistribution of the two lots. Although not directly involved Moreover, the heirs of the Locquiao spouses, including Romana
in this discord, Benito signed the Compromise Agreement, referred in the deed of partition and the compromise
including Romana, confirmed all other stipulation in the deed agreement to the previous donations made by the spouses in
of partition. favor of some of the heirs. As found by RTC, Benito was not
allotted any share in the deed of partition precisely because he
In 1983, petitioner Constancia filed an action for annulment received his share by virtue of previous donations. The
of title against respondents before RTC. Buy was dismissed, exclusion of the subject property in the deed of partition
and later December that year respondent Benito Locquiao filed dispels any doubt as to the authenticity of the earlier
with MTC seeking the ejectment of Constancia from property Inventario Ti Sagut.
and was granted for such.
On the Formalities of Donations Propter Nuptias
Romana and Constancia countered with Complaint for the Unlike ordinary donations, donations propter nuptias are those
annulment of the TCT, alleging that the issuance of the TCT made before the celebration of marriage in consideration of
was fraudulent; that the Inventario Ti Sagut was spurious; the same in favor of one or both future spouses. The distinction
that the notary public who notarized such had no authority to is crucial because the two classes of donations are not
do so and that the donation did not observe the form governed by the same rules, especially about the formal
required by law as there was no written acceptance on the essential requisites.
document itself or in a separate public instrument.
Old Civil Code
RTC dismissed the complaint for annulment on the grounds of Donations propter nuptias must be made in a public instrument
prescription and laches and ruled the Inventario Ti Sagut as a in which the property donated must be specifically described.
valid public document to transmit ownership. However, Article 1330 of the same Code provides that
"acceptance is not necessary to the validity of such gifts". In other
CA affirmed the RTC decision finding that the cause of action words, the celebration of the marriage between the beneficiary
already prescribed and that there was implied acceptance couple, in tandem with compliance with the prescribed form,
flowing from the very fact of marriage between respondents was enough to effectuate the donation propter nuptias under
together with the registration of the fact of marriage at the back the Old Civil Code.
of OCT constituting substantial compliance.
New Civil Code
Issues Article 127 thereof provides that the form of donations propter
1. Whether the donation propter nuptias is authentic; nuptias are regulated by the Statute of Frauds. Article 1403,
2. Whether the acceptance of the donation by the donees paragraph 2, which contains the Statute of Frauds requires that
is required; and the contracts mentioned thereunder need be in writing only to
3. If so, in what form should the acceptance appear; and be enforceable. However, as provided in Article 129, express
4. Whether the action is barred by prescription and laches. acceptance "is not necessary for the validity of these
donations." Thus, implied acceptance is sufficient.
On the Validity of the Inventario Ti Sagut
The petitioners attacked the validity of instrument stating (1) it Q. Which formal requirements should be applied with respect
is not authentic, (2) acceptance was not in public document. to the donation proper nuptias in this case?
Applicable Provisions Barred by Laches

It is settled that only laws existing at the time of the execution In any event, independent of prescription, petitioner’s action is
of a contract are applicable thereto and not later statutes unless dismissible on the ground of laches. The elements of laches are
the latter are specifically intended to have retroactive effect. present in this case:
1. Conduct on the part of the defendant, or one under
Consequently, it is the Old Civil Code which applies in this case whom he claims, giving rise to the situation that led to
since the donation propter nuptias was executed in 1944 and the complaint and for which the complainant seeks a
the New Civil Code took effect only on August 30, 1950. remedy;
Therefore, applying Article 1330 of the Old Civil Code in the 2. Delay in asserting the complainant’s right, having had
determination of the validity of the questioned donation, it knowledge or notice of defendant’s conduct and
does not matter whether or not the donees had accepted the having been afforded an opportunity to institute suit;
donation. The validity of the donation is unaffected in either. 3. Lack of knowledge or notice on the part of the
defendant that the complainant would assert the right
Even if the provisions of the New Civil Code were to be applied, on which he basis his sought, and
the case of the petitioners would collapse just the same. As 4. Injury or prejudice to the defendant in the event relief
earlier shown, even implied acceptance of a donation propter is accorded to the complainant, or the suit is not held
nuptias suffices under the New Civil Code. barred.
With the genuineness of the donation propter nuptias and Of the facts which support the finding of laches, stress should
compliance with the applicable mandatory form requirements be made of the following:
fully established, petitioners’ hypothesis that their action is (a) the petitioners Romana unquestionably gained
imprescriptible cannot take off. Viewing petitioners’ action for actual knowledge of the donation propter nuptias
reconveyance from whatever feasible legal angle, it is barred when the deed of partition was executed in 1973
by prescription. and the information must have surfaced again when
the compromise agreement was forged in 1976, and;
Action Barred by Prescription (b) as petitioner Romana was a party-signatory to the
Petitioners’ right to file an action for the reconveyance of the two documents, she had the opportunity to question
land accrued in 1944, when the Inventario Ti Sagut was the donation propter nuptias on both occasions, and
executed. It must be remembered that before the effectivity of she should have done so if she were of the mindset,
the New Civil Code in 1950, the Old Code of Civil Procedure given the fact that she was still in possession of the
(Act No. 190) governed prescription. land in dispute at the time.
Under the Old Code of Civil Procedure, an action for recovery But she did not make any move. She tarried for eleven (11)
of the title to, or possession of, real property, or an interest more years from the execution of the deed of partition until
therein, can only be brought within ten years after the cause of she, together with petitioner Constancia, filed the annulment
such action accrues. case in 1985.
Thus, petitioners’ action, which was filed on December 23, 1985, HELD: CA decision ordering Romana and Constancia to vacate
or more than forty (40) years from the execution of the deed is hereby affirmed.
of donation on May 22, 1944, was clearly time-barred.
LITONJUA v. FERNANDEZ (2004)
Even following petitioners’ theory that the prescriptive period 427 SCRA 478
should commence from the time of discovery of the alleged
fraud, the conclusion would still be the same. Facts: In 1995, Mrs. Alimario and Fisico who worked as brokers
offered to sell to the petitioners Litonjua the parcels of land.
As early as May 15, 1970, when the deed of donation was The petitioners were shown a locator plan and copies of titles
registered and the transfer certificate of title was issued, showing that the owners were represented by Mediatrix
petitioners were considered to have constructive knowledge of Fernandez and Eleosida. The brokers told the petitioners that
the alleged fraud, following the jurisprudential rule that they were authorized by Fernandez to offer properties for sale.
registration of a deed in the public real estate registry is The petitioners, thereafter, made two ocular inspection of the
constructive notice to the whole world of its contents, as well property, hey saw people gathering coconuts.
as all interests, legal and equitable, included therein.
In November 1995, the Litonjuas met with Fernandez and the
As it is now settled that the prescriptive period for the two brokers they agreed that the Litonjuas would buy the
reconveyance of property allegedly registered through fraud is property consisting of 36,742 sq.m., for the price of P150 per
ten (10) years, reckoned from the date of the issuance of the square meter, or the total sum of P5M. They also agreed that
certificate of title, the action filed on December 23, 1985 has the owners would shoulder the capital gains tax, transfer tax
clearly prescribed in this case. and the expenses for the documentation. They agreed to meet
on December 8, 1995 to finalize the sale.
It was agreed upon that on said date, Fernandez would Trial Court declared Fernandez and other respondents in
present an SPA executed by the owners of the property, default for their failure to file their responsive pleading within
authorizing her to sell the property for an in their behalf, the reglementary period. The court rendered judgment in
and to execute a Deed of Sale thereon. It was also agreed favor of the Litonjuas. CA reversed and set aside such ruling.
that they would remit the purchase price to the owners,
through Fernandez. Issues
1. Whether or not there was a perfected contract of sale
However, only Fisico attended the meeting. He informed the between the parties.
petitioners the Fernandez were encountering some problems 2. Whether or not the contract falls under the coverage
with the tenants and was trying to work out a settlement with of the statute of frauds.
them. After a few weeks of waiting, the petitioners wrote 3. Whether or not the defendants declared in default are
Fernandez demanding finalization. benefited by the CA decision.
When they received no response, they sent her another letter No Perfected Contract of Sale
asking for the Deed of Absolute Sale to be executed in CONTENTION: Petitioners assert that there was a perfected
accordance with their verbal agreement on November contract of sale between them and the owners through
1995. They also demanded the turnover of the subject respondent Fernandez. They contend that the perfection of the
properties them. Upon receipt of the above letter, Fernandez said contract is evidence by the 1996 Letter of Fernandez.
wrote the petitioners on 1996, and clarified her stand: They argue that such is a sufficient note or memorandum of the
perfected contract, thus removing it from the coverage of the
1) It is not true I agreed to shoulder registration fees and other miscellaneous statute of Frauds, for the letter specifically refers to a sale which
expenses, etc. I do not recall we ever discussed about them. Nonetheless, I
they agreed to initially but which the latter withdrew because
made an assurance at that time that there was no liens/encumbrances and
tenants on my property (TCT – 36755). of the emergence of the tenants.
2) It is not true that we agreed to meet on December 8, 1995 in order to COURT REPLY: The contention is bereft of merit. The letter is
sign the Deed of Absolute Sale. The truth of the matter is that you were the
one who emphatically stated that you would prepare a Contract to Sell and hardly the note or memorandum contemplated under Article
requested us to come back first week of December as you would be leaving 1403(2)(e) of the New Civil Code.
the country then. In fact, what you were demanding from us was to apprise
you of the status of the property, whether we would be able to ascertain that
The letter can hardly be said to constitute the note or
there are really no tenants. Ms. Alimario and I left your office, but we did not
assure you that we would be back on the first week of December. memorandum evidencing the agreement as it is very clear that
the seller did not accept the conditions that she will be the
Unfortunately, some people suddenly appeared and claiming to be "tenants" one to pay the registration fees and miscellaneous
for the entire properties (including those belonging to my other relatives.)
Another thing, the Barangay Captain now refuses to give a certification that expenses and therein denied that she committed to execute
our properties are not tenanted. the deed of sale. The letter stated the reasons that are beyond
the control of them why the sale could no longer push.
Thereafter, I informed my broker, Ms. Lulu Alimario, to relay to Mr. Agapito
that due to the appearance of "alleged tenants" who are demanding for
a one-hectare share, my cousin and I have thereby changed our mind There is no documentary evidence on record that the
and that the sale will no longer push through. I specifically instructed her respondents authorized Fernandez to sell their properties.
to inform you thru your broker that we will not be attending the meeting
to be held sometime first week of December.
ARTICLE 1878. A special power of attorney is necessary to enter into any contract
by which the ownership of an immovable is transmitted or acquired either
In view thereof, I regret to formally inform you now that we are no longer
gratuitously or for a valuable consideration, or to create or convey real rights over
selling the property until all problems are fully settled. We have not
immovable property, or for any other act of strict dominion. Any sale of real
demanded and received from you any earnest money, thereby, no obligations
property by one purporting to be the agent of the registered owner without any
exist. In the meantime, we hope that in the future we will eventually be able
authority therefor in writing from the said owner is null and void. The declarations
to transact business since we still have other properties in San Pablo City.
of the agent alone are generally insufficient to establish the fact or extent of her
authority.
On April 1996, the Litonjuas filed the Complaint for Specific
Performance with Damages against Fernandez and the IN THE CASE:The only evidence adduced by the Litonjuas to
registered owners of the property. prove authorization is the testimony of Antonio Litonjua that
Fernandez openly represented herself to be representative of
Fernandez claimed the while they Litonjuas offered to buy the respondent-owners, and she promised to present an SPA.
property during the meeting in 1995, she did not accept the However, this was belied when Fernandez testified that there
offer, thus no verbal contract to sell was ever perfected. She was no authority given to her yet.
specifically alleged that the said contract to sell was
unenforceable for the failure to comply with the Statute of The petitioners cannot feign ignorance of her lack of authority
Frauds. to sell the properties. It must be stressed that the petitioners
are noted businessmen who ought to be very familiar with the
She also maintained that the even if there was commitment, it intricacies of business transactions, such as the sale of real
was not binding for there was absence of consideration distinct property.
and separate from the price.
When dealing with an agent, they have the burden to ascertain Answer. Mercado denied having transacted with Gozun or
not only the fact of agency but also the nature and extent of entering into any contract for the printing of campaign
authority and the burden is for them to prove it. In this case, materials. He alleged that the materials were donations from
there were no authority given to Fernandez. his family, friends and political supporters.
The Letter is Not a Sufficient Note or Memorandum Mercado claimed the Gozun was his over-all coordinator in
Contrary to their contention, the letter is not a note or charge of the conduct of seminar for volunteers and other
memorandum within the context of Article 1403(2) because it matters, and that his campaign manager, Juanito "Johnny"
does not contain the following: Cabalu (Cabalu), who was authorized to approve details with
(a) All the essential terms and conditions of the sale of the regard to printing materials, presented him some campaign
properties; materials, those were partly donated.
(b) An accurate description of the property subject of the
sale, and, When confronted about the official receipt issued to his wife
(c) The names of the owners of the properties. acknowledging her payment to JMG Publishing House of P1M,
Mercado claimed that it was his first time to that receipt and
IN THE CASE: It was noted that the Litonjuas were uncertain as to that it was just to compensate him for a job well done.
the specific area of the property they were seeking to buy. The
failure of respondent Fernandez to object to parol evidence to RTC ruled in favor of Gozun warding the amount. CA reversed
prove (a) the essential terms and conditions of the contract the decision holding that there was no evidence to support
asserted by the petitioners and, (b) her authority to sell the claim that Lilian was authorized by Mercado to borrow money
properties for the respondents-registered owners did not and on his behalf and that the acknowledgement receipt signed by
should not prejudice the respondents-owners who had been Lilian did not specify in what capacity she received money thus
declared in default. applying Article 1317, the claim of P253K was unenforceable.
GOZUN v. MERCADO (2006) Issues

511 SCRA 305 1. Whether or not CA erred in dismissing the complaint
on the ground that there is no evidence other than
Facts: In the local election of 1995, Mercado vied for governor testimony to prove that Lilian was authorized by
in Pampanga and upon his request, Gozun, owner of JMG Mercado to receive amount.
Publishing House, submitted to Mercado draft samples and 2. Whether or not CA erred in dismissing complaint for
price quotation of campaign materials. the other two printing press because it was not under
the authority to sue for those.
Upon Gozun’s claim, Mercado’s wife had told him that Mercado
already approved his price quotation and that he could start Contract of Agency and the Rules of Unenforceability
printing and hence printed such. Given the urgency and limited By the contract of agency, a person binds himself to render
time to do the job order, Gozun availed the service of other some service or to do something in representation or on
printing presses owned by his daughter and mother behalf of another, with the consent or authority of the latter.
respectively. Gozun delivered the camping material to Contracts entered into in the name of another person by one
Mercado’s headquarters. who has been given no authority or legal representation or who
has acted beyond his powers are classified as unauthorized
On March 31, 1995, Mercado’s sister in law, Lilian Soriano, contracts and are declared unenforceable unless they are
obtained from Gozun a cash advance of P253K for the ratified.
allowance of pollwatchers attending a seminar and other
expenses. Lilian acknowledge on Gozun’s 1995 diary receipt Generally, the agency may be oral, unless the law requires a
of the amount. Gozun soon sent a SOA for the amount of P2M specific form. However, a special power of attorney is
detailing the amount for printing and cash advance by Lilian. necessary for an agent to, as in this case, borrow money, unless
it be urgent and indispensable for the preservation of the things
Mercado’s wife partially paid P1M and issued a receipt. which are under administration. Since nothing in this case
However, despite repeated demands and promise to pay, involves the preservation of things under administration, a
Mercado failed to settle the balance of his account to Gozun. determination of whether Soriano had the special authority to
borrow money on behalf of respondent is in order.
Them being compadres, waited for more than three years for
respondent to honor his promise but to no avail, compelling IN THE CASE: Petitioner failed to categorically state however,
petitioner to endorse the matter to his counsel who sent whether the loan was made on behalf of Mercado or of his wife.
respondent a demand letter. Respondent failed to heed. While Gozun claims that Lilian was authorized by Mercado, the
statement of account states that the amount received by Lilian
Complaint. It was filed at RTC Angeles for collection of sum of was made in behalf of “Mrs. Annie Mercado.” The receipt did
money plus inflationary adjustment and Attorney’s Fees. not specify for what reason and for what capacity did Lilian
Soriano received the money.
Nowhere in the note can it be inferred that Mercado It is hereby declared and understood that the amount of TWO
himself was connected with the transaction. It bears noting THOUSAND TWO HUNDRED EIGHTY SIX PESOS (P2,286.00)
that Lilian signed in the receipt in her name alone, without corresponding and belonging to the Heirs of Alberto Cabales
indicating therein that she was acting for Mercado. She thus and to Rito Cabales who are still minors upon the execution of
bound herself in her personal capacity and not as an agent of this instrument are held in trust by the VENDEE and to be paid
anyone for that matter. and delivered only to them upon reaching the age of 21.
Thus, as a rule in the law of agency, in order to bind the principal In 1985, ROD Leyte issued OCT in favor of Felianos. On
by a mortgage on real property executed by an agent, it must December 30, 1985 Saturnina and her four children executed
upon on its face, be made, signed and sealed in the name of the an affidavit to the effect that Nelson would only receive the
principal otherwise it will bring agent. amount of P176.34 from respondents-spouses when he reaches
the age of 21 considering that Saturnina paid Dr. Corrompido
Concerning the Two Other Publishing Companies ₱966.66 for the obligation of petitioner Nelsons late father
On the amount due him and the other two printing presses, Alberto, i.e., ₱666.66 for his share in the redemption of the sale
petitioner explains that he was the one who personally and with pacto de retro as well as his "vale" of ₱300.00.
directly contracted with respondent and he merely sub-
contracted the two printing establishments in order to deliver In 1986, 24-year-old petitioner Rito Cabales acknowledged
on time the campaign materials ordered by respondent. receipt of the sum of P1,143 from Feliano representing his share
Respondent counters that the claim of sub-contracting is a in the property.
change in petitioner’s theory of the case which is not allowed
on appeal. In 1988, Saturnina died. Nelson, then residing in Manila went
back to his father’s hometown in Southern Leyte.
Gozun is indeed the real party in this case for only the
contracting parties are bound by the stipulations in the In 1995, contending that they could not have sold their shares
contract. In sum, Mercado has still the obligation to pay the in subject property when they were minors, thus they filed to
total cost of printing but not the amount advanced by Gozun the RTC of Maasin for redemption of the subject land and
to Lilian Soriano. damages.
HELD: Wherefore the petition is granted, CA decision reversed In their answer, respondents-spouses maintained that
and set aside, the RTC decision is reinstated. petitioners were estopped from claiming any right over subject
property considering that (1) petitioner Rito had already
CABALES v. COURT OF APPEALS (2007) received the amount corresponding to his share of the
511 SCRA 305 proceeds of the sale of subject property, and (2) that petitioner
Nelson failed to consign to the court the total amount of the
Facts: Rufino Cabales died on 1966 leaving a parcel of land in redemption price necessary for legal redemption. They prayed
Leyte to his surviving wife Saturnina and five children. In 1971, for the dismissal of the case on the grounds of laches and
brothers and co-owners Bonifacio, Albino and Alberto sold the prescription.
subject property to Dr. Corrompido for P2,000 with right to
repurchase within 8 years. The three siblings divided the RTC ruled against petitioners, it held that
proceeds of the sale among themselves of P666.6 each. 1. Alberto, or by his death, any of his heirs including
Nelson lost their right to subject land when not one of
In August 1971, Alberto secured a note (vale) from Corrompido them repurchased such from Dr. Corrompido;
in the amount of P300. In 1972, Alberto died leaving his wife 2. Saturnina was effectively subrogated to the rights and
and his son Nelson Cabales which is the petitioner in this case. interests of Alberto when she paid for Alberto’s share
as well as his obligations to Dr. Corrompido;
In 1975, within the 8-year redemption period, Bonifacio and 3. Petitioner Rito had no more right to redeem his share
Albino tendered payment of P666.6 each to Dr. Corrompido, to redeem his share to subject property as the sale by
but Dr. Corrompido only released the document of sale with Saturnina, his legal guardian pursuant to Section 7,
pacto de retro after Saturnina paid for the share of her Rule 93 of the Rules of Court, was perfectly valid; and
deceased son, Alberto, including his "vale" of ₱300.00. it was shown that he received his share of the
proceeds of the sale on July 24, 1986, when he was 24
Dr. Corrompido only released the document of sale with pacto years old.
de retro after Saturnina paid for the share of her deceased son,
Alberto, including his "vale" of ₱300.00. CA modified RTC decision it held that sale by Saturnina was
unenforceable but effectively ratified by petitioner Rito’s
On even date, Saturnina and her four (4) children Bonifacio, receipt of the proceeds on July 24, 1986. Saturnina was not
Albino, Francisco and Leonora sold the subject parcel of land to subrogated to the rights and directed Nelson to pay Saturnina’s
respondents-spouses Jesus and Anunciacion Feliano for estate. It denied redemption for it was not made within the
₱8,000.00. The Deed of Sale provided in its last paragraph, thus: period.
Issues Unenforceable but was Ratified

1. Recognizing petitioner Nelson Cabales as co-owner of Accordingly, the contract of sale as to the pro-indiviso share of
subject land but denied him the right of legal petitioner Rito was unenforceable. However, when he
redemption, and acknowledged receipt of the proceeds of the sale on July 24,
2. Not recognizing petitioner Rito Cabales as co-owner 1986, petitioner Rito effectively ratified it. This act of ratification
of subject land with similar right of legal redemption. rendered the sale valid and binding as to him.
Sale on Nelson was Void

Rights of Petitioners to the Subject Land He was a minor at the time of the sale. Saturnina or any and all
When Rufino Cabales died intestate, his wife Saturnina and his the other co-owners were not his legal guardians with judicial
six children survived and succeeded him. But before partition of authority to alienate or encumber his property. It was his
the subject land was effected, Alberto died. By operation of law, mother who was his legal guardian and, if duly authorized by
his rights and obligations to the 1/7 of the land are transferred the courts, could validly sell his undivided share to the property.
to his legal heirs. She did not.
Rights to the Parties and the Two Sales Necessarily, when Saturnina and the others sold the subject
The first sale with pacto de retro to Dr. Corrompido by the property in its entirety to respondents-spouses, they only sold
brothers and the co-owners Bonifacio, Albino and Alberto was and transferred title to their pro-indiviso shares and not that
valid but only as to their pro-indiviso shares to the land. When part which pertained to petitioner Nelson and his mother.
Alberto died prior to repurchasing his share, his rights and Consequently, petitioner Nelson and his mother retained
obligations were transferred to and assumed by his heirs, ownership over their undivided share of subject property.
namely his wife and his son, petitioner Nelson. But the records
show that it was Saturnina, Albertos mother, and not his heirs, But may the petitioners redeem the subject land?
who repurchased for him. As correctly ruled by the Court of
Appeals, Saturnina was not subrogated to Albertos or his Clearly, legal redemption may only be exercised by the co-
heir’s rights to the property when she repurchased the share. owner or co-owners who did not part with his or their pro-
indiviso share in the property held in common. As
When Saturnina redeemed for Alberto’s heirs who had then demonstrated, the sale as to the undivided share of petitioner
acquired his pro-indiviso share in subject property, it did not Rito became valid and binding upon his ratification on July 24,
vest in her ownership over such share the she redeemed. But 1986. As a result, he lost his right to redeem subject property.
she had the right to be reimbursed for the redemption price
and held a lien until reimbursed. The result is that the heirs of However, as likewise established, the sale as to the undivided
Alberto; his wife and his son Nelson, retained ownership. share of petitioner Nelson and his mother was not valid such
that they were not divested of their ownership thereto.
Upon redemption from Dr. Corrompido, the subject property Necessarily, they may redeem the subject property from
was resold to respondents-spouses by the co-owners. respondents-spouses. But they must do so within thirty days
Petitioners Rito and Nelson were then minors and as indicated from notice in writing of the sale by their co-owners vendors.
in the Deed of Sale, their shares in the proceeds were held in
trust by respondents-spouses to be paid and delivered to them Thirty Period Has Lapsed to Redeem
upon reaching the age of majority. In the instant case, the right of redemption was invoked not
days but years after the sale was made in 1978. We are not
As to Rito the contract of sale was unenforceable. The father, unmindful of the fact that petitioner Nelson was a minor when
or in his absence the mother is considered the legal the sale was perfected. Nevertheless, the records show that in
administrator of the property pertaining to the child under his 1988, petitioner Nelson, then of majority age, was informed of
or her parental authority without need of giving a bond incase the sale of subject property.
the amount of the property does not exceed two thousand.
Moreover, it was noted by the appellate court that petitioner
Saturnina was clearly petitioner Rito’s legal guardian without Nelson was likewise informed thereof in 1993 and he signified
necessity of court appointment considering that the amount of his intention to redeem subject property during a barangay
his property or one-seventh of subject property was ₱1,143.00, conciliation process. But he only filed the complaint for legal
which is less than two thousand pesos. redemption and damages on January 12, 1995, certainly more
than thirty days from learning about the sale. In the face of the
The legal guardian has only plenary power of administration established facts, petitioner Nelson cannot feign ignorance of
over the minor’s property. It does not include the power of the sale of subject property in 1978.
alienation for such requires judicial authority.
To require strict proof of written notice of the sale would be to
Thus, when Saturnina as legal guardian of Rito, sold his pro- countenance an obvious false claim of lack of knowledge
indiviso share in the land, she did not have the legal authority thereof, thus commending the letter of the law over its purpose,
to do so.
i.e., the notification of redemptioners. The Court is satisfied that Lina contended that the Deed of Absolute Sale executed did
there was sufficient notice of the sale to petitioner Nelson. not convey any valid title, respondent was a buyer in bad faith,
but also because respondent spouses Ramos did not own the
Petitioner Nelson, as correctly held by the Court of Appeals, Ugac properties. Thus, Lina prayed for the declaration of nullity
can no longer redeem subject property. But he and his of the Deed of Donation and the cancellation of titles.
mother remain co-owners thereof with respondents-
spouses. Accordingly, title to subject property must include Second Cause of Action
them. Lina claimed that many years prior to 1984, she operated a
building she owned in Bonifacio St., Tuguegarao, Cagayan.
HELD: The petition is denied the decision of CA is affirmed with However, the commercial lot (Bonifacio property) upon which
modification. A new certificate of title in the name of building stood is owned by and registered in the name of Maria
respondents-spouses Jesus and Anunciacion Feliano for the 6/7 Mendoza from whom Lina rented the same.
portion, and petitioner Nelson Cabales and his mother for the
remaining 1/7 portion, pro indiviso. In 1982, Lina allowed the Spouses Ramos to manage the
hardware store. In 1984, Mendoza put the property up for sale.
As Lina did not have enough cash to buy the property, Lina
PEÑALBER v. RAMOS (2009) entered into a verbal agreement with respondent Spouses
511 SCRA 305
Ramos with the following terms:
(1) The lot would be bought by Ramos in behalf of Lina;
Facts: Lina Peñalber is the mother of Leticia and the mother in
(2) The consideration of P80K be paid from the
law of Quirino Ramos, Bartex is a corporation which bought
accumulated earnings of the store;
from Ramos and Leticia one of the two properties in this case.
(3) Since Ramos have the better credit standing, they
would be made to appear in the Deed of Sale as the
In 1987, Lina filed before RTC for Declaration of Nullity of Deeds
vendees so that the title be issued in their named
and Titles, Reconveyance and Damages with WPI against the
could be used by them to secure a loan with which to
respondent Ramos and others.
build a bigger building a expand the business of Lina.
First Cause of Action

In accordance with such agreement, the Ramos entered into a
Lina alleged in her complaint that she was owner of a parcel of
contract of sale with Mendoza over the Bonifacio property
land in Ugac, Cagayan, a residential house and a warehouse
thus a TCT was issued in the name of the respondent Ramos.
were constructed on the said parcel of land which she claimed
to own (Ugac Properties). She averred that in the middle of
In September 1984, respondent spouses Ramos returned the
1986, she discovered that the title for such was cancelled and a
management of the hardware store to the petitioner. On the
TCT was issued in the name of spouses Ramos.
basis of receipts and disbursements, petitioner asserted that
the Bonifacio was fully paid out of the funds of the store. Lina
Upon verification, Lina learned that the basis for the
demanded from respondent spouses Ramos the reconveyance
cancellation of her title was a Deed of Donation of a
of the Title to the Bonifacio property to her, but they refused.
Registered Lan which she purportedly executed in favor of the
respondent spouses Ramos on 1983. Lina insisted that her
Lina insisted that they Ramos spouses were merely trustees of
signature of such was a forgery as se did not donate any
the Bonifacio property; thus, they were under a moral and legal
property to respondent spouses Ramos. When she confronted
obligation to reconvey title over the property to her. Lina
the spouses of the donation, they pleaded that they would just
therefore prayed that she be declared the owner of the
pay for the Ugac properties in the amount of P1 Million. She
Bonifacio property.
agreed to such proposition.
Answer. Ramos filed, as regards to the first cause of action, they
In 1987, she found out that the respondent spouses Ramos
alleged that Lina Peñalber, together with her son, mortgaged
were selling the Ugac properties to respondent Bartex. She ten
the Ugac properties to the DBP in 1990 in the amount of P150K
sent her son Johnson to caution respondent Bartex that the
and that when it was about to be foreclosed due to failure to
spouses Ramos were not the lawful owners of the said
pay the debt, Ramos stated that Lina asked for them to redeem
properties. Lina also warned the spouses Ramos not to sell the
the property or pay her mortgage and that in return Lina
Ugac properties anymore, otherwise, she would file action. The
promised to cede, convey and transfer full ownership of the
respondent Ramos assured her that they would do no such
Ugac properties to them.
thing. As a precaution, Lina executed an Affidavit of Adverse
Claim over the properties on 1987 and caused such to be
The Ramos paid the mortgage debt, and in compliance with her
annotated on the same day. Despite the warnings however, the
promise, Lina voluntarily transferred the Ugac properties to the
spouses Ramos still executed in favor of Bartex a Deed of
former by Deed of Donation and they then took actual and
Absolute Sale over the Ugac properties for a total price of
physical possession of the Ugac properties as they posted
P150,000 as a result, a title was issued in the name of
placards for sale.
respondent Bartex.
As regards the second cause of action involving the Bonifacio The CA found that the said inventory showing such difference
property, spouses Ramos contended that they were given not is not conclusive proof to show that the said amount was
only the management, but also the full ownership of the store used to pay the purchase price of the subject lot. Thus, the CA
by the petitioner by the condition that object shall be granted the appeal and revered the RTC decision.
inventoried and out of the proceeds they shall pay Lina’s
outstanding assets and liabilities and after, they bought the Issue
Bonifacio property using their own funds. 1. Whether or not the existence of a trust agreement
between Lina and Spouses Ramos was clearly
RTC promulgated its decision: established and;
First cause of action, the Court finds that the testimony of Lina 2. Whether or not such trust agreement was valid and
Peñalber denying her executed of the Deed of Donation over enforceable;
the Ugac property in favor of spouses Ramos is insufficient to
support the cause of action. A notarial document is by law Trusts, Concept and Application
entitled to full faith and credit upon its face and a high degree A trust is defined as the right, enforceable solely in equity to
of proof is needed to overthrow presumption of truth. Such the beneficial enjoyment of property, the legal title to which is
denial by itself is not sufficient to overcome the presumption of vested in another, it is frequently employed to indicate duties,
regularity of the notarial deed of donation and its entitlement relations and responsibilities.
to full faith and credit.
CONTENTION: Lina maintains that she was able to prove the
Second cause of action, the RTC finds in favor of Lina. The existence of a trust agreement between them. She calls
evidence on record shows that when Lina allowed the Spouses attention to the fact that respondent spouses Ramos could not
Ramos full management of the hardware store located on the account for the P116K difference and they failed to present
Bonifacio property in March 1982 an inventory of stock and proof to support allegation that such was made to pay for her
trade made showing worth of P226K and when she got back obligations. She alleges that based on the verbal agreement
the store from respondents another inventory was made on the between her and Spouses Ramos a trust agreement was made
stocks in trade in the said store with the amount of P110K. and that the same was valid and unenforceable.
The reason for the inventory made was for the account for the COURT REPLY:The arguments to persuade. Lina has the burden
sale of such stocks, and to arrive at the net amount due to Lina, of proving her cause of action and she may not rely on the
all that is needed to be done is to deduct the value of the stocks weakness of the defense.
found in the hardware store when management was returned
to Lina in 1984. Lina claims that the purchase price of the From the allegations of Lina there was a verbal trust
Bonifacio property was to be taken from the proceeds of sales agreement in the nature of an express trust of allowing Ramos
and there was a balance in her favor of P116K. to acquire title but to hold such property for her benefit.
That [petitioner] and [respondent spouses Ramos] agreed that Given that the alleged trust concerns an immovable property,
the amount due [petitioner] from the proceeds of the sales of however, spouses Ramos counter that the same is
her stocks in the hardware store would be applied to the unenforceable since the agreement was made verbally and no
purchase price of the Bonifacio property is supported by the parol evidence may be admitted proving the existence of an
fact that [petitioner] did not ever ask for an accounting of said express trust concerning an immovable property, or any
proceeds, despite the fact that as early as September, 1984 she interest therein.
already knew that her stocks left by her in March, 1982 was
already sold by [respondent spouses Ramos] and that there was However, the spouses were deemed to have waived their
a difference of ₱116,000.00 plus which was due to her. objection to the parol evidence as they failed to timely
object when petitioner testified on the said verbal
Thus, the RTC ruled that the (1) the first cause of action is agreement.
dismissed; (2) Lina is the owner of the Bonifacio. MR Denied.
Even though an express trust concerning an immovable fall
CA rendered a decision in favor of the Spouses Ramos stating under the Statute of Frauds, but the parties made no objection
that the second cause of action did not involve only Lina and to the admissibility of the oral evidence to support the contract
her daughter, but also her son-in-law who was not covered by thus it was just as binding.
the term family relations thus the need for exertion of earnest
efforts towards a compromise need not be applied. As to the testimony of Lina, the Bonifacio property was offered
for sale by its owner Mendoza. She told the respondent spouses
CA declared the Lina failed to prove claim with quantum of Ramos that she was going to buy lot, but the title will be in their
evidence. It appears that before the management of the store name. The money from the hardware store shall be used to buy
was transferred to Ramos a beginning inventory was of P226K lot and shall be mortgaged by spouses Ramos to obtain a loan
after management what accounted for was P110K showing a to build a bigger store.
difference of P116K.
A careful perusal of the records of the case reveals that RTC dismissed the complaint of respondents stating that the
respondent Spouses Ramos did indeed fail to interpose their Deed of Sale between Gonzales and Perez was not notarized,
objections regarding the admissibility of the testimonies and the same ins considered void and of no effect. In addition,
when the same were offered to prove the alleged verbal the trial court held that Gonzales became the owner of the lot
trust agreement between them and petitioner. only on 1992 as such he could have not lawfully became the
owner and as such, he could have not validly transferred
However, even though admissible, they are still subject to ownership thereof to Marcos in 1966.
judicial evaluation. Thus, despite the admissibility of the said
testimonies, the Court holds that the same carried little weight CA reversed and set aside, stating that even though the sale
in proving the alleged verbal trust agreement between was not in a public document, the sale is valid, and that Article
petitioner and respondent spouses. 1358 only refers to convenience, but it is not essential for
validity or enforceability of the property covered by the sale.
The finding of the RTC was speculative, The resulting difference
in the two inventories might have been caused by other factors Issues
and the same is capable of other interpretations (e. g., that the 1. Whether or not Perez could have legally bought the
amount thereof may have been written off as business losses disputed parcel of land from the Gonzales because at
due to a bad economic condition, or that the stocks of the store that time he was not yet the owner of the property,
might have been damaged or otherwise their purchase prices stating that it was still subject to approval by the
have increased dramatically, etc.), the exclusion of which rested Provincial Governor.
upon the shoulders of petitioner alone who has the burden of 2. Whether the deed of sale was valid and enforceable
proof in the instant case. without notarization.
This petitioner miserably failed to do. The fact that Pending Approval from Provincial Governor, Voidable
respondent spouses Ramos never denied the ₱116,946.15 Pending approval or disapproval by the Provincial Governor of
difference, or that they failed to present proof that they indeed a contract entered into by a municipality which falls under the
used the said amount to pay the other obligations and liabilities provisions of Section 2196 of the Revised Administrative Code,
of petitioner is not sufficient to discharge petitioner’s burden to such contract is considered voidable.
prove the existence of the alleged express trust agreement.
IN THE CASE: There is no showing that the contract of sale entered
HELD: The petition here is denied, the CA decisions affirmed. into between Pedro and the Municipality of Marikina was ever
acted upon by the Provincial Governor. Hence, consistent with
GONZALES v. PEREZ (2009) the rulings enunciated above, the subject contract should be
605 SCRA 47 considered voidable.
Facts: The Municipality of Marikina used to own a parcel of land Voidable or annullable contracts, before they are set aside, are
in Barrio Concepcion which were subdivided to lots A, B, and C. existent, valid, and binding, and are effective and obligatory
In 1966, the Council passed resolution authorizing the sale between the parties. In the present case, since the contract was
through public bidding of the lots A and C. never annulled or set aside, it had the effect of transferring
ownership of the subject property to Pedro.
In 1966, a public bidding was conducted wherein Pedro
Gonzales was the highest bidder. The council accepted the bid Having lawfully acquired ownership of Lots A and C, Pedro, in
of Pedro. Thereafter, a deed of sale was executed in favor of the turn, had the full capacity to transfer ownership of these parcels
latter which was later forwarded to the Provincial Governor of of land or parts thereof, including the subject property which
Rizal for his approval. The Governor, however, did not act upon comprises a portion of Lot C.
the said deed.
There is no dispute that Pedro took control and possession of
Gonzales sold to Perez a portion Lot C, denominated Lot C-3, it the said lot immediately after his bid was accepted by the
was denominated as a Deed of Sale which was notarized. Municipal Government of Marikina. In fact, herein petitioners,
Subsequently, Pedro and Marcos died. in their Answer with Compulsory Counterclaim admit that both
Pedro and Marcos, together with their respective heirs, were
On 1992, the Municipality of Marikina executed a Deed of already occupying the subject property even before the same was
Absolute Transfer of Real Property over Lots A and C in favor sold to Pedro and that, after buying the same, Pedro allowed
of the Estate of Pedro Gonzales. Marcos and his family to stay thereon.
Subsequently, the Estate and Heirs they had a partition This only shows that upon perfection of the contract of sale
wherein Lot C was subdivided into three lots. As a result of the between the Municipality of Marikina and Pedro, the latter
subdivision, new titles wee issued. Perez asked for acquired ownership of the subject property by means of
reconveyance of the property, but the petitioner refused thus delivery of the same to him. The issuance of the title is simply
they filed for Annulment and/or Rescission of the Deed/ a confirmation of such ownership.
Deed of Sale is Enforceable even if Not Notarized RTC rendered a decision annulling the Extrajudicial Settlement
Under Article 1403(2), the sale of real property should be in of the Estate with Absolute Deed of Sale. It ruled that while the
writing and subscribed by the party charged for it to be sale occurred beyond the 5-year prohibitory period, the sale is
enforceable. still void because Eutropia and Victoria were deprived of their
hereditary rights and that Enrique had no judicial authority to
In the case before the Court, the Deed of Sale between Pedro sell that shares of his minor children.
and Marcos is in writing and subscribed by Pedro and his wife
Francisca; hence, it is enforceable under the Statute of Frauds. CA reversed and set aside the ruling of the RTC stating that
However, not having been subscribed and sworn to before a unconscionable to permit the annulment of the sale
notary public, the Deed of Sale is not a public document and, considering spouses Uy’s possession thereof for 17 years, and
therefore, does not comply with Article 1358 of the Civil Code. that Eutropia and Victoria belatedly filed their action in 1997, or
more than two years from knowledge of their exclusion as heirs
Nonetheless, it is a settled rule that the failure to observe the in 1994 when their stepfather died.
proper form prescribed by Article 1358 does not render the acts
or contracts enumerated therein invalid. It has been uniformly It, however, did not preclude the excluded heirs from
held that the form required under the said Article is not recovering their legitimes from their co-heirs. Similarly, the CA
essential to the validity or enforceability of the transaction, but declared the extrajudicial settlement and the subsequent sale
merely for convenience. as valid and binding with respect to Enrique and his children,
holding that as co-owners, they have the right to dispose of
Although a conveyance of land is not made in a public their respective shares as they consider necessary or fit.
document, it does not affect the validity of such
conveyance. Article 1358 does not require the accomplishment While recognizing Rosa and Douglas to be minors at that time,
of the acts or contracts in a public instrument in order to they were deemed to have ratified the sale when they failed to
validate the act or contract but only to insure its efficacy. question it upon reaching the age of majority. It also found
laches to have set in because of their inaction for a long period
HELD: Thus, based on the foregoing, the Court finds that the of time.
CA did not err in ruling that the contract of sale between Pedro
and Marcos is valid and binding. WHEREFORE, the instant Issues
petition is DENIED. The assailed CA decision is affirmed. 1. Whether or not the CA erred in upholding the validity
of the settlement of the estate as far as the shares of
NERI v. HEIRS OF YUSOP UY (2012) Eutropia and Victoria were concerned, thereby
683 SCRA 553 depriving them of their inheritance;
2. Whether or not the CA erred when it did not nullify or
Facts: During her lifetime, Anunciacion Neri had seven children annul the settlement with respect to the shares of
namely: Napoleon, Alicia, Visminda, Douglas and Rosa Rosa and Douglas, depriving them of inheritance;
throughout their marriage, they acquired several homestead 3. Whether or not the CA erred when it ruled that
properties with a total area of 299,655 square meters in Samal, prescription or laches has set in.
Davao del Norte.
COURT RULING: The petition is meritorious. It found that all the
In 1977, Anunciacion died intestate, her husband Enrique, in his petitioners therein are indisputably legitimate children of
personal capacity and as natural guardian of minor Rosa and Asuncion from her first and second marriages and are entitled
Douglas, together with Napoleon, Alicia, and Visminda they to inherit from her in equal shares.
executed Extrajudicial Settlement of the Estate with
Absolute Deed of Sale adjudicating among themselves the As such, upon the death of Anunciacion in 1977, her children
said homestead properties, and thereafter, conveying them to and husband Enrique acquired the respective inheritance:
the late spouses Yusop Uy for a consideration of P80K.
Enrique 9/16 (1/2 of the conjugal share + 1/16)
On June 11, 1996, the children of Enrique filed a complaint for Eutropia 1/16
annulment of sale of the said homestead properties against Victoria 1/16
spouses Uy for it was sold during the prohibited period. In their Napoleon 1/16
answer with counterclaim, they stated that the sale took place Alicia 1/16
beyond the 5-year prohibitor period from the issuance of the
Visminda 1/16
homestead patents.
Rosa 1/16
Douglas 1/16
They also denied knowledge of the exclusion of the first two
children of Anunciacion Eutropia and Victoria from the
Hence, in the execution of the Extrajudicial Settlement of the
extrajudicial settlement. They interposed the defenses of
Estate with Absolute Deed of Sale, all the heirs should have
prescription and of laches.
participated.
Considering that Eutropia and Victoria were admittedly BUCTON v. RURAL BANK OF EL SALVADOR (2014)
excluded and that then minors Rosa and Douglas were not 717 SCRA 458
properly represented therein, the settlement was not valid
and binding upon them and consequently, a total nullity. Rule: A mortgage executed by an authorized agent signed in
his own name without indicating that he acted for and on behalf
However, while the settlement of the estate is null and void, the of his principal binds only the agent and not the principal.
subsequent sale of the subject properties made by Enrique and
his children, Napoleon, Alicia and Visminda, in favor of the Facts: Bucton filed for Annulment of Mortgage, Foreclosure
respondents is valid but only with respect to their and SPA against Concepcion and Rural Bank of El Salvador.
proportionate shares therein. It cannot be denied that these Bucton alleges that she is the owner of a parcel of land in CDO
heirs have acquired their respective shares in the properties of and that on 1982, Concepcion borrowed on the pretext that
Anunciacion from the moment of her death and that, as owners Concepcion was going to show it to interest buyer and
thereof, they can very well sell their undivided share in the Concepcion obtained a loan worth P30K from Rural Bank as
estate. security for the loan. Concepcion mortgaged Bucton’s house
and lot to Rural Bank using an SPA allegedly executed in favor
Sale of Share of Minors, Unlawful and Unenforceable of Concepcion. Concepcion failed to pay the loan and the house
With respect to Rosa and Douglas, who were minors at the and lot were foreclosed by the Sheriff without Notice of
time of execution of the settlement and sale, their natural Extrajudicial Foreclosure or Notice of Auction Sale and that such
guardian and their father, Enrique represented them in the was sold in favor of the Respondent Bank.
transaction, however on the basis of the law prevailing at that
time, Enrique was merely clothed with powers of Rural Bank in its answer denied the allegation of the forgery of
administration and bereft of any authority to dispose 2/16 the SPA and that Bucton went to the bank and promised to
of the shares in the estate of their mother, Anunciacion. settle the loan of Concepcion.
Consequently, the disputed sale entered in to in behalf of his During trial, Bucton testified that a representative of Rural Bank
minor children without the proper judicial authority, are went to her house to inform her that the loan was overdue,
considered unenforceable unless ratified according to Articles shocked, she went to the bank and inquire about matter. It was
1317 and 1403(1) of the Civil Code. only then she discovered that such house was mortgaged by a
forged SPA. She insisted that ever since she got married she did
Rosa ratified the sale in a Manifestation that they confirmed no longer used her maiden name and denied appearing before
and freely respect and acknowledge the validity of the sale. For the notary public and the titles are covered by different title.
Douglas however, it was not shown that there was evidence
showing his ratification. She presented Emma Nagac who testified that when she was at
Concepcion’s boutique, she was asked by Concepcion to sign
Considering, thus, that the extrajudicial settlement with sale is as witness to the SPA, that when she signed the SPA the
invalid and therefore, not binding on Eutropia, Victoria and signatures of petitioner and her husband had already been
Douglas, only the shares of Enrique, Napoleon, Alicia, Visminda affixed and that she was instructed not to tell Bucton.
and Rosa in the homestead properties have effectively been
disposed in favor of spouses Uy. "A person can only sell what RTC found the SPA was forged and that the bank should have
he owns or is authorized to sell and the buyer can therefore checked the authenticity of the SPA since there was no
acquire no more than what the seller can legally transfer. residence certificate attached to such.
As a consequence, the buyers were deemed to hold in trust CA reversed the RTC for it was not convinced that SPA was
the 3/16 share of Eutropia, Victoria and Douglas under an forged stating that even though the PN and REM did not
implied constructive trust. As such it is only fair, just and indicate that Concepcion was signing in behalf of Bucton, that
equitable that the amount paid total of ₱ 15,000.00 be returned she was estopped due to her negligence handing over the title.
to spouses Uy with legal interest. On the issue of prescription,
the Court agrees with petitioners that the present action has Issue:
not prescribed in so far as it seeks to annul the extrajudicial Whether or not the SPA was forged and if it was entered in
settlement of the estate. behalf of Bucton.
Prescription: Court reckoned from the execution of the The Real Estate Mortgaged Was Entered by Concepcion in
extrajudicial settlement finds no application to petitioners her Own Personal Capacity
Eutropia, Victoria and Douglas, who were deprived of their In order to bind the principal by a deed executed by an agent,
lawful participation in the subject estate. Besides, an "action or the deed must upon its face purport to be made, signed and
defense for the declaration of the inexistence of a contract does sealed in the name of the principal. In other words, the mere
not prescribe" in accordance with Article 1410 of the Civil Code. fact that the agent was authorized to mortgage the property is
10 years to recover property in trust, within the prescriptive not sufficient to bind the principal unless the deed was
period of the law. executed and signed by the agent in behalf of principal.
IN THE CASE: The authorized agent failed to indicate in the On 1983 and 1984, BSP granted emergency advances in the
mortgage that Concepcion was acting for and on behalf of amount of P1.6M and P6.4M respectively. DSLAI latter became
Bucton. The Real Estate Mortgage, explicitly shows on its face known as MSLAI. Guillermo Torres died on 1989. MSLAI failed
that it was signed by Concepcion in her own name and in her to recover from losses and was liquidated in 1991.
own personal capacity. In fact, there is nothing in the document
to show that she was acting or signing as an agent of Bucton. On 1999, BSP sent a letter to UM informing that it would
Thus, consistent with law and jurisprudence, Bucton cannot be foreclose the mortgage properties if the MSLA’s obligation of
bound by the actions of Concepcion. P12.5M remained unpaid. In its reply, UM denied that such
properties were mortgaged and that it did not receive any loan
In light of the foregoing, there is no need to delve on the issues proceeds from BSP. Prompting it to file for nullification and
of the forgery of the SPA and the nullity of the sale. For even if cancellation of mortgage.
the SPA was valid, the REM would still not bind petitioner for it
was signed by Concepcion in her personal capacity, not as an UM alleges that the certification of De Leon was anomalous,
agent of petitioner. Simply put the REM is void and that it never authorized Petalcorin to execute a REM involving
unenforceable against Bucton. its properties to secure FISLA’s debts and that it never ratified
the execution of the mortgage contracts. It also alleged that as
Respondent Bank was Negligent an educational institution, it cannot mortgage its properties to
Respondent bank has no one to blame but itself. Not only did secure another person’s debts.
it act with undue haste when it granted and released the loan
in less than three days, it also acted negligently in preparing the RTC CDO. It ruled in favor of UM finding that there was no
REM as it failed to indicate that Concepcion was signing it board resolution giving Petalcorin authority to execute
for and behalf of are vital in order for Bucton to be bound by mortgage contracts in favor of UM. Petalcorin testified that he
the acts of the agent. Without these words, any mortgage, had no authority to execute mortgage and executed such on-
although signed by the agent, cannot bind the principal as it is Guillermo Torres request.
considered to have been signed by the agent in his personal
capacity. Thus, Concepcion is liable to pay her unpaid RTC Iligan. It ruled in favor of UM, finding that the Secretary
obligations and reimburse it for all damages. Certificate issued in favor of Petalcorin was fictitious and
irregular for being unnumbered. It also did not specify the
identity, description, or location of the mortgaged properties.
UNIVERSITY OF MINDANAO v. BSP (2016)
778 SCRA 458
CA. It reversed both rulings of the RTC finding that although
BSP failed to prove that there was a board resolution
Rule: Acts of an officer that are not authorized by the board of
authorizing Petalcorin, the Secretary Certificate was clothed
directors/trustees do not bind the corporation unless the
with authority to allow Petalcorin and BSP relied in good faith.
corporation ratifies the acts or holds the officer out as a person
It was notarized, and that it was signed by late Guillermo and
with authority to transact on its behalf.
thus UM is presumed to have knowledge and that annotations
were constructive notice.
Facts: UM is an educational institution, for year 1982, its Board
of Trustees was chaired by Guillermo Torres. His wife, Dolores
Issue 1:
Torres sat as UM’s Assistant Treasurer.
Whether or not BSP’s action to foreclose the mortgaged
properties had already prescribed.
Before 1982, the Spouses Torres incorporated two thrift banks,
the FISLAI and DSLAI, Guillermo chaired both thrift banks. Upon
No. The prescriptive period for mortgages is ten years from the
Guillermo’s request, BSP issued P1.9M standby emergency
day the cause of action accrues, which is upon the default in
credit to FISLAI evidenced by three promissory notes dated
payment of the obligation which is the failure to pay on due
1982 signed by him and either his wife or Ramos.
date after demands for payment were made by creditor.
1. When obligation becomes due and demandable
In 1982, UM’s VP for Finance Petalcorin executed a deed of
2. When demand for payment has been made.
REM over UM’s Property in CDO in favor of BSP to serve as
security for the P1.9M loan executed on UM’s behalf. As proof
IN THE CASE: The mortgages were executed by Petalcorin in 1982,
of his authority to executed REM for UM, he showed a
the maturity dates were repeatedly extended until the loans
Secretary’s Certificate signed on April 13, 1982 by UM
became due and demandable only upon 1990. BSP informed
Corporate Secretary Aurora De Leon. The mortgage deed
UM of its decision to foreclose the properties and demanded
executed by Petalcorin in favor of BSP was annotated on the
payment in 1999. Thus, the running of the prescriptive period
title of the CDO property.
of action on the mortgage did not start upon execution of
contract thus there are two scenarios, if it falls under exception
On October 1982, BSP granted FISLAI additional loan of P620K
of Article 1169 then it is 1990; if not 1999, but in both cases the
and on November 1982 Petalcorin executed another deed of
action is still well within the period as brought forth by BSP.
REM on behalf of UM over its two Iligan Properties as security.
Given the termination of the all traces of existence of FISLAI, IN THE CASE: Securing FISLAI’s loans by mortgaging the UM
demand was unnecessary, thus the reckoning point would have properties do not fall under the purpose of being an
had ten years from 1990, or until 2000 to institute an action on educational institution. Securing loans is not UM’s conduct of
the mortgage contract. business, thus it was not within the corporation purpose.
Article 1155 however provides that there are three ways to Separate Personality of Corporation from its Officers and
interrupt the running of the prescriptive period: Shareholders and other Juridical Persons
1. Filing of a court action CONTENTION OF BSP: UM’s act of mortgaging its properties to
2. Written extrajudicial demand guarantee FISLAI’s loans was consistent with UM’s business
3. Written acknowledgement of the debt by debtor. interests, since UM was a FISLAI shareholder whose officers and
shareholders interlock with FISLAI stating that its key officers,
Therefore, the running was interrupted when BSP sent its held substantial share in MSLAI (when DSLAI and FISLAI
demand letter to UM in 1999 thus it was well interrupted. merged).
Issue 2: Therefore, it was safe to assume that when the mortgages were
Whether UM is bound by the REM executed by Petalcorin. executed n 1982, UM has shares with FISLAI.
Execution of REM was Ultra Vires; Concept of Corporations COURT REPLY: UM is an entity distinct and separate not only from
CONTENTION: Petitioner argues that the execution of the its own officers and shareholders but also from FISLAI, its
mortgage contract was ultra vires. As an educational institution, interest as an educational institution may not be consistent with
it may not secure the loans of third persons. Securing loans of FISLAI’s, it has a separate personality from its officers.
third persons is not among the purposes for which petitioner
was established. Exception to Separate Personality Rule: Piercing of Corporate Veil
The corporate veil is pierced when the separate personality of
COURT RULING: The petitioner is correct. Corporation are artificial the corporation is being used to perpetrate fraud, illegalities
entities granted legal personalities in accordance with law. and injustice.
Unlike natural persons, they have no inherent powers. Third
persons dealing with corporations cannot assume that they However, these instances have not been shown in the case,
heave powers, it is up to those persons dealing with corporations there is no evidence pointing to the possibility that UM used its
to determine their competence as defined by law and their separate personality to defraud third persons or commit illegal
articles of incorporation. acts. Neither is there evidence to show that UM was a farce of
a corporation, what has been shown that UM is also a victim of
A corporation may exercise its powers only within those fraud and unauthorized acts of its officers.
definitions, corporate acts that are outside those express
definitions under the law or articles of incorporation are Contract Unenforceable, but it can be
considered ultra vires. Ratified by the Board of Trustees
The mortgage contracts executed in favor of BSP do not bind
The only exception is when acts are necessary and incidental to UM, there was no board resolution to that effect. Thus, the
carry out the purposes of the corporation’s purposes under mortgages executed by Petalcorin were unenforceable. UM
Section 36 of the Corporation Code. must exercise its powers and conduct its business through its
Board of Trustees according to Section 23 of the Corporation
Thus, it is always important to find the logical relation of the act Code.
to the corporate purpose. If that act is one which is lawful in
itself and for the purpose of serving the corporate’s ends, then Thus, being a juridical person, UM cannot conduct business,
it is within the charter powers. The test is, whether the act in make decisions, or act in any manner without action from its
question is in direct and immediate furtherance of the Board of Trustees. An individual trustee cannot bind the
corporation’s business. corporation by himself or herself.
Education Institutions, Corporate Powers The corporation may through a board resolution delegate its
As an educational institution, the power to mortgage powers or functions to a representative subject to the
properties in order to secure loans of other persons do not limitations under the law and the articles of incorporation. An
fall under the power of an education institution. It is limited to agency is established between the representative and the
the development of human capital through formal instruction. corporation. This is still covered by Article 1317 of Civil Code.
It is not a corporation engaged in the business of securing loans
of others. IN THE CASE:The Secretary’s Certificate and the board resolution
were either non-existent or fictitious for there was no board
Thus, the acts of hiring professors, acquiring equipment and meeting to that for it was Guillermo Torres who ordered the
real estate, housing facilities for personnel and students are issuance of the Certificate and this was corroborated by
those directly connected with the corporation purpose. Petalcorin himself.
Unauthorized Acts Ultra Vires of the Powers of the Subsequently, Sergio died without being able to pay his
Corporation are not Void Ab Initio obligations with the DBP. Since the loan was nearing its
They are not void but may be capable of ratification, they are maturity and the mortgaged properties were in danger of being
not illegal but merely ultra vires. Mere ultra vires acts on the foreclosed, Leandro paid Sergio’s obligations.
other hand which are not illegal but are not merely within the
scope of the articles of incorporation are merely voidable and Considering that respondents were unable to reimburse
may become binding when ratified by stockholders. Leandro for the advances he made in Sergio’s favor,
respondents agreed that Sergio’s share in the lot which he co-
Ratification was not possible because even though
IN THE CASE: owned with his siblings and the other land in the name of
the Spouses Torres were officers their knowledge of the Sergio and Juana shall be assigned in favor of Leandro and
mortgage cannot be considered the knowledge of UM. It was Juliana. But despite demands and several follow-ups made by
not shown that they were acting for and behalf of UM. petitioners, respondents failed and refused to honor their
undertaking.
Secretary Certificate was Void, whether or Not Notarized
Since the notarized Secretary’s Certificate was found to have Answer: Respondents deny the allegations in the complaint
been issued without supporting board resolution, it produced raising the following defenses against the petitioners:
no effect. It is not binding upon UM. It should not have been 1. The respondents are not parties to the contract
relied on by respondent especially given its status as a bank. between Sergio and DBP;
2. There is neither verbal or written agreement between
BSP is not under Good Faith petitioners and respondents that the latter shall
For its failure to exercise the degree of diligence required of reimburse whatever payment was made by their
banks, respondent cannot claim good faith in the execution of predecessor-in-interest;
the mortgage contracts with Petalcorin. Respondent’s witness, 3. Jean was only a minor during the execution of the
there was no board resolution authorizing Petalcorin to act on alleged agreement and is not a party thereto;
behalf of petitioner. Respondent did not inquire further as to 4. That whatever liability or obligations of respondents is
his authority. already barred by prescription, laches and estoppel;
5. That the complaint states no cause of action as
Annotations are Merely Claims respondents are not duty-bound to reimburse
Annotations are merely claims of interest or claims of the legal whatever alleged payments were made by petitioners
nature and incidents of relationship between the person whose 6. There is no contract between the parties to the effect
name appears on the document and the person who caused that respondents are under obligation to transfer
the annotation. It does not say anything about the validity of ownership in Leandro and Juliana’s favor as
the claim or convert a defective claim or document into a valid reimbursement for the alleged payments made by
one. These claims may be proved or disproved during trial. Thus, petitioners to the DBP
annotations are not conclusive upon courts or upon owners who
may not have reason to doubt the security of their claim as their Also, during pendency" of the trial, Leandro died and was
properties' title holders. substituted by his heirs, herein petitioners.
NATIVIDAD v. NATIVIDAD (2016) RTC decided in favor of petitioners Leandro and Juliana
785 SCRA 239 Natividad ordering them to transfer title of the properties.
Petitioners: Leandro and Juliana Natividad, later substituted by CA however modified the decision, for it only granted instead
their heirs. to Leandro and Juliana the amount of P162K representing the
amount paid by Leandro to DBP with interest.
Respondents: Juana Mauricio-Natividad, and Spouses Jean
Natividad-Cruz and Jerry Cruz. Issues
1. Whether or not the CA erred in stating that the verbal
Complaint: In their Complaint, Leandro and Juliana alleged agreement to convey the property shares of Sergio
that in 1974, Sergio Natividad (Sergio), husband of respondent Natividad in payment of obligation is covered by the
Juana Mauricio-Natividad (Juana) and father of respondent Statute of Frauds despite it being partially executed
Jean Natividad Cruz (Jean), obtained loan from DBP. and is contrary to existing jurisprudence.
2. Whether or not the CA erred in ruling that the interest
As security for the loan, Sergio mortgaged two parcels of land, imposed shall be reckoned from date of demand
one of which is co-owned and registered in his name and that rather than the date of verbal agreement.
of his siblings, Leandro, Domingo and Adoracion. Sergio’s
siblings executed an SPA authorizing him to mortgage said Petitioners insist that there was a verbal agreement between
property. The other mortgaged lot was registered in the name Sergio (Juana and Jean) with Leandro, wherein the subject
of Sergio and Juana. properties shall be assigned to the latter as reimbursement for
the payment he made in Sergio’s favor. To support this
contention, petitioners relied heavily on the Extrajudicial Respondents; claim on the existence of a verbal agreement
Settlement Among Heirs, which was executed by respondents between them, and petitioners’ predecessors-in-interest, on
to prove partial execution of said agreement. the other remains to be mere allegation.
EXTRAJUDICIAL SETTLEMENT AMONG HEIRS CONTENTION: Petitioners contend that the subject verbal
agreement actually existed, they reiterate their contention that
KNOW ALL MEN BY THESE PRESENTS:
the conveyance of the subject properties in their favor is not
This EXTRAJUDICIAL SETTLEMENT, made and entered into by and among: covered by the Statute of Frauds because they claim that
respondent’s execution of the Extrajudicial Settlement
JUAN M. NATIVIDAD, widow; JEAN N. CRUZ, married to JERRY CRUZ;
JOSELITO M. NATIVIDAD, single, all of legal age, Filipino citizens, and constitutes partial execution of their alleged agreement.
residents of Malanday, San Mateo, Rizal.
COURT REPLY: This court does not agree. Suffice it to say, that
WITNESSETH
That the above-named parties, is the legitimate wife and children and sole there was no partial execution of any contract, whatsoever,
heirs of the deceased SERGIO NATIVIDAD, who died in San Mateo, Rizal on because petitioners failed to prove in the first place, that there
May 31, 1981: was a verbal agreement that was entered into.
That the said deceased at the time of his death, left certain real estate
properties located at San Mateo, Rizal, and Montalban, Rizal, more particular Granting for the sake of argument that indeed there was an
described as follows: agreement, the CA did not err on stating that the assignment
a. A whole portion of a parcel of land in Barrio of Malanday, San of the shares of Sergio on the subject properties in favor of
Mateo with an area of 208 square meters.
b. A one-fourth share in the parcel of land in Guinayang, San Mateo, Leandro cannot be enforced if there is no written contract to
Rizal with an area of 2,742 square meters. such effect.
c. A one-fourth share in the parcel of land in San Jose, Rizal, with an
area of 4,775 square meters.
Agreement to Convey Real Properties
d. A one-fourth share in the parcel of land, situated in San Mateo,
Rizal with an area of 13,456 square meters. Covered under Statute of Frauds
Agreement to convey real properties is unenforceable by action
That no other personal properties are involved in this extrajudicial settlement. in the absence of written note or memorandum thereof and
That to the best knowledge and information of the parties hereto, the said subscribed by the party charged or by his agent under the
deceased left certain obligations amount to P175,000.00 representing the Statute of Frauds.
loan obligations with the Development Bank of the Philippines.
IN THE CASE: As earlier discussed, the pieces of evidence

That a notice of this extrajudicial settlement had been published once a week
for three consecutive weeks in a newspaper of general circulation as certified presented by petitioners, consisting of the acknowledgment of
by the said newspaper hereto attached as Annex “A”. Sergio’s loan obligations with DBP under the Extrajudicial
Settlement Among Heirs, as well as the cash voucher
That the parties hereto being all of legal age and with civil capacity to
contract, hereby these presents agree to divide and adjudicate, as they representing the payment of taxes and transfer of title do not
thereby divide and adjudicate among themselves the above- described real serve as written notes or memoranda of the alleged verbal
estate property in equal shares and interest. agreement. As stated by Tolentino, a note or memoranda must
have at least (1) names of parties; (2) terms and conditions; (3)
IN WITNESS WHEREOF, the parties have signed this document on this 2nd
day of September 1994 in San Mateo, Rizal, Philippines description of subject matter; (4) date and place (5) signature.
After a careful reading of the abovequoted Extrajudicial
Settlement Among Heirs, the Court agrees with the CA that Respondent’s Acknowledgment of Sergio’s Debt in
there is nothing in said document which would indicate that DBP makes them liable to Reimburse Leandro
respondents agreed to the effect that the subject properties The foregoing, notwithstanding, the Court finds it proper to
shall be transferred in the name of Leandro as reimbursement reiterate the CA ruling that, in any case, since respondents had
for his payment of Sergio’s loan obligations with the DBP. already acknowledged that Sergio had, in fact, incurred loan
obligations with the DBP, they are liable to reimburse the
On the contrary, the second to the last paragraph of the said amount paid by Leandro for the payment of the said obligation
Settlement clearly shows that herein respondents, as heirs of even if such payment was made without their knowledge or
Sergio, have divided the subject properties exclusively among consent.
themselves.
Article 1236 of the Civil Code provides:
There is no competent evidence to prove the verbal The creditor is not bound to accept payment or performance by a third
agreement being claimed by respondents. Aside from the person who has no interest in the fulfillment of the obligation unless
there is a stipulation to the contrary.
subject extrajudicial settlement, the self-serving claims of
Leandro on the witness stand, as well as the cash voucher, Whoever pays for another may demand from the debtor what he has
which supposedly represented payment of P8,000 given to Atty. paid, except that if he paid without the knowledge or against the will of
Domingo Natividad for the expenses in transferring title of the the debtor, he can recover only insofar as the payment has been
subject properties in Leandro’s favor would hardly count as beneficial to the debtor.
competent evidence in the eyes of the law.
IN THE CASE:Neither can respondents evade liability by arguing

that they were not parties to the contract between Sergio and
DBP. As earlier stated the fact remains that in the Extrajudicial
Statement Among Heirs respondents clearly acknowledge
Sergio’s loan obligations with DBP. Being Sergio’s heirs, they
succeed not only to the rights of Sergio but also to his
obligations on such.
The following provisions of the Civil Code provides that:

Art. 774. Succession is a mode of acquisition by virtue of which the property, rights
and obligations to the extent of the value of the inheritance, of a person are
transmitted through his death to another or others either by will or by operation
of law.
Art. 776. The inheritance includes all the property, rights and obligations of a
person which are not extinguished by his death.
Art. 781. The inheritance of a person includes not only the property and the
transmissible rights and obligations existing at the time of his death, but also
those which have accrued thereto since the opening of the succession.
IN THE CASE: Respondent, being heirs of Sergio are now liable to

settle his transmissible obligations which include the amount
due to the petitioners, prior to the distribution of the remainder
of Sergio’s estate to them.
On the Reckoning Point of Interest Rate

As to when the interest on the sum due from respondents
should be reckoned, the Court finds no error in the ruling of the
CA that such interest should be computed from June 23, 2001,
the date when petitioners made a written demand for the
payment of respondents' obligation.
There is no merit in petitioners' contention that the reckoning

date should have been September 23, 1994, the date when
respondents executed the Extrajudicial Settlement Among
Heirs because there is nothing therein to prove that petitioners,
at that time, made a demand for reimbursement.
HELD: Petition herein is denied; the CA decision is affirmed but

interest is modified from 12% to 6% until fully satisfied.
OBLIGATIONS AND CONTRACTS Rescissible Void

Civil Code The defect is in their effects The defect is inherent in the
Articles 1409-1422 either to one of the parties contract itself
or to a third party
CHAPTER 9 Based on equity and is Nullity is a matter of law
VOID OR INEXISTENT CONTRACTS more a matter of private and public interest
interest
Voidable and Void Contracts Distinguished If no action is taken to set There are no legal effects
Voidable Void aside a rescissible contract, even if no action is taken to
May be ratified Cannot be ratified it remains valid and set it aside
Produces effects until Generally, effects are not produces all its effects
annulled produced at all The action to rescind The action to declare the
Defect is due to incapacity The defect here is that prescribes nullity of void contracts
or vitiated consent ordinarily, public policy is never prescribes
militated against
Valid until annulled Void from the very Void or Inexistent Contracts
beginning so generally, no A void or inexistent contract is one which has no force and
action is required to set it effect from the very beginning, as if it had never been entered
aside, unless the contract into, and which cannot be validated by either time or
has already been performed ratification. This definition includes not only those contracts in
May be cured by Cannot be cured by which one of the essential requisites is totally wanting, but also
prescription prescription those which are declared void by positive provision of law or
Defense may be invoked Defense may be availed of statute. A void contract is equivalent to nothing; it is absolutely
only by the parties or their by anybody, whether he is a wanting in civil effects.
successors in interest and party to the contract or not,
privies as long as his interest is Special Classifications
directly affected 1. Inexistent ones – like contracts those where essential
Referred to as relative or Referred to as absolute formalities are not complied with;
conditional nullity nullity 2. Illegal or illicit ones – like a donation made because
of immoral condition.
Unenforceable and Void Contracts Distinguished
Characteristics of Void Contracts (Paras)
Unenforceable Void
1. The right to set up the defense of illegality cannot be
May be ratified Cannot be ratified
waived, and may be considered on appeal even if not
There is a contract, but it No contract at all
raised in the trial court;
cannot be enforced by a
2. The action or defense for their declaration as
court action
inexistent does not prescribe;
Cannot be assailed by third Can be assailed by anybody
3. The defense of illegality of contracts is not available to
parties directly affected
third persons who interests are not directly affected;
4. Cannot give rise to a contract; thus, a contract which
ARTICLE 1409
is the direct result of a previous illegal contract is also
The following contracts are inexistent and void from the
void and inexistent;
beginning:
(1) Those who cause, object or purpose is contrary to 5. Generally, produces no effect.
law, morals, good customs, public order, or public 6. Generally, no action to declare them void is needed,
policy; since they are inexistent from the very beginning;
(2) Those which are absolutely simulated or fictitious; 7. They cannot be ratified.
(3) Those whose cause or object did not exist at the time
of the transaction; ARTICLE 1410
(4) Those whose object is outside the commerce of The action or defense for the declaration of inexistence of a
men; contract does not prescribe.
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to Defect Incurable
the principal object of the contract cannot be
The defect of inexistence of a contract is permanent and
ascertained;
(7) Those expressly prohibited or declared void by law. incurable; hence, it cannot be cured either by ratification or by
prescription.
These contracts cannot be ratified. Neither can the right to
set up the defense of illegality be waived. As between the parties to a contract; in fact, such action cannot
be given to it by estoppel if it is prohibited by law or is against
NOTE: This covers void or inexistent contracts under Civil Code. public policy.
ARTICLE 1411 This refers to contract that is void because it proceeds from the
When the nullity proceeds from the illegality of the cause or illegality of the cause or object and the act constitutes a criminal
object of the contract, and the act constitutes a criminal offense. Either both parties are in pari delicto or only one of the
offense, both parties being in pari delicto, they shall have no
parties is guilty. If both parties are guilty, or in pari delicto, they
action against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative to the shall have no action against each other and are prosecuted. The
disposal of the effects or instruments of a crime shall be articles of the crime shall be confiscated in favor of the state.
applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given and
guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.
shall not be bound to comply with his promise.
ARTICLE 1412 Article 1412. Illegal Contract but not Criminal Offense
If the act in which the unlawful or forbidden cause consists It is also a void contract, but the unlawful or forbidden cause
does not constitute a criminal offense, the following rules does not constitute a criminal offense but nevertheless it is
shall be observed: unlawful or forbidden.
(1) When the fault is on the part of both contracting • If both are at fault the rules in pari delicto applies,
parties, neither may recover what he has given by they cannot recover from each other.
virtue of the contract, or demand the performance • If one is only at fault, the other can demand of
of the other’s undertaking;
what he has given or cannot be compelled.
(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 NOTE: Article 1411 and 1412 does not apply to fictitious or
been promised him. The other, who is not at fault, inexistence contracts.
may demand the return of what he has given
without any obligation to comply with his promise. ARTICLE 1413
Interest paid in excess of the interest allowed by the usury
Application of Articles laws may be recovered by the debtor, with interest thereon
Articles 1411 and 1412 are not shown to applicable to fictitious from the date of payment.
or simulated contracts because they refer to contracts with an
illegal cause or subject-matter, whether it constitutes an ARTICLE 1414
When money is paid or property delivered for an illegal
offense, or whether the cause is only rendered illegal or to
purpose, the contract may be repudiated by one of the
contracts which are null and void ab initio. parties before the purpose has been accomplished, or before
any damage has been caused to a third person. In such case,
These articles, therefore, presuppose, the existence of a cause, the courts may, if the public interest will thus be subserved,
although such cause may be vitiated and may render contract allow the party repudiating the contract to recover the
void. Hence, they cannot refer to fictitious or simulated money or property.
contracts which are in reality non-existent.
One Instance Where Recovery Can Be Had
Illegal Contracts Even in Presence of Pari Delicto
There are two kinds of illegal contracts: This is one case where recovery can be made even if the parties
(a) Those where there is a criminal offense; be in pari delicto. Note, however, that recovery can be done:
(b) Those where there is no criminal offense. (a) If the purpose has not yet been accomplished;
(b) Or if damage has not been caused any third person.
Illegal and Criminal Contracts [Article 1411]
Contracts where there is a criminal offense may be two kinds: Repudiation of Illegal Contract
(a) Those where both parties are guilty (in pari delicto); Where the parties to an illegal contract are not equally guilty,
• Since they are in pari delicto, they shall have no and where public policy is considered as advanced by allowing
action against each other; both shall be the more excusable of those two to sue for relief against the
prosecuted and the effects or the instruments of transaction, relief is given to him.
the crime shall be confiscated in favor of the
government. Instance. For a reward, A promised to kill C for B. B gave the reward.
Before A could kill C, B repudiated the contract. Is B allowed to do so?
• Since they in pari delicto each must bear the
Yes, because here, the purpose has not yet been accomplished and no
consequences of his own acts. damage has as yet been caused to a third person. May B recover what
he has paid?
(b) Those where only one is guilty and other is innocent;
• The guilty party will be prosecuted. The It depends on the discretion of the court. If public interest allows the
instrument of the crime will be confiscated. The party repudiating the contract to recover the money or property given.
innocent one may claim what he has given; or if If, however, the repudiation took place after the crime has been done,
he has not yet given anything, he shall not be such repudiation is invalid and both parties will be guilty.
bound to comply with his promise.
Example. Suppose A would give B P100,000 to kill X. Now suppose A ARTICLE 1418
later on has a change of heart and tells B to not proceed with the plan. When the law fixes, or authorizes the fixing of the maximum
In this case A would decide to repudiate the plan and has a change of number of hours of labor, and a contract is entered into
heart, then he can now get back what A has earlier given to B before whereby a laborer undertakes to work longer than the
the purpose has been accomplished, and when public interest will be maximum thus fixed, he may demand additional
subserved, then the other can recover what he has give either money compensation for service rendered beyond the time limit.
or property.
ARTICLE 1415 Hours of Labor
Where one of the parties to an illegal contract is incapable of This concerns hours of labor. It should be noted that the Eight-
giving consent, the courts may, if the interest of justice so Hour Labor Law applies only to employments in industry or
demands allow recovery of money or property delivered by occupation performed for profit or gain.
the incapacitated person.
So, when the minimum hours of work is fixed, you can demand
Effect if One Party Is Incapacitated
for overtime pay. May overtime pay be waived? It depends. If
An insane man gave money to another to kill X. May the insane
for service rendered, yes. But if you are still going to render
man recover what he has paid? Yes, since the interest of justice
service. No, that is against the law.
so demands. This is one case when recovery can be had.
ARTICLE 1419
ARTICLE 1416
When the law sets, or authorizes the setting of a minimum
When the agreement is not illegal per se but is merely
wage for laborers, and a contract is agreed upon by which a
prohibited, and the prohibition by the law is designed for the
laborer accepts a lower wage, he shall be entitled to recover
protection of the plaintiff, he may, if public policy is thereby
the deficiency.
enhanced, recover what he has paid or delivered.
Minimum Wage – No Waiver of Right
Contracts Illegal Per Se and Those Merely Prohibited
No worker or organization of workers may voluntarily or
(a) Illegal per se
otherwise, individually or collectively, waive any rights
(b) Merely prohibited contracts
established under this Act, and no agreement or contract, oral
or written, to accept a lower wage or less than any other benefit
Illegal Per Se
required under this act shall be valid. Any contract in violation
Illegal per se contracts are those forbidden because of public
of this article shall be invalid.
interest.
ARTICLE 1420
Merely Prohibited In case of a divisible contract, if the illegal terms can be
Merely prohibited contracts are those forbidden because of separated from the legal ones, the latter may be enforced.
private interests. Here recovery is permitted, provided that:
(a) The contract is not illegal per se, Illegal Terms of a Contract
(b) The prohibition is designed for the protection of the The contract may be indivisible or divisible:
plaintiff, (a) If indivisible the whole contract is void, even if only
(c) Public policy would be enhanced by allowing the some terms are illegal.
recovery (b) If divisible, the legal terms may be enforced if same
can be separated from the illegal terms.
Instance. A donated to B everything that he (A) possessed and owned,
leaving nothing for himself. This is prohibited but not illegal per se. As a rule, the provisions of the article must be applied if there
Since public policy is hereby enhanced, A will be allowed to recover, at are several stipulations in the contract, some of which are valid
least that necessary for his own support and the support of his relatives.
and some void. If the stipulation can be separated from each
other, then those which are void will not have any effect, but
ARTICLE 1417
those which are valid will be enforced. In case of doubt, the
When the price of any article or commodity is determined by
statute, or by authority of law, any person paying any amount contract must be considered as divisible or inseparable.
in excess of the maximum price allowed may recover such
excess. Rule of divisibility in this article, however, has two exceptions:
1. When the nature of the contract requires divisible;
Rule in Case of Payment in Excess of Maximum Price 2. When the intention of the parties is that the contract
The purpose of the article is to curb the evils of profiteering. For be entire
example, if the ceiling price for a pack of cigarettes is pegged
at the P300 a carton and you paid P400 for it, you may recover Intention of the Parties
the excess of P100. The rule of divisibility and partial enforceability stated in this
Article must yield to the contrary intention of the parties.
This is true in basic necessities, and you there was a store. So, if Despite divisibility, the entire contract will be void if it is clear
the store sells you more than what is permitted by the that the parties would have not entered into it without the void
Department of Trade and Industry, you can go to DTI and part, thus if illegality affects an essential part, the entire is void.
complain. So here you can recover the excess of what is paid. Nullity of the principal includes the accessory.
ARTICLE 1421
The defense of illegality of contracts is not available to third
persons whose interests are not directly affected.
Defense of Illegality Not Generally Available Third Persons

Even if a contract is illegal, the defense of illegality may be set
up only by those whose interest are directly affected.
Nullity of Defense
The right to set-up the nullity of a void or non-existent contract
is not limited to the parties, as in the case of annullable or
voidable contracts; it is extended to third persons who are
directly affected by the contract. Thus, where a contract is
absolutely simulated, third persons who may be prejudiced may
set-up its non-existence.
Third persons whose interest are served by the nullity of the

contract may attack it, especially creditors of those who dispose
of their property under a void contract. The creditor may attach
the property thus alienated, asserting the nullity of the
alienation.
ARTICLE 1422
A contract which is the direct result of a previous illegal
contract, is also void and inexistent.
Contract That Is the Direct Result of a

Previous Illegal Contract
Precisely because the previous contract might either be one
that has an illegal object or an illegal cause of forbidden cause.
In short, the contract that will arise from such forbidden
contract would be void and inexistent.
Instance. A promised to give B a car as a reward after B has killed C.

Later, after the killing, the contract was changed to a lease of a big
house for a certain period. The second contract here is the direct result
of a previous illegal contract and is, therefore, null and void.
Osmeña v. Commission on Audit

City of Cebu appropriated P5,000,000 for the construction of a
modern slaughterhouse but the allocation exceeded the
budget. The construction company that won the bidding had
already started the 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 construction is
about P2,500,000 so they arrived at about P1,500,000 as
compromise and it was questioned. The compromise
agreement is void because it is a derivative of a void contract.
OBLIGATIONS AND CONTRACTS The trial court debunked the contention that Merlinda
Articles 1409-1422 intentionally gave away the bulk of her and her late estate to
Ramon Chiang as his exclusive property. They were in fact
JURISPRUDENCE NOTES
married. Since one of the characteristics of a void or inexistent
contract is that it does not produce any effect, Merlinda can
1409-1422. Void and Inexistent Contracts
recover the property from Modina.
MODINA v. COURT OF APPEALS (1999)

Issue 2:
317 SCRA 696
Whether or not Modina was in good faith.
Facts: The parcels of land are under the name of Chiang. He
Modina was not a purchaser in good faith. There are these
theorized that subject properties were sold to him by his wife
circumstances where are indicia of bad faith on his part:
as evidenced by a Deed of Absolute Sale dated 1975 and were
1. He asked his nephew to investigate the origin of the
subsequently sold by Chiang to Modina as shown by the Deed
property and learned that it formed part of the
of Sale on 1979.
property of Merlinda’s first husband.
2. That the said sale was between the spouses;
Modina brought Complaint for Recovery of Possession with
3. That when the property was inspected, Modina met all
Damages against the private respondents Hontarciego,
the lessees and they had no knowledge of sale.
Figueroa and Teodoro Hipalla. Upon learning the case, Merlinda
sought the declaration of nullity between his husband Ramon
A purchaser cannot close his eyes to the fact which would cast
Chiang and that of Modina claiming the titles were never legally
doubt to such. His mere refusal to believe the defect exists will
transferred to Ramon Chiang.
not make him an innocent purchaser for value.
It was alleged that fraudulent acts obtain a Torrens Title in his
favor. However, she confirmed the validity of the lease contracts GUAN v. ONG (2001)
367 SCRA 559
with the other private respondents.
Rule: A simulate deed of sale has no legal effect, and the
Merlinda also admitted that the said parcels of land were those
transfer certificate of title issued in consequence thereof should
ordered by Branch 2 of the then CFI where she was appointed
be cancelled. The doctrine of in pari delicto does not apply to
as the administratrix being widow of deceased first husband.
simulated sales.
RTC decided in favor of Merlinda Chiang which declaring as

Facts: Ong said that she and Guan are husband and wife
void and inexistent the sale of lots by Plana to Ramon Chiang
married on 1961 and lived together until Ong and her children
and also that sale of Ramon Chiang to Modina. CA affirmed.
were abandoned by Guan on 1992 due to incurable
promiscuity, volcanic temper and vices.
Issue 1:
Whether the sale of subject lots should be nullified.
She purchased in 1968 out of her personal funds a parcel of
land (Rizal Property) from Aurora Seneris registered in her
Inapplicability of the In Pari Delicto Doctrine
name. Also, during their marriage, out of their conjugal funds, a
CONTENTION: Petitioner theorizes that the sale in question is null
house and lot registered under their names.
and void for being violative of Article 1490 of the CC for it was
a sale between spouses, and that Article 1412 of the principle
Before their separation in 1992, Ong reluctantly agreed to
of in pari delicto applies which leaves both guilty parties where
Guan’s importunings that she execute a Deed of Sale of the
they are and keeps undisturbed the rights.
Rizal property in his favor, but on the promise that Guan would
construct a commercial building for the benefit of their
Articles 1411 and 1412 of the Civil Code on the doctrine of the
children. He suggested that the Rizal property should be in his
in pari delicto applies only to contracts with illegal
name alone so that she would not be involved in any obligation.
consideration or subject matter whether the attendant facts
The consideration was simulated and that after he would
constitute offense or misdemeanor whether the consideration
represent himself as single, a Deed of Absolute would be
involved is merely rendered illegal.
executed in favor of three (3) children and that he would pay
the Allied Bank the loan he obtained.
IN THE CASE:Records show the Merlinda Chiang she did not aver
the same as a ground to nullify the subject Deed of Sale. In fact,
Because of the assurance of Guan, Ong executed a Deed of
she denied the existence of the Deed of Sale in favor of her
Absolute Sale in 1922, but then Guan did not pay the
husband, in the said Complaint, her allegations referred to the
consideration of P200K supposedly the consideration. On the
want to consideration of such Deed of Sale. She did not put
contrary, she paid for the capital gains tax and other
up the defense under Article 1490 because such defense would
assessments out of her personal funds. A new TCT was issued
be inconsistent with her claim that the same sale was inexistent
in the name of Guan. Later on, Ong filed for an Adverse Claim.
for such.
To avoid burdening of title for additional loan amount, she Second Issue:
wrote Allied Bank that she withdraws authority for Guan to Fictitious, Simulated and Inexistent Sale
apply for additional loans.
CONTENTION OF GUAN: There was a valid sale between the parties
Guan filed a replacement for owner’s duplicate title, it was and that the consideration of his promise was to construct a
attached an Affidavit of Loss which he made falsely appear that commercial building for the benefit of their three children and
the owner’s copy of the title was misplaced (which was to pay the loan he had obtained with Allied Bank.
actually in the possession of Ong). It was granted.
COURT REPLY: The court disagrees. A deed of sale in which the
Guan’s Version of the Facts consideration which had not in fact been paid is null and void.
Guan alleged that sometime in 1968 or before he became a In the present case, it is clear from the factual findings that the
Filipino, the Rizal property was being offered to him for sale. sale was completely simulated, void and without effect
Because he was not a Filipino he utilized Ong as dummy and because no portion of the P200K was ever paid, and neither
agreed to have the sale executed in the name of Ong although party had any intention whatsoever to pay that amount.
the consideration was his own. And when he became a Filipino
in 1972. Guan also stated that Ong could have not purchased Instead the Deed of Sale was executed merely to facilitate the
the property because she had no financial capacity to do so; transfer of the property to petition pursuant to the agreement
and such Ong was in pari delicto for being part of such between the parties to enable him to construct a commercial
simulated sale. building, being merely a subterfuge that argument cannot be
taken as consideration for the sale.
RTC ruled that it was the paraphernal property of Ong and that
the pari delicto rule does not apply to a simulated sale. CA Third Issue:
upheld the trail court stating that the property was bought Inapplicability of the In Pari Delicto Principle
using her own personal funds.
The principle of in pari delicto provides that when two parties
First Issue are equally at fault, the law leaves them as they are and denies
Nature of the Property recovery by either one of them. However, this principle does
not apply with respect to inexistent and void contract. The
CONTENTION OF GUAN: He states the Rizal Property must be cancellation of the TCT was cancelled correctly, for there was
considered as co-owned considering that Guan testified that no legal basis for the issuance of such.
the money used was her income and wages which were
considered conjugal in nature. DOMINGO v. CA (2001)
367 SCRA 368
CONTENTION OF ONG:She states that the property was acquired
using he own funds as fund by the RTC and CA. Facts: Paulina Rigonan owned 3 parcels of land which had one
house and warehouse on one parcel. She allegedly sold them
COURT REPLY: There is no reason to disturb the RTC and CA to private respondent’s spouses Felipe and Concepcion
findings that the use of source of money was paraphernal in Rigonan who claim to be her relatives.
nature for this is a factual issue. It was shown that Guan’s
testimony as to the source of the money he had supposedly In 1966, herein petitioners Domingo, Mangabat and
used to purchase the property was vague and unclear. Capalungan who claim to be her closest relatives allegedly too
possession of the properties by means of stealth, force and
It was established during trial that Ong was able to have her intimidation and refused to vacate the same.
own capacity to purchase the Rizal property for she had the
means to do so because of her ability to purchase other lots. Consequently, on 1976, respondent Felipe Rigonan filed a
complaint against petitioner in the RTC and alleged that they
It was shown that there was inconsistency with the testimony: were the owners of the three parcels of land through a Deed of
• Guan stated that he used Ong as mere dummy and Sale executed by Paulina Rigonan on 1965 and that they were
testified that at the last month of 1968 he consulted a in continuous possession of the subject properties and had
certain Atty. Flores which advised him to register it to introduced permanent improvements thereon.
the name of Ong.
• However, the title has been issued earlier on April Petitioners contested that the alleged deed of sale was spurious
1968 thus it was already bought by Ong before Guan as well as lacking consideration. They said that Paulina did not
was advised by Atty. Flores. sell her properties to anyone.
Thus, the Court agrees with the CA’s affirmation of the RTC As her nearest surviving kin they inherited the three lots upon
findings that the property had been acquired using Ong’s Paulina’s death and that they were in possession of the property
exclusive resources which was the paraphernal property. for more than 10 years.
Franco testified that he was a witness to the execution of the The other copies also had different dates of entry and different
deed of absolute sale, however upon cross-examination it was entry numbers. The deed was apparently registered long after
shown that the deed he signed was the will and testament its alleged date of execution and after Paulina’s death on 1966.
made by Paulina Rigonan.
It also appears that the alleged vendor was never asked to
Atty. Tagatag stated that he personally prepared the deed and vacate the premises she purportedly sold. The buyer’s
saw Paulina affix her thumbprint on it and signed it both as immediate possession and occupation of the property is
witness and notary public and he notarized the las will and deemed corroborative to the truthfulness to the authenticity of
testament. That the will mentioned the same lots sold. the deed of sale. But the continued occupation by Paulina
presents otherwise.
Felipe Rigonan claimed that he was Paulina’s close relative, but
he admitted that there are discrepancies with the ROD copy and Element of Consideration of the Sale
his copy of the titles. The price allegedly paid by private respondents for 9 parcels of
land. On record, there was the unrebutted testimony that
Testimony for the Petitioners Paulina as landowner was financially well off. She loaned
Jose Flores stated that he did not receive nay notice nor any money. We see no apparent and compelling reason for her to sell
offer to sell the lots from Paulina, contrary to what was the subject parcels of land with a house and warehouse at a
indicated in the deed of sale that the vendor had notified all meager price of P850 only.
adjacent owners of the sale.
The Factor of Age and Infirmity on Contracts
Ruben Blanco acting ROD testified only the carbon copy was The general rule, is that a person is not incompetent ton
filed in his office. contract merely because of advanced years or by reason of
physical infirmities. However, when such age or infirmities have
Zosima Domingo testified that her husband Eugenio, was impaired the mental faculties so as to prevent the person from
Paulina nephew, and that they lived with Paulina and that they properly, intelligently, and firmly protecting her property rights
took care of her spent for her daily needs and medical expenses the she is undeniably incapacitated.
especially when she was hospitalized prior to her death, and
that Paulina was never badly in need of money during lifetime. At the time of the execution of the contract, Paulina
IN THE CASE:
Rigonan was already of advanced age and senile. She died an
RTC rendered judgment in favor of Domingo stating that by octogenarian barely over a year when the deed was executed.
virtue of intestate succession the lawful owners of the
properties were the Domingo, and the alleged Deed of Sale was The unrebutted testimony of Zosima Domingo shows that tat
null and void. CA reversed the decision sating that the Rigonan the time of the alleged execution of the deed Paulina was
(respondents) are the owners. already incapacitated mentally and physically. She narrated
that Paulina played with her waste and urinated in bed. Given
Issue: these circumstances, there is in our view sufficient reason to
Did the private respondents sufficiently seriously doubt that she consented to the sale and the price
establish the existence and due execution of the for her parcels of land, in addition there is no receipt to show
Deed of Absolute and Irrevocable Sale of Real Property? that said price was indeed paid to her. PETITION GRANTED.
No. The private respondents only presented a carbon copy of RAMIREZ v. RAMIREZ
the deed. When ROD was subpoenaed to produce the deed, no 367 SCRA 559
original or typewritten deed but only a carbon copy was
presented to the trial court. The deed contained filled in blanks Facts: Potenciano Ramirez filed a complaint against Ma. Cecilia
and alteration. None of the witnesses directly testified to prove before RTC Olongapo. Potenciano claimed the Ma. Cecilia
positively and convincingly Paulina’s execution of the original caused the execution of a Deed of Donation and Waiver of
deed of Sale. The carbon copy did not bear her signature, but Possessory Rights to acquire ownership over the land and
only her alleged thumbprint. improvement. Using the Deed of Donation, respondent
allegedly had the cancellation of the deeds and able to transfer
There were clear irregularities governing the execution and such titles to name.
registration of the alleged deed of sale.
• Atty. Tagatag testified that he himself registered the The Deed of Donation and Waiver of Possessory Rights were
original deed with ROD, yet the original was nowhere allegedly executed by Potenciano and his wife, Dolores in 1995
to found and none could be presented at the trial.. but it was shown in the death certificate that Dolores already
• Also the carbon copy on file, shows intercalations and died in 1991 and thus could not have executed such
discrepancies when compared to the purported copies documents. Potenciano also repudiated other signatures
in existence. The intercalations were allegedly due to appearing on the two documents that were allegedly his and
the blanks unfilled by Atty. Tagatag at the time of insisted that he did not intend to transfer the properties to
registration, which were filled later by ROD. respondent.
In Maria Cecilia’s answer, she alleged that her father, BAUTISTA v. BAUTISTA (2007)
Potenciano would not have filed the case were it not for the fact 529 SCRA 187
that he remarried despite his age of 84 years. She further
claimed that it was her father’s idea to cause the preparation Facts: Teodora Rosario was the owner of a parcel of land in
of the Deed of Donation and Waiver of Possessory Rights to Pangasinan and died intestate in 1970, leaving behind her
save on expenses for publication and inheritance taxes. spouses Isidro and five children, Teofilo, Alegria, Angelica,
Pacita and Gil Bautista.
RTC ruled that the signature of Dolores was a forgery but on
the Waiver of Possessory rights was genuine. It also found that In 1981, Isidro and four of his five children (except Teofilo)
they were both in pari delicto as participants to the forgery and executed a Deed of Extrajudicial Partition of the property in
ruled that they must bear the consequences of their acts. which Isidro waived his share in favor of his four children,
Teofilo was excluded from the partition.
CA held the both signatures were forgeries and held both • Alegria and Angelica (who acquired ½ of the property)
parties in pari delicto. sold such share to Pedro and Pacita, and later
conveyed to Tamondong.
Issue
Whether or not the parties are in pari delicto. In 1994, Teofilo filed a complaint against his siblings Alegria and
Angelica and others for annulment of documents, partition,
Doctrine of In Pari Delicto, Applicable is 1411 not 1412 recovery of ownership, possession and damages.
As one of the modes of acquiring ownership, donations inter
vivos are covered. The Court agrees that the both of them are In his complaint, he claim that his co-heirs defrauded him of
in pari delicto. But both courts erred in applying Article 1412 of his rightful share of his property and that the deed of sale was
the Civil Code, for it refers to a situation where the cause is fictitious as it was impossible for her to have executed the same
unlawful or forbidden but does not constitute a violation of the in Manila for she was already ill (Pacita). Pedro and Tamondong
criminal laws. What applies is Article 1411, because the act raised the defense that they were buyers in good faith.
constituted a criminal offense.
RTC declared as null and void the assailed documents were
IN THE CASE: Petitioners alleged that the signatures of Dolores on executed. CA reversed RTC decision on the ground of
the Deed of Donation and on the Waiver of Possessory Rights prescription thus the present petition. The CA stated that it
are a forgery. Ma. Cecilia does not deny this allegation. Forging must be brought within four years from the discovery of the
a person’s signature is a felony under the RPC. Thus, the act fraud and that there was already constructive notice.
of forging the signature of Dolores constitutes a criminal
offense under the terms of Article 1411 of the Civil Code. Issue
Whether or not the cause of action of Teofilo has prescribed.
Twin elements for the application of in pari delicto doctrine:
1. The nullity of the contract proceeds from an illegal Action against Void Contracts, Imprescriptible
cause or object; The partition in the present case was void because it excluded
2. The act of executing said contract constitutes a an heir who was entitled to the share in the partitioned
criminal offense (for Article 1411). property. No extrajudicial settlement shall be binding upon any
person who has not participated therein or had no notice
Illegality of Cause or Object, Essential thereof.
CONTENTION: Petitioner alleges that the object or cause of the
Deed of Donation and of the Waiver of Possessory Rights is the As the partition was a total nullity, it is considered
transfer of real properties and there is nothing illegal on them. imprescriptible. It was not correct for the trial court to hold that
their right to challenge the partition had prescribed after two
COURT REPLY: Object and cause are two separate elements of a years.
donation and the illegality of either element gives rise to the
application of in pari delicto. The deed of extra-judicial partition in the case at bar being
• Object is legal, the properties which are the subject invalid, the action to have it annulled does not prescribe. Since
matter the donation. the deed of extra-judicial partition is invalid, it transmitted no
• Cause, which moved the parties to execute the Deed rights to Teofilo’s co-heirs.
of Donation, which was the motive behind the forgery
is the desire to evade the payment of publication Consequently, the subsequent transfer by Angelica and Alegria
expenses and inheritance taxes, which became due of ½ of the property to Pacita and her husband Pedro, as well
upon the death of Dolores was illegal. as the transfer of ½ of the property to Cesar Tamondong is
Undeniably, the documents were executed for an illegal cause, invalid, hence, conferring no rights upon the transferees under
thus completing all the requisites for the application for Article the principle of nemo dat quod non habet. PETITION GRANTED.
1411, thus, no one can ask positive relief from court, they
are left as they are. PETITION DENIED.
HULST v. PR BUILDERS, INC. (2007) Since petitioner and his wife, being Dutch nationals
IN THE CASE:
532 SCRA 74 are proscribed under the Constitution from acquiring and
owning real property, it is unequivocal that the Contract to Sell
Facts: Hulst (petitioner) and his spouses Ida. Dutch nationals, entered in to by petitioner together with his wife and
entered into a Contract to Sell with PR Builders for the respondent is void.
purchase of a unit in respondent’s townhouse project in
Batangas. When PR Builders failed to comply with its verbal Exceptions to the Rule of In Pari Delicto, Article 1414
promise to complete project by June 1995, the spouses Hulst Generally, parties to a void agreement cannot expect the aid of
filed to the HLURB for rescission of contract. the law, the courts leave them as they are, as they are deemed
in pari delicto or in equal fault, thus no recovery is allowed.
HLURB rendered in favor of Hulst. Meanwhile, spouses Hulst
divorced, Ida assigned her rights over the purchased property This rule is however, subject to exceptions, that permit the
to Jacobus Hulst. return of that which may have been given under a void contract.
1. Innocent parties under Articles 1411-1412;
In 1997, HLURB executed a WOE addressed, an Alias WOEx 2. The debtor who pays usurious interest (1413)
levied on respondent’s 15 parcels of land covered by 13 TCTs 3. The party repudiating the contract before the illegal
in Batangas. purpose is accomplished or before damage is cause to
a third person and if public interest is subserved by
Two days before the scheduled public auction, because there allowing recovery (1414);
was already an overlevy since the aggregate appraised value 4. The incapacitated party if the interest of justice so
of the levied property is at P83.6M based on the Appraisal demands (1415);
Report which is over and above the judgment award. 5. The party for whose protection the prohibition by law
is intended and if public policy would be enhanced by
At 10:15AM, PR Builders objected to the conduct of the public permitting recover (1416);
auction on the ground that the motion to quash was pending 6. The party for whose benefit the law has been intended
resolution. Absent any restraining order from the HLURB, the as in price ceiling laws (1417);
sheriff the Sheriff continued to sell the properties and that there 7. Labor laws (1418-1419).
was the winning bidder in the amount of P5M.
It is significant to note that the agreement executed by the
At 4:15PM, the Sheriff while remitting the legal fees of the sale, parties in this case is a Contract to Sell and not a contract of
received the order of the HLURB Arbiter to suspend the auction sale. A distinction between the two is material in the
proceedings. Four months later, on August 2000, HLURB issued determination of when ownership has been vested.
an order setting aside the levy on the real properties of PR
Builders on the reason that the property is not only worth P6M Since the contract involved is a Contract to Sell, ownership is
because it really was P83M and that any levy in excess of the not yet transferred to the petitioner when he filed the suit for
judgment award is void. rescission. While the intent to circumvent the constitutional
proscription on aliens owning real property was evident by the
CA ruled that the questioned levy covered 15 parcels of land execution of the Contract to Sell, but such violation of the law
with an aggregate value of P83M which shockingly exceeded did not materialize because Hulst caused the rescission of
the judgment debt of P6M. the contract before the execution of the final deed
transferring ownership.
Issue 1:
Whether or Not Hulst and his wife are foreign nationals who Thus, Article 1414 applies in this case. Petitioner therefore is
are disqualified under the Constitution from owning real entitled to recover what he has paid, which was only P3.1M
property in their names. which is the purchase price paid to respondent. No damages
may be recovered on the basis of a void contract; being
The Constitutional Prohibition of Foreign Ownership inexistent, the agreement produces no juridical tie between the
Section 7 of Article XII of the 1987 Constitution provides: parties involved.
Save in cases of hereditary succession, no private lands shall be
transferred or conveyed except to individuals, corporations, or
Unjust Enrichment
associations qualified to acquire or hold lands of the public domain.
The HLURB Decision which became final and immutable
resulted in the unjust enrichment of Hulst at the expense of PR
The capacity to acquire private land is made dependent upon
Builders for he received more than what he is entitled to
the capacity to acquire or hold lands of the public domain. The
recovered. Thus Article 22 on unjust enrichment applies.
Constitution reserved the right to participate in the disposition,
exploitation, development and utilization of lands of the public
The Sheriff delivered to the petitioner the amount of P5.3M
domain to the Filipino Citizens. Aliens, whether individuals or
which was the amount of auction sale but in fact he is only
corporations, have been disqualified from acquiring public
entitled to the amount of P3.1M which is the paid amount by
lands; hence also disqualified from acquiring private lands.
Hulst.
QUIMPO v. BELTRAN (2008) IN THE CASE: The stated consideration for the sale are P5K and
545 SCRA 174 P6K an amount which was difficult to raise during the year of
1946. The respondents established at the time of the sale,
Facts: Eustaquia was the owner of four parcels of land in Joaquin Quimpo was not gainfully employed as he was
Camarines Sur. She died intestate in 1948 leaving this parcel of studying in Manila and Eustaquia was the one supporting him;
land to her grandchild and great grandchildren namely Joaquin that when Eustaquia died Joaquin was not able to continue
Quimpo and respondents Consuelo, Ireneo, Danilo, Marites, studies. The Quimpo failed to rebut this. Thus, petitioners fail to
Anita and Helen all surnamed and Abad. convince us that the CA committed reversible error in affirming
the trial court deicison in giving weight to respondents.
In 1966, Joaquin and respondents undertook an oral partition • Both the trial court and CA found that Eustaquia was
of parcel III and parcel IV, where half of the properties were for 91 years old at the time of the execution, in other
Joaquin and the grandchildren. However, no document of words, she was already mentally incapacitated by
partition was executed because Joaquin refused to execute a then, and could no longer be expected to give her
deed. Consuelo and Ireneo occupied their respective shares in consent to the sale.
the San Jose property and installed several tenants over their • The possession of tax declaration do not prove
share in parcel IV. Joaquin on the other hand the administrator ownership and are not conclusive proof thereof.
of the remaining undivided properties and of the shares of
Danilo, Marites, Anita and Helen, who were still minors at that HELD: The respondents are the co-owners of the subject parcel
time. of land as such respondent can rightfully ask for the
confirmation of the oral partition, and as co-owners they can
In 1989, four who were minors before wanted to take demand for the partition, it does not prescribe and is not
possession of the portions allotted to them, but Joaquin subject to laches.
prevented them from occupying the same, he refused to heed
to the demand for partition of parcels I and II, prompting ALINAS v. ALINAS (2004)
respondents to file a complaint for judicial partition. 551 SCRA 154
Joaquin denied the material allegations in the complaint and Facts: Spouses Onesiforo and Rosario Alinas (petitioners)
averred prescription. He asserted absolute ownership over separated in 1982. They left behind two lots, Lot 1 (with a
parcels III and IV, claiming that he purchased these lands from bodega) and Lot 2 with the house of the petitioner.
Eustaquia in 1946 as evidenced by the deed of sale and claim
adverse possession in 1946. The petitioners herein entrusted their properties to Victor and
Elena Alinas (respondents) with the agreement that any income
RTC ruled in favor of the respondents declaring them as co- from rentals of their properties should be remitted to the SSS
owners of all properties left by Eustaquia. It found out that and to the Rural Bank of Oroquieta as such rentals were
Joaquin was not gainfully employed and had no known source believed sufficient to pay off petitioners’ loans. Lot 1 was
of income during the execution of the deeds, making such mortgaged to SSS; while Lot 2 was mortgaged to RBO.
having a false and fictitious consideration and that during the Onesiforo alleges that he left blank papers with his signature to
sale Eustaquia was already 91 years old. CA affirmed the ruling. facilitate administration. However, in 1993, petitioners
discovered that the two lots were already in the name of the
CONTENTION OF THE PETITION: Quimpo insist on the validity of the respondents.
deeds of sale between Eustaquia and Joaquin. They assail the
probative value and weight given by RTC and CA over the Lot 1 with a Bodega. It was shown that it was extrajudicially
pieces of evidence, because they have notarized deeds of sale foreclosed and that TCT was issued to RBO and it executed a
and tax declarations that sufficiently established ownership. Deed of Installment Sale to respondents.
Issue Lot 2 with a House. It was also foreclosed by SSS and issued a
Whether or not the sale to Joaquin was valid. certificate of sale was issued. However, pursuant to the SPA
signed by Onesiforo in favor of Victor, then Victor was able to
COURT RULING: No. The contention of the petition has no merit. redeem the Lot 2 for sum of P111K. Onesiforo’s signature also
appears in Deed of Absolute Sale selling Lot 2 to respondent.
Deed of Sale where Consideration Has Not Been Paid is
A False Contract, that is Void Ab Initio There was also an Agreement, that was notarized stating that
A contract of purchase and sale is null and void and produces Onesiforo acknowledged that Victor used his own money to
no effect whatsoever where it appears that the same is without redeem Lot 2 from the SSS making Victor the owner of the lot.
cause or consideration which should have been the motive In the same Agreement, petitioner Onesiforo waived whatever
thereof, or the purchase price which appears thereon as paid rights, claims, interest he or his heirs, successors and assigns
but which in fact has never been paid by the purchaser to the have or may have over the subject property. This prompted the
vendor in such instances. petitioners to filed to the RTC a complaint for recovery of
possession and ownership of their conjugal properties.
RTC declared that the respondents were the owner of Lot 1 but LANDBANK v. POBLETE (2013)
the petitioners the owner of Lot 2 and ordered the petitioners 691 SCRA 613
to pay respondents the redemption price. CA affirmed.
Facts: Poblete is the registered owner of a parcel of land. In
Issue 1997, she obtained a loan of P300K from Kapantay. Poblete
Whether or not respondents are the owners of Lot 2 when they mortgaged the lot to Kapantay to guarantee payment.
merely redeemed the property and therefore mere trustees of Kapantay however used such as collateral under its loan
the real owners of the property. account with Landbank.
The records are indeed bereft of proof to support the In 1998, Poblete decided to sell the secured lot to pay her loan.
allegations of the petitioners that they left the care and According to Poblete, Maniego (buyer) agreed to buy the lot
administration of their respondent spouses and that there is an for P900K but suggested that the deed of absolute for P300K
agreement regarding the remittance of the rental income. be executed instead to reduce the taxes. Thus, a deed was
executed with P300K as consideration, in the deed she
As to the Lot 1 with Bodega described herself as a widow. Upon delivery of the title,
The facts show that the petitioners did not question the however, no payment was given for Maniego stated that he
foreclosure. Ownership of the lot has been given to the RBO would pay the amount upon his return from the US.
upon foreclosure sale and registration and subsequently sold
the lot with improvements to the respondents. The sale was Based on a Certification, Maniego paid Kapantay’s loan account
made also after the redemption period; thus, this property was for P442K and that Maniego applied for a loan of P1M with
acquired by the respondent spouses over the lot from RBO not Land Bank using OCT as the collateral. Landbank alleged that
from petitioners. as a condition for the approval of the loan, the title of the
collateral should first be transferred to Maniego.
As to the Lot 2 with House
The Court finds that the CA erred in applying the principle of Deed of Absolute Sale was issued Maniego’s name. Landbank
equity declaring that the sale is valid as to Onesiforo’s one-half and Maniego executed a credit line agreement and a REM over
share of the property. the land and thus P1M was released in favor of Maniego. In
2002, Land Bank filed an application for foreclosure of P1M for
Although petitioners were married before the Family Code, the Maniego’s indebtedness amount P1.1M.
sale in question took place in 1989, thus the rules under
Conjugal Partnership under the Family Code applies. Poblete filed a Complaint for Nullification of the Deed of Sale.
Poblete alleged that despite her demands, she did not receive
ARTICLE 124. The administration and enjoyment of the conjugal the consideration of P900K for the lot, and that without her
partnership shall belong to both spouses jointly. x x x knowledge, Maniego used the Deed to acquire OCT from
Kapantay and that it was also used to obtain TCT.
In the event that one spouses is incapacitated or otherwise unable to
participate of the conjugal properties, the other spouses may assume
Poblete claimed that Deed bearing her signature and her
sole powers of administration. These powers do not include the
deceased husband was a forgery. Poblete presented the death
powers of disposition or encumbrance which must have the
authority of the court or the written consent of the other spouses. certificate of her husband dated 1996 showing that the
In the absence of such authority or consent the disposition or signatures in 2000 were forgeries. Landbank claimed that it was
encumbrance shall be void. a mortgagee in good faith.
Thus, pursuant to Article 124 of the Family Code and RTC ruled in favor of Poblete finding the Deed of Sale was null
jurisprudence, the sale of petitioners’ conjugal property made and void as well as the TCT for the reason was the non-payment
by petitioner Onesiforo alone is void in its entirety. of the consideration and the signatures were forgeries. CA
affirmed the decision in toto.
The respondent’s spouses were well aware that Lot 2 was a
conjugal property and that the disposition was made by Issue
Onesiforo alone without the consent of his wife, as they knew Whether or not the TCT was null and void and that Landbank
that petitioners merely separated, and the sale documents do was a mortgagee in good faith.
not bear the signature of petitioner Rosario.
The Issue on Nullity of Maniego’s Title – Final
The fact that Onesiforo executed two documents which is the It was already final and executory. It is settled that a decision
Deed of Absolute Sale and Agreement shows that they had full that has acquired finality becomes immutable and unalterable
knowledge of the severe infirmities of the sale. Verily the sale and may no longer be modified in any respect. This is without
of Lot 2 is entirely null and void. However, under the principle prejudice, however, to the right of Maniego to recover from
of unjust enrichment, they should reimburse the respondent- Poblete what he paid to Kapantay for the account of Poblete,
spouses of the redemption price paid for Lot 2 with legal otherwise there will be unjust enrichment by Poblete.
interest from time of complaint. PETITION PARTLY GRANTED.
Since the title was already void by final judgment, the REM Tarnate demanded the payment of the retention fee from
constituted over it also void, because it is essential that the Gonzalo but to no avail. Thus, he brought the suit against
mortgagor be the absolute owner of the property to be Gonzalo for recovery of such retention fee.
mortgaged, otherwise the mortgage is void.
Answer. Gonzalo admitted to the deed and the authority to
Land Bank is Not a Mortgagor in Good Faith Tarnate but averred that the project was cancelled by DPWH
Based on the evidence, Land Bank processed Maniego’s loan thus he revoked such deed of assignment. He insisted that the
application upon his presentation of the OCT which was still deed of assignment could not stand independently due to its
under the name of Poblete. It also ignored the fact that being a mere product of the subcontract that had been based
Kapantay previously used Poblete’s title as collateral. on his contract with the DPWH; and that Tarnate, having been
fully aware of the illegality and ineffectuality could not go to
Records do not show that the bank investigated and inspected court with unclean hands.
the property to ascertain its actual occupant. It merely
mentioned that inspected to appraise the value of property. RTC found that the deed was valid and binding. CA affirmed
Banks usually send representatives to the premises of the land but according to the rules of unjust enrichment.
to investigate its real owners. It admitted that it processed loan
based on the assurances by Maniego that title will be his. CONTENTION OF GONZALO: Stated that the subcontract and the
deed of assignment being specifically prohibited by law, had no
Since it was not in good faith, it is not entitled to protection. force and effect, that upon finding both him and Tarnate guilty,
The injunction against the foreclosure should be permanent. the in pari delicto doctrine must apply.
The ownership remains to remains with Poblete.
Issue
In Pari Delicto, Not Applicable Whether or not there could be recovery by Tarnate from
The court finds that only Maniego is at fault. PETITION DENIED. Gonzalo for his services.
GONZALO v. TARNATE COURT RULING: Yes, on the basis of unjust enrichment. The
713 SCRA 224 petition of Gonzalo is hereby denied.
Rule: The doctrine of in pari delicto which stipulates that the Subcontract and Deed of Assignment Void
guilty parties to an illegal contract are not entitled to any relief, There is no question that every contractor is prohibited from
cannot prevent a recovery if doing so violates the public policy subcontracting with or assigning to another person any
against unjust enrichment. contract or project he has with DPWH unless the DPWH
Secretary has approved the subcontracting or assignment,
Facts: DPWH awarded the contract for improvements of the Mt. pursuant to Section 6 of PD 1594. The illegality of the
Province – Benguet Road (project) in the total amount of P7M subcontract necessarily affects the deed of assignment because
to Gonzalo Construction. Gonzalo subcontracted to respondent an illegal agreement could not give birth to a valid contract.
Tarnate, Jr., the supply of materials and labor for the project
under the latter’s business as JNT Aggregates. Their agreement Parties are In Pari Delicto; Exception is Unjust Enrichment
stipulated, among others, that Tarnate would pay to Gonzalo Tarnate had voluntarily entered into the agreements with
8% and 4% of contract price upon first and second billing. Gonzalo, and he admitted that he did not participated in the
bidding because he knew that he was not authorized to
In furtherance of the agreement, Gonzalo executed on April 6, contract with the DPWH. According to Article 1412(1) of the
1999 a Deed of Assignment whereby he as contractor, assigns Civil Code, the guilty parties to an illegal contract cannot
to Tarnate an amount equivalent of 10% of the total recover from one another.
collection from DPWH for the project. This 10% retention fee
was the rent for Tarnate’s equipment that had been utilized in Nonetheless, the application of the doctrine of in pari delicto is
the project. not always rigid. An accepted exception arises when its
application contravenes well-establish public policy. Unjust
In the deed of assignment, Gonzalo further authorized Tarnate enrichment exists when a person unjustly retains a benefit at
to use the official receipt of Gonzalo in the processing of the the loss of another, or when a person retains money or property
documents relative to the collection of 10% retention fee and of another against the fundamental principles of justice, equity
in encashing the check to be issued by DPWH for such. The and good conscience.
deed of assignment was sent to the DPWH.
There is no question that Tarnate provided the equipment,
During the processing of the documents for the retention fee, labor and materials for the project in compliance with the
however, Tarnate learned that Gonzalo had unilaterally obligations under the contract and the deed of assignment, and
rescinded the deed of assignment by means of a cancellation that it was Gonzalo as the contractor who received the payment
filed in the DPWH and that the 10% retention fee was disbursed for his contract with the DPWH as well as the 10% retention fee
in the name of Gonzalo. which should have been paid to Tarnate.
Considering that Gonzalo refused despite demands to deliver Upon going to Henry’s residence, Henry stated that he could
to Tarnate the stipulated 10% retention fee, he would be no longer sell the property because the new administrator of
unjustly enriched at the expense of Tarnate. If the latter was to the property was his brother, Franklin Ysaac. Due to Cabrera’s
be barred from recovering because of the rigid application of inability to enforce the sale he filed a case for specific
the doctrine of in pari delicto. Thus, Gonzalo is laible to pay performance claiming for execution of the sale.
Tarnate in the amount of P233K or the 10% retention fee.
However, before the RTC can decide the case, the Heirs under
Award of Moral Damages, Fees and Expenses Inappropriate the administration of Franklin, sold their property to Naga City
We have ruled that no damages may be recovered under a void on 1997 and was made into a project for urban poor.
contract, which, being nonexistent, produces no juridical tie
between the parties involved. It is notable, too, that the RTC and RTC ruled that the sale was duly rescinded when Cabrera filed
the CA did not spell out the sufficient factual and legal to pay the balance of the purchase price. CA ruled that the sale
justifications for such damages to be granted. was not correctly rescinded, and that Naga City had a
preferential right under the rules on double sales.
Interest should be awarded however from the time of demand
because it would be a travesty of the justice to which Tarnate Issue
was entitled for having suffered too long from Gonzalo’s unjust Whether or not there was a valid contract of sale.
enrichment. PETITION DENIED.
There Was No Valid Contract of Sale; Co-Ownership
CABRERA v. YSAAC (2014) A contract is a meeting of minds between two persons whereby
740 SCRA 612 one binds himself with respect to the other, to give something
or to render some service. A contract of sale is perfected at the
Rule: Unless the co-owners have agreed to partition their moment there is a meeting of minds upon the thing which is
property, none of them may sell a definite portion of the land. the object of the contract and upon the price. The object of a
The co-owner may only sell his or her proportionate interest in valid sale contract must be owned by the seller or at the least
the co-ownership. A contract of sale a specific or definite authorized to sell the object.
portion of unpartitioned land is null and void ab initio.
Specific Rules when Seller Co-Owns Object of Contract
Facts: The Heirs of Ysaac co-owned a parcel of land in Naga, As a general rule, a sale of a portion of the property is
one of the co-owners is respondent Henry Ysaac. Henry leased considered as an alteration of the thing owned in common, and
out portions of the property to several lessees, Cabrera one of such disposition requires the unanimous consent of the other
the lessees. co-owners. However, the rules also allow the co-owner to
alienate his or her part of the co-ownership.
In 1990, Henry needed money and offered to sell the 95 sq.m.
area being leased by Cabrera. Cabrera told him that the area If alienation precedes partition:
was too small for his needs for there was no parking space. The co-owner cannot sell a definite portion of the land without
Thus, Henry expanded his offer to include two adjoining lands consent of the co-owners, he or she could only sell the
that Henry was then leasing. Henry however warned Cabrera undivided interest over the co-owned property. This undivided
that the sale for those two could only proceed if the two interest is also known as proportionate share. Definite portion
families agree to it. means specific metes and bounds of a co-owned property.
Cabrera accepted the new offer. They settled on the price of Illustration. If a ten-hectare property is owned equally by ten
P250 per square meter, but Cabrera could only pay in full after co-owners, the undivided interest of a co-owner is one hectare.
his retirement in 1992. The definite portion of that interest is usually determined by
partition. After partition, a definite portion is then allocated to
According to Cabrera, Henry informed him that the families that a specific co-owner, and at that point the co-ownership is
were leasing on the lots purported to be included in the sale dissolved and such they are now free to exercise rights of
were no longer interested. In 1992, when Henry was in US, Juan ownership over such definite portion.
tried to pay rest of the purchase price to his wife, but the latter
refused to accept. Hence, prior to a partition, a sale of a definite portion requires
the consent of all co-owners because it operates to partition the
Cabrera alleged that Henry approached him, requesting to land and the co-owner is already marking which portion should
reduce the area of the land because part of it was to be made redound to his ownership upon future partition.
walkway and that a family was there occupying that was difficult
to eject. Cabrera agreed to the proposal thus another survey IN THE CASE: The object of the sale contract was a definite
was one. However, the counsel of Henry sent the counsel of portion and that at the time of the sale it was still held in
Cabrera that Henry is formally rescinding the contract for failure common. The rules allow Henry to sell his undivided share, but
to pay the balance of the purchase price of the land and the it was shown that the object of the sale was a definite portion
payments were to be applied as payment for overdue rent. thus he had no right to sell.
As such Henry had no right to sell the parcel of land as In 2005, RTC ruled in favor of the heirs and found that the
determined by the petitioners. The determination of those Affidavit of Self-Adjudication and the deed of absolute sale
metes and bounds are not binding to the co-ownership hence, did not validly transfer to Marietta the title to the property and
cannot be subject to sale, unless consented by all co-owners. Yabut was not an innocent purchaser for value and that DBP
was not a mortgagor in good faith. CA reversed and set aside
The Case of Pamplona does Not Apply in this Case the RTC decision.
In the said case, there was sale of the property prior to
liquidation but the court ruled here in favor of the sale because Issue
the sale was questioned only nine years after and that there Whether or not the property was validly transferred to Marietta
were already several acts of ownership the land. That is why the and eventually to the DBP.
court considered it as acquiescence or tolerance on the part of
the co-heirs. One-Fourth Inheritance; Nemo Dat Quod Non Habet
A seller can only sell what he or she owns, or that which he or
But this case does not apply to the instant facts, because there she does not own but has authority to transfer, and a buyer can
was no evidence in case of acquiescence of co-owners, there only acquire what the seller can legally transfer. Title or rights
was tolerance of possession because Cabrera was a lessee. to a deceased person are passed to heirs upon death and they
• There was no evidence of consent to sell from the co- become vested without needed to be declared heirs before
owners thus it can hardly be considered as consent. partition they are co-owners of the property.
At best the agreement is a contract to sell not a contract of IN THE CASE:Gregorio, Simplicio, Severino and Enrique became
sale. A co-owner could enter into a contract to sell a definite co-owners of the property, with each of them entitled to an
portion of the property subject to a suspensive condition of undivided portion of ¼ of the property. Upon their death, their
the partition of the property, and that the other co-owners children became the co-owners. The heirs cannot alienate
shall agree that the subject of contract to sell vests in favor of shares that do not belong to them.
the co-owner’s buyer.
Since Enrique’s right to the property was only one-fourth, he
A Non-Existent Contract Cannot be a Source of had no right to sell the undivided portions that belong to his
Obligations and Cannot be Enforced by the Courts siblings or respective heirs. Any sale by one heir of the rest of
The absence of a contract of sale means that there is no source the property will not affect the rights of the other heirs who did
of obligations for Cabrera as seller or as buyer, rescission is not consent to the sale, such sale is void with the respect of
impossible because there is no contract to rescind. The the shares of other.
question of double sale was moot and academic as there was
no valid sale between Cabrera the sale to the Naga City was Regardless of the agreement, Enrique could only convey to
valid, there is only one valid sale. Marietta his undivided one-fourth share to the property and
Marietta could only acquire that share. This is because Marietta
HELD: Cabrera is entitled to the return of the amount of money obtained her rights from Enrique who, in the first place, had no
because he paid it as consideration for the ownership of the title or interest over the rest of property that he could convey.
land, since it cannot be transferred for the purpose payment
was made for, it must be returned otherwise Henry would be The self-adjudication was false, and the issuance of the original
unjustly enriched. title did not grant title, title does not vest ownership it is mere
evidence of such ownership or right.
HEIRS OF GREGORIO LOPEZ v. DBP (2014)
741 SCRA 153 Marietta Not an Innocent Purchaser
In this case, there was no certificate of title to rely on when she
Facts: Gregoria Lopez owned a parcel of land in Bulacan and purchased the property from Enrique. At the time of the sale,
died on 1922 and was survived by her three sons, Teodoro, the property was still unregistered. What was available was only
Francisco and Carlos, the three died and survived by children, a tax declaration issued under the name of "Heirs of Lopez."
Gregorio, Enrique, Simplicio and Severino.
The unregistered status of the property should have
Petitioners discovered that on 1990, Enrique executed an prompted Marietta to inquire further as to the right of Enrique.
affidavit of self-adjudication declaring himself to be Gregorio She did not, hence, she was not an innocent purchaser.
Lopez sole heir adjudicating upon himself the Bulacan property.
He sold such to Yabut. Petitioners demanded from Yabut the No Valid Mortgage; Not Mortgagee in Good Faith
nullification of the affidavit and sought to redeem the share, It arose from a void contract and that facts show that DBP
but Yabut refused. In 1993, Yabut obtained a loan from DBP and disregarded the circumstances that should have aroused
mortgaged the same property as security. suspicion because Marietta only had a tax declaration under
her name to show that she was the owner, yet DBP still granted
Petitioners filed complaint with RTC for annulment of the mortgage to her. Thus, the bank should have exercised due
document, recovery of possession, reconveyance of property. diligence.
TINGALAN v. MELLIZA (2015) Sale of Homestead within the Prohibitory Period of Five
760 SCRA 514 Years without Permission from DENR Secretary is Void
The subject property was clearly encumbered within the
Rule: The law prohibiting any transfer or alienation of mandatory five-year prohibitory period in flagrant violation of
homestead land within five years from the issuance does not the Public Land Act, as amended. They knew that the sale of the
distinguish between executory and consummated sales. subject land was prohibited by law in 1977 and conditional
clause in the deed was included in order to circumvent the legal
Facts: The original owner in fee simple of the subject property prohibition of the sale.
was Anastacio Tingalan a member of the Bukidnon tribe. His
ownership is evidenced by OCT Free Patent over a five-hectare Both parties knew that the permission from the Secretary of the
property in Bukidnon. The free patent was issued under his Agriculture and Natural Resources could not have been legally
name one 1976. procured within the prohibitory period, thus this failure of the
spouses would make the contract binding only upon 1981 or
In a Deed of Absolute Sale, Anastacio sold the subject property after the five-year prohibition. But despite the condition, the
to spouses Melliza. Anastacio countered and demanded that spouses immediately occupied the property after the sale
respondent-spouses vacate the property, but the latter refused was executed in 1977 and such exercising acts of ownership
claiming ownership through the Deed executed between them. during the prohibitory period (by cultivating property).
Anastacio filed with the court for Quieting of Title and It is clear that during the period of the five-year prohibition, the
Anastacio claimed that he remains to be the owner of the scheme devised had resulted in depriving the grantees. The law
subject property as his title under OCT was never cancelled and prohibiting any transfer or alienation of homestead land within
that the sale was null and void since the Deed was within the five years from the issuance of the patent does not distinguish
five year prohibitory period under the Public Land Act and between executory and consummated sale.
that it was written in English language for he could neither
speak nor understand. Spouses Melliza countered stating that Issue 2:
they have been in actual, exclusive and uninterrupted Whether or not Tingalan was held in laches.
possession of the subject property.
Void Contract Produces No Legal Effect; Laches
RTC ruled in favor of the spouses stating that despite the five- Tingalan admitted that they could have had
ASSAILED CA RULING:
year prohibitory period because the sale purportedly executed repurchased the property within the five-year period, but they
is not the kind of violation contemplated in the Public Land Act did not and they have waited 24 years to institute this case.
for the transfer was not yet completed by the issuance of a new
certificate of title under the name of respondent-spouses. CA COURT RULING: The court disagrees, the subject contract of the
affirmed the ruling of the RTC for the contract was considered sale being null and void from its inception, did not pass any
as a conditional sale. rights over the property from Tingalan to the Spouses Melliza,
thus there was no need for him to repurchase such. Thus, laches
Issue 1: could have not set in.
Whether or not the sale was in violation of Section 118 of the
Public Land Act for it was made within the five-year prohibitory HELD: Thus, being void the land must be returned to the heirs
period rendering it null and void. of Tingalan and the heirs are also bound to restore the Spouses
the amount received, which such was not discussed in the case
The Contract of Sale, Void thus, the Court deems it proper to remand such.
The contract of sale entered into between petitioner Anastacio
and Spouses Melliza on 1977 is null and void from inception for FILINVEST LAND v. ADIA (2015)
violation Section 118 of the Public Land Act which requires that 775 SCRA 494
land acquired under free patent or homestead provisions shall
not be susceptible of ratification. Facts: The respondents were the registered owners of various
parcels of land in Cavite, these properties were awarded to
Following Section 118, the subject land could not have been them pursuant to the CARL.
validly alienated or encumbered on 1977 which was way within
five years from the date of the issuance of the free patent under In 1995, Filinvest acquired possession of these properties. Each
the name of petitioner Anastacio on 1976. Thus any acquisition, of the respondents executed a Sinumpaang Salaysay entitled
conveyance, alienation, transfer or other contract made in Pagbibitaw ng Karapatan (affidavits). Based on these, the
violation of Sect 118 shall be unlawful and void from its respondents relinquished all their rights over the properties
execution and has the effect of annulling and cancelling the for valuable consideration.
grant, title, patent or permit originally issued, recognized or
confirmed, actually or presumptively, and cause the reversion of The respondents alleged that they surrendered their properties
the property and its improvements back to the State. with the understanding that Filinvest would develop these into
a residential subdivision, pursuant to a JVA.
They also entrusted their duplicate original copies of the TCTs The Pari Delicto Doctrine Does Not
to Filinvest because they were told that these would be used in Apply in Agrarian Reform Cases; Article 1416
the preparing of the development plans. The respondents CONTENTION: Filinvest claims that if the affidavits are void, this
added that they were even given money to find their own place Court should consider the parties to be in pari delicto, because
while the development was taking place. they voluntarily entered into the void transaction.
The respondents repeatedly requested Filinvest to return their COURT REPLY: The court finds no merit in this position. In the case
TCT copies and to give them copy of the JVA. Since the of Torres in pari delicto doctrine does not apply in an
development had not yet begun, they also sent a letter to agrarian reform case, to hold otherwise would defeat the spirit
Filinvest to allow them temporarily to return, they received no and intent of the agrarian reform to free the tillers from the
response and instead Filinvest began to fence the area and bondage of the soil.
prohibited entry which prompted them to file an adverse claim.
To elaborate, to the pari delicto doctrine provides an exception
In its answer, Filinvest argued that: under Article 1416 under this article, the plaintiff may recover
a. Respondents haver relinquished their rights over the what he paid or delivered pursuant to a void contract if the
property and that; following requisites are met:
b. No joint venture agreement (JVA) was signed; 1. The contract is not illegal per se but merely prohibited;
c. All of the respondents signed the affidavits under 2. The prohibition is for the plaintiff’s protection; and
which possession was validly transferred to Filinvest. 3. Public policy will be enhanced by his recovery.
De Guzman testified that the sale with Filinvest did not push IN THIS CASE: The three requisites are present in this case to allow
through because the properties were covered by the CARL. the recovery of the subject properties:
Under its Section 27, the properties cannot be sold within 10 1. The affidavits are merely prohibited, a contract is illegal per
years thus instead of a sale she negotiated a transfer of se if by universally recognized standards, it is inherently bad,
possession until such time sale could be made. improper, immoral, or contrary to good conscience. Ordinary,
affidavits or contracts of sale are lawful, only Section 27 of RA
6657 made them unlawful.
RTC found the respondents as lawful possessors and order 2. The prohibition under Section 27 of CARL meant to protect
Filinvest to vacate the properties. CA affirmed the decision. the farmer-beneficiaries.
3. Public policy will be promoted by allowing the respondents
Issue to recover their land because the CARL distributes
Whether or not Filinvest and the respondents are the lawful agricultural land to landless farmers to improve their quality
possessors of the property. of life. Returning the land to them will enhance this public
policy of agrarian reform.
Affidavits are Void for Violating Section 27 of CARL
Under Section 27 of CARL, lands acquired by the beneficiaries No Unjust Enrichment
under such may not be sold, transferred or conveyed except There is no unjust enrichment because Filinvest had possessed
through hereditary succession, or the government, or the LBP or the properties the properties since 1995 or for about twenty
to other qualified beneficiaries for a period of 10 years. This years. During this period, the respondents were deprived of the
provision prohibits the sale, transfer, or conveyance of the productive use of their land. The amount they paid to the
properties within ten years, subject to exceptions which do not respondents may serve as compensation for Filinvest’s use
apply to this case. of the properties for this long period.
Under the case of Torres v. Ventura, transfer of possessory HELD: The respondents are the lawful possessors of the
rights over landholdings awarded under agrarian laws had been disputed properties; their affidavits are void and did not
declared void and that in Lapanday v. Estita the court stated transfer possessory rights.
that waivers of rights and interests over landholdings awarded
by the government are invalid for violation agrarian reform laws TAN, JR. v. HOSANA (2016)
783 SCRA 87
thus these waivers are void.
Rule: A void document is admissible as evidence because the

IN THE CASE: The parties do not dispute that the transfers
purpose of introducing it as evidence is to ascertain the truth
occurred within the ten-year period, Filinvest contends however
respecting a matter of fact, not to enforce the terms of the
the what was prohibited was the transfer of ownership not of
document itself.
possession.
Facts: Jose and Milagros Hosana are married in 1979, and

The Pagbibitaw ng Karapatan totally waive or transfer the
during their marriage, they bought a house and lot in Tinago,
respondents’ rights and interest over the properties. The
Naga City which lot was covered by TCT No. 21229. Thus it was
affidavits do not only assign possessory rights, but perpetually
however sold to a certain Tomas as evidenced of a deed of sale.
surrender the ownership rights. Thus, Section 27 is clearly
violated and that these affidavits or waivers are void.
The sale was shown to be between Milagros and Tomas as The deed of sale may be used as a documentary evidence may
evidenced by a deed of sale executed by Milagros herself as be used to ascertain the truthfulness of the consideration stated
attorney-in-fact of Jose by SPA executed by Jose in favor of and its actual payment. The purpose of introducing the deed of
Milagros and that the purchase price was P200K. A TCT was sale as evidence is not to enforce the terms.
issued in the name of Tomas.
Hence, a void contract is admissible as evidence because the
In 2001, Jose filed for annulment of sale, cancellation of title, purpose of introducing it as evidence is to ascertain the truth
reconveyance and damages against Milagros and Tomas respecting a matter of fact, not to enforce the terms of the
averring that while he was working in Japan, Milagros, without document of itself.
his consent and knowledge, conspired with Tomas to execute
an SPA authorizing Milagros to sell property to Tomas. Tomas IN THE CASE:The deed of sale was declared null and void by
raised up the defense as a buyer in good faith. positive provision of law prohibiting the sale of conjugal
property without the consent of Jose. It does not however,
Bonifacio Hosana’s Testimony preclude the possibility that Tomas paid the consideration
As brother of Jose, he testified that he learned of the subject therein.
sale of the property from the son of Milagros and that when he
confronted Milagros retorted that she sold the property The admission of the deed of sale as evidence is consistent with
because she needed the money. Jose was furious when he the liberal policy of the court to admit evidence which appears
learned of the sale and went back to the Philippines and verified to be relevant in resolving an issue before the courts.
that indeed the title was transferred to Tomas.
The Consideration Stated in the Notarized Deed of Sale is
Bonifacio further allege that the signature of Jose was forged, Prima Facie Evidence of the Amount Paid by Petitioner
and he presented documents to compare with his signatures The notarized deed of sale is public document and is prima
and a letter. facie evidence of the truth of the facts state therein. The
consideration stated in the deed of sale constitutes prima facie
Tomas Testimony evidence of the amount paid by Tomas.
Tomas directed Rosana to go the house of Milagros to confirm
about the sale transaction and through a phone call by Milagros Tomas failed to substantiate his claim of P700K instead the
to Jose, Rosana was able to confirm the Hose gave him the amount of P200K stated in the deed of sale. Hence, the
capacity to proceed with the sale. consideration stated in the deed of sale remains insufficient
evidence of the actual amount the petitioner paid and the same
RTC ruled in favor of Jose and nullified the sale to Tomas. CA amount which should be returned under unjust enrichment.
affirmed the decision of the of the RTC. Thus, Milagros is ordered to return P200K. PETITION DENIED.
Issue PEÑA v. DELOS SANTOS (2016)

Whether or not the contract adjudged void can be made basis 785 SCRA 440
for the amount of the consideration paid.
Facts: Jesus Delos Santos and Rosita Delos Santos Flores were
The Force and Effect of a Void Contract is judgment awardees of the 2/3 portion of four adjoining lots in
Different from its Admissibility as Evidence Boracay. Peña averred that he is the transferee of the alleged
CONTENTION: Tan, Jr. argues that the CA erred in relying on the allotments over the subject lots. He claimed that he bought the
consideration stated in the deed of sale as basis for the same from Atty. Robiso who acquired the properties from Jesus
reimbursable amount because a null and void document and Rosita through assignment and sale.
cannot be used as evidence.
It was shown that Atty. Robiso sold the lots to Peña thru a Deed
COURT REPLY: We find no merit in the petitioner’s argument. A of Absolute Sale. The plaintiffs opposed his motion claiming
void or inexistent contract has no force and effect from the very that the conveyance was null and void for being a prohibited
beginning. This rule applies to contracts that are declared void transaction because the latter was their counsel in the case.
by positive provision of law, as in the case of a sale of the
conjugal party without the other spouses’ written consent. It was shown that Atty. Robiso was indeed engaged by Jesus
Hence, the restitution of what each party has given is a and Rosita to be the counsel in their case. Under the
consequence of a void and inexistent contract. Agreement and Undertaking where Atty. Robiso bound
himself to render his legal services in connection with Jesus and
While the terms and provisions of a void contract cannot be Rosita’s involvement as party-litigants and that Atty. Robiso
enforced since its deemed inexistent, it does not preclude undertook to advance his own funds for all expenses and costs
admissibility of the contract as evidence the prove matters that he may incur in relation to the case. In consideration thereof,
occurred during executing the contract the contract, what each Jesus and Rosita obliged themselves to give or pay to him as
party has given in execution of the contract. contingent professional fees the 2000 sq.m. of any and all
lands that the courts will award to them.
RTC ruled that Jesus and Rosita that conveyance was valid since FULLIDO v. GRILLI (2016)
it was not made during the pendency of litigation but after 785 SCRA 278
judgment has been rendered.
Rule: Contracts may be declared void in a summary action for
CA reversed ruling because it was prohibited transaction under unlawful detainer because void contracts cannot be source of
Article 1491(5) of the Civil Code, when the two Deeds of Sale in rights. PD 471 also limits the foreign lease duration up to 25
favor Atty. Robiso were executed on executed the case was still years renewable only for another 25 years (maximum 50 years).
pending with the SC and were still represented by Atty. Robiso.
Facts: In 1994, Grilli (an Italian national), met Fullido in Bohol
Issue and courted her. In 1995, Grilli decided to build a residential
Whether or not the deeds of conveyance between Atty. Robiso house where they would stay whenever he would be
and Jesusa and Rosita were executed long after the decision vacationing in the country. Grilli financially assisted Fullido in
became final and executory. procuring a lot. They constructed a house funded by Grilli. In
1998, Grilli and Fullido executed a Contract of Lease and a MOA
The Lots Were Transferred through a and an SPA to define their respective rights over house and lot.
Prohibited Sale Transaction
Article 1491(5) of the Civil Code expressly prohibits lawyers Lease Contract
from acquiring property or rights that may the object of any Grilli as the lessee, would rent the lot, in the name of Fullido, for
litigation in which they may take part by their profession, thus. a period of fifty years to be automatically renewed for another
fifty years upon its expiration for P10,000 for the whole term;
A property is in litigation if there is a contest or litigation over and that Fullido as the lessor, was prohibiting from selling,
it in court or when it is subject of a judicial action over the donating, encumbering lot without written consent of Grilli.
subject lots was still in the appellate proceedings stage when
they were conveyed to Atty. Robiso. The two deeds of sale were Memorandum of Agreement
all execute long before termination of the proceedings. There is an acknowledgement that Grilli paid for the purchase
price of the house, that the ownership was to reside with Grilli;
Clearly then, since the property conveyed to Atty. Robiso by and that should the common-law relationship be terminated,
Jesus and Rosita was still the object of litigation, the deeds of Fullido could only sell house and lot whomever Grilli desired.
conveyance executed by the latter are deemed inexistent.
Article 1409 applies, this being so, Atty. Robiso could not have Special Power of Attorney
transferred a valid title in favor of Peña over the lots awarded This allowed Grilli to administer, manage, and transfer the
to Jesus and Rosita. Thus, the petitioner has no legal standing. house and lot on behalf of Fullido. After 16 years, their
relationship turned sour, they both charged each other with
Issue: infidelity, there was issue to who should leave the property.
Whether or not the action for the declaration of nullity of the
contract should be in a separate contract. Grilli’s Position
Grilli discovered the Fullido was pregnant and at first, she told
There is no need to bring a separate action for the declaration him that the child she was carrying was his, after delivery of the
of the subject deeds of conveyance as void. A void or inexistent said child, it became apparent that was not his based-on time
contract is one which has no force and effect from the very of his physical presence in the country, the baby’s physical
beginning. Hence, it is as if it has never been entered and features and that Fullido later on admitted.
cannot be validated by prescription or ratification.
He let Fullido stay out of generosity, but later Fullido became
The need to bring a separate action for declaration of more hostile and difficult to handle. She was not able to
nullity applies only if the void contract is no longer full maintain the property to keep in good conditions, after
executory. If the contract is still fully executory, no party demands to leave, she refused to leave which prompted him to
need bring an action to declare its nullity; but if any party file the unlawful detainer complaint.
should bring an action to enforce it, the other party can
simply set up the nullity as a defense. Fullido’s Position
Sometime in 1995, Grilli offered to build a house for her on a
Contrary to Peña’s stance, the deeds of conveyance cannot be parcel of land she exclusively owned which is to become their
considered as executory because at that time the judgment conjugal abode. Fullido claimed that their relationship as
award ceding the lots was not yet implement. common-law spouses ended when she found out that Grilli had
found a new and younger woman and that he began to
IN THE CASE: Contingent fee agreements are recognized in this threaten and physically hurt her by knocking her head and
jurisdiction as a valid exception to the prohibitions under Article choking her.
1491(5) of the Civil Code. The Court cannot extent a similar
recognition to the present case for the payment of his She asserted that even if Grilli funded construction, she
contingent fees was during the pendency. PETITION DENIED. exclusively owned lot.
MCTC dismissed the case because Fullido could not be ejected Grilli then has No Cause of Action
for she was a co-owner. RTC reversed stating that Grilli had The court rules that Grilli has no cause of action for unlawful
exclusive right to use and possess the house and lot by the detainer against Fullido. As can be gleaned, the complainant for
lease. CA held that it was a possession that it was an ejectment an unlawful detainer must be the one who must have some
case the only issue to be resolved would be the physical right of possession over the property.
possession of the property.
The lease and MOA are found to be null and void for
IN THE CASE:
Issue being unconstitutional, hence as void contracts which cannot
Whether or not the Contract of Lease and MOA were null and be source of rights, Grilli had no possessory right over the
void the could not be sourced for Grilli’s de facto possession. subject land. A person who does not have any right over a
property from the beginning cannot eject another.
Even in Unlawful Detainer, the
Court can Set Aside a Void Contract Doctrine of In Pari Delicto Cannot Apply
A review of the relevant jurisprudence reveals that the Court did Even though Fullido and Grilli are both parties to a void
not hesitate to set aside a void contract even in an action for contract, Fullido is not barred to file the petition because the
unlawful detainer. Clearly, contract may be declared void even issue involved a public policy involving foreign ownership of
in a summary action for unlawful detainer because, void lands.
contract does not produce any legal effect and cannot be
source of any rights. To emphasize, void contracts may not be The said constitutional provision would be defeated and its
invoked as defense in any court proceeding even in an continuous violation sanctioned if the lands continue to remain
ejectment suit. in the hands of the foreigner. PETITION GRANTED.
Lease Contract and MOA Circumvent the Constitutional NICOLAS v. MARIANO (2016)
Restraint Against Foreign Ownership; PD 471 785 SCRA 440
The constitutional prohibition is shown that alienation is only
limited to Filipino Citizens, thus any transfer of lands to public Facts: Leonora Mariano was awarded a land grant from the
aliens is considered against the constitution. This prohibition is NHA project of the Barrio Project which she built on the lot a
not limited to sale of lands to foreigners. It also covers leases five-unit apartment which she leases out to tenants.
amounting to transfer of all or substantially all the rights
of dominion. The grant however was subject to a mortgage stating that the
property cannot be mortgaged within 5 years from such
As held in Philippine Banking Corporation v. Lui She, if an alien without prior written consent and authority from the NHA.
is given not only a lease of, but also an option to buy a piece of
land by virtue of which the Filipino owner cannot sell or NHA held the delivery of the original title to Mariano and given
otherwise dispose of his property, to last for 50 years renewable her the photocopy of such conditioned upon the full payment
for the same, then it becomes clear that the agreement is of the mortgaged loan. It was shown that the obligation
considered as a virtual transfer of ownership. remained unpaid.
PD 471 was enacted to regulate lease of lands to aliens, it Despite such, Mariano obtained a loan from Nicolas for an
provides for a maximum period allowable for the duration of amount of P100K and to secure such loan, she executed a
leases of private lands to aliens or alien-owned corporations mortgage contract over the same property comprising the one-
which is 25 years renewable for another period of 25 years thus half portion of the property, this first loan however, defaulted.
any contract in violated shall be null and void ab initio.
Mariano defaulted in the payment, executed in favor of Nicolas
IN THE CASE: The court finds that the Lease Contract and the another second mortgage which is the Sanglaan ng Lupa at
MOA are null and void for virtually transferring the reigns of the Bahay, this time mortgaging the property and improvements
land to a foreigner. thereon for a consideration.
The lease in favor of Grilli was for a period of 50 years, Mariano still defaulted on her obligation in 2000, because of
automatically extended for another 50 years upon expiration of this she executed a Deed of Absolute Sale or Real Property
the original period which prohibited Fullido from alienating conveying to Nicolas the ownership and the improvements
such land to anyone without the written consent of Grilli for thereof for the amount of P600K.
only the amount of P10,000. Through this, Grilli would
technically occupy the land for 100 years and she is powerless It was discovered however, that Nicolas was already collecting
to dispose the same. rents which amount also to P600K thus the case filed to the RTC.
It is clear that the lease contract and MOA operated to strip Mariano sought to be released from the second mortgage
Fullido of any dignified right over her own property the term of agreement and to stop Nicolas from further collecting upon her
lease for 100 years is in excess of PD 471. credit through the rentals from her apartments claiming that
she has fully paid her debt, and she also prays for damages for STONE v. CATTELYA LAND (2016)
such specific performance, damages, with prayer for issuance 802 SCRA 173
of TRO and later for Permanent Mandatory Injunction.
Facts: Cattleya entered into a contract of Conditional Sale with
RTC ruled in favor of Mariano stating that what was entered the Tecson spouses covering nine parcels of land involving the
was a mere mortgage not a sale of real property, for the deed subject property.
was void for lack of consent and of consideration.
However, neither the Contract of Conditional Sale nor the Deed
CA affirmed holding that deed was void, not because of of Absolute could be annotated on the title covering the subject
absence of elements but due to fact that Mariano was not yet property because the ROD Bohol stated that it was improper to
owner when he sold the property for the sale was in violation do so because of the writ o attachment annotated on the title
of the grant. of the property in connection to a Civil Case.
Issue Despite lifting of the attachment however, Cattleya still did not
Whether or not the Deed of Absolute Sale was properly succeed in having the Deed of Absolute Sale registered and in
executed by Mariano in favor of Nicolas is void. having title transferred to its name because the owner’s copy
to the title of the subject property because such title was
The Deed of Absolute Sale is Void destroyed in a fire in Bohol.
While the title to the TCT is in the name of Mariano, she had
not completed installment payments to the NHA; this fact is not This claim by the Tecson spouses turned out to be false because
disputed; upon checking the ROD of Bohol, the owner’s copy of the TCT
had in fact been presented by Taina-Manigque Stone (Taina)
Mariano also admits such, she even conceded that she was not with a deed of sale from the Tecson spouses, in favor of Taina
yet the owner of the property Thus, if she never became the covering the subject property.
owner of the subject property, she could not have validly
mortgage and sell the same to Nicolas. The Deed of Sale concerning Taina Manigque-Stone
It appears that when Taina’s then common-law husband Mike
Placing a parcel of land under the mantle of the Torrens system Stone (Mike) they fell in love and decided to buy a portion of
does not mean that ownership thereof can no longer be the beach lot and met with Tecson and latter agreed to sell
disputed. them a portion there was initial downpayment for a portion of
a beach lot but did not ask for a receipt for this initial
The title is only the best proof of ownership, but the certificate downpayment. A Deed of Absolute Sale was executed in favor
of title cannot always be rendered as conclusive proof of the of such subject portion in favor of Taina in 1987. In 1986, Taina
ownership, the registration only confirms ownership and it and Mike got married.
cannot be used to divest lawful owners.
After learning that the Tecson are now filing for a second
Nicolas not a Mortgagee or Buyer in Good Faith owner’s copy (due to the first one falsely alleged to be lost in a
Nicolas is charged with knowledge of the circumstances fire) she filed a notice of Adverse Claim. Thus, in 1995 she
surrounding the subject property because the original owner of sought to have her Deed of Absolute Sale registered such and
the TCT was not in Mariano’s possession and only had the presented the real owner’s copy and a TCT was issued in the
photocopy thereof, it is only natural for a mortgagee or buyer name of Taina. This prompted Cattleya to file a civil case.
to demand the presentation of the original owner’s copy of the
certificate of the title. RTC Bohol ruled in favor of Cattleya finding that the sale by
Tecson to Cattleya and to Taina stone was a double sale. CA
The dorsal side with annotations constitutes sufficient affirmed with modifications.
warning as to the subject property’s condition at the time,
because if Nicolas exercised negligence he would have Issue
discovered that Mariano was delinquent in the payment of the Whether or not the sale of land by Tecson spouses to Mike, a
installments to the NHA. foreigner, although made in Taina’s name was valid and if there
were double sales.
In Pari Delicto Doctrine Applies
Mariano cannot recover damages on account of her claimed Constitutional Prohibition to Foreign Ownership of Lands;
losses arising from her entering into contract with Nicolas, she Taina as Mere Dummy Still Renders Contract Void
knew that she is not the owner and not fully paid the prices she Taina herself admitted that it was really Mike who paid with his
is as guilty as Nicolas for mortgaging and selling a property not own funds the subject lot and that was the real purchaser. It
hers. The courts will leave them as they were at time of filing. shows that when it was proclaimed that Taina was the buyer of
PETITION DENIED. the property it was simply because she and Mike wanted to skirt
or circumvent the constitutional prohibition of foreign
ownership of lands.
A scrutiny of the records would show that the Taina was only a
dummy for Mike Stone who is a foreigner. Even if the Deed of
Absolute Sale is in the name of Taina Stone that does not
change the fact that the real buyer was Mike a foreigner.
The appellant herself had admitted in court that the buyer was
Mike Stone and at the time of the negotiation she was not yet
legally married to Mike Stone, they cannot do indirectly what is
prohibited directly by law.
Given the fact that the sale by Tecson spouses to Taina was as
Mike’s dummy was shown to be totally abhorrent to the
constitution it is thus void ab initio.
There is No Double Sale to Speak Of

In the first place, there is no double sale to speak of. Art. 1544
of the Civil Code, which provides the rule on double sale,
applies only to a situation where the same property is validly
sold to different vendees. In this case, there is only one sale to
advert to, that between the spouses Tecson and respondent.
Application of the Case of Muller v. Muller

In the Muller case, by entering into a contract knowing that it
was illegal, no implied trust created and no reimbursement for
his expenses can be allowed to allow such would countenance
indirect controversion of the constitutional prohibition. To
allow recovery in this case would mean that the alien would be
able to benefit from such illegal act.
Thus, in the instant case, respondent cannot seek

reimbursement on the ground of equity where it is clear that he
willingly and knowingly bought the property despite the
constitutional prohibition.
Further, the distinction made between transfer of ownership as

opposed to recovery of funds is a futile exercise on
respondent’s part. To allow reimbursement would in effect
permit respondent to enjoy the fruits of a property which he is
not allowed to own. Thus, it is likewise proscribed by law.
PETITION DENIED.
OBLIGATIONS AND CONTRACTS Two Conditions Necessary for Natural Obligations

Civil Code 1. That there be a juridical tie between two parties;
2. That this tie is not given effect by law.
Articles 1423-1430
TITLE III The first requirement distinguishes the natural from moral and
NATURAL OBLIGATIONS the second requirement distinguishes natural from civil. The
binding tie of these obligations is in the conscience of man, for
Basis of Natural Obligations under the law they do not have the necessary efficacy to give
From nature of man and of things, as well as from law and rise to an action.
reason, there arises a natural law, which is immutable and
independent of all human regulations; it is also sometimes It presents a dilemma between law and equity. The law
called rational law. This includes those rules which are neither considers that the debtor should pay the obligation, but equity
written nor promulgated but derived from reason and nature. leaves it entirely to his conscience whether he would pay or not.
If he does not want to pay, he cannot be compelled to do so; if
ARTICLE 1423 he pays, he cannot recover what he has paid.
Obligations are civil or natural. Civil obligations give a right
of action to compel their performance. Natural obligations, Perfect and Imperfect Obligations
not being based on positive law but on equity and natural The perfect obligation is one where there is a determination of
law, do not grant a right of action to enforce their
the creditor, debtor, and the nature and value of the obligation,
performance, but after voluntary fulfillment by the obligor,
they authorize the retention of what has been delivered or while an imperfect obligation is not so determined.
rendered by reason thereof. Some natural obligations are set
forth in the following articles. Natural Obligations is not an imperfect obligation because it
has all the characteristics of determination of perfect
Four Types of Obligations under Juridical Science obligations as to creditors, debtors and objects.
1. Moral obligations – which are duties of conscience
completely outside the field of law. Natural Obligations and Moral Obligations
2. Natural obligations – which are not sanctioned by any Natural Obligations Moral Obligations
action but have a relative juridical effect. There is a juridical tie There is none
3. Civil obligations – which are juridical obligations which Performance by the debtor The act is pure liberality,
apparently are in conformity with positive law but are is a legal fulfillment of the which springs from blood,
susceptible of being annulled. obligation, not necessarily affection or benevolence
4. Mixed obligations – which have full juridical effect. an act of generosity
In the domain of law, being Domain of morals
However, jurisprudence has reduced this classification to two, a true obligation, with a
natural and civil obligations. The civil obligations include mixed. legal tie between debtor
and creditor, but which
Concept of Natural Obligations because of certain causes
Natural obligations are midway between civil and purely moral cannot be enforced in court
obligations. Civil obligations are enforceable by action, while
moral obligations rest entirely upon conscience.
The moral duty is inexistent from the juridical point of view. The
consequence of the juridical tie in natural obligations is that
It is distinguished from moral in that it produces some juridical
they produce certain civil effects. For instance, that which has
effects, such as right to retain what has been voluntarily paid by
been paid by the debtor cannot be recovered; the obligation
the debtor, and from the civil in that it does not give rise to an
can be novated; it can be guaranteed; and in some cases, it can
action to compel its performance.
even be ratified. Not every moral duty is a natural obligation.
It is usually termed as an obligation without a sanction,

Conversion of Natural Obligations to Civil Obligations
susceptible of voluntary performance, but not through
The term fulfillment does not refer only to delivery but also
compulsion by legal means. It is a real obligation to which the
performance of an act similar to the definition of payment. The
law denies an action, but which the debtor may perform
signing of a document, novation or acknowledgment of
voluntarily. It is patrimonial and presupposes a prestation.
prescribed debt has the effect of converting a natural obligation
to a civil obligation. This is because the signer renounces the
In order that there may be a natural obligation, there must exist
defense which prevents enforcement of the obligation, which
a juridical tie which is not prohibited by law and which in itself
can be thereafter the basis of a judicial action.
could give a cause of action.
The promise to perform natural obligation is as effect as the
But because of some special circumstances is actually without
performance itself and it converts natural to civil obligation. A
legal sanction or means of enforcing compliance by invoking
natural obligation is a valid cause for a civil obligation such as
the intervention of court.
debt of a deceased parent or family member.
Q. Is Christmas Bonus a Natural or Civil Obligation? Payment with Debtor’s Consent

Christmas bonus, not yet given to employees, is not generally a If payment is made with the consent of the debtor, a civil
demandable and enforceable obligation; nor may it be considered a obligation arises. Refer to Article 1236 and 1237 of Civil Code:
natural obligation for there has been no voluntary performance as yet.
The Courts cannot order therefore the grant of the bonus (Ansay, et al.
Art. 1236. The creditor is not bound to accept payment or
v. Board of Directors of the NDC, L-13667, Apr. 29, 1969) unless:
performance by a third person who has no interest in the
1. It has been made part of the wage or salary.
fulfillment of the obligation, unless there is a stipulation to the
2. Granted on equitable considerations, as when it used to be
contrary. Whoever pays for another may demand from the
given in the past, although withheld in succeeding years.
debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover
Voluntary Fulfillment only insofar as the payment has been beneficial to the debtor.
The term voluntary may be understood as spontaneous, free
from fraud or coercion or it may be understood as meaning Art. 1237. Whoever pays on behalf of the debtor without the
with knowledge, free from error. Voluntary fulfillment means knowledge or against the will of the latter, cannot compel the
that the debtor complied with the same even if he knew that creditor to subrogate him in his rights, such as those arising
he could not have been legally forced to do so. Thus, payment from a mortgage, guaranty, or penalty.
through a coercive process is not considered as voluntary. And
NOTE: The current articles refers to a natural obligation only
in cases of partial voluntary fulfillment the creditor cannot
when that a third person pays for the debtor on a prescribed
recover for the balance, since on said balance, there has not yet
debt but voluntarily reimburses such third person, the debtor
been created a legal obligation.
cannot recover what he has paid the third person.
Undue Payment and Natural Obligations
ARTICLE 1426
If one pays a debt that has already prescribed, two things: When a minor between eighteen and twenty-one years of age
(a) If was done without knowledge of prescription, one can who has entered into a contract without the consent of the
recover on the ground of undue payment. parent or guardian, after the annulment of the contract
(b) If was done with knowledge of prescription, one can no voluntarily returns the whole thing or price received,
longer recover for this is a case of natural obligation. notwithstanding the fact that he has not benefited thereby,
there is no right to demand the thing or price thus returned.
Example of Other Natural Obligations
Art. 1423 says: “Some natural obligations are set forth in the following Restitution by a Minor
articles.” Hence, there may be other natural obligations. After a decree of annulment of a contract, Article 1398 of the
• Obligation to pay interest for use of money, even if not Civil Code provides that there should be mutual restitution.
agreed upon in writing (1956, 1960 of Civil Code). When the ground for annulment however, is the incapacity of
• Duty to support natural or spurious children even if not
the plaintiff, Article 1399 of the Civil Code provides the plaintiff
recognized voluntarily or by judicial compulsion.
is t bound to make restitution except to the extent that he was
• Giving of material and financial assistance to children upon
their marriage. benefited by such. If there was no benefit derived by the
incapacitated party, he is not legally obliged to make restitute.
ARTICLE 1424
When a right to sue upon a civil obligation has lapsed by However, he has a natural obligation to do so, under this article,
extinctive prescription, the obligor who voluntarily if that he voluntarily makes restitution, he cannot recover what
performs the contract cannot recover what he has delivered he has delivered, if he is a minor over eighteen years of age.
or the value of the service he has rendered.
Illustration. A, a minor, entered into a contract with some sui juris,
Effect of Extinctive Prescription without consent of his parents. In said contract, A received a car. This
By virtue of extinctive prescription, a right or property has been car was afterwards destroyed by fortuitous event. Later when contract
lost. For illustration, A’s debt to C has been extinguished by was annulled, A returned voluntarily the value of the car although he
prescription. Yet A, knowing of the prescription, voluntarily paid had not profited or benefited a single centavo from the car. Has he now
the prescribed A cannot now recover what he has paid C. the right to demand that the price be returned? No more.
Prescribed debt may indeed give rise to new obligation.
ARTICLE 1427
When a minor between eighteen and twenty-one years of
ARTICLE 1425 age, who has entered into a contract without the consent of
When without the knowledge or against the will of the the parent or guardian, voluntarily pays a sum of money or
debtor, a third person pays a debt which the obligor is not delivers a fungible thing in fulfillment of the obligation, there
legally bound to pay because the action thereon has shall be no right to recover the same from the obligee who
prescribed, but the debtor later voluntarily reimburses the has spent or consumed it in good faith.
third person, the obligor cannot recover what he has paid.
Payment by a Minor
Payment by a Third Person but was Reimbursed by Debtor
Here the creditor who has spent or consumed the object in
A owes B P700,000. But the debt soon prescribes. Later C, against the
good faith is not required to restore. Good faith of the obligee
consent of A, pays B the P700,000. A here does not have to reimburse
C because he (A) has not at all been benefited by the transaction. must be present at the time of the spending or consuming.
However, A later voluntarily reimburses C. A can no longer recover.
This article dealt with voluntary payment by a minor over ARTICLE 1430
eighteen years of age under an annullable contract. There is no When a will is declared void because it has not been executed
natural obligation in the situation contemplated by this article; in accordance with the formalities required by law, but one
of the intestate heirs, after the settlement of the debts of the
the obligation here is a civil obligation which exists and is
deceased, pays a legacy in compliance with a clause in the
enforceable unless set aside. It is not the voluntary payment the defective will, the payment is effective and irrevocable.
prevents recovery under this article but the fact that the
obligee/creditor has consumed or spend the thing or money is Payment of Legacies Despite the Fact that Will is Void
good faith. If the will is void, the legacy would also be void and the
deceased is considered to have died without a will. This is the
This article simply creates an exception to the general rule in reason for the existence of the Article.
restitution in case the contract is annulled. Generally, upon the
annulment of the contract, the party who contracted with the Wills, Legacy and Devise
minor must return whatever he may have received under the Wills are classified into (1) notarial and (2) holographic. A
contract, but he is exempted from this obligation to restore, if holographic will has three elements:
the payment was made by a minor over eighteen years old, and 1. It must be entirely handwritten by the testator;
the thing or money paid was consumed or spent by the former 2. Each page must be dated;
in good faith. 3. Each page must be signed.
Nature of the Thing Any alteration must be with a signature, otherwise it shall be
The code uses the term fungible, but it means that the thing is void. Thus, if one of the pages is not dated, then the
consumable. However, even if the thing delivered is not holographic will shall be void. Upon probate to the court, the
consumable, the debtor still cannot recover if the thing is no court finding the failure to date on page, the court shall declare
longer in the possession of the creditor who has acted in good such will void. Therefore, the stipulations in the will no longer
faith who may have alienated it or lost it without fault. The right governs the distribution of the estate of the deceased.
to recover presupposes the existence of the thing.
Legacy and Device, Defined
ARTICLE 1428 • A legatee is a person who will receive a legacy which is a
When, after an action to enforce a civil obligation has failed, personal movable property. The legatee refers to a person
the defendant voluntarily performs the obligation, he cannot who inherits under a will but who may or may not be related
demand the return of what he has delivered or the payment to the decedent, but not all the time.
of the value of the service he has rendered. • A devisee is a person who will receive a devise which is a real
property usually refers to anyone who receives real property
Winner in an Action to Enforce a Civil Obligation by being named in a decedent's will whether they are related
Here the defendant may have realized that he should have lost or not—such as a friend.
the case, instead of winning it, thus the existence of the Article.
Note that when the will is held to be void, the heirs can now
Illustration. Suppose A owes B P500,000. B brings a suit against A, but ignore the provisions concerning the legacy due to the will
B loses the case for insufficient evidence. No appeal is made from the having been found to be void. Article 1430 applies when
decision, and the judgment becomes final. Later, A paid B voluntarily despite such defective will, one of the intestate heirs, after
the debt. May A now recover from B what he (A) has paid? No. settlement of the debts of the deceased pays a legacy in
ARTICLE 1429 compliance with a clause in a defective will is considered to be
hen a testate or intestate heir voluntarily pays a debt of the effective and irrevocable.
decedent exceeding the value of the property which he
received by will or by the law of intestacy from the estate of Illustration. Suppose A, B and C are heirs of deceased X. The deceased
the deceased, the payment is valid and cannot be rescinded left a will containing a stipulation in favor of D which was a legacy.
by the payer. However, the court declared the will void because one of the pages
were not signed by the testator. But B and C chose to honor the legacy,
Rule in Case of Payment of Debts Beyond Value of Estate A did not want to. But he was forced by B and C. Therefore, A’s consent
Heirs inherit obligations only to the extent of the value of the was vitiated. A died a year later. The heirs of A, Y and R filed a petition
for rescission because the consent of A was vitiated by force. Being the
inheritance. This is the reason for the Article, coupled with the
heirs of A, will the action prosper?
basis for the natural obligation. As provided in the last sentence
of Article 1311, paragraph 1, “The heir is not liable beyond the No. Because even they are successors-in-interest, the vice that was
value of the property he received from the decedent.” employed upon A is personal upon A, they merely have an inchoate
right over the thing that was delivered to D as a legacy at the time of
Illustration. Suppose A dies, leaving an estate of P10,000,000 and
the delivery. The action is for A but not to the heirs both Y and R.
debts amounting to P15,000,000. His heir here is not expected to make
up for the difference, BUT if he does so voluntarily, then he cannot
Illustration. In a will defective for lack of the needed legal formalities,
recover said difference. After all, one does have a moral duty to see to
X, a friend, was given a legacy. The legacy is void, and the whole estate
it that the dead relative’s or friend’s obligations in life are all carried out.
should go to the intestate heirs. If, however, the intestate heirs give X
Here, the heir is not really required by law to shoulder the deficit, but
the legacy, they cannot get it back now, provided that the debts of the
since he does so voluntarily, he cannot now back out.
deceased have been settled.
OBLIGATIONS AND CONTRACTS Distinguished from Ratification

Civil Code The distinction between ratification and estoppel is that in
ratification the party is bound because he intended top be, in
Articles 1431-1439
estoppel, he is bound notwithstanding the fact that there was
TITLE IV no such intention, because the other party will be prejudiced
ESTOPPEL and defrauded by his conduct unless the law treats him as
legally bound.
ARTICLE 1431
Through estoppel an admission or representation is Representation and Positive Acts
rendered conclusive upon the person making it, and cannot An estoppel in pais, may be based upon express representation
be denied or disproved as against the person relying or statements or upon positive acts or conduct. The
thereon. representation must be intended to influence the other party
or, at least, must be such as may reasonably have supposed to
Concept of Estoppel be so intended. The representation must be clear and plain.
Generally speaking, estoppel is a bar which precludes a person Estoppels cannot be sustained on doubtful inferences.
from denying or asserting anything contrary of that which has,
in contemplation of law, been established as the truth, either by An estoppel may arise from the making of a promise, even
the act of judicial or legislative offers or by his own deed or though without consideration, if it was intended that the
representation either express or implied. promise should be relied upon, and if a refusal to enforce it
would be virtually to sanction the perpetuation of fraud or
It concludes the truth in order to prevent fraud and falsehood, would result in other injustice. A promise cannot be the basis
and imposes silence on a party only when in conscience and of an estoppel if any other essential element is lacking, there
honesty he should not be allowed to speak. must be justifiable reliance or irreparable detriment to the
promisee are requisite factors.
Thus, whenever a party has, by his own declaration, act, or
omission, intentionally and deliberately led another to believe Where the plaintiff, induced to buy a promissory note on the
a particular thing to be true, and to act upon such belief, he representations of the defendant made at the time of the sale
cannot, in any litigation arising out of such declaration, act, or that the note has no legal defect, the defendant cannot later on
omission, be permitted to falsify it. allege that the note was executed for an unlawful consideration.
Defendant cannot be allowed to go against his own act to the
The principle of estoppel would step in to prevent one party prejudice of the plaintiff.
from going back upon his own acts and representations to the
prejudice of the other party who relied upon them. One who clothes another with apparent authority as his agent
and holds him to the public as such, cannot later be allowed to
However, if act, conduct, or representation of the party sought deny the authority of such person to act as his agent in any
to be estopped is due to ignorance founded on innocent action upon a contract entered into by third persons with such
mistake, estoppel will not arise. A party who had no knowledge apparent agent, when such third persons entered into the
of nor gave consent to a transaction is not estopped by it. contract in good faith and in an honest belief that he is such
agent for such.
The origin of estoppel is in equity therefore based on moral
right and natural justice. Its applicability to any particular case An employee who accepts an acting appointment without any
depends, to a very large extent, upon the special circumstances protest or reservation, and having acted thereunder for a
of the case. considerable time cannot be later heard to say that such
appointment is permanent and that, by reason of its being so,
Illegal Act, Excluded he could not be removed, except for cause. The following are
Estoppel cannot be predicated on an illegal act. It is generally examples of the application of estoppel.
admitted that as between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law. Mirasol v. Municipality of Tabaco, 43 Phil. 610
In one case, the plaintiff manifested that he had no objection
Distinguished from Waiver to the boring of a well on his lot by the municipal government,
A waiver is a voluntary and intentional abandonment or thereby leading the latter to believe that it was given the
relinquishment of a known right. It carries no implication fraud. authority to make the necessary drilling.
It involves the act or conduct of only one of the parties.
A few days after the work was started, plaintiff changed his mind
An equitable estoppel may arise however, even where there is and order the stopping of the work. It was held that he was
no intention on the part of the person estopped to relinquish estopped from revoking the authority he gave the municipality
any existing right, and frequently carries the implication of without reimbursing the latter for the expenditure incurred
fraud. It involves the conduct of both parties. upon the strength of such authority.
Papa v. Montenegro, 54 Phil. 33 so or intentionally closes his eyes to the ascertainment to the
A husband who connived with his wife to conceal her civil status, ultimate truth, he cannot later one be heard to say that he was
so as to induce her parents to believe that she was still single, led to believe what has been represented to him.
is estopped to assert her true civil status in an action to
invalidate a deed of some of her property in favor of her father. Silence of Inaction
An estoppel may arise under certain circumstances from silence
CIR v. Suyoc Consolidated Mining (1960) or inaction. This kind of estoppel is sometimes referred to as
Where the government could have collected a tax but without estoppel by “standing by or laches.” The principle underlying
action upon the specific request of the taxpayer, the latter will such estoppel is embodied in the maxim, “one who is silent
not be permitted later to raise the defense of the statute of when he ought to speak will not be heard to speak when he ought
limitations. He who prevents a thing from being done may not to be silent.”
avail himself of the non-performance which he himself has
occasioned for such. Mere innocent silence will not work an estoppel. There must
aslo be some element of turpitude or negligence connected
Margate v. Rabacal, 7 SCRA 894 with the silence by which another is misled to his injury. But one
A party who requested and prated the court in the guardianship who invokes this doctrine of estoppel must show not only
proceedings to approve the sale of a parcel of land and had unjustified inaction but also some unfair injury would result to
derive utmost advantage and benefit out of the proceeds him unless the action is barred.
thereof, is estopped from asserting a fact inconsistent with his
previous acts. Estoppel by acquiescence is closely related to estoppel by
silence. In estoppel by acquiescence, a person is prevented
San Miguel Corporation Employees v. Noriel, 103 SCRA 185 from maintaining a position inconsistent with one in which he
One who petitions the courts for an early union election cannot has acquiesced.
afterwards be heard to claim, after an election was actually held
wherein one party’s ticket won, that said election is null and Thus, when the owner of a piece of land merely keeps silent and
void because a policy of the Ministry of Labor that the term of makes no objections, although he knows that a railroad
the union officers should be three years and not less. corporation has entered upon his land without authority and is
constructing a railway therein, he cannot later on recover his
Summit Guaranty v. CA, 110 SCRA 241 land or prevent its use by the railroad corporation after the
A party is also estopped on the grounds of public policy from railway is completed at much expense.
invoking the plea of the lack of jurisdiction after submitting
himself to the jurisdiction of the Court and assailing its Nature of Laches
jurisdiction only after an adverse judgment was rendered Laches, in general sense, is failure or neglect, for an
against him. unreasonable and unexplained length of time, to do that which,
by exercising due diligence, could or should have been done
Admissions earlier; it is negligence or omission to assert a right within a
A party may be estopped to insist upon a claim, assert an reasonable time, warrant a presumption that a party entitle to
objection, or take a position which is inconsistent with an assert it either has abandoned or declined to assert it.
admission which he has previously made and in reliance upon
which the other party has changed his position. Public policy requires, for the peace of society, the discourage
of stale claims and laches, unlike the statute of limitations, is
Where therefore, one admits in a will that a certain property not a mere question of time but is principally a question of
belonging to his son had been sold by his son to a third person, inequity or unfairness of permitting a right or claim to be
said testator was estopped from claiming the same lot from the enforced or asserted.
vendee on the ground that his son had sold the same lot to him
a month after the said testator made the will. Elements of Laches
The essential elements of laches are:
Likewise, admissions in pleadings or facts agreed by stipulation 1. Conduct on the part of the defendant, or of one under
is conclusive between the parties and cannot be contradicted whom he claims, giving rise to the situation
unless it be shown that the admissions were made through a complained of;
palpable mistake for the parties are not allowed to gainsay 2. Delay in asserting complainant’s rights after he had
their own acts or deny right which they have previously knowledge of the defendant’s conduct and after he
recognized. has had an opportunity to sue;
3. Lack of knowledge or notice on the party of the
But the doctrine of estoppel does not extend in favor of those defendant that the complainant would assert the right
are charged with notice of the true facts or of facts and on which he bases his suit; and
circumstances which, through due diligence and ascertainment, 4. Injury or prejudice to the defendant in the event relief
could have unerringly disclosed those true facts in connection is accorded to the complainant.
with which the representation was made, and if he fails to do
Laches and Estoppel, Distinguished Other kinds of estoppel are corporation by estoppel where
Prescription Laches two or more persons would represent themselves to a person
It is concerned with the fact It is concerned with the that they are officers of a corporation and by reason of that
of delay effect of delay misrepresentation, the third person would enter into a
It is a matter of time It is principally a question of transaction with these people who are in fact not a corporation,
inequity of permitting a then those who misrepresented themselves are already
claim to be enforced, this estopped from denying that actually no corporation existed.
inequity being founded on
some change in the Another is a estoppel by judgment, where one of the parties
condition of the property or knew that the court trying the case has no jurisdiction but
relation of the parties despite the knowledge he entered into trial. And that
Statutory Not statutory based unfortunately the ruling was not favorable to the person who
Applies at law Applies to equity new, so he invoked the fact that the lower court had no
jurisdiction, in this instance, he is estopped.
Based on a fixed time Not based on fixed time
ARTICLE 1432
Reliance and Belief, Essential The principles of estoppel are hereby adopted insofar as
It is essential to the existence of an equitable estoppel that the they are not in conflict with the provisions of this Code, the
representation of the party against whom the estoppel is Code of Commerce, the Rules of Court and special laws.
asserted shall have been believed by the party claiming the
benefit thereof and that he shall have relied therein and been Effect of Provision
influenced and mislead thereby. This article incorporates into our law a consideration portion of
the law of estoppel. The principles of estoppel are suppletory.
In a case where one of the co-owners of a lot sold the entire lot
without the conformity of the other co-owners, evidence was ARTICLE 1433
presented at the trial to the effect that the other co-owners had Estoppel may be in pais or by deed.
made statement that the one who sold the lot was the exclusive
owner of the property. There was however, no evidence Kinds of Estoppel
presented that nay of their statements ever came to the 1. Estoppel In Pais (equitable estoppel)
knowledge of the defendant before purchasing said lot or that a. By conduct or by acceptance of benefits,
said vendee ever acted upon the statement in any way. b. By representation or concealment.
c. By silence
In order to create an estoppel, it is necessary to prove, not only d. By omission,
the conduct of the person sought to be estopped, ut also that e. By laches (unreasonable delay in suing)
the person claiming the estoppel knows such conduct and
relied and acted upon it to his damage. Want of knowledge of 2. Estoppel by Deed (technical estoppel)
the law cannot be based on estoppel. a. By deed proper (written instrument or bond)
b. By judgment as a court record
Summary Discussion
Estoppel works against the person representing that he is this Kinds of Estoppel (Tolentino)
type of person and later on he would say that it was just a joke 1. Estoppel by record
if the other person has relied on your statement or 2. Estoppel by deed
representation. Now there is also what there is called estoppel 3. Estoppel by matter in pais
by acquiescence, but estoppel is different from laches which is
the failure to institute the action within the reasonable period Estoppel by record is the preclusion to deny the truth of
of time. It is not based on positive law, unlike prescription. matters set forth in a record, whether judicial or legislative, and
also to deny the facts adjudicated by a court of competent
Estoppel cannot also be predicated on an illegal act. Meaning jurisdiction like a conclusiveness of a judgment on the parties.
the person who has acted on a particular illegal act, cannot be
estopped. For example, a person who is in need of money Estoppel by deed is a bar which precludes one party to a deed
because of a loved one is hospitalized, and he goes to a money and his privies from asserting as against the other party and his
lender and the money lender says the rate of interest is 20% per privies any right or title in derogation of the deed or from
month. Despite that, he borrows. denying the truth of any material facts asserted in it.
And later on, when payment is to be made, he would now Estoppel in pais is a term applied to a situation, where because
question the interest. The creditor cannot say that you are of something which he has done or omitted to do, a party is
estopped from questioning interest, because that is predicated denied the right to plead or prove an otherwise important fact.
in an illegal act. So, estoppel will not lie against the debtor. As It is different from technical estoppel in that it arises out of the
such there was estoppel. acts and conducts of the party estopped.
Elements of Estoppel In Pais ARTICLE 1435

If a person in representation of another sells or alienates a
Elements essential in relation to the party sought to be estopped: thing, the former cannot subsequently set up his own title as
against the buyer or grantee.
1. Conduct amount to false representation or
concealment of material facts, or at least calculated to
Sale or Alienation in Representation of Another
convey the impression that the facts are otherwise
This is estoppel created in a representative capacity. In this kind
than, and inconsistent with, those which the party
of estoppel, prejudice is also not essential.
subsequently attempts to assert;
2. Intent, or at least expectation that this conduct shall
For example, Amalia, in representation of Romeo, sells to
be acted upon by, or at least influence, the other party;
Juanito a car. Amalia cannot afterwards allege that she was
3. Knowledge, actual or constructive, of the real facts.
really the owner of the car, and that, therefore, the sale is not
valid because of this Article.
Elements essential to the party claiming the estoppel:
1. Lack of knowledge or of the means of knowledge of
ARTICLE 1436
the truth as to the facts in question; A lessee or a bailee is estopped from asserting title to the
2. Reliance, in good faith, upon the conduct or thing leased or received, as against the lessor or bailor.
statements of the party to be estopped; and
3. Action or inaction based thereof of such character as Estoppel on the Part of a Lessee or a Bailee or Tenant
to change the position or status of the party claiming A tenant will not be heard to dispute his landlord’s title. Once a
the estoppel, to his injury, detriment or prejudice. contract of lease is shown to exist between the parties, the
lessor cannot be compelled to prove his title thereto.
ARTICLE 1434
When a person who is not the owner of a thing sells or
The tenant cannot deny the title of his landlord at the time of
alienates and delivers it, and later the seller or grantor
the commencement of the relation of landlord and tenant
acquires title thereto, such title passed by operation of law
to the buyer or grantee. between them for such reasons.
Subsequent Acquisition of Title When Presumption Does Not Apply

An action for the recovery of some parcels of land was brought If the alleged tenant does not admit expressly or implicitly the
by plaintiff on the ground that when his father sold the said existence of the lease contract (such as when the landlord did
parcels to the defendant his father was not yet the owner of said not attach or plead in his complaint the contract of lease), the
parcels of land, having obtained title thereto only after the sale. presumption does not apply.
It was held that although plaintiff’s father did not obtain title to Discussion. Article 1436, provides that a tenant will not be
the land until some years after he had sold such land, his heard to dispute the title of the landlord, and this presumption
subsequent acquisition of the land would have the effect of is conclusive, it is not a disputable presumption, neither can a
making his conveyance of the sale of the same to defendant bailee dispute the title of the bailor.
valid.
ARTICLE 1437
When in a contract between third persons concerning
A person who sells property when he did not have title to it, it
immovable property, one of them is misled by a person with
cannot deny validity to the sale after he had acquired the title. respect to the ownership or real right over the real estate,
The vendee is also deemed a purchaser in good faith. the latter is precluded from asserting his legal title or
interest therein, provided all these requisites are present:
Sale or Alienation by Non-Owner (1) There must be fraudulent representation or
In this kind of estoppel, prejudice is not essential. Article 1434 wrongful concealment of facts known to the party
applies to the sale of “after acquired property.” This is allowed estopped;
(2) The party precluded must intend that the other
by the law on Sales under the Civil Code.
should act upon the facts as misrepresented;
(3) The party misled must have been unaware of the
Jose sold in his own name Brigitte’s car to Gina. He also true facts; and
delivered the car to Gina. If later on Brigitte donates the car to (4) The party defrauded must have acted in accordance
Jose, ownership over the same passes to Gina, not by tradition with the misrepresentation.
or delivery, but by operation of law.
Estoppel on Concerning Immovable Property
Discussion. Here, the person is not the owner of the thing To apply this article, one should have been misled otherwise
alienated but he sold it, later on however, he acquired there is no estoppel. Knowledge of the true facts by the
ownership of the thing, he cannot be heard later on that, at the stranger prevents deception so estoppel cannot apply.
time of the sale he was not actually the owner but a mere
representation. On the part of the party who is in estoppel, he should have
made a fraudulent misrepresentation or wrongful concealment
of the facts known to him.
Estoppel Against the Owner Discussion. This applies to a situation wherein you allow your
The rule is well-settled that the title to land or real property may friend to borrow your jewelry and pawn, and later on aslo made
pass by an equitable estoppel, which is effectual to take the title use of the portion of the proceeds of the loan. Later on, you
to land from one person and vest it in another where justice had a change of heart and tell the owner of the pawnshop that
requires that such an action be done. you are the owner, that is already under estoppel for you have
accepted the benefits thereof.
Thus, where the true owner of real property holds out another
as the owner thereof, or with knowledge of his own title, allows Illustration. A has a diamond ring. He allowed B to assume apparent
the latter to represent himself as the owner having full power ownership over the ring so that B might sell the same. Instead, B
of disposition over the property, and innocent third persons are pledged the ring with C to obtain a loan. The money lent was later
led into dealing with such person with apparent title, the true handed over to A. Later A attacks the validity of the pledge claiming
that under the law, the pledgee must be the owner thereof, and since
owner cannot, to the prejudice of such third persons, nullify the
B in this case acted without authority, the pledge is invalid. Is A allowed
act of the apparent owner. to do this?
Discussion. This article applies to an immovable property and ANS.: No, A is not allowed to do this. His receipt of the sum for which
a third person is misled by a person with respect to the the pledge was made is an implied ratification of the pledge and A is,
ownership or real right over the immovable. The latter is therefore, in estoppel.
precluded from asserting his legal title or interest provided the
requisites set forth are present. Note that this article applies to ARTICLE 1439
immovables, for movables refer to Article 1435 and 1436. Estoppel is effective only as between the parties thereto or
their successors in interest.
ARTICLE 1438
One who has allowed another to assume apparent ownership Parties Affected
of personal property for the purpose of making any transfer An estoppel operates on the parties to the transaction out of
of it, cannot, if he received the sum for which a pledge has which it arises and their privies. Conversely, a stranger to a
been constituted, set up his own title to defeat the pledge of transaction neither bound by, nor in a position to take
the property, made by the other to a pledgee who received advantage, an estoppel arising therefrom. If anybody at all may
the same in good faith and for value. be heard to challenge the application of the doctrine of
estoppel, it is only the party against whom it may be invoked.
Estoppel from Benefits
An estoppel, however, binds privies in blood, like heirs and in
This provision refers to a case where the owner of personal
estate, like grantees.
property has allowed another to assume apparent ownership of
the thing for the purpose of making any transfer of it, and the
The reason for the rule is that mutuality is an essential element
latter pledges it to a third person who receives the same in
of an estoppel; an estoppel must bind both parties or neither is
good faith and for value.
bound. Thus, in a sale, only the vendors and vendees are
chargeable with misrepresentation as against each other.
The owner is then precluded from setting up his own title to
defeat the pledge of the property if he received the sum for
No Estoppel Against the Government
which the pledge has been constituted.
As a general rule, the government is not estopped by mistake
or error on the part of its officials or agents; this erroneous
The receipt of the sum for which the pledge has been made,
application and enforcement of the law by public officers does
estops the party benefited from questioning the validity and
not prevent a subsequent correction application of the statute.
effectiveness of the transaction.
This estoppel is based upon acceptance and retention by one

having knowledge of the facts of the benefits from the
transaction which he might have rejected. It is said that the case
is referable, when no fraud is involved, to the principles of
ratification rather than to those of equitable estoppel. The
result produced however, is the same and the distinction is
usually not made.
However, notwithstanding the fact that the owner never

received the proceeds of the pledge, he may be estopped from
questioning the pledge if he clothed the agent with apparent
authority to dispose of it and when the person setting up the
estoppel acted and parted with value or extended credit on the
faith of such apparent ownership or authority. Thus, one who
voluntarily clothed a person with apparent authority to
negotiate which the other relied is estopped to question.
OBLIGATIONS AND CONTRACTS Shia went with Lim to the bank to purchase a traveler’s check,
Articles 1431-1439 but Shia noticed that the traveler’s check was not indorsed but
Lim told Shia that Queensland could sign the indorsee portion.
JURISPRUDENCE NOTES
Because Shia trusted Lim’s good credit rating and of ignorance,
he brought back the check to the office unsigned. Due to a busy
1431-1439. Estoppel
Friday, the check was kept in the drawer in Queensland’s
consultant and it was later deposited to Citibank.
LIM v. QUEENSLAND TOKYO (2002)
317 SCRA 696
On October 26, 1992, Shia informed Lim that they incurred a
floating loss of P44K on October 23 and told Lim that they can
Facts: Queensland is a duly licensed broker engaged in the
still recover by unlocking the floating loss on Friday.
trading of commodities futures with full membership and with
a floor trading right at the Manila Futures Exchange, Inc.
On October 27, Citibank informed Queensland that the
traveler’s check could not be cleared unless it was duly signed
In 1992, Shia, a market analyst and trader for Queensland, was
by Lim, the original purchaser of the check, thus it was returned
introduced to Jefferson Lim by Marissa Bontia. Shia suggested
to Lim for signing. But Lim aware of his P44K loss, demanded for
that Lim invest in the FOREX Market. Before investing, Lim
liquidation of his account and said he would get back what was
requested Shia for proof that FOREX was lucrative. They
left of his investment.
conducted mock tradings and it showed profitability.
Meanwhile, Lim signed only one portion of the traveler’s checks

Thus, Lim invested with a marginal deposit of $5,000 in
leaving the other blank. Lim refused to talk, Shia made follow-
manager’s check, the amount was made to apply to any
ups for to petitioner for settlement, because of this disregard
authorized future transactions and answered for any trading
there was demand letters sent but was unheeded.
account against which the deposit, for any loss and for all
obligations which the investor would incur with broker.
RTC dismissed, CA reversed and ordered Lim to pay P125K.
Because Queensland dealt in pesos only, it had to convert such
Issue
check to pesos it amounts to P125K, to accommodate the
Whether or not Lim is estopped in questioning the validity of
request to trade right away, it advanced the P125K from its own
the Customer Agreement.
funds while waiting for the clearing of the manager’s check.
Thereafter, a deposit notice in the amount of P125K was issued
Estoppel, Concept and Elements
to Queensland and sent to Lim received such and he signed the
The essential elements to the doctrine of estoppel are the
Customer’s Agreement which provides as follows:
following enumerated:
Upon signing of this Agreement, I shall deposit an initial margin either by 1. Conduct of a party amounting to false representation
personal check, manager’s check or cash. In the case of the first, I shall not or concealment of material facts or at least calculated
be permitted to trade until the check has been cleared by my bank and to convey the impression that the facts are otherwise
credited to your account. In respect of margin calls or additional deposits
required, I shall likewise pay them either by personal check, manager’s check
than, and inconsistent with, those which the party
or cash. In the event my personal check is dishonored, the company has the subsequently attempts to assert;
right without call or notice to settle/close my trading account against which 2. Intent, or at least expectation, that his conduct shall
the deposit was made. In such event, any loss of whatever nature shall be
be acted upon by, or at least influence, the other party;
borne by me and I shall settle such loss upon demand together with interest
and reasonable cost of collection. However, in the event such liquidation gives 3. Knowledge, actual or constructive, of the real facts.
rise to a profit then such amount shall be credited to the Company. The above
notwithstanding, I am not relieved of any legal responsibility as a result of my IN THE CASE: It is uncontested that Lim singed the Customer’s
check being dishonored by my bank
Agreement knowing fully well the nature of the contract he was
entering into. It was notarized.
Lim was allowed to trade with Queensland through Shia by
virtue of blank order forms all signed by Lim. Queensland
Lim paid his investment deposit to Queensland in the form of a
furnished Lim with daily market report and statements of
manager’s check. All these are indicia that Lim treated the
transactions as evidenced by the receiving forms.
Customer Agreement as valid.
During the first day of trading, Lim made a net profit of P6K,
On Lim’s part there was misrepresentation of acts. He replaced
Shia went to the office and informed Lim about it, Lim was
the manager’s check with an unendorsed traveler’s check,
elated and thus he agreed to continue trading. However, during
instead of cash, while assuring Shia that Queensland can
the second day, they lost P44K.
sing the indorsee portion thereof, and it turned out that
only Lim (as original purchaser) could sign the check.
Meanwhile Queensland learned that it would take 17 days to
clear the manager’s check given by Lim thus upon the request
When the check was returned to him for signature, he refused
of the management, Shia returned the check to petitioner who
to sign, and it was shown that he used the traveler’s check for
informed Shia that Lim would rather replace managers’ check
his travel expenses.
with a travelers checks.
Lim availed himself of the benefits of the Customer Agreement On 1986, Lot 19 was awarded by NHA to Jaime to which he and
which he now impugns. Even before the deposit was converted his wife were issued a Title for such property.
in to cash, he started trading and made a profit of P6K and
continued availing of said agreement, although this time he had On 1992, the petitioners filed an action for Annulment of Title
a floating loss of P44K. While he claimed that he had not on the ground of fraud against Jaime and his spouse before the
authorized respondent to trade on those dates, this claim is RTC, alleging that by the 1972 Kasunduan, Jaime conveyed to
belied by his signature in the order forms. his uncle Salvador Lot 19.
Clearly, by his own acts, petitioner is estopped impugning the RTC found the Kasunduan a perfected contract of sale, there
validity of the Customer’s Agreement. For a party to a contract being a meeting of the minds upon an identified object and
cannot deny the validity thereof after enjoying its benefits upon a specific price, and that ownership was transferred.
without outrage to one’s sense of justice and fairness.
The RTC however, found that the alleged failure of
It appears that the reason for backing out of the agreement is consideration did not render it void but found it a ground for
that he began incurring losses from the trade. However, this specific performance thus finding the plaintiffs co-owners of
alone is insufficient to nullify the contract. Notably in the Lot 19.
Customer’s Agreement, Lim has been forewarned of the high
risk involved in FOREX investment. CA reversed such holding the Kasunduan void for the time of
its execution, the Republic of the Philippines was still the owner
CONTENTION: Lim contends that the Customer’s Agreement is of Lot 19 thus no right was transmitted, because Jaime was only
rendered nugatory because (1) the marginal deposit given was awarded the property only on 1986 and the Kasunduan was
in dollars and; (2) they allowed him to trade even before the executed only in 1972. It also held that the action has
checks had been cleared. prescribed due to the four years has passed.
COURT REPLY: The contentions are hardly meritorious. Lim was Issue
responsible for the issuance of the check, it was he who failed Whether or not the Kasunduan was a valid contract.
to replace such with cash and he even authorized Shia to start
trading before check clearance, therefore he could not, invoke Reconveyance Based on Implied Trust
his own misdeeds to exculpate himself. PETITION DENIED. An action for reconveyance based on implied trust prescribed
in ten years. The ten-year prescriptive period applies only when
HERMOSILLA v. REMOQUILLO (2007) there is an actual need to reconvey the property and when the
513 SCRA 403 plaintiff is not in possession of the property.
Facts: On August 1931, the Republic of the Philippines acquired However, if the plaintiff, as the real owner of the property, also
through purchase the San Pedro Tunasan Homesite. remains in possession of the property, the prescriptive period
Hermosilla, who was occupying a lot in such until his death in to recover the title and possession of the property does not run
1964, caused the subdivision of lot to two, Lot 12 and Lot 19. against him. In such, an action for reconveyance, if filed would
be a suit for quieting the title, an action that is imprescriptible.
In 1962, Apolinario Hermosilla executed a Deed of Assignment
transferring possession of Lot 19 in favor of his grandson, IN THE CASE: It
is undisputed that petitioners’ houses occupy that
respondent Jaime Remoquillo. As the Land Tenure questioned property and the respondents have not been in
Administration later found that Lot 19 was still available for possession thereof.
disposition to qualified applicants, Remoquillo, being its actual
occupant, applied for its acquisition before the LTA on 1963. Since there was no actual need to reconvey the property as
petitioners remained in possession thereof, the action is in a
On 1963, Apolinario converted Lot 12 to his son Salvador nature of quieting the title, it is having been filed to enforce an
Hermosilla, Jaime’s uncle. Salvador later filed an application to alleged implied trust after Jaime refused to segregate title over
purchase Lot 12 which was awarded to him by the defunct Land Lot 19.
Authority on 1971.
One who is in actual possession of a piece of land claiming to
In 1972, Jaime and Salvador forged a Kasunduan ng Paglipat ng be the owner thereof may wait until his possession is disturbed
Karapatan sa Isang Lagay ng Lupang Solar (Kasunduan) or his title is attacked before taking steps to vindicate his right.
whereby Jaime transferred the ownership of Lot 19 in favor of From such, this type of action is imprescriptible.
Salvador.
The Kasunduan was executed in 1972 by Jaime in favor of
After Apolinario’s death, his daughter Angela filed a protest Salvador the Lot 19, which is still owned by the Republic. Nemo
before the Land Authority (now NHA) contending that as an dat quod non habet, Jaime could not have transferred
heir of the deceased she is also entitled to the two lots, but this anything to Salvador via the Kasunduan.
was dismissed by the NHA.
Principles of Estoppel Apply Insofar as they are Labor Arbiter rendered a decision ordering ASI to pay Erlinda
Not in Conflict with Civil Code, Code of Commerce, the amount of P693K and $74K amount to a total of P4.7M.
Rules of Court and Special Laws They filed a notice of appeal with motion to reduce bond. NLRC
CONTENTION: Petitioners posit that at the time the Kasunduan denied the motion to reduce bond and such became final.
was executed by Jaime in 1972, his application was filed in 1963
for the award of Lot 19 was till pending, hence the Kasunduan Issue 1
transferred the vested right to purchase Lot 19 citing the law Whether or not the action of respondents has prescribed.
on estoppel under Article 1434 stating that when a person is not
the owner of a thing, sell or alienates and delivers it and later, Promissory Estoppel, Exception to
the seller or grantor acquires title thereto, such title passes by Article 291 of Labor Code
operation of law to the buyer or grantee. CONTENTION: Petitioners aver that the action of has already
prescribed since the action was filed almost five years from the
COURT REPLY: This contention does not lie, the principles of time Jones severed his employment from ASI. Jones filed his
estoppel apply insofar as they are not in conflict with the Civil resignation on October 31, 1997, while the complaint before
Code, Code of Commerce, Rules of Court and special laws. the LA was instituted on September 29, 2002. Petitioners
contend that the three-year prescriptive period under Article
The Land Authority Administrative Order No. 4 proscribes 291 of the Labor Code had already set-in, thereby barring all of
the conveyance or privilege or preference to purchase a land respondent’s money claims arising from their employer-
from the San Pedro Tunasan Homesite before it is awarded to employee relations.
a tenant or bona fide occupant. Thus, petitioners’ insistence on
any right to the property under the Kasunduan fails. COURT REPLY: This contention is untenable. Based on the
findings, it was ASI which was responsible for the delay in the
The transfer became one in violation of law and therefore void institution of the complaint, when Jones filed he immediately
ab initio. The appellant acquired no right over the lot from asked for payment of his money claims.
some contract void ab initio. Estoppel will not apply for it
cannot be predicated on an illegal act, it is generally However, the management of ASI promised him that he would
considered that as between the parties to a contract, validity be paid immediately after the claims of the rank-and-file
to it cannot be given if its prohibited by law or against employees had been paid. Jones relied on this
public policy. representation, this promise was never fulfilled even until the
death of Jones. Thus, as an exception under Article 291 of the
HELD: The action for reconveyance based on fraud must be Labor Code is the principle of promissory estoppel.
proved by clear and convincing evidence and this burden they
failed to prove. PETITION DENIED. Promissory Estoppel, Concept and Elements
This may arise from the making of a promise, even though
ACCESSORIES SPECIALISTS v. ALABANZA (2008) without consideration, if it was intended that the promise
559 SCRA 550 should be relied upon, as in fact it was relied upon, and if a
refusal to enforce would virtually sanction the perpetration of
Facts: Erlinda Alabanza in behalf of Jones Alabanza filed a fraud or would result in other injustice.
complaint against Accessories Specialists (ASI), Tadahiko
Hashimoto for non-payment of salaries, separation pay and 13th Promissory estoppel presupposes the existence of a promise on
month pay. the part of one against whom estoppel is claimed. The promise
must be plain and unambiguous and sufficiently specific so that
Erlinda alleged that her husband Jones was the Vice President, the court can understand the obligation assumed and enforce
Manager and Director of ASI. Jones rendered outstanding the promise according to its terms.
services however on 1997, Jones was compelled by Hashimoto
to file his involuntary resignation claiming ASI suffered losses To make out a claim of promissory estoppel, a party bears the
due to lack of market and debts. burden of establishing the following elements:
1. That a promise was reasonable expected to induce
At time of his resignation, Joes had unpaid salaries of 18 action or forbearance;
months equivalent to P396K and $38K and he was not paid the 2. Such promise did, in fact, induce such action or
separation pay of 21 years of service worth P462K and $45K, forbearance; and
and 13th month pay. Jones demanded money claims fro ASI but 3. The party suffered detriment as a result.
ASI informed him that they will settle his money claims
thereafter. Jones patiently waited by after several demands, ASI IN THE CASE: All the requisites are present in this case. Jones
failed and Jones died on 2002 failing to receive the same. relied on the promise of ASI that he would be paid as soon as
the claims of all the rank and file employees had been paid. If
On the other hand, ASI contend that Jones had voluntarily not for this promise he had held on to until the time of his
resigned and that cause of action has already prescribed under death, there is no reason for Jones to delay filing the complaint
Article 291 of the Labor Code. before the Labor Arbiter.
Thus, the Court finds ample justification not to follow the Sandiganbayan Proceedings. The Spouses Bombasi
prescriptive period imposed under Article 291 of the Labor (including Visitacion) filed a criminal complaint against the
Code. Great injustice will be committed if we will brush aside respondents for violation of Section 3(e) of RA 3019 (Angeles
the employee’s claims on a mere technicality, especially when and Mayor Comendador died during the pendency of the
it was petitioner’s own action that prevented respondent from criminal case). Sandiganbayan found Comendador and Asilo, Jr.
interposing the claims within the required period. guilty beyond reasonable doubt.
HELD: The propriety of the money award of the Labor Arbiter Asilo on an MR stated the he has no liability for he was just
is already binding upon the SC. PETITION DENIED. following the order of Mayor Comendador and just complied
with such. However, the SB denied this stating that there was
ASILO, JR v. PEOPLE AND BOMBASI (2011) finding of bad faith in the implementation of the commission
645 SCRA 41 of the offense charged. Asilo cannot base a lawful order as
much as the order of demolition was patently illegal.
Facts: Marciana obtained a lease contract with the Municipality
of Nagcarlan whereby allowing her the use and enjoyment of Guilty of Section 3(e) of RA 3019
property of a lot and a store for 20 years from 1978 – 1998, The Supreme Court ruled that the demolition of the plaintiff’s
extendible for another 20 years. It provided that Marciana can store was carried out without a court order and
build a firewall and that in case of the modification of the public notwithstanding the restraining order which the plaintiff was
market, she or her heirs would be given preferential rights. able to obtain. The demolition was attended by evident bad
Upon her death, Visitacion (private respondent) took over the faith as there is nothing in the two resolutions which gave the
store when her mother died in 1984. accused the authority to demolish the store.
In 1986 a fire razed the public market of Nagcarlan. Upon The defense that the store was a public nuisance cannot
Visitacion’s request for inspect the store in fact stood strong. prosper because first and foremost the store was not a nuisance
The store continued to operate under 1993. because the building had not been affected by the 1986 fire.
On September 1993, she received a letter from Mayor A closer look at the Sangguniang Bayan resolution, these do
Comendador directing her to demolish her store within 5 days not justify demolition, what they merely contain the power to
from notice. Attached to the letter were copies of Sangguniang file for an unlawful detainer case in case of resistance to obey
Bayan Resolution and a Memorandum issued by prosecutor. the demolition order or to demolish the building using legal
• Giving power to Mayor Comendador to cause means. Clearly, the demolition was herein without legal order.
demolition of the properties in the lot for a new
municipal public market. Estoppel had Set in By Yearly Grant of Business Permits
• Filing an unlawful detainer to those who cause delay. Furthermore, the Municipality of Nagcarlan, Laguna, as
represented by the then Mayor Comendador, was placed in
Visitacion wrote a reply stating the lease is still valid and estoppel after it granted yearly business permits in favor of the
binding, she will accede to the demolition if she is given the Spouses Bombasi.
same area or if not an unlawful detainer case.
Art. 1431 of the New Civil Code provides that, through estoppel, an
Municipal Administrator Paulino S. Asilo, Jr. (Asilo) also sent a admission or representation is rendered conclusive upon the person
letter to Visitacion informing her of the impending demolition making it and cannot be denied or disproved as against the person
of her store the next day. relying thereon.
Within the same day, Visitacion wrote a reply letter to Asilo, The representation made by the municipality that the Spouses
alleging that there is no legal right to demolish the store in the Bombasi had the right to continuously operate its store
absence of a court order and that the Resolutions did not binds the municipality. It is utterly unjust for the Municipality
sanction the demolition of her store but only the filing of an to receive the benefits of the store operation and later claim the
appropriate unlawful detainer case against her. illegality of the business.
She further replied that if the demolition will take place, The bad faith of the petitioners completes the elements of the
appropriate administrative, criminal and civil actions will be criminal offense of violation of Sec. 3(e) of Republic Act No.
filed against Mayor Comendador, Asilo and all persons who will 3019. The same bad faith serves as the source of the civil liability
take part in the demolition. of Asilo, Angeles, and Mayor Comendador.
However, on October 1993, Comendador relying on the HELD: Due to death of Mayor Comendador, his criminal liablity
strength of the Sangguniang Bayan resolutions authorized the is extinguished. Respondents are hereby declared solidarily
demolition of the store with Asilo, Jr. and Angeles supervising liable to the Spouses Bombasi for temperate damages in the
the work, the estimated cost of the demolished property was amount of ₱200,000.00 and moral damages in the amount of
around P437K. ₱100,000.00.
PRISMA CONSTRUCTION v. MENCHAVEZ (2010) Ruling on the Interest: Applying this provision, we find that the
614 SCRA 590 interest of ₱40,000.00 per month corresponds only to the six
(6)-month period of the loan, or from January 8, 1994 to June
Facts: Pantaleon, the President and Chairman of PRISMA 8, 1994, as agreed upon by the parties in the promissory note.
obtained a P1M loan from respondent Menchavez on a six- Thereafter, the interest on the loan should be at the legal
month loan payable. The petitioners failed to completely pay interest rate of 12% per annum.
the loan within a six-month period.
Doctrine of Estoppel Not Applicable
As of January 4, 1997, the petitioners had already paid a total CONTENTION: Menchavez states that Prisma are estopped from
of P1.1M However, the respondent found that the petitioners disputing the 4% monthly interest rate beyond the six-month
still had an outstanding balance of P1.3M as of January 4, 1997, stipulate period since they agreed to pay this interest under the
to which it applied a 4% monthly interest. Promissory Note and Board Resolution.
Thus, on August 28, 1997, the respondent filed a complaint for COURT REPLY: The court disagrees with this contention. We
sum of money with the RTC to enforce the unpaid balance, plus cannot apply the doctrine of estoppel in the present case since
4% monthly interest, ₱30,000.00 in attorney’s fees, ₱1,000.00 the facts and circumstances, as established by the record,
per court appearance and costs of suit. negate its application.
In their Answer dated October 6, 1998, the petitioners admitted Under the promissory note what petitioners agreed to the
the loan of ₱1,240,000.00, but denied the stipulation on the payment of a specific sum of P40,000 for six months and not
4% monthly interest, arguing that the interest was not a 4% interest rate per month. Thus, no reason exists to place
provided in the promissory note. Pantaleon also denied that the petitioners in estoppel barring them from raising present
he made himself personally liable and that he made defenses against a 4% per month interest.
representations that the loan would be repaid in six months.
The board resolution, on the other hand, simply authorizes
RTC found that the respondent issued a check of P1M in favor Pantaleon to contract for a loan with a monthly interest of not
of petitioners and ordered petitioners to jointly and severally more than 4%. This resolution merely embodies the extent of
pay the respondent the amount of P3.5M plus interest. Pantaleon’s authority to contract and does not create any right
or obligation except as between Pantaleon and the board.
CA found that the parties agreed to a 4% monthly interest Again, no cause exists to place the petitioners in estoppel.
based on the board resolution that authorized Pantaleon to
transact a loan with an approved interest of not more than 4% HELD: The petitioner’s loan of P1M shall bear the interest of
per month of 48% per annum. P40,000 per month for six months and any unpaid portion at
the end of the six-month period shall bear interest of 12% per
Issue annum, amount to be determined thus remanded.
Whether the parties agreed to the 4% monthly interest on the
loan, if so, does the rate of interest apply to the 6-month DIZON v. PHILIPPINE VETERANS BANK (2009)
payment period only or until full payment of the loan? 605 SCRA 441
Interest Rate Must be In Writing Facts: Rogelio Dizon and his wife Corazon were the owners of
In the present case, the Menchavez issued a check for three parcels of land, they mortgaged such lots to Philippine
₱1,000,000.00. In turn, Pantaleon, in his personal capacity and Veterans Bank (PVB) as security for a credit accommodation.
as authorized by the Board, executed the promissory note They failed to pay as such it was foreclosed, and a certificate of
quoted above. Thus, the ₱1,000,000.00 loan shall be payable sale was issued in favor of PVB was awarded.
within six (6) months, or from January 8, 1994 up to June 8,
1994. Sometime in 1986, PVB filed with the RTC for issuance of an
owner’s duplicate certificate of title for the subject lots, it was
During this period, the loan shall earn an interest of ₱40,000.00 dismissed but was dismissed for failure to prosecute. Filed anew
per month, for a total obligation of ₱1,240,000.00 for the six- in 1999, petitioner herein opposed such petition. RTC was
month period. We note that this agreed sum can be directed to issue another owner’s duplicate of TCT in favor of
computed at 4% interest per month, but no such rate of petitioner in replacement of the lost ones.
interest was stipulated in the promissory note; rather a
fixed sum equivalent to this rate was agreed upon. Issue 1
Whether or not the petition filed by bank has prescribed.
Payment of interests is allowed only if:
1. There was an express stipulation for the payment of It is true that, under Article 1142, an action to enforce a right
interest; and arising from a mortgage should be enforced within ten years
2. The agreement for the payment of interest was from the time the right of action accrues other wise it is barred
reduced in writing. by prescription against mortgage creditor.
It is clear that the actions referred to under Article 1142, are HOJAS v. PHILIPPINE AMANAH BANK (2013)
those which necessarily arise from a mortgage. It is clear that 605 SCRA 441
PVB’s petitioner for issuance of an owner’s duplicate of TCT
already rises from PVB as owner of the property and no longer Facts: Spouses Hojas alleged that on 1980 they secured a loan
as a mortgagee as it has already been foreclosed, thus Article from respondent Philippine Amanah Bank (Amanah) in the
1142 no longer applies. amount of P450K that this loan was secured by a mortgage,
covering both personal and real properties and that they made
Issue 2 various payment, but the Amanah Bank did not properly credit
Whether or not the titles, which were delivered by Dizon as their payment only 13 payments were credited and they have
genuine, but were later on altered by bank officials, were the paid already P486K but only credited P317K.
ones presented in the RTC for the petition.
They averred that due to the failure to pay, Amanah Bank filed
These allegations remain unsubstantiated. They are self- for the extrajudicial foreclosure of the mortgaged properties
serving statements which are not supported by any evidence and that during the auction sale, PAB acquired such properties,
whatsoever. It is settled that one who alleges a fact has the subject to redemption period within one-year.
burden of proving it and mere allegation is not evidence. The
established fact remains that petitioner and his wife were the It was alleged that Carpizo, OIC President of Amanah Bank
ones who submitted to PVB the authentic owner's copy of the wrote on March 9, 1988 to the son of spouses Hojas, Roberto
titles over the subject properties and these copies were lost. that the one-year redemption period was extended until
December 31, 1998.
Article 1431 on Estoppel Applies
The Court cannot follow the logic in petitioner's arguments Despite said letter of the President, another officer of the
considering that, in the first place, he and his wife were the ones Amanah Bank wrote to Roberto that the properties were
who submitted the titles to PVB. already auctioned to a certain Ramon Kue on November 1988.
They received from this certain Kue a letter informing them to
Now that PVB seeks to obtain a duplicate copy of the titles vacate their properties which prompted them to file an action.
covering the subject properties which it legally acquired,
petitioner has made a complete turnaround and now assails RTC dismissed complaint finding that Amanah Bank was not
the authenticity of these titles which he and his wife used to guilty of bad faith in conducting the foreclosure, Amanah Bank
obtain their loan. Petitioner is estopped from doing so. became the absolute owner.
Settled is the rule that a person who by his deed or conduct has CA held the period of redemption was never extended and that
induced another to act in a particular manner, is barred from date was merely the last day for the availment of the liberalized
adopting an inconsistent position, attitude or course that payment and was not an extension and that Amanah Bank did
thereby causes loss or injury to the latter. not make an unqualified representation.
IN THE CASE: Dizon may not renege on his own acts and Issue
representations to the prejudice of the respondent bank, which Whether or not Amanah Bank violated the principle of estoppel
has relied on them. when the bank conducted the November 4, 1988 public sale.
Since petitioner entered into a binding contract on his own CONTENTION OF THE HOJAS SPOUSES: November 4, 1988 public sale
volition using the titles which he now assails, he is therefore by PAB was violative of the principle of estoppel because said
estopped from questioning the authenticity of these bank made it appear that the one-year redemption period was
documents which paved the way for the consummation of the extended. As such, when Amanah Bank sold the property
contract from which he derived benefit. before said date, they suffered damages and were greatly
prejudiced. They also argued that since they manifested their
Other than to harass the respondent, the Court is at a loss as to interest in availing of the said "incentive scheme," they should
what petitioner really desires to achieve in opposing the have, at the very least, waited until December 31, 1988, before
respondent bank's petition. it sold the subject foreclosed property in a public auction.
The Court agrees with respondent's observation that CONTENTION OF THE AMANAH BANK: the purpose of the "incentive
petitioner's actuations are demonstrative of his desperate scheme" was to give previous owners the chance to redeem
attempt to cling on to the subject properties despite the fact their properties on easy payment term basis, through
that he has lost them by reason of foreclosure due to his failure condonation of some charges and penalties and allowing
to pay his obligations and his subsequent inability to redeem payment by installment based on their proposals which may be
them during the period allowed by law. acceptable to Amanah Bank. Therefore, the March 9, 1988
Letter of Carpizo was an invitation for petitioners to submit a
HELD: There is no doubt to the identity of the properties, proposal to Amanah Bank. It was not meant to extend the one-
neither are they in dispute. PETITION DENIED. year redemption period.
Redemption Period was Never Extended; No Estoppel During the pendency of the appeal, the parties reached to a
In this case, a perusal of the letter, on which petitioners based Compromise Agreement which states as follows:
their position that the redemption period had been extended,
shows otherwise. Pertinent portions of the said letter read: I. AMOUNT TO BE SETTLED
Our records show that the above account has already been foreclosed by the In consideration of this Compromise Agreement and subject to faithful
bank. However, the borrowers concerned can still exercise the one (1) year compliance by the defendants of the terms hereof, the parties herein have
right of redemption over the foreclosed properties until April 21, 1988. agreed that the total amount of Deficiency Claim and Overdraft payable by
defendants to plaintiff shall be equivalent to PESOS: TWO BILLION NINE
As the Bank has adopted an incentive scheme whereby payments are HUNDRED SEVENTY-FOUR MILLION NINE HUNDRED THREE THOUSAND
liberalized to give chances to former owners to repossess their properties, we (PhP2,974,903.00) (sic) which amount shall be paid by the defendants in the
suggest that you advise your parents to drop by at our Zamboanga Office, so following manner:
they can avail of this rare privilege which shall be good only up to December
31, 1988.
A. A down payment shall be made by the defendants through the DACION of
certain real estate properties more particularly described in Annex "B" hereof.
The date December 31, 1988 refers only to the last day when
the owners of foreclosed properties, like the Hojas spouses, a ii) The parties shall execute separate DEEDS OF
could submit their payment proposals to the bank, the letter was DACION over the real estate properties described in
Annex "B" upon the execution of the Agreement;
very clear it was about the availment of the liberalized payment
scheme of the bank, redemption period was never extended.
a ii) All Capital Gains Tax on the properties for DACION
shall be payable by the defendants but Documentary
The letter of Carpizo was an invitation to the petitioners to Stamp Tax, Transfer Tax and all registration fees on the
come to the bank with their proposal. It appears that the DACION shall for the account of plaintiff.
petitioners could not come up with a proposal acceptable to
the bank. B. The balance remaining after the DACION of the real estate properties shall
be paid by the defendants within a period of ten (10) years but extendible for
another five (5) years provided that the defendants shall religiously comply
And for said reason, the mortgaged property was included in with the amortization schedule (Annex "C" hereof) for a continuous period of
the scheduled public bidding, they petitioners were even two (2) years from date of first amortization.
informed on August 11, 1988 about such, they did however
go to the respondent to explain their case. b i) The foregoing outstanding balance shall be
charged interest at 91-day T-Bill rate upon execution
of this Compromise Agreement repriced every three
Here, there is no estoppel to speak of. The letter does not show (3) months for a period of 10 years and payable
that the Bank had unqualifiedly represented to the Hojas monthly in arrears.
spouses that it had extended the redemption period to
December 31, 1988. Thus, the Hojas spouses have no basis in C. Additional Properties for Execution
positing that the public sale conducted on November 4, 1988
was null and void for having been prematurely conducted. c i) To ensure payment of the monthly amortizations
due under this Compromise Agreement, defendants
Ever Crest Golf Club Resort, Inc., and Mega
HELD: The record is bereft of evidence showing that they were Heights, Inc., have agreed to have its real
ready to pay the redemption price and failed to exercise the properties with improvements covered by TCT
right of redemption and to take advantage of liberalized Nos. T-68963, T-6890, T-68966 and TD ARPN-AA-
1702 00582 and AA-17023-005 shall be subject of
scheme of Amanah bank, the latter is well in its right to sell such.
existing writ of attachment to secure the faithful
payment of the outstanding obligation herein
GO v. BANGKO SENTRAL NG PILIPINAS (2015) mentioned, until such obligation shall have been
762 SCRA 344 fully paid by defendants to plaintiff.
Facts: On February 13, 1998 OCBC declared a bank holiday on c ii) That all the corporate approvals for the
execution of this Compromise agreement by Ever
account of its inability to pay all its obligations to depositors, Crest Golf Club Resort, Inc., and Mega Heights,
creditors and BSP. They filed a petitioner for rehabilitation with Inc., consisting of stockholders resolution and
the monetary board and was placed under receivership and the Board of Directors approval have already been
PDIC was designated as receiver. PDIC took over all the assets, obtained at the time of the execution of this
Agreement.
properties and operations of OCBC.
c iii) Failure on the part of the defendants to fully settle
Respondent Jose C. Go, the principal and biggest stockholder their outstanding obligations and to comply with any
of OCBC with affiliate companies challenge the action of PDIC of the terms of this Compromise Agreement shall
but was dismissed. Receiver PDIC proceeded with the entitle the plaintiff to immediately ask for a Writ
of Execution against all assets of the Ever Crest
liquidation of OCBC. In 1999, OCBC instituted a petition for Golf Club Resort, Inc., and Mega Heights, Inc., now
assistance in the liquidation of OCBC. or hereafter arising upon the signing of this
Compromise Agreement.
Petitioner filed with RTC sum of money against the respondents
seeking to recover deficiency obligation of OCBC of P1B.
I. DISMISSAL OF ALL PENDING CASES They also expressly assured Bangko Sentral in the same
compromise agreement that "all the corporate approvals for the
II. FUNDS UNDER GARNISHMENT execution of this Compromise agreement by Ever Crest Golf Club
Resort, Inc., and Mega Heights, Inc., consisting of stockholders
III. REPRESENTATION AND WARRANTIES resolution and Board of Directors approval have already been obtained
at the time of the execution of this Agreement."
The signatories to this Compromise Agreement represent and pursuant to
Bangko Sentral as follows: They warranted in the compromise agreement that: "Failure on
the part of the defendants to fully settle their outstanding obligations
b. It has obtained the respective Board of Directors approval and other and to comply with any of the terms of this Compromise Agreement
corporate authorizations for its execution, signing and delivery of this shall entitle the plaintiff to immediately ask for a Writ of Execution
Compromise Agreement and its attachments.
against all assets of the Ever Crest Golf Club Resort, Inc., and Mega
Heights, Inc., now or hereafter arising upon the signing of this
c. The execution and delivery of this Compromise agreement and all other Compromise Agreement."
documents and deeds related thereto and the performance and observance
by the parties of the respondent and conditions thereof, shall not contravene
or violate any provision of term of any contract or agreement entered into by By such express commitments, the petitioners and Ever
the parties with any third party, nor contravene any provision or term of its Crest were estopped from claiming that the properties of
Articles of Incorporation and By-Laws.
Ever Crest and Mega Heights could not be the subject of
levy pursuant to the writ of execution issued by the RTC. In
d. It shall defend the title and peaceful possession by Bangko Sentral of the
other words, they could not anymore assail the RTC for
Properties against all claims of third persons, and shall indemnify and hold
Bangko Sentral any and all losses, claims, damages, liabilities and expenses authorizing the enforcement of the judgment on the
which it might suffer or incur as a result of this Compromise Agreement or compromise agreement against the assets of Ever Crest.
any document or agreement entered into in connection therewith.
Here, the petitioners are estopped by deed by virtue of the

e. It shall not execute or enter into any agreement or contract with any third
execution of the compromise agreement. They were the ones
party involving the properties which in any way, diminish, impair, prejudice or
affect the rights, title and interest of Bangko Sentral over the properties who had offered the properties of Ever Crest to Bangko Sentral,
acquired by or vested in Bangko Sentral pursuant to Compromise Agreement and who had also assured that all the legalities and formalities
and all other documents executed between the parties in connection for that purpose had been obtained.
therewith.
They should not now be allowed to escape or to evade their

But despite the approval of the compromise agreement, the
responsibilities under the compromise agreement just to
controversy was not laid to rest when Go did not comply with
prevent the levy on execution of Ever Crest’s properties.
its provisions. This prompted BSP to move execution of the
Compromise Agreement against the properties Mega Heights
And, secondly, the petitioners as well as Ever Crest and Mega
and Ever Crest. CA dismissed the petition for it was moot and
Heights were contractually prohibited from challenging the levy
academic for the public auction for the properties pushed
on the assets of Ever Crest. Through the compromise
through and were sold and bought by BSP.
agreement, the petitioners warranted that they would defend
Bangko Sentral's title and peaceful possession of such
Issue
levied properties against all claims of third persons.
Whether or not CA correctly dismissed the petitioner for being
moot and academic.
Their warranty was expressly made applicable to the properties
subject of the dacion as well as to the properties of Ever Crest
Petitioner’s Contention
and Mega Heights subject of the preliminary attachment.
The petitioners argue that the issuance of the order of
execution was tainted with grave abuse of discretion because
Considering that the petitioners asserted that Ever Crest was a
the execution was directed against the properties of Ever Crest
third party or stranger to the compromise agreement, they
despite Ever Crest being neither a defendant in the cases
were contractually mandated to resist the adverse claim of
between Bangko Sentral and Go, nor a signatory to the
Ever Crest and to defend the validity and efficacy of the levy
compromise agreement.
on execution.
COURT REPLY: The argument is bereft of substance.

As such, they could not validly raise any issue that would defeat
the rights of Bangko Sentral in such properties.
Petitioners are Estopped by Deed
First of all, the petitioners and Ever Crest themselves firmly
HELD: The Court denies the petition for review and that the CA
committed in the compromise agreement, supra, to have their
did not err in dismissing the petition for certiorari because the
properties with their improvements be made subject to the writ
petitioners did not show how the RTC could have been guilty
of attachment in order "to secure the faithful payment of the
of gravely abusing its discretion amounting to lack or excess of
outstanding obligation herein mentioned, until such obligation
jurisdiction for allowing the execution of the properties
shall have been fully paid by defendants to plaintiff.”
designated as security for an obligation contracted since 1998.
CABRERA v. CLARIN (2016) Jurisdiction by Estoppel

810 SCRA 563 CONTENTION: Cabrera alleges that the CA erred in finding the RTC
to have not acquired jurisdiction over the action in the instant
Facts: This petition originated from a complaint for accion case being contrary to the doctrine of estoppel.
publiciana with damages filed by Cabrera against Clarin and
wife Barrios and Serafina and Moreno. COURT REPLY: The court is not persuaded. It is axiomatic that the
nature of an action and the jurisdiction of a tribunal are
Cabrera alleged that he is the lawful and registered owner of a determined by material allegation of the complaint and the law
parcel of land in Bulacan and that he was in actual and physical at the time action was commenced.
possession of the land until he discovered the encroachment by
respondents sometime in December 2005 by means of fraud, A court’s jurisdiction may be raised at any stage of the
strategy and stealth, respondents usurped and occupied proceedings, even on appeal for the same is conferred by
portions of property. law, and lack of it affect the very authority of the court to
take cognizance of and to render judgment on the action.
Respondents claim that complaint failed to state the assessed It applies even if the issue on the jurisdiction was raised for
value of the property which is needed to determine the amount the first time on appeal or even after final judgment.
of docket fees and that Cabrera failed to give a survey plan to
prove the alleged encroachment. Exception: The exception to the basic rule mentioned operates
on the principle of estoppel by laches whereby a party may be
Cabrera anchors his claim of ownership in the certificate of title barred by laches from invoking the lack of jurisdiction at a later
registered in his and his father’s name. However, there was no hour for the purpose of annulling everything done in the case
proof showing the respondents indeed intruded his portion of with the action participation of said party invoking the plea.
the property and that a proof of partition.
Tijam v. Sibonghanoy
RTC denied the respondents motion and stated that the case is In this case the party-surety invoked the jurisdictions of both
the plenary action of accion publiciana which clearly falls within the trial and appellate courts in order to obtain affirmative
the jurisdiction. relief, and even submitted the case for final adjudication on the
merits. It was only after the CA had rendered an adverse
The trial court, declared respondents in default for failing to file decision that the party-surety raised the question of the
their answer and allowed Cabrera to present ex parte. In its jurisdiction for the first time in a motion to dismiss almost
decision, it ruled in favor of Cabrera. fifteen years later. Hence, the Court adjudicated party to be
estopped from assailing the court jurisdiction.
CA reversed the ruling of the RTC and that the accion publiciana
was dismissed for lack of jurisdiction. When Jurisdiction by Estoppel Applies; When It Does Not
In the case of La Naval Drug v. CA discusses that estoppel on
Issue the question of jurisdiction depends whether the lower court
Whether or not estoppel bars respondents from raising the issue actually had jurisdiction or not.
of lack of jurisdiction. • If it had no jurisdiction, but the case was tried and
decided upon the theory that it had jurisdiction, the
Assessed Value of Property a Jurisdictional Element parties are not barred on appeal, from assailing such
BP 129 as amended by RA 7691:Before the amendments, jurisdiction, for the same must exist as a matter of law,
plenary action for accion publiciana may be brought before the and may not be conferred by consent of the parties or
RTC regardless of the value of the property. However, due to by estoppel;
the modifications brought by RA 7691 in 1994, the jurisdiction • However, if the lower court had jurisdiction, and the
of first level courts has been expanded to include jurisdiction case was heard and decided upon a given theory,
over other real actions where assessed value does not exceed such, for instance, as that the court had no jurisdiction,
P20K (P50K in Metro Manila). the party who induced it to adopt such theory will not
be permitted, on appeal, to assume an inconsistent
IN THE CASE: A perusal of the complaint readily shows that position by stating that it actually had jurisdiction.
Cabrera failed to state the assessed value of the disputed land. Here, the principle of estoppel applies.
Nowhere in the complaint was the assessed value of the IN THE CASE:The court rules that the respondents are not
property even mentioned. On its face, there is no showing that estopped from assailing the jurisdiction of the RTC over the
he RTC has jurisdiction exclusive of the MTC. civil case.
Absent any allegation of the assessed value of the property, it Records reveal that even before filing their Answer, respondent
cannot be readily determined which court had original and assailed the jurisdiction of the RTC through a motion to dismiss
exclusive jurisdiction over the case at bar. for the failure of Cabrera to state that assessed value of the
property in the complaint.
This case is not a situation wherein a party who after obtaining In 1999, Trendline, in compliance with the conditions in the
affirmative relief from the court, alter on turned around to letter agreement, advised PSE of the terms and conditions
assailed jurisdiction of the same court that granted such relief imposed upon it for the acquisition of the seat.
by reason of an unfavorable judgment.
• Respondents did not obtain an affirmative relief from In 29 April 1999, PSE through Atty. Almadro, sent a letter to
the trial court whose jurisdiction they are assailing as Trendline advising the latter that the PSE has resolved to accept
their motion was denied and lost the case. the amount of P19M as full settlement of the outstanding
obligations to be paid not later than 13 May 1999.
It bears emphasis that the case of Tijam establishes an
exception to be applied only under extraordinary circumstances Trendline was advised that failure to pay the said amount will
or those cases similar to its factual situation. resolute to the collection in full of the imposable fines/penalties
and enforcement of payment by selling its seat in auction.
The general rule is that the lack of a court’s jurisdiction is a non- Trendline sent PSE and assurance that the Litonjua group will
waivable defense that a party can raise at any stage of the comply to the terms of the Agreement.
proceedings in the case, even on appeal; the doctrine of
estoppel being the exception to the non-waivable defense, In compliance, the Litonjua group delivered to Atty. Almadro of
must be applied with great care and the equity be strong. the PSE three check payments, all dated May 1999 and payable
to PSE totaling to an amount of P19M. This payment was made
HELD: The court fids no error on the part of CA dismissing the in advance payment for acquisition of a seat with the PSE and
complaint for lack of jurisdiction and all proceedings of the RTC as full settlement of the obligations of Trendline. These were
are null and void. A void judgment is because the want of received by PSE and annotated.
jurisdiction and cannot be the source of any right nor the • Despite several exchanges of letters of conformity and
creator of any obligations performed pursuant to it and all delivery of checks, PSE failed to lift the suspension
claims emanating from it have no legal effect. of Trendline’s seat.
• This prompted the Litonjua group to request PSE to
PHILIPPINE STOCK EXCHANGE v. LITONJUA (2016) reimbursement that P19M it paid with interest. PSE
810 SCRA 563 refused, thus the petition.
Ponente: Perez, J. PSE’s Version of the Facts

PSE was a non-stock corporation with 200 members one of
Facts: Litonjua group wrote a letter-agreement to Trendline which was Trendline, which as member owns a trading seat with
through its President Zapanta, confirming previous agreement a right to conduct trading activities in the PSE.
for the acquisition of the 85% majority equity of Trendline’s • During the course of trading activities, Trendline
membership seat in PSE (stock corporation engaged in business violated PSE Rules and failed to pay its cash
of operating a market for buying and selling securities). settlement payables in the amount of P113.7M. As
result, PSE was compelled to assume obligation and
The agreement provided that thus suspended Trendline’s trading privileges.
1. Sale of 85% of equity membership/seat to Litonjua • Zapanta (Trendline) negotiated for an extension
2. With a price of P23M period to settle and was given until March.
3. Terms of payment involve that Litonjua will be willing
to pay the standing obligations of Trendline with PSE Prior to the expiration of the deadline, Trendline and Litonjua
provided that: Group were already negotiating for the purchase for the seat.
a. The P18M is the entire obligation and as full Thus, a letter agreement was issued by the Group providing for
settlement of Trendline to PSE. the terms of acquisition without securing the consent of PSE
b. Upon acceptance of payment and approval for approval. This was approved by Zapanta.
of PSE board, PSE will lift suspension and
allow the Litonjua group to resume normal On May 1999, PSE received three checks of P19M for the full
trading operation of the seat settlement of the obligation, Trendline and not Litonjua was
indicated as payor of the obligation. Upon a follow-up audit,
The letter was conformed to by Zapanta in behalf of Trendline. it was shown that Trendline was not financially liquid to settle
In a letter-confirmation, the Litonjua Group undertook to pay all its outstanding obligation.
the amount of P18M directly to PSE within three working days
upon confirmation that it will be for full settlement of all claims On 2006, PSE was informed that Trendline filed for a petition
and outstanding obligations including interest of Trendline to for corporate rehabilitation before RTC. In reply PSE informed
lift its membership suspension and resumption to normal that 85% of the seat of Trendline was being claimed by the
trading operation. Litonjua group and that it give the names enumerated those
• Further in this letter, Trendline was obligated to secure who have pending claims against trendline worth P19.6M. PSE
approval of the PSE for a new corporation to be received a demand letter from Litonjua group requesting for
incorporation that will own a seat. reimbursement with interest.
Declining such request for reimbursement, PSE stated that the PSE is still Liable to Reimburse by
amount of P19M was received Trendline as a settlement of its Virtue of Unjust Enrichment and Estoppel
own obligation. It insisted that cause of action of the Litonjua CONTENTION: PSE insists that there is no unjust enrichment when
Group but from Trendline as settlement of obligation. It insisted it received the P19,000,000.00 since it has every right to accept
that cause of action is against Trendline not against PSE itself. the amount which was voluntarily and knowingly paid by the
Litonjua Group to discharge Trendline from its obligations to
RTC granted that Litonjua is entitled to claim a refund from the the corporation. Following this premise, it is not obligated to
PSE. The trial court based its decision on the principle of solutio return the money.
indebiti, for the payment was made in mistake for it was under
the belief of payment for the consideration of seat in PSE. CA COURT REPLY: The court against disagrees. Applying law and
affirmed the RTC decision on the basis of unjust enrichment. jurisprudence, the principle of unjust enrichment requires PSE
to return the money it had received at the expense of the
Issue 1 Litonjua Group since it benefited from the use of it without any
Whether or not PSE is considered party to the letter-agreement. valid justification.
Consent of Corporations IN THE CASE: Litonjua Group was led to believe that the payment
CONTENTION OF THE PSE: PSE asserts that it is not a party in the of P19M will be the full settlement of the obligation due to the
letter-agreement due to the absence of any board resolution effect of lifting the suspension of the seat/membership as
authorizing the corporation to be bound by the terms of the apparent to the letter of Atty. Almadro to Trendline stating that
contract between Trendline and the Litonjua Group. In essence, the PSE Committee agreed to accept the amount as full and
it avers that no consent was given to be bound by the terms of final settlement of the obligation of the Trendline, and it turn
the letter-agreement. Trendline assured the payment.
COURT REPLY: The court agrees. In corporations, consent is Upon receipt of the checks, an annotation was indicated by PSE
manifested through a board resolution since powers are that the checks were received as advance payment for full
exercised through its board of directors. As a general rule, in settlement of Trendline's outstanding obligation. PSE became
the absence of authority from the board of directors, no person, an active participant in all transactions between the
not even its officers, can validly bind a corporation. This is so Litonjua Group and Trendline. By accepting Litonjua's
because a corporation is a juridical person, separate and payment, PSE is estopped from claims that Trendline still
distinct from its stockholders and members, having powers, has penalty obligation that settled before transfer of seat.
attributes and properties expressly authorized by law or
incident to its existence. PSE cannot assert to be a non-party to the letter-agreement
and at the same time claim a right to receive the money for
No board resolution was issued to authorize PSE to
IN THE CASE: the satisfaction of the obligation of Trendline.
become a party to the letter-agreement. This fact was
confirmed by PSE Corporate Secretary by judicial affidavit. PSE must not be allowed to contradict itself. A position
must be made. PSE must either consider itself a party to the
She testified that there was no record of any board resolution letter agreement and assume the all rights and obligations
authorizing PSE to bind itself to the said obligations under the flowing from the transaction or disavow its consent
letter agreement or to lift he suspension over Trendline’s PSE derivative from its participation.
seat in accordance with the terms and conditions of the said
letter-agreement. PSE never authorized by the Board to be Since, it is already made clear that it is not a party due to
bound by the letter agreement. Thus, PSE is not considered its lack of consent, it is now estopped from claiming the
as a party to the letter- agreement. right to be paid.
Issue 2 On Award of Exemplary Damages

To whom Litonjua Group should seek reimbursement. PSE, despite demands by the Litonjua Group, continuously
refused to return the money received despite the fact that it
CONTENTION: PSE maintains that the proper recourse of Litonjua received it without any legal right to do so. This conduct, as
Group is to demand reimbursement from Trendline following found by the trial court, falls within the purview of wanton,
the provision of Article 1236. oppressive and malevolent in nature. Further, we find the words
of the appellate court on its justification of the award
COURT REPLY: The court does not agree, Article 1236 does not meritorious.
apply. PSE is not bound to accept the payment of a third person
who has no interest in the fulfillment of the obligation, however, HELD: Petition is denied, and that the decision of CA is affirmed
Litonjua Group is not a disinterest party. Since the inception with modification.
of the meeting, there was a clear understanding that the
Litonjua Group has the intention to settle the outstanding - END OF OBLIGATIONS AND CONTRACTS -
obligation of Trendline in consideration of 85% seat ownership.

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NOTES ON OBLIGATIONS AND CONTRACTS | REGINALD MATT SANTIAGO 2

OBLIGATIONS AND CONTRACTS ARTICLE 1108

ARTICLE 1111 ARTICLE 1115

Public lands become patrimonial property upon express

2. Public ARTICLE 1123

ARTICLE 1121 3. Possessor is absolved from the complaint

ARTICLE 1122 ARTICLE 1125

Natural Interruptions Express or Tacit Recognition

ARTICLE 1127 ARTICLE 1129

ARTICLE 1132 ARTICLE 1137

CHAPTER 3 ARTICLE 1142

Prescription of Actions Mortgage

ARTICLE 1140 ARTICLE 1144

Computation Periods of Action Not Fixed; Five Years

2. Defamation • When the principal obligation is not yet due, payment

ARTICLE 1148 ARTICLE 1152

Action to Compel Accounting

Interruption of Prescription of Action

2. There is a written extrajudicial demand by the

3. There is a written acknowledgment of the debt by the

NOTE: Interruption renews or starts a new period of

OBLIGATIONS AND CONTRACTS With Respect to Object of Prescription

Republic opposed applicating claiming that:

The Spouses Supapo demanded from respondents the No Res Judicata

The Action Has Not Yet Prescribed LAUSA v. QUILATON (2015)

Whether or not the complaint for specific performance was filed

Labor Arbiter: According to the LA, the complaints of these 10

NLRC: Dismissed by prescription. hose to be selective in

CA: Dismissed by petition due to the four-year prescriptive

Whether or not the petitioner’s complaint for illegal dismissal

Article 1146 on Injury on the Rights

Voluntary withdrawal effectively cancelled the tolling of the

The running of the four-year prescriptive period not having

Held: Petitioners have no one but themselves to blame for their

Although the Constitution is committed to the policy of social

OBLIGATIONS AND CONTRACTS 3. Object or Prestation

CHAPTER 1 4. Juridical Tie or Vinculum Juris

3. Moral Obligations ARTICLE 1157

2. Passive Subject Unilateral Promise

ARTICLE 1158 2. Solutio Indebiti

Examples of quasi-contracts and principles: ARTICLE 1163

Limited generic obligation is when the generic object is Kinds of Fruits

6. Traditio by operation of law – consists in the delivery

ARTICLE 1165 ARTICLE 1167

Requisites for Mora Accipiendi

ARTICLE 1172 Elements of Fortuitous Events

ARTICLE 1173 ARTICLE 1175

GENERAL RULE: All rights acquired in virtue of an obligation

LEAÑO v. COURT OF APPEALS (2001)

Facts: On 1985, Fernando as vendor and Leano as vendee,

Robbery Per Se is not a Fortuitous Event

In the case: Petitioners merely presented the police report of

On Diligence. Article 2209 provides that the creditor shall take

In the case: A review of the records clearly shows that

Held: Preponderance of evidence shows that petitioners failed

CHAPTER 3 Resolutory – its happening extinguishes the

SECTION 1. – PURE AND CONDITIONAL OBLIGATIONS

Effect if Period of Fulfillment is Not Fixed

1. When it perishes The power to rescind obligations is implied in reciprocal

soon as the time expires, or if it has become indubitable that

RTC. Noted that failure to furnish the financial document and

• Obligation for Mutual Restitution