Civil-Law-Reviewer-Rabuya (2) - 343-451

BOOK IV.
— OBLIGATIONS AND CONTRACTS
PART 1: OBLIGATIONS
1) Concept
1.1 Basic Concents:
1.1.1 Definition: An obligation is a juridical necessity to
give, to do, or not to do.1 It is also defined as a juridical
relation whereby a person (creditor) may demand
from another (debtor) the observance of a determinate
conduct, and in case of breach, may obtain satisfaction
from the assets of the latter.2
1.1.2 Essential Elements: (1) juridical tie or vinculum juris
- the efficient cause established by the various sources
of obligations (law, contracts, quasi-contracts, delicts,
and quasi-delicts); (2) object - the prestation or the
particular conduct required to be observed by the debtor
(to give, to do, or not to do); (3) active subject (called
the obligee or creditor) - the person who can demand
the fulfillment of the obligation; and (4) passive subject
(called the obligor or debtor) - the person from whom
the obligation is juridically demandable.’
2) Sources of Obligations
2.1 Five Sources:
2.1.1 Five Sources: (1) Law; (2) Contracts; (3) Quasi-
contracts; (4) Acts or omissions punished by law
(Delicts); and (5) Quasi-delicts.4 This enumeration is
exclusive.’
'Art. 1156, NCC.

’Makati Stock Exchange, Inc. v. Campos, 585 SCRA 120 (2009).
’Ang Yu Asuncion v. CA, G.R. No. 109125, Dec. 2, 1994.
’Art. 1157, NCC.
’Makati Stock Exchange, Inc. v. Campos, supra.
332
BOOK IV. — OBLIGATIONS AND CONTRACTS 333
PART I: OBLIGATIONS
2.2 Law:
2.2.1 Must Be Expressly Provided: Obligations derived from
law are not presumed? Hence, only those expressly
determined in the Civil Code or in special laws are
demandable.7 These obligations are regulated: (1) by the
precepts of the law which establishes them; and (2) as to
what has not been foreseen, by the provisions of Bock
IV of the Civil Code?
2.2.2 When Source of Obligation: Law is the source of
obligation when it does not merely limit itself to
enforcing compliance with an obligation originating
from the acts of the parties, but by itself establishes the
obligation, making the act of the party or parties only a
moment, or determining the occasion in order that the
obligation contained in the legal precept may begin to
be demandable.’
2.3 Contracts:
2.3.1 Definition: A contract is defined as "a meeting ofminds
between two persons whereby one binds himself, with
respect to the other, to give something or to render some
service. The definition lays stress on the meeting of
the minds of the contracting parties," for consent is
the essence of a contract.12 It is the element of consent
which distinguishes contracts from the other sources of
obligations.
2.3.2 Obligatory Force of Contracts: Obligations arising from
contracts have the force of law between the contracting
parties and should be complied with in good faith.12 In
contract law, this principle is known as the obligatory
force ofcontracts, which presupposes the existence of a
valid and enforceable contract.
“Art. 1158, 1“ sentence, NCC.

’/</., 2nd sentence.
•id
’8 Munresa, 18-19.
'"Art. 1305, NCC.
"Lustan v. CA, 266 SCR A 663, 670 (1997).
l2Jalandre v. Custodio, 92 Phil. 1063, Unreported.
"Art. 1159, NCC.
334 PRE-BAR REVIEWER IN CIVIL LAW
2.4 Ouasi-contracts:
2.4.1 Definition: It is a juridical relation arising from certain
lawful, voluntary, and unilateral acts with the objective
ofpreventing unjust enrichment or benefit at the expense
of another.'4
2.4.2 Forms of Ouasi-contracts: There are several forms of
quasi-contracts enumerated in the Civil Code," but
the enumeration is not exclusive.'6 The obligation is
not contractual in nature in the absence of the element
of consent, whether express or implied. Neither is the
obligation based on delict or quasi-delict, if the act
which gives rise to it is not unlawful. In those instances
where there is no pre-existing contractual relation, and
there being neither a delict nor a quasi-delict, a juridical
relation known as quasi-contract may arise between the
parties to avoid a case of unjust enrichment."
2.4.3 Nepotiorum Gestio: (a) Definition: It is a juridical
relation which arises when a person voluntarily takes
charge of the agency or management of another’s
abandoned or neglected business or property without
the owner’s authority." (b) Requisites: (1) a person
(called the officious manager or gestor) voluntarily
assumes the management or agency of the business
or property of another;1’ (2) the property must be
neglected or abandoned; otherwise, what results is a
case of unauthorized/unenforceable contract and not
negotiorum gestio;20 (3) there is no authorization from
the owner, whether express or implied; otherwise,
what results is a contract of agency and not negotiation
gestio;21 and (4) the assumption of agency or
management must be done in good faith. If the owner
ratifies the management of the business, the effects of an
"Art. 2142, NCC.

"Arts. 2144-2175, NCC.
"Art. 2143, NCC.
"Report of the Code Commission, p. 60.
"Art. 2144, NCC.
"M.
“Art. 2144(1), NCC.
2lArt. 2144(2), NCC.
PARTI: OBLIGATIONS
express agency shall be produced, even if the business

may not have been successful.22 (c) Obligations of
officious manager: (1) he is obliged to continue with the
agency or management until the termination of the affair
and its incidents and he can only require the owner to
substitute him if the latter is in a position to do so;22 (2)
in the performance of his duties, he is obliged to observe
the diligence of a good father of a family—if the owner
suffers damage by reason of the fault or negligence of
the officious manager, the latter is liable to pay damages
to the former,24 but the courts may, however, increase or
moderate the indemnity according to the circumstances
of each case;25 (3) he is personally liable for contracts
which he has entered into with third persons, insofar as
the latter shall be concerned, even though he acted in
the name of the owner,26 hence, there shall be no right of
action between the owner and such third persons, except
(i) if the owner has ratified the management, either
expressly or tacitly; or (ii) when the contract refers to
things pertaining to the owner of the business;27 (4) if he
delegates to another person all or some of his duties, he
is liable for the acts of the delegate, without prejudice
to the direct obligation of the delegate to the owner;21
(5) the obligation of two or more officious managers
is solidary, unless when the management was assumed
to save the thing or business from imminent danger, in
which case, their obligation is merely joint;2’ and (6) he
is not, as a rule, liable for any loss or damage to the
property or business by reason of fortuitous event. But
in the following situations, he is liable for any fortuitous
event if he: (i) undertakes risky operations which the
owner was not accustomed to embark upon; (ii) prefers
his own interest to that of the owner; (iii) fails to return
the property or business after demand by the owner; (iv)
-’■’Art. 2149, NCC.

21 Art. 2144, NCC.
“Art. 2145, NCC.
’’/</.
“Art. 2152, NCC.
27M.
“Art. 2146. 1“ par., NCC.
2’M.
assumes the management in bad faith;30 (v) is manifestly

unfit to carry on the management, except when the same
was assumed to save the property or business from
imminent danger; and (vi) prevents, by his intervention, a
more competent person from taking up the management,
except when the same was assumed to save the property
or business from imminent danger.31 (d) Obligations of
owner: The owner is liable to the officious manager for
the following: (1) obligations incurred in his interest;
(2) necessary and useful expenses; and (3) damages
suffered by the officious manager in the performance
of his duties, in the following situations: (i) if the owner
enjoys the advantages of the officious management;32
(ii) if the management had for its purpose the prevention
of an imminent and manifest loss, although no benefit
may have been derived;33 or (iii) even if he did not
derive any benefit and there has been no imminent and
manifest danger to the property and business provided
that the officious manager has acted in good faith and
the property or business is intact, ready to be returned to
the owner.32
2.4.4 Solutio Indehiti: (a) Definition: It is a juridical relation
which arises when something is received when there is
no right to demand it, and it was unduly delivered thru
mistake." (b) Requisites: (1) payment is made when
there exists no binding relation between the payor, who
has no duty to pay, and the person who received the
payment; and (2) payment is made thru mistake, and
not thru liberality or some other cause." (c) Similarities
with action in rem verso: (1) the plaintiff suffers a loss;
(2) the defendant is correspondingly enriched; (3) the
enrichment of the defendant is unjustified because the
delivery or payment to him is without legal or just cause;
(4) the defendant has the obligation to return what was
"Art. 2147, NCC.

"Art. 2148, NCC.
32Art. 2150, l“par„ NCC.
"Art. 2150,2nd par., NCC.
"Art. 2151, NCC.
"Art. 2154, NCC.
"Power Commercial & Industrial Corp. v. CA, 274 SCRA 597.
/
PART I: OBLIGATIONS
unduly delivered to him; and (5) the objective is to

prevent unjust enrichment, (d) Distinctions between
solutio indebiti and in rem verso: (1) the source of
obligation in solutio indebiti is quasi-contract; while in
in rem verso, it is law; (2) in solutio indebiti, the undue
payment is by reason of mistake of fact or mistake in a
doubtful or difficult provision of law; while in in rem
verso, the undue payment need not be by reason of
mistake, or if there was mistake, it was a mistake of
law that is not doubtful nor difficult, (e) Obligations in
solutio indebiti: (1) the recipient has the obligation to
return what has been unduly delivered;37 (2) if he acted
in bad faith, he is also liable: (i) to pay legal interest, if
a sum of money is involved; (ii) to return the fruits he
received or those which should have been received, if
the thing produces fruits;3’ (iii) to answer for any loss
or impairment of the thing from any cause, until it is
recovered; and (iv) to pay damages to the person who
delivered the thing, until it is recovered;3’ (3) if there are
two or more payees, their responsibility is solidary."
2.4.5 Other Forms ofOuasi-Contracts: (a) Support and funeral
expenses: (1) if support was given by a stranger, without
the knowledge of the person obliged to give support,
the former has the right to claim reimbursement from
the latter unless he gave it out of piety and without
intention of being repaid;’1 (2) when support is unjustly
refused by the person obliged to give it and a third
person furnished the same when urgently needed, the
latter has the right to demand reimbursement from the
former unless the same was given without the intention
of being reimbursed—also applicable when the father
or mother of a minor unjustly refuses to support or fails
to give support to the child when urgently needed;43
(3) when funeral expenses are borne by a third person,
without the knowledge of the relatives who were
’’Art. 2154, NCC.

’•Art. 2159, 1“ par., NCC.
’’Art. 2159,2"“ par., NCC.
“Art. 2157, NCC.
“Art. 2164, NCC; Art. 206, FC.
“Art. 207, FC; Art. 2166, NCC.
obliged to give support to the deceased, the former may

claim reimbursement from the latter;43 (b) Accident and
calamities: (1) when during a fire, flood, storm, or other
calamity, property is saved from destruction by another
person without the knowledge of the owner, the latter is
bound to pay the former just compensation;44 (2) when
through an accident or other cause a person is injured or
becomes seriously ill, and he is treated or helped while
he is not in a condition to give consent to a contract, he
shall be liable for the services of the physician or other
person aiding him, unless the service has been rendered
out of pure generosity;45 (3) when in a small community
a majority of the inhabitants of age decide upon a
measure for protection against lawlessness, fire, flood,
storm, or other calamity, anyone who objects to the plan
and refuses to contribute to the expenses but is benefited
by the project as executed shall be liable to pay his
share of said expenses;46 (c) Other situations: (1) a third
person who pays the debtor’s indebtedness without the
latter’s knowledge is entitled to demand reimbursement
but only up to the extent that the payment has benefited
the debtor;47 (2) any person who is constrained to pay
the taxes of another shall be entitled to reimbursement
from the latter;48 and (3) when the government, upon the
failure of any person to comply with health or safety
regulations concerning property, undertakes to do the
necessary work, even over his objection, he shall be
liable to pay the expenses.4’
2.5 Delicts:
2.5.1 Basis of Civil Liability Ex Delicto'. Criminal liability
will give rise to civil liability only if the same felonious
act or omission results in damage or injury to another
and is the direct and proximate cause thereof. Damage
“Art. 2165, NCC.

“Art. 2168, NCC.
45Art. 2167, NCC.
“Art. 2174, NCC.
“Art. 2136, NCC; Art. 2173, NCC.
“Art. 2175, NCC.
"Art. 2169, NCC.
PARTI: OBLIGATIONS
or injury to another is evidently the foundation of the

civil action.50
2.5.2 Effect of Acquittal: (a) If accused is declared not
author of act or omission complained of: There is
no civil liability ex delicto.*' This is the situation
contemplated in Rule 111 of the Rules of Court, which
says that the civil action based on delict shall be deemed
extinguished if there is a finding in a final judgment in
the criminal action that the act or omission from which
the civil liability may arise did not exist.” (b) If based on
reasonable doubt: He is not exempt from civil liability
based on delict which may be proved by preponderance
of evidence only. This is the situation contemplated in
Article 29 of the Civil Code, where the civil action for
damages is "for the same act or omission. ””
2.5.3 Effect of Death Pending Appeal of Judgment of
Conviction: Both the criminal liability and the civil
liability (arising from the crime) are extinguished.
However, the civil liability based on other sources of
obligations (other than the delict) is not extinguished but
may be recovered only by filing a separate civil action.
The statute of limitations on the civil liability (based on
other sources than delict) is deemed interrupted during
the pendency of the criminal case.54
2.6 Ouasi-delicts:
2.6.1 Requisites for Recovery: To sustain a claim based on
quasi-delict, the following requisites must concur: (1)
damage suffered by the plaintiff; (2) fault or negligence
of the defendant; and (3) connection of cause and effect
between the fault or negligence of defendant and the
damage incurred by the plaintiff.55
’“Banal v. Tadeo, Jr.. 156 SCR A 325.

’'Mananlan V. CA, 350 SCRA 387.
”Sec. 2(b), Rule 111, 2000 Rules of Criminal Procedure.
’’Manantan v. CA, 350 SCRA 387.
^People v. Bayoias, 236 SCRA 239; Villegas v. CA, G.R. No. 82562, April 11, 1997;
People v. Abungan, G.R. No. 136843, Sep. 28, 2000; Go v. Looyuko, 537 SCRA 445; People v.
Ayocbok, 629 SCRA 324 (2010).
55Dy Teban Trading, Inc. v. Ching, 543 SCRA 560; BPI v. Lifetime Marketing Corp., 555
SCRA 373; Corinthian Gardens Association, Inc. v.Tanjangco, 556 SCRA 154; NgoSin Singv. Li
Seng Giap & Sons, Inc., 572 SCRA 625.
2.6.2 Distinguished from Delict: (1) crimes affect the public

interest, while quasi-delicts are only of private concern;
(2) the Penal Code punishes or corrects the criminal
act, while the Civil Code, by means of indemnification,
merely repairs the damage; and (3) delicts are not as
broad as quasi-delicts, because the former are punished
only if there is a penal law clearly covering them, while
the latter, quasi-delicts, include all acts in which any
kind of fault or negligence intervenes.5'1
2.6.3 Scope of Quasi-delicts: (a) Covers acts or omissions
criminal in character: Article 2176 of the Civil Code,
where it refers to “fault or negligence, ” covers not only
acts “not punishable by law" but also acts criminal
in character, whether intentional and voluntary or
negligent.57 Hence, the same intentional, voluntary,
or negligent act causing damages and punished by
law may produce two kinds of civil liability: (1) civil
liability arising from the crime under Article 100 of the
Revised Penal Code (RPC); or (2) civil liability arising
from quasi-delict under Article 2176 of the Civil Code.51
(b) But double recovery not allowed: The Civil Code
expressly prohibits the plaintiff from recovering damages
twice under delict and quasi-delict “for the same act or
omission” of the defendant.5’ (c) Effect of nre-exisline
contractual relations: As a rule, the pre-existing contract
between the parties may bar the applicability of the law
on quasi-delict.60 However, by way of exception, the
existence of a contract between the parties does not bar
the commission of a tort (quasi-delict) by one against
the other and the consequent recovery of damages
therefor, when the act that breaks the contract is also a
tort.61 (d) Culpa contractual distinguished from culpa
’‘Garcia v. Barredo, 73 Phil. 60; Diana v. Balangas Transportation Co., 93 Phil. 392.
’’Safeguard Security Agency, Inc. V. Tangco, 511 SCRA 67; I-.lcano v. Hill, 77 SCRA 89;
Garcia v. Barredo, supra.
5*ld.
59Art. 2177, NCC.
“Coca-Cola Bottlers Philippines, Inc. v. CA, G.R. No. 110295, October 18, 1993.
61 Air France v. Carrascoso, 18 SCRA 155 (1966); Singson v. BPI, 23 SCRA 1117 (1968);
also in Light Rail Transit Authority v. Navidad, 397 SCRA 75 (2003); YHT Realty Corp. v. CA,
451 SCRA 638 (2005); and Schmitz Transport & Brokerage Corp. v. Transport Venture. Inc., 456
SCRA 557 (2005).
PART 1: OBLIGATIONS
extra contractual (culna aauiliana); (1) in the first, the

source of obligation is contract; while in the second, the
source of obligation is quasi-delict; (2) in the first, the
negligence is merely incidental to the performance of
an already existing obligation (arising from contracts)
and that the vinculum juris exists independently of
the negligence; while in the second, the negligence is
substantive and independent in that it is the negligence
itself which creates the vinculum; and (3) in the first,
proof of the contract and of its non-performance is
sufficient prima facie to warrant recovery, hence, it
is not necessary to prove the negligence; while in the
second, the burden of proof rests upon the plaintiff to
prove the negligence and failure to do so shall result in
the dismissal of the action.
3) Kinds of Obligations: Civil and Natural

3.1 Classification of Obligations Based on Juridical Quality/
Efficaciousness:
3.1.1 Civil Obligation: One which gives a right of action
to compel its performance.62 In other words, a civil
obligation is one which provides for a legal sanction in
case of its breach.
3.1.2 Natural Obligation: One which does not grant a right
of action to enforce its performance, but after voluntary
fulfillment by the debtor, it authorizes the retention of
what has been delivered or rendered by reason thereof.63
In other words, this kind of obligation does not provide
for a legal sanction in case of non-performance.
3.2 Legal Consequences of Natural Obligations:
3.2.1 Effect of Voluntary Fulfillment: While it does not grant
a right of action to enforce its performance, a natural
obligation grants the creditor the right to retain what has
been delivered by reason thereof after the same has been
voluntarily fulfilled by the debtor.63
“Art. 1423, NCC.

“M.
“Art. 1423, NCC.
3.2.2 May Be Converted Into Civil Obligation: A natural

obligation may again be converted into a civil obligation,
either by reason of novation or when it has been made
the subject matter of a contract of guaranty, pledge, or
mortgage.65 In novation, its first requisite is that there
must be a valid previous obligation. The first requisite
does not require that the obligation be a civil one
because even a natural obligation can be novated. The
Court held that a prescribed debt is a natural obligation
which can be the subject matter of novation.66
3.2.3 Cannot Be Subject Matter of Legal Compensation:
Since legal compensation requires that both obligations
be demandable,67 a natural obligation cannot be the
subject matter of legal compensation because it is not
legally demandable.
3.3 Important Examples of Natural Obligations:
3.3.1 When Right to Sue Has Prescribed: When the right to
sue upon a civil obligation has lapsed by extinctive
prescription (or barred by statute of limitations), the
obligation is converted into a natural obligation.66 In
relation thereto, when without the knowledge or against
the will of the debtor, a third person pays a debt which
the obligor is not legally bound to pay because the
action thereon has prescribed, the latter may not demand
reimbursement from the former because such payment
has not been beneficial to the debtor.69 The obligation
of the debtor to the third-party payor is not civil, but
a natural one. Hence, if the debtor later voluntarily
reimburses the third person, he cannot recover what he
has paid.™
3.3.2 No Agreement in Writing for Payment of Monetary
Interest: The debtor may not be compelled to pay
monetary interest on a loan unless the same has been
“Ans. 2052, par. 2 and 2086, NCC.

“Villaroel v. Estrada, 71 Phil. 140 (1940).
67Art. 1279(4), NCC.
“Art. 1424, NCC.
"Art. 1236,2“ par., NCC.
’“Art. 1425, NCC.
PARTI: OBLIGATIONS
expressly stipulated in writing.71 However, if the

borrower voluntarily pays the monetary interest in
the absence of stipulation therefor, he cannot recover
the same because such voluntary payment is a case of
natural obligation.72 But if the payment of the interest
was by reason of mistake, the debtor may still recover it
pursuant to solutio indebiti.n
3.3.3 When Action Has Failed: When, after an action to
enforce a civil obligation has failed, the defendant
voluntarily performs the obligation, he cannot demand
the return of what he has delivered or the payment of the
value of the service he has rendered.74
3.3.4 When There is No Legal Obligation To Pay in
Succession Bv Will: The rule is that an heir is not liable
beyond the value of the property he received from the
decedent.75 But when he voluntarily pays a debt of the
decedent exceeding the value of the property which
he received by will or by the law of intestacy from the
estate of the deceased, the payment is valid and cannot
be rescinded by the payor.7'1 In the same way, when a
will is declared void because it has not been executed
in accordance with the formalities required by law, the
estate shall pass to the legal or intestate heirs by the law
of intestacy. But if one of the intestate heirs, after the
settlement of the debts of the deceased, pays a legacy
in compliance with a clause in the defective will, the
payment is effective and irrevocable.77
4) Kinds of Obligations: Real and Personal

4.1 Classifications of Obligations Based on Prestation:
4.1.1 Kinds of Obligations: (a) Real Obligation - One which
involves an obligation to give or to deliver; (b) Personal
Obligation - One which involves an obligation to do or
not to do.
71 Art. 1956, NCC.

77Art. 1960, NCC.
”W.
74Art. 1428, NCC.
7!Art. 1311, 1" par., NCC.
"Art. 1429, NCC.
77Art. 1430, NCC.
4.1.2 Two Kinds of Real Obligations: (1) Determinate

or Specific Obligation - One which involves an
obligation to deliver a determinate or specific thing;
(2) Indeterminate or Generic Obligation - One which
involves the obligation to deliver an indeterminate or
generic thing. A thing is considered determinate or
specific when it has been particularly designated or
physically segregated from all others of the same class
or species.’8 A thing is generic if it has been designated
merely by its class or genus.
4.1.3 Two Kinds of Personal Obligations: (1) Positive
Personal Obligation - One which involves an obligation
to do; (2) Negative Personal Obligation - One which
involves an obligation not to do.
4.2 Legal Consequences of Determinate Obligations:
4.2.1 As to Performance: 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.”
4.2.2 Three Accessory Obligations: In every determinate
obligation, there are three accessory obligations, in
addition to the obligation to deliver the specific thing
due: (1) to preserve the thing to be delivered with the
proper diligence of a good father of a family, unless
the law or the stipulation of the parties requires another
standard of care;8" (2) to deliver also all the accessions
and accessories, even though they may not have been
mentioned;81 and (3) to deliver also the fruits if the
creditor is already entitled to the same. The creditor
acquires a right to demand for the delivery of the fruits
of the determinate thing due from the time the obligation
to deliver the determinate thing arises."2 In obligations
to deliver a determinate thing by reason of contract, the
obligation to deliver the principal thing arises at the
time of perfection of the contract, unless the obligation
’’Art. 1460, l“par.,NCC.

’’Art. 1244, par. l.NCC.
“Art. 1I63.NCC.
"Art. 1166.NCC.
ald.
PART 1: OBLIGATIONS
is subject to a suspensive condition, in which case, the

obligation arises only upon the happening of the said
condition.81
4.2.3 Remedies in Case of Breach: The creditor can compel
the debtor to deliver the determinate thing due in an
action for specific performance, with a right to recover
damages.84
4.2.4 Susceptibility to Extinguishment by Wav of Loss: A
determinate obligation can be extinguished by reason of
loss if: (1) the loss is without the debtor’s fault; and (2)
it was lost before he has incurred in delay.”
4.3 Legal Consequences of Generic Obligations:
4.3.1 As to Performance: When the obligation consists in the
delivery of an indeterminate or generic thing, whose
quality and circumstances have not been stated, the
creditor cannot demand a thing of superior quality.
Neither can the debtor deliver a thing of inferior
quality.86
4.3.2 Remedies in Case of Breach: The creditor can either: (I)
ask another person to comply with the obligation at the
expense of the debtor;87 or (2) compel the debtor himself
to make the delivery, plus damages in either case.88
4.3.3 Not Susceptible to Extinguishment by Wav of Loss: A
generic obligation is not susceptible to extinguishment
by reason of loss84 because the genus of a thing never
perishes (genus- nunquam peril).
4.4 Legal Consequences of Positive and Negative Personal
Obligations:
4.4.1 Remedies in Case of Breach of Obligation to Do: (a)
When considered breach: Not only in case of non
performance but also when the performance is either
"'Art. 1181, NCC.

“Art. 1165, par. I, NCC.
"’Art. 1262, par. I. NCC.
“Art. 1246, NCC.
87Art. 1165, par. 2, NCC.
“Art. 1170, NCC.
“Art. 1263, NCC.
poor or in contravention of the tenor of the obligation;”

(b) Remedies: In case of non-performance, the remedy
is to ask another person to execute the act at the cost of
the debtor, plus damages;’1 however, if the obligation is
personal only to the debtor, the only remedy is to recover
damages. The debtor may not be compelled to execute
the act against his will because the same is tantamount
to involuntary servitude, which is prohibited by the
Constitution.92 If the obligation to do was done poorly
or in contravention of the tenor of the obligation, there
is an additional remedy of demanding for the undoing of
what has been done at the expense of the debtor.”
4.4.2 Remedies in Case of Breach of Obligation Not To
Do: (a) When considered breach: If the obligor does
what he is forbidden to do. (b) Remedies: To demand
for the undoing of what has been done at the expense
of the obligor,94 in addition to the creditor’s right to
recover damages.” If it becomes physically or legally
impossible to exercise the right to demand the undoing
of what has been done, the remedy of the creditor is
simply to recover damages from the debtor.
5) Breach of Obligations
5.1 Causes of Non-Performance of Obligations:
5.1.1 Involuntary Cause: A cause which is without the debtor’s
fault, or independent of his will, such as fortuitous event
orforce majeure, or fault of someone else.
5.1.2 Voluntary Cause: Causes which are due to the debtor’s
fault, or by reason of his will, such as (I) mora or delay;
(2) Mo or fraud; (3) culpa or negligence; and (4)
contravention of the tenor of the obligation.
■"Art. 1167.NCC.
’'Art. 1167, par. l.NCC.
’’Sec. 18(2), Article III, 1987 Philippine Constitution.
’’Art. 1167, par. 2, NCC.
'"Art. 1168, NCC.
’’Art. 1170, NCC.
PART I: OBLIGATIONS
5.2 Mora or Delay:

5.2.1 Kinds of Delay: (a) mora solvendi - delay on the part
of the debtor; (b) mora accipiendi - delay on the part of
the creditor; and (c) compensation morae - delay on the
part of both parties because neither has completed their
part in their reciprocal obligation.14
5.2.2 Mora Solvendi: (a) Requisites: (1) the obligation be
demandable and already liquidated; (2; the debtor
delays performance; and (3) the creditor requires the
performance judicially or extrajudicially?" Once the
creditor makes a demand, whether judicial or extra-
judicial, the debtor incurs mora or delay.1' Hence, absent
any demand from the obligee, the obligor does not incur
delay.” (b) Exceptions to requirement of demand: (I)
when the obligation expressly so declares; (2) when
the law expressly so declares; (3) when from the nature
and the circumstances of the obligation it appears that
time was the controlling motive for the establishment
of the contract; or (4) when demand would be useless,
as when the obligor has rendered it beyond his power
to perform.100 (c) Effects of mora solvendi: (1) the
debtor becomes liable for damages,101 referred to as
“compensatory interests"; (2) the debtor remains liable
if the thing was lost after he has incurred in delay even if
the loss was without his fault102 or by reason of fortuitous
event;101 and (3) the prescriptive period within which the
obligee may bring an action against the obligor does not
commence to run until a demand is made.10*
’“Cortes V. CA. G.R. No. 126083, July 12,2006.

’'Social Security System v. Moonwalk Development and Housing Corp., 221 SCRA 119;
Selegnu Management and Development Corp. v. UCPB, supra: I’antaleon v. American Express
International, Inc., G.R. No. 174269, May 8,2009.
’“Art. 1169, NCC; Titan-Ikeda Construction and Development Corp. v. Primetown Property
Group, Inc., G.R. No. 158768, Feb. 12, 2008.
'"Solid I lomes, Inc. v. CA, 465 SCRA 137.
""Art. 1169, 2nd par., NCC.
101 Art. 1170, NCC.
102Art. 1262, 1“ par., NCC.
103Art. 1165, last par., NCC.
'“Solid Homes, Inc. v. CA, 465 SCRA 137.
5.2.3 Requisites of Mora Accioiendi-. (1) An offer of

performance by the debtor who has the required capacity;
(2) the offer must be to comply with the prestation as it
should be performed; and (3) the creditor refuses the
performance without just cause.105
5.2.4 Delay in Reciprocal Obligations: (a) Concept of
reciprocal obligations: Reciprocal obligations are those
which arise from the same cause, and which each party
is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of
the other.106 They are to be performed simultaneously,
so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.107 (b) When delay
exists: The mutual inaction of the parties gives rise
to compensation morae.m In other words, if both did
not perform, the delay of one is cancelled out by the
delay of the other. Hence, there is no delay. But from
the moment one of the parties fulfills his obligation,
delay by the other begins,109 without the necessity of
a demand.110 But demand is necessary when different
dates for performance are fixed for the obligations.1"
5.3 Polo (Fraud) and Culpa (Negligence):
5.3.1 Polo (fraud): (a) Concent: It is the deliberate and
intentional evasion of the normal fulfillment of
obligations, (b) Prohibited Waiver: Any waiver of an
action for future fraud is void."2
5.3.2 Negligence (culna contractual)’. (a) Concent: It is the
fault or negligence incident in the performance of an
obligation which already existed, and which increases
the liability from such already existing obligation, (b)
Prohibited waiver: When negligence shows bad faith it
mId.
'“Cortes v. CA, G.R. No. 126083, July 12, 2006.
mId.
mld.
109 Art. 1169, last par., NCC.
""Solar Harvest, Inc. v. Davao Corrugated Carton Corp., G.R. No. 176868, July 26, 2010.
"'Id.
112Art. 1171, NCC.
PART I: OBLIGATIONS
is tantamount to fraud. Hence, any waiver of an action

for future negligence showing bad faith is also void."’
5.4 Fortuitous Event (Caso FortuitoY.
5.4.1 Definition: Fortuitous events by definition are
extraordinary events not foreseeable or avoidable. It is,
therefore, not enough that the event should not have been
foreseen or anticipated, but it must be one impossible to
foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same."4
It may either be an act of God, or natural occurrences
such as floods or typhoons (known as “fortuitous event
proper”), or an act of man (force majeure) such as riots,
strikes, or wars."5
5.4.2 Effect and Requisites: The rule is that no person shall be
responsible for a fortuitous event."6 Hence, the obligor,
as a rule, is not liable for any loss or deterioration caused
by a fortuitous event. However, to exempt the obligor
from liability for a breach of an obligation by reason
of a fortuitous event, the following requisites must
concur: (1) the cause of the breach of the obligation
must be independent of the will of the debtor; (2) the
event must be either unforeseeable or unavoidable; (3)
the event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner;
and (4) the debtor must be free from any participation
in, or aggravation of, the injury to the creditor."’ If the
negligence or fault of the obligor coincided with the
occurrence of the fortuitous event, and caused the loss
or damage or the aggravation thereof, the fortuitous
event cannot shield the obligor from liability for his
negligence."6 In other words, the whole occurrence is
humanized and removed from the rules applicable to a
fortuitous event."’
"’Art. 1173, in relation to Art. 1171, NCC.

"’Sicain v. Jorge, 529 SCRA 443, citing Republic v. Luzon Stevedoring Corp., 21 SCRA
279.
"’Asset Privatization Trust v. TJ. Enterprises, G.R. No. 167195, May 8,2009.
"‘Art. 1174, NCC.
"’Mondragon Leisure and Resorts Corp. v. CA, 460 SCRA 279.
"‘College Assurance Plan v. Belfranlt Development, Inc., 538 SCRA 27.
"’Asset Privatization Trust v. TJ. Enterprises, supra; Sicam v. Jorge, supra.
5.4.3 Exceptions to Fortuitous Event: The obligor remains

liable for a breach of an obligation by reason of a
fortuitous event in the following instances: (1) when
the law expressly so specifies; (2) when it is otherwise
declared by the parties; and (3) when the nature of the
obligation requires the assumption of risks.120
6) Kinds of Obligations: Pure, Conditional, and With a Term

6.1 Classification of Obligations Based on Absence/Presence of
Condition or Term:
6.1.1 Pure Obligation: Obligation is not subject to any
condition or term (period).
6.1.2 Conditional Obligation: One which is subject to a
condition.
6.1.3 Obligation With a Term: An obligation whose effects
are subjected in one way or another to the expiration of
a term.
6.2 Pure Obligation:
6.2.1 Effect: The obligation already exists and it is already
demandable. In other words, the obligation is
immediately demandable.121
6.2.2 Other Obligations which are Immediately Demandable:
(1) obligation subject to a resolutory condition; and (2)
obligation subject to a resolutory term.122
6.3 Conditional Obligation:
6.3.1 Definition: It is an uncertain event which wields an
influence on a legal relation.12' It is also defined as every
future and uncertain event upon which an obligation or
provision is made to depend.124
6.3.2 Kinds of Conditions: (J) Suspensive or Resolutory
- effect is on the existence of the obligation; (2)
Potestative, Casual, or Mixed - effect is on the validity
l2°Art. 1174, NCC.

l2lAn. 1179, par. I, NCC.
,22Arts. 1179, par. 2 and 1193, par. 2, NCC.
I2J8 Manresa 126.
l24Esrichc, Law Dictionary.
PART 1: OBLIGATIONS
of the obligation; (3) Possible and Impossible - effect

is on the validity of the obligation; and (4) Positive
and Negative - effect is on the determination of the
effectivity of the obligation.
6.3.3 Suspensive and Resolutory: (a) Suspensive Condition:
Obligationarisesonlyuponthefulfillmentofthecondition.
If the condition is not fulfilled, the obligation does not
arise.125 During the pendency of the condition, however,
the creditor has the right to take necessary measures to
preserve and protect his inchoate interest.126 (b) Effect
of fulfillment of condition: The effects in an obligation
to give shall retroact to the day of the constitution of
the obligation. However, when the obligation imposes
reciprocal prestations, the fruits and interests are
deemed mutually compensated.127 In obligations to do
and not to do, courts shall determine, in each case, the
retroactive effects.128 (c) Effect of loss, deterioration, or
improvement of determinate thing prior to fulfillment
of condition: (1) If lost without the fault of the debtor,
the obligation is extinguished.12'1 (2) If lost through the
fault of the debtor, the debtor’s obligation is converted
into payment of damages.130 (3) If it deteriorates without
the fault of the debtor, the impairment is borne by the
creditor.131 (4) If it deteriorates through the fault of the
debtor, the creditor may choose between the rescission
of the obligation and its fulfillment, with damages in
either case.132 (5) If it is improved by its nature, or by
time, the improvement shall inure to the benefit of
the creditor.133 If it is improved at the expense of the
debtor, the debtor may remove the improvement if the
l2!Art. 1181. NCC.

'“Art. 1188, NCC.
'“Art. 1187, NCC.
'"Art. 1189(1), NCC.

'“Art. 1189(2), NCC.
“'Art. 1189(3), NCC.
132Art. 1189(4), NCC.
'“Art. 1189(5), NCC.
removal can be done without injuring the thing due.'34

(d) Resolutory Condition: Obligation already exists
but the same is extinguished upon the fulfillment of the
condition.135 Hence, it is immediately demandable.'36
Upon performance of the obligation by the debtor, the
condition becomes a suspensive condition as to him.
(e) Effect of fulfillment of condition: Obligation is
extinguished.137 In obligations to give, the parties shall
return to each other what they have received.'38
6.3.4 Tacit Resolutory Condition in Reciprocal Obligations:
(a) Reciprocal Obligation: Reciprocal obligations are
those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such that
the obligation of one is dependent upon the obligation
of the other. They are to be performed simultaneously
such that the performance of one is conditioned upon
the simultaneous fulfillment of the other.'3’ (b) Tacit
Resolutory Condition: The power to rescind obligations
is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him,140
such that "absent any provision providing for a right
to rescind, the parties may nevertheless rescind the
contract should the other obligor fail to comply with
its obligations. ”14' But the power to rescind must be
invoked judicially.142 (c) Not absolute right: Rescission
will not be permitted for slight or casual breach of the
contract, but only for such breaches as are so substantial
and fundamental as to defeat the object of the parties
in making the agreement.'43 (d) Prescriptive period for
action to rescind based on Article 1191: 10 years from
'34Art. 1189(6), in relation to Art. 579, NCC.

135Art. 1181, NCC.
'“Art. 1179, par. 2, NCC.
,37Art. 1181, NCC.
'“Art. 1190, NCC.
'“Heirs of Antonio Bernabe v. CA, 559 SCRA 53.
'“Art. 1191, par. I,NCC.
l4'Casiflo, Jr. v. CA, 470 SCRA 57.
l420ng v. Bogflalbal, 501 SCRA 490.
l43Song Fo & Company v. Hawaiian-Philippine Co., 47 Phil. 821; Yancza v. CA, 572
SCRA 413.
PART I: OBLIGATIONS
accrual of the right of action, for written contracts144 or

six years, for verbal contracts.145 (e) If both committed
breach: If it can be determined who the first infractor is,
the first infractor is liable for damages but the same shall
be equitably tempered by the courts,146 since the second
infractor also derived or thought he would derive some
advantage by his own act or neglect.147 If it cannot be
determined who the first infractor is, the obligations
are deemed extinguished and each shall bear his own
damages.148
6.3.5 Potestative, Casual, and Mixed Conditions: (a)
Potestative Condition: When the fulfillment of the
condition is exclusively dependent upon the will
of either the debtor or creditor. If the condition is
potestative on the part of the debtor and it is at the same
time suspensive, the obligation becomes void;14’ if it is
at the same time resolutory, the obligation is valid.150 If
the condition is potestative on the part of the creditor
the obligation is valid, (b) Casual Condition: When th<
fulfillment of the condition is entirely dependent upon
chance or upon the will of a third person, in which case
the obligation is valid and will take effect in conformity
with the Civil Code.151 (c) Mixed Condition: When the
fulfillment of the condition is partly dependent upon the
will of either of the parties and partly upon chance or
the will of a third person, in which case the obligation
is valid, (d) Doctrine of Constructive Fulfillment of
Suspensive Condition: When the condition is mixed,
suspensive, partly dependent upon the will of the debtor,
and the latter intentionally prevents the fulfillment of
the condition dependent on him, the entire condition is
l44Art. 1144(1), NCC.

145Art. 1145(1), NCC; Iringan v. CA, 366 SCRA 41; Cannu v. Galang. supra.; Unlad Re
sources Development Corp. v. Dragon, 560 SCRA 63; Heirs of Sofia Quirong v. Development
Bank of the Phil., G.R. No. 173441, Dec. 3, 2009.
146Art. 1192, NCC.
l47Ongv. Bogfialbal, 501 SCRA 409.
14!Art. 1192, NCC.
‘"’Art. 1182, NCC.
‘"Taylor v. Uy Tieng, 43 Phil. 873 (1922).
,s,Id.
deemed constructively fulfilled.152 This is the doctrine

of constructive fulfillment of a suspensive condition,
provided for in Article 1186 of the Civil Code, (e)
Rule on Constructive Fulfillment of Mixed Conditional
Oblieation: When the condition is mixed, suspensive,
partly dependent upon the will of the debtor and partly
dependent upon the will of a third person, and the debtor
did all in his power to comply but the condition is not
fulfilled because of the third person over whom the
debtor has no control, the entire condition is deemed
constructively fulfilled. This is known as the rule
on constructive fulfillment of a mixed conditional
obligation, which is provided for by jurisprudence.'53
6.3.6 Possible and Impossible Conditions: (a) Possible
Condition: When the condition is not contrary to
the law of nature, or not contrary to good customs or
public policy, or not prohibited by law. (b) Impossible
Condition: When the condition is contrary to the law
of nature (physical impossibility), or contrary to good
customs or public policy, or prohibited by law (legal
impossibility), (c) Effect of Impossible Condition: (1)
On obligation: The obligation becomes void.'51 (2) On
simple and remuneratorv donations: The condition is
considered not imposed.'55 Hence, the donation remains
valid. (3) On testamentary dispositions: The condition
is considered not imposed.156 Hence, the testamentary
disposition remains valid.
6.3.7 Positive and Negative Conditions: (a) Positive
Condition: A condition that a certain event will happen
within a specific period has the effect of extinguishing
the obligation dependent upon such condition from the
moment: (1) said period lapses without the condition
having been fulfilled; or (2) when it becomes certain
that the event will not take place, even before said
period expires.'5’ (b) Negative Condition: A condition
'“Art. 1186, NCC.

'“International Hotel Corp. v. Joaquin, Jr., 695 SCRA 382 (2013).
'“Art. 1183,NCC.
'“Art. 727, NCC.
'“Art. 873, NCC.
'“Art. 1184, NCC.
PART 1: OBLIGATIONS
that some event will not happen at a determinate time

has the effect of rendering the obligation effective from
the moment: (1) the period indicated has elapsed; or (2)
if it has become evident that the event cannot occur.'56
6.4 Obligation With a Term:
6.4.1 Definition: A term or period consists of a space of time
which, having an influence on obligations as a result of
a juridical act, and either suspends their demandability
or produces their extinguishment.1” It may also refer
to a future event, the happening of which is certain. If
the happening of the future event is uncertain, it is a
condition; if the happening of the future event is certain,
it is a term.
6.4.2 Kinds of Terms: (a) Suspensive and Resolutory: (1)
Suspensive Term: One that must lapse before the
performance of the obligation can be demanded.160
Before the arrival of the period, the obligation already
exists but is not yet demandable. A suspensive condition
affects the very existence of the obligation, such that
if the condition is not fulfilled, the obligation does
not arise. But a suspensive term does not affect the
existence of the obligation but only its demandability.
(2) Resolutory Term: The period after which the
obligation is terminated. The obligation is valid up
to a certain date. Upon the arrival of said date, the
obligation is terminated.'61 A resolutory condition,
upon its happening, results in the extinguishment of
the obligation,163 as though it had not existed. On the
other hand, a resolutory term, upon the arrival of the
day certain, simply results in the termination of the
obligation161 without annulling the fact of its existence,
(b) Definite and Indefinite: (1) Definite Term: Refers to
a known date or time. (2) Indefinite Term: Refers to an
"“Art. 1185, NCC.

'”8 Manresa 158; Lirag Textile Mills v. CA, 63 SCRA 374,375.
'“Art. 1193, par. 1, NCC.
161 Art. 1193, par. 2, NCC.
163 Art. 1181, NCC.
161 Art. 1193, par. 2, NCC.
event which will necessarily happen but the date of its

happening is unknown, such as the death ofa person.164 If
the uncertainty consists in whether the day will come or
not, the obligation is conditional.165 (c) Legal, Voluntary,
and Judicial: (1) Legal Term: It is the period granted by
law. (2) Voluntary Term: It is the period stipulated by
the parties. (3) Judicial Term: It is the period allowed by
the courts.
6.4.3 Benefit of Term: (a) Rule: Whenever in an obligation
a period is designated, it is presumed to have been
established for the benefit of both the creditor and
the debtor.166 It means both can use the period. As a
consequence, the creditor cannot demand payment,
and the debtor cannot make an effective tender and
consignation of payment, before the period stipulated
has arrived, (b) Exceptions: (1) Contrary agreement.
If the period is for the benefit of the creditor alone, he
may demand performance at any time, even before the
arrival of the day certain, but the debtor in such a case
cannot compel him to accept payment before the period
lapses. On the other hand, if the period is for the benefit
of the debtor alone, he may make payment at any time,
even before the expiration of the period, but he may
oppose a premature demand for payment. (2) Debtor
loses the right to use period in the following instances:
(i) debtor becomes insolvent, unless he gives a security;
(ii) debtor does not furnish the promised security; (iii)
by his acts, debtor impaired the security or it disappears
by reason of fortuitous event, unless he gives a new
security; (iv) debtor violates any undertaking by reason
of which the creditor agreed to the period; (v) debtor
attempts to abscond.16’
6.4.4 Instances When Court Authoriz.ed to Fix Period: (1) when
obligation is intended to be with a period but the period
has not been fixed;16" (2) when duration of the period is
'“Art. 1193, par. 3, NCC.

'“Art. 1193, par. 4, NCC.
'“Art. 1196, NCC.
'"Art. 1198, NCC.
'“Art. 1197, NCC.
PART 1: OBLIGATIONS
left to the exclusive will of the debtor,1® such as when

the debtor binds himself to pay when his means permit
him to do so;170 and (3) when the non-compliance by one
of the parties in reciprocal obligations is with respect to
time, the court may fix or grant a period if there exists
a just cause therefor.171 When the obligation is not one
with a period, such as when the obligation is payable on
demand (which is actually a pure obligation), the court
is not authorized to fix the period.'77 In numbers I and
2 hereof, the fulfillment of the obligation itself cannot
be demanded until after the court has fixed the period
for compliance therewith, and such period has arrived.
Any action to compel performance brought before that
would be premature.173
7) Kinds of Obligations: Alternative and Facultative Obligations

7.1 Classification Based on Number of Prestations (Object):
7.1.1 Simple Obligation: When there is only one prestation
agreed upon.
7.1.2 Conjunctive Obligation: When there are several
prestations which are due and the debtor is required to
perform ail prestations in order for the obligation to be
extinguished.
7.1.3 Alternative Obligation: When there are several
prestations which are due but the debtor is required to
perform only one prestation in order for the obligation
to be extinguished.
7.1.4 Facultative Obligation: When there is only one
prestation agreed upon, but the debtor may render
another in substitution.''4
"•"Supra.
'’"Art. 1180. NCC.
■’'Art. 1191. par. 3, NCC.
,72Peoples Bank & Trust Co. v. Odom, 64 Phil. 126.
'^Conception v. People of the Phil., 74 Phil. 63: Gonzales v. Jose. 66 Phil. 369; Pages v
Babiian Lumber Co.. J 04 Phil. 882.
174ArL 1206. NCC.
7.2 Alternative Obligation:

7.2.1 Right of Choice: (a) Rule: It belongs to the debtor,
unless expressly granted to the creditor.175 (b) Limitation
upon debtor's right of choice: (1) The creditor cannot
be compelled to receive part of one and part of the
other undertaking;176 and (2) the debtor cannot choose
prestations which are impossible, unlawful, or which
could not have been the object of the obligation.177 (c)
When debtor's right of choice is lost: When only one
prestation is practicable.'7'
7.2.2 Effectivitv of Choice: (a) When choice becomes
effective: from the time it has been communicated
to the other or when the other gains knowledge of
such choice.'” (b) Effect: Once choice is effective, it
becomes irrevocable.'60 Hence, the obligation ceases to
be alternative and becomes a simple one of performing
that which has been chosen.'61
7.2.3 Effect of Loss of Prestation/s: (a) If all were lost: (1) by
reason of fortuitous event or by reason of the creditor’s
fault, the obligation is extinguished; (2) by reason of the
debtor’s fault but the right of choice is with him, he is
bound to pay the value of the last prestation which he
lost,"12 plus damages;"1’ and (3) by reason of the debtor’s
fault but the right of choice is with the creditor, the latter
can demand for the payment of the price of any of the
prestations, with indemnity for damages."" (b) If not all
were lost: (1) by reason of fortuitous event, the choice
may still be exercised from those remaining;1” (2) by
reason of the debtor’s fault but the right of choice is
,,5Art 1200, par. l.NCC.

"‘Art. 1199, par. 2, NCC.
l77Art 1200, par. 2, NCC.
""Art. 1202, NCC.
"’Art. 1201, NCC.
'“Reyes v. Martinez, 55 Phil. 492 (1930).
""Art. 1205, par. l.NCC.
"“Art. 1204, par. 2, NCC.
'"Art. 1204, par.3, NCC.
'“Art. 1205(3), NCC.
'“Art 1205(1), NCC.
PART 1: OBLIGATIONS
with him, he can simply choose from the remaining

prestation/s; (3) by reason of the debtor’s fault but the
right of choice is with the creditor, the latter may claim
any of those subsisting (without right to damages), or
the price of that which has disappeared (with a right
to damages);186 (4) by reason of the creditor’s fault but
the right of choice is with him, he can simply choose
from the remaining prestation/s; and (5) by reason of
the creditor’s fault but the right of choice is with the
debtor, the latter may either rescind the contract with
damages because he cannot make a choice according to
the terms of the obligation,187 or he may choose from the
remaining without a right to damages.
7.3 Facultative Obligation:
7.3.1 Concept: Only one prestation has been agreed upon
to be due (called “original prestation”), but the debtor
may instead perform in substitution another prestation
which has already been agreed upon (called “substitute
prestation”). The choice to substitute is always with
the debtor. The loss of the substitute prestation does
not produce any legal effect. However, the loss of the
original prestation by fortuitous event will result in the
extinguishment of the obligation.
7.3.2 Requirement of Notice: If the debtor will be performing
the original prestation, there is no need to notify the
creditor because it is what is due. However, if the
debtor chooses to perform the other prestation, there
is a need to notify the creditor because it is not what
is due; otherwise, the loss of such prestation by reason
of a cause not attributable to him shall not result in
the extinguishment of the obligation. Once the debtor
notifies the creditor that he will be performing the
other prestation, the obligation becomes a simple one
of performing the chosen prestation. The loss of the
chosen prestation by fortuitous event will result in the
extinguishment of the obligation.
'“Art. 1205(2), NCC.

'•’Art. 1203, NCC.
i
8) Kinds of Obligations: Joint and Solidary Obligations
8.1 Classification Based on Number of Subjects:
8.1.1 Simple Obligation: When there is only one debtor and
only one creditor.
8.1.2 Joint or Solidary Obligation: In case of plurality of
subjects, the obligation is either joint or solidary. Ajoint
obligation is one in which each debtor is liable only
for a proportionate part of the debt, and each creditor
is entitled to demand only a proportionate part of the !
credit from each debtor.188 On the other hand, a solidary
obligation is one in which each of the debtors is liable for
the entire obligation, and each of the creditors is entitled
to demand the satisfaction of the whole obligation from
any or all of the debtors."9
8.1.3 Presumption in Favor of Joint Obligation: In case of
plurality of subjects, the law presumes the obligation
to be merely joint.190 For example, where an instrument
containing the word "We promise to pay" is signed by
two or more persons, they are presumed to be merely
joint debtors.
8.1.4 When Obligation Becomes Solidary: (1) when the
obligation expressly so states; (2) when the law so
provides; or (3) when the nature of the obligation so
requires.191
8.1.5 Solidarity Bv Slipulalion/Aureement: The obligation
may expressly state, for example, that each one of
the debtors can be compelled to pay the totality of
the debt, or that each one of them is obligated to pay
for the entire value of the obligation;192 or the word
“solidary" may be used; or the parties may simply use
words indicating an agreement for solidarity, such as
ffi t-rcdii Corp. v. CA, G.R. No. 109648, Nov. 22, 2001; Dy-Dumalasa v. Fernandez,
el al, G.R. No. 178760, July 23, 2009.
'“id.
'"'An. 1207, NCC; Escafio v. Ortigas, Jr., G.R. No. 151953, June 29, 2007.
"‘An. 1207, NCC.
"‘Juan Ysmael & Co. v. Salinas, 73 Phil. 601.
!
PART I: OBLIGATIONS
“jointly and severally,”1” "“junto o separadamente"m

“individually and collectively,' or “individually and
jointly liable.”'"
8.1.6 Solidarity Bv Provision of Law: Examples are the
following: (1) where an instrument containing the
word "I promise to pay" is signed by two or more
persons, they are deemed to be jointly and severally
liable thereon, where the language of the instrument is
ambiguous;197 (2) if two or more heirs take possession
of the estate, they shall be solidarily liable for the loss
or destruction of a thing devised or bequeathed, even
though only one of them should have been negligent;”*
(3) all partners are liable solidarily with the partnership
for everything chargeable to the partnership for loss
or injury caused to any person by any wrongful act
or omission of any partner in the ordinary course of
the business of the partnership,”9 and for money or
property of a third person misapplied by a partner in the
course of the partnership business;™ (4; the principal
is solidarily liable with the agent even when the latter
has exceeded his authority, if the former allowed the
latter to act as though be had full pow ers;21" (5) if tw o
or more persons have appointed an agent for a common
transaction or undertaking, they shah be solidarily liable
to the agent for all the consequences of the agency;2"2
(6) in commodantm. two or more bailees are solidarily
liable for a thing loaned in the same contract;2® (7) the
responsibility of tw o or more officious managers shall
be solidary, unless the management was assumed to
'"'International Finance Corp. v. Imperial Textile Mills, Inc., G.R. No. 160324. Nov. 15,
2005.
'"Parot v. Gemora, 7 Phil. 94.
’’’Oriental Commercial v. Lafucnte, (C.A.) 38 Off. Gaz. 947.
'"Ronquillo v. CA, 132 SCRA 274.
l9,Art. 17(g), Negotiable Instruments Law.
’’“Art. 927, NCC.
l99Art. 1824, in relation to Art. 1822, NCC.
’“"Art. 1824, in relation Io Art. 1823, NCC.
“'Art. 1911, NCC.
202Art. 1915, NCC.
203Art. 1945, NCC.
i
L
save the thing or business from imminent danger;’” and

(8) the responsibility of two or more payees is solidary
in solutio indebiti.™ Note that those provisions of law
providing for solidarity only provide for solidarity with
respect to the liability of the debtors. Hence, solidarity
on the side of the creditors may only exist by agreement
of the parties.
8.1.7 Solidarity by Reason of Nature of Oblieation: It cannot
refer to the indivisibility of the obligation because
the law says that “the indivisibility of an obligation
does not necessarily give rise to solidarity.” Some of
the obligations, solidary by nature, are also provided
by law, such as civil liability arising from crime,206
the obligations of two bailees,’07 of two officious
managers,“* or of two tortfeasors.2" Likewise, when
several heirs of a deceased partner continued with the
business and management of the partnership against
the will of the other partner, the obligation of said heirs
to undertake an inventory, render an accounting of
partnership assets, and to wind up the partnership affairs
is solidary by its nature.210
8.2 Joint Obligation:
8.2.1 Division of Joint Debts or Credits: The division ofjoint
credits or debts may be established in the obligation
itself, as when the debtors specified their respective
liabilities or when the creditors specified the sums for
which each ofthem is entitled. However, ifthe obligation
itself is silent as to how the debt or credit shall be
divided among the joint debtors or joint creditors, then
such debt or credit shall be presumed to be divided into
as many equal parts as there are creditors or debtors.’"
’“Art. 2146, par. 2, NCC.

“’Art. 2157, NCC.
’“Art. 110, RPC.
“’Art. 1945, NCC.
’“Art. 2146, par. 2, NCC.
’"Art. 2194, NCC.
’l0Sunga-Chan v. CA, G.R. No. 164401, June 25, 2008.
’"Art. 1208, NCC.
I

PART 1: OBLIGATIONS
8.2.2 Each Share Distinct From Olhers: The most essential

and characteristic effect of a joint obligation is that the
share of each of the joint creditors or debtors in the
credit or debt is considered distinct from one another.21-'
As a consequence: (a) Extinction: The extinction of the
debt of one of the various debtors does not necessarily
affect the debts of the others.215 (b) Delay: The delay-
on the part of only one of the joint debtors does not
produce effects with respect to the others, and if the
delay is produced through the acts of only one of the
joint creditors, the others cannot take advantage thereof,
(c) Interruption of prescription: The interruption of
prescription by the judicial demand of one creditor upon
a debtor does not benefit the other creditors nor interrupt
the prescription as to other debtors. In the same way,
a partial payment or acknowledgment made by one of
several joint debtors does not stop the running of the
statute of limitations as to the others.214 (d) Vices of each
obligation: The vices of each obligation arising from
a personal defect of a particular debtor or creditor, do
not affect the validity of the other credits or debts. <e)
Insolvency of a debtor: The insolvency of a debtor does
not increase the liability of his co-debtors, nor does it
authorize a creditor to demand anything from his co
creditors. (f) Defense of n-s judicata: In divisible joint
obligations, the defense of res judicata is not extended
from one debtor to another, the reason being that no
debtor has more of an obligation than his own. nor may-
each creditor claim more rights than what respectively
pertains to him.215
8.2.3 Correlation of Debts and Credits: Since each debt
and credit is considered distinct and separate from the
others, the problem of correlation of debts and credits
shall be governed by the following rules: (I) when the
number of creditors and debtors are the same, and the
division of the joint credit among the joint creditors and
the division among the joint debtors are unequal, and
2l2Art. 1208, NCC.

2l5Agoncillo and Marino v. Javier, 38 Phil. 424.
ll4/d, citing^ Manresa 182.
21!8 Manresa 200-201.
the debts and credits, as thus divided, can be matched

with each other, they shall be the debtor and creditor
of each other; and (2) where the number of creditors
and debtors are unequal, or when although there is an
equal number of creditors and debtors, the credits to
which each joint creditor is entitled and the share of
the joint debt for which each joint debtor is answerable
are unequal and do not match, each creditor may ask or
each debtor may pay all in proportion to the respective
credits and debts, in order that such credits or debts may
be subject to equal contingencies.
8.3 Solidary Obligation:
8.3.1 Kinds of Solidarity: (a) Active Solidarity - It is the
solidarity existing among the creditors of the same
obligation, by virtue of which, each of them, as regards
his co-creditors, is a creditor only as to his share in the
obligation and, in regard to the common debtor, he
represents all of them.216 (b) Passive Solidarity - It is
the solidarity existing among the debtors of the same
obligation, by virtue of which they are bound to the
payment of the whole credit.217 (c) Mixed Solidarity - It
is the solidarity existing on the part of both creditors and
debtors.21*
8.3.2 Solidarity Among Creditors: (a) Mutual agency: In
regard to their common debtor or debtors, each one of
the creditors can represent all of them. Hence, insofar
as the common debtors are concerned, each one of the
creditors is a representative of the others, (b) Effect of
demand: Because of mutual agency, the debtor may pay
any one of the solidary creditors; but if any demand has
been made by one of the solidary creditors, payment
must be made only to such creditor.21’ Payment to
another is a case of payment made to a wrong person
which will not extinguish the debtor’s obligation,
(c) Extinguishment of obligation: Because of mutual
agency, any one of the solidary creditors may extinguish
2I61 Giorgi, Teoria de la Obligaciones, 89.

™Id.
2I,8 Manrcsa 205.
2l’Art. 1214, NCC.
BOOK IX'. OBI IGA1IONS IX w
PARI I:OBI.IGAl IONS
the debtor's obligation even without the consent of

the others. Insofar as the debtor is concerned, the act
is valid and will result in the extinguishment of the
debtor’s obligation.™ But the creditor who executed
such act shall be liable to the others for the share in the
■ obligation corresponding to them."1 (d) Assignment of
creditor’s rights: A solidary creditor cannot assign his
rights to a stranger without the consent of the others.™
Such unauthorized assignment is invalid. Hence, if the
debtor pays the assignee the payment is not valid.
8.3.3 Solidarity Among Debtors: (a) Mutual guaranty: The
creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously.™ In
short, each one of the solidary debtors is liable for the
entire obligation, (b) Who may nay: Any one of the
solidary debtors may extinguish the entire obligation.
However, if two or more solidary debtors offer to pay,
the creditor may choose which offer to accept.™ (c)
Right of solidary debtor who paid entire obligation: He
may demand reimbursement from his co-debtors only
the share which corresponds to each, with interest for
the payment already made.™ When one of the solidary
debtors cannot, because of his insolvency, reimburse his
share to the debtor paying the obligation, such shall be
bome by all his co-debtors, in proportion to the debt of
each."” (d) Solidarity not affected bv varied terms and
conditions: Solidarity may exist although the creditors
and debtors may not be bound in the same manner and
by the same periods and conditions."’ (e) Defenses
available to solidary debtor: (1) Those derived from the
nature of the obligation,"* such as when the obligation
is void or unenforceable, in which case, the debtor
““Art. 1215, NCC.
“'Art. 1213, NCC.

“'Art. 1216, NCC.
“'Art. 1217, par. l.NCC.
“’Art. 1217, par. 2, NCC.
“‘Art. 1217, par. 3, NCC.
“’Art. 1211, NCC.
““Art. 1222, NCC.
1
invoking it is not liable for the entire obligation; (2)

Those defenses which are personal to the debtor sued,229
such as minority or insanity, in which case, the debtor
invoking it is not liable for the entire obligation; or those
defenses which pertain only to his share,230 such as when
his share is subject to a suspensive condition which is
not yet fulfilled, in which case, the debtor invoking it
may not be compelled to pay his share but only the
shares pertaining to the others; and (3) Those defenses
which personally belong to the others,231 in which case,
the debtor invoking it may not be compelled to pay the
share pertaining to such other debtor or debtors.
8.3.4 Effect of Remission in Mixed Solidarity: Ifthe remission
is effected by one of the solidary creditors in favor of
one of the solidary debtors and without the consent of
the other creditors: (a) Remission of entire obligation:
It shall extinguish the obligation; but the creditor who
effected the remission shall be liable to the others for the
share in the obligation corresponding to them.232 But the
remission of the whole obligation obtained by one of the
solidary debtors does not entitle him to reimbursement
from his co-debtors.233 (b) Remission of entire share
of solidary debtor: It releases such debtor from the
obligation, with respect to the payment of the balance.
But in case of insolvency of another solidary debtor, his
share shall be borne by all his co-debtors, including the
debtor whose entire share had already been condoned.234
(c) Partial remission of share of solidary debtor: If the
remission in favor of a solidary debtor is partial, his
character as solidary debtor continues with respect to
the creditors and his co-debtors. Hence, he can be made
to pay the balance of the obligation.233
mld.
™ld.
mld.
232Art. 12I5.NCC.
’’’Art. 1220, NCC.
“Art. 1217, par. 3, NCC.
2358 Manresa 225-227.
PART 1: OBLIGATIONS
8.4 Joint and Indivisible Obligation:

8.4.1 Concent: As to the object of the obligation (prestation),
the same is indivisible. As to the subjects, in case of
plurality, the same is a joint obligation. Hence, the
obligation is a joint obligation and, at the same time,
indivisible. This is because the indivisibility of the
obligation does not necessarily give rise to solidarity.334
Hence, even ifthe obligation is indivisible, it is presumed
to be merely joint in case of plurality of subjects.
8.4.2 Consequences of Joint and Indivisible Obligation: In
case of plurality of debtors, each one of the debtors is
liable only for his part (not the entire obligation), but he
cannot separately perform his part because of the indi
visibility of the prestation. Here, the obligation can be
enforced only by proceeding against all the debtors,337
although each is liable only for his respective share.
Since they are merely joint debtors, the others shall
not be liable in case of insolvency of one of them.33*
In case of breach of the obligation because any one of
the joint debtors does not comply with his undertaking,
the obligation may be converted into payment of dam
ages. But only the erring debtor is liable for the payment
of punitive damages, while the others cannot be liable
beyond their corresponding portion of the price of the
thing or of the value of the service in which the obliga
tion consists.33’ In case of plurality of creditors, each of
the creditors is entitled to collect only his part (not the
entire obligation), but since the obligation is indivisible,
he cannot demand performance of such part. The collec
tion of the entire credit will require the collective action
of all creditors, although each is entitled only to his own
part.
9) Kinds of Obligations: Divisible and Indivisible Obligations

9.1 Classification Based on Susceptibility to Partial Performance:
9.1.1 Divisible Obligation: The obligation is susceptible of
division and partial performance.
"‘Art. 1210, NCC.

3)7Art. 1209, NCC.
™ld.
21,Art. 1224, NCC.
l
9.1.2 Indivisible Obligation: The obligation is not susceptible

of partial performance.
9.1.3 Test: The test of divisibility of an obligation is whether
or not it is susceptible of partial performance. This
susceptibility does not mean that it is possible or not to
fulfill the obligations by parts, but rather, whether or not
it is opposed to the ends or purpose of the obligation.240
9.2 Rules in Determining Indivisibility:

9.2.1 Obligation To Give: Obligations to deliver a definite
thing, such as an animal or vehicle, are indivisible.241
However, even though the object may be physically
divisible, an obligation is indivisible if so provided by
law or intended by the parties.242
9.2.2 Obligation To Do: Generally indivisible. Even though
the service may be physically divisible, an obligation
is indivisible if so provided by law or intended by the
parties.243 These obligations are divisible, however,
when: (1) the obligation has for its object the execution
of a certain number of days of work; (2) the obligation
has for its object the accomplishment of work by
metrical units; or (3) the obligation has for its object
analogous things which by their nature are susceptible
of partial performance.244
10) Kinds of Obligations: Obligations with a Penal Clause

10.1 Concent of Penal Clause:
lO.l.l Definition: A penal clause is an accessory obligation
which the parties attach to a principal obligation for
the purpose of insuring the performance thereof by
imposing on the debtor a special prestation (generally
consisting in the payment of a sum of money) in
case the obligation is not fulfilled or is irregularly or
inadequately fulfilled.245
24O1V Francisco, Civil Code ofthe Philippines, 366.

24lArt. 1225, par. l.NCC.
242Art. 1225, par. 3, NCC.
mld.
244Art. 1225, par. 2, NCC.
243Pryce Corporation v. Philippine Amusement and Gaming Corp., 458 SCRA 164, 180-
181.
PART 1: OBLIGATIONS
10.1.2 As Substitute For Damages and Interest: (a) Rule: The

penalty takes the place of the indemnity for damages
and the payment of interest.246 (b) Exceptions: Indemnity
for damages, in addition to and apart from the penalty
stipulated, may be recovered in three cases: (1) when
there is an express stipulation to that effect; (2) when
the obligor, having failed to comply with the principal
obligation, also refuses to pay the penalty, in which case
the creditor is entitled to interest in the amount of the
penalty, in accordance with Article 2209 of the NCC; or
(3) when the obligor is guilty of fraud in the fulfillment
of the obligation.247
10.1.3 Not Replacement for Principal Obligation: (a) Rule:
Penalty is not a substitute for the performance of the
obligation. Hence, as a rule, the debtor cannot exempt
himself from the performance of the obligation by
paying the penalty.248 (b) Exception: when the foregoing
right is expressly reserved for the debtor.24’
10.1.4 When Creditor Entitled to Both Principal and Penalty:
(a) Rule: Creditor cannot demand the fulfillment of the
obligation and the satisfaction of the penalty at the same
time.250 (b) Exception: Creditor may only be entitled
to both rights if the same has been clearly granted to
him.251
10.1.5 Proof of Actual Damages Not Needed: Creditor need
not present proof of actual damages suffered by him in
order that the penalty may be demanded.252 There is no
difference between a penalty and liquidated damages.
A stipulation on liquidated damages is a penalty clause
where the obligor assumes a greater liability in case of
breach of an obligation.251
246Art. 1226, NCC.

24,M.
248Art. 1227, NCC.
wld.
™Id.
u'ld.
“Art. 1228, NCC.
“’Titan Construction Corp- V. Uni-Field Enterprises, G.R. No. 153874, 517 SCRA 180,
189.
10.1.6 When Penalty May Be Reduced bv Court: (1) when

the principal obligation has been partly or irregularly
complied with by the debtor; or (2) even if there has
been no performance, if the penalty is iniquitous or
unconscionable.25*
11) Extinguishment of Obligations: Payment

11.1 Importance of Compliance with Rules for Valid Payment:
11.1.1 If Strictly Complied: Debtor may compel the creditor
to accept payment. If the creditor refuses to accept, the
refusal is without just cause. Hence, the debtor may
resort to valid consignation.
11.1.2 If Not Strictly Complied: Creditor has just cause for
refusing to accept payment. If the debtor resorts to
consignation, the same is not valid.
11.2 Rule No. 1: Payment must be complete. This element is known as
“integrity of payment.”
11.2.1 Rule on Partial Payment: (a) Rule: Creditor cannot be
compelled to accept partial payment.255 (b) Exceptions:
(1) when there is express stipulation allowing partial
payment; and (2) when debt is partly liquidated
and partly unliquidated, the debtor can pay the part
liquidated without waiting for the liquidation of the part
that is unliquidated.256
11.2.2 When Obligation Extinguished: (a) Rule: Only when
obligation is completely delivered or rendered.25’
(b) Exceptions: (1) when obligation is substantially
performed in good faith;25* and (2) when creditor waives
the balance of the obligation.25’
11.2.3 First Exception - Doctrine of Substantial Performance:
Two requisites: (1) performance must be substantial,
meaning the omission or deviation is slight, technical,
“’Art. 1229, NCC.

255Art. 1248, par. l.NCC.
“‘Art. 1248, pars. 1 and 2, NCC.
“’Art. 1233, NCC.
“‘Art. 1234, NCC.
“‘Art. 1235, NCC.
PART 1: OBLIGATIONS
or unimportant;260 and (2) the performance was in good

faith, meaning the incomplete performance is the result
merely of an oversight, misunderstanding, or excusable
neglect
11.2.4 Second Exception - Waiver of the Balance: While
the creditor may not be compelled to accept partial
payment, he may opt to accept the same. However, the
acceptance of incomplete payment does not result in
the extinguishment of the obligation unless the creditor
waives his right to recover the balance.261 Such intention
to waive may not be inferred from the creditor’s mere
silence in accepting an incomplete payment.
11.3 Rule No. 2: Payment is made by the proper person; otherwise,
the creditor cannot be compelled to accept the same.
11.3.1 Who are Considered Proper Persons: (1) the debtor
or his authorized representative; (2) a third person
allowed to make payment by agreement of the parties;
or (3) a third person interested in the fulfillment of the
obligation, such as guarantors, sureties, or third-party
mortgagors.
11.3.2 Rule If Payment is from a Stranger: He cannot compel
the creditor to accept payment from him. But if the
creditor accepts the payment, the same is valid and the
debtor’s obligation is extinguished.
11.3.3 Distinction Between Payment from a Third Person
(Interested in the Obligation) and from a Stranger:
(1) if payment is from the former, the creditor can be
compelled to accept; while if payment is from the latter,
the creditor cannot be compelled;262 ( 2) if payment is
from the former, he is entitled to full reimbursement
even if such payment was made without the debtor’s
consent; on the other hand, if the payment is from the
latter and the debtor consented to the payment, he is also
entitled to full reimbursement; but if he pays without
the debtor’s consent, he is entitled to reimbursement
““International Hotel Corp- v. Joaquin, Jr., 695 SCRA 382 (2013).

26lArt. 1235, NCC.
262Art. 1236, par. 1, NCC.
only up to the extent that the debtor was benefitted;263

and (3) if payment is from the former, he is entitled
to be subrogated to the creditor’s rights even if such
payment was made without the debtor’s consent;2" on
the other hand, if the payment is from the latter and the
debtor consented to the payment, he is also entitled to
be subrogated to the creditor’s rights;265 but if he pays
without the debtor’s consent, he is not entitled to be
subrogated to the creditor’s rights.
11.4 Rule No. 3: The payor must have the capacity to make payment.
11.4.1 Effect If Payor is Incapacitated: Where the person
paying has no capacity to make the payment, the creditor
cannot be compelled to accept it; consignation will not
be proper; in case he accepts it, the payment will not be
valid.266
11.4.2 Capacity to Make Payment in Obligations To Give: In
obligations to give, payment to be valid must be made
by a person having the free disposal of the thing due and
capacity to alienate it.267
11.5 Rule No. 4: Payment must be made to the proper person.
11.5.1 Who are Considered Proner Persons to Whom Payment
Must be Made: (1) a person in whose favor the
obligation has been constituted (or the original creditor);
(2) his successor-in-interest; or (3) persons authorized
to receive the payment,266 whether authorized by the
creditor or any person authorized by law to do so, such
as a guardian, executor, or administrator of the estate of
a deceased and assignee or liquidator of a partnership or
corporation.26’
11.5.2 Effect of Payment to Wrong Person: (a) Rule: Payment
is invalid, (b) Exceptions: payment to a wrong person
is exceptionally valid if: (1) payment has redounded to
261 Art. 1236, par. 2, NCC.

267 Art. 1302(3), NCC.
261 Art. 1302(2), NCC.
2“8 Manresa 267.
267Art. 1239, NCC.
2“Art. 1240, NCC.
MSee Haw Pia v. China Banking Corp., 80 Phil. 604, citing 4 Manresa 254.
PART I: OBLIGATIONS
the benefit of the creditor2’" —it is the debtor, generally,

who has the obligation to prove that the wrong payment
redounded to the creditor’s benefit; but in the following
cases, the law already presumes that the wrong payment
has already redounded to the creditor’s benefit: (i) if,
after payment, the third person acquires the creditor’s
rights; (ii) if the creditor ratifies the payment to the
third person; or (iii) if, by the creditor’s conduct, the
debtor has been led to believe that the third person had
authority to receive the payment;2’1 (2) if the payment
is made in good faith to any person in possession of the
credit272 —in the absence of assignment of the creditor or
a valid negotiation (in case of negotiable instruments),
the payee does not become a possessor of the credit,
except when he is a holder of a negotiable instrument
payable to bearer, in which case, any payment to the
latter in good faith by the debtor is a valid payment;
and (3) if the debtor pays the creditor prior to acquiring
knowledge of the assignment of credit made by the
latter.27’
11.6 Rule No. 5: The person to whom payment is made must have the
capacity to receive it.
11.6.1 Effect of Payment Made to Incapacitated Person: (a)
Rule: Payment is invalid, (b) Exceplions: Payment
is valid: (1) if the incapacitated has kept the thing
delivered; or (2) insofar as the payment has been
beneficial to him.27’
11.7 Rule No. 6: The very thing or service due must be delivered—an
element of payment known as “identity of payment.”
11.7.1 Nature of Obligation: (a) Determinate Obligation: The
debtor 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.2” (b) Generic
2,“Art. 1241, par. 2, NCC.

271 Art. 1241, par. 2, NCC.
2,2Art. 1242, NCC.
’’’Art. 1626, NCC.
’’’Art. 1241, par. I, NCC.
’’’Art. 1244, par. l.NCC.
_ J
Obligation: If the quality and circumstances have not

been stated, the creditor cannot demand a thing of
superior quality and the debtor may not deliver a thing
of inferior quality.276 (c) Obligation To Do or Not To Do:
An act or forbearance cannot be substituted by another
act or forbearance against the creditor’s will.277
11-7.2 Obligation To Pay in Money: (a) Rule: The creditor
cannot be compelled to accept payment not in the
currency stipulated; or in the absence of agreement, in
the currency which is legal tender in the Philippines.27*
(b) Legal tender currency in the Philippines: All notes
and coins issued by the Bangko Senlral ng Pilipinas
and guaranteed by the Republic of the Philippines are
considered legal tender for all debts, both public and
private.279 With respect to coins, they shall be considered
legal tender: (1) up to the maximum amount of Pl,000
only—for denominations of I-Piso, 5-Piso, and 10-
Piso coins; and (2) up to the maximum amount of Pl 00
only—for denominations of 1-sentimo, 5-sentimo,
10-sentimo, and 25-sentimo coins.280 (c) Checks are not
legal tender: (1) Rule: A check is not legal tender, and an
offer of a check in payment of a debt is not a valid tender
of payment and may be refused receipt by the creditor,2*1
whether it be a manager’s, cashier’s, or personal check.2*2
(2) When creditor accents: The foregoing rule does not
prevent a creditor from accepting a check as payment.
However, the delivery of checks (or promissory note
payable to order or other mercantile documents) shall
produce the effect of payment only when: (i) they have
been encashed; or (ii) they have been impaired through
the fault of the creditor.281 (3) When tender of payment
!7‘Art. 1246, NCC.

277Art. 1244, par. 2, NCC.
27*Art. 1249, NCC.
2”Sec. 52, R.A. No. 7653, otherwise known as the New Central Bank Act.
:*°BSP Circular No. 537, Series of 2006.
“'Philippine Airlines, Inc. v. Court of Appeals, 181 SCRA557; Roman Catholic Bishop of
Malolos, Inc. v. Intermediate Appellate Court, 191 SCRA411.
M2Tibajia, Jr. v. Court of Appeals, 223 SCRA 163, G.R. No. 100290, June 4, 1993.
283Art. 1249, par. 2, NCC.
PARTI: OBLIGATIONS
in check is for exercise of right: The requirement of

legal tender is applicable only in the payment of an
obligation to pay in money. When the case involves not
the payment of an obligation but the exercise of a right,
i.e., the right of redemption, the Civil Code provisions
on payment of obligations do not apply. Instead, what
applies is the settled rule that a mere tender of a check
is sufficient to compel redemption.284 A check may be
used for the exercise of the right of redemption, the
same being a right and not an obligation. The tender
of a check is sufficient to compel redemption but is not
in itself a payment that relieves the redemptioner from
his liability to pay the redemption price.288 (d) Effect of
extraordinary inflation or deflation: (1) Rule: In case
an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at
the time of the establishment of the obligation shall be
the basis of payment, unless there is an agreement to the
contrary.286 (2) Requisites: For extraordinary inflation
(or deflation) to affect an obligation, the following
requisites must be proven: (i) that there was an official
declaration of extraordinary inflation or deflation from
the Bangko Sentral ng Pilipinas;2'1 absent an official
pronouncement or declaration by competent authorities
of the existence of extraordinary inflation during a given
period, the effects of extraordinary inflation are not to
be applied;288 (ii) that the obligation was contractual
in nature;28’ and (iii) that the parties expressly agreed
to consider the effects of the extraordinary inflation or
deflation.2*1
’“Biuna v. Gimenez, 469 SCRA 486.

’"’Fortunado v. Court of Appeals, 196 SCRA 269.
“‘Art. 1250, NCC.
“’Equitable PCI Bank v. Ng Slieung Ngor, 541 SCRA 223, G.R. No. 171545, Dec. 19,
2007.
““Telengtan Brothers & Sons, Inc. v. United States Lincs, Inc., supra', Almeda v. Bathala
Marketing Industries, Inc., supra.
“’Equitable PCI Bank v. Ng Sheung Ngor, supra.
™ld.
11.8 Rule No. 7: Payment must be in the proper place; otherwise, the
creditor cannot be compelled to accept the payment.
11.8.1 Rule: Payment must be made at the domicile of the
debtor.291 This rule applies even if the debtor changes
his domicile in bad faith, except that the additional
expenses in collecting the credit shall be borne by the
debtor.292
11.8.2 Exceptions: (1) if there is another place of payment
designated in the obligation;29’ or (2) in the absence
of agreement and when the obligation is to deliver a
determinate thing, the payment shall be made wherever
the thing might be at the moment the obligation was
constituted.294
11.9 Special Forms of Payment:
11.9.1 Dation in Payment: (a) Concept: It is the alienation
of property to the creditor in satisfaction of a debt
in money.295 (b) Requisites: (1) there must be the
performance of a prestation in lieu of payment (animo
solvendi) which may consist in the delivery of a
corporeal thing or a real right or a credit against the third
person; (2) there must be some difference between the
prestation due and that which is given in substitution
(aliud pro alio)-, and (3) there must be an agreement
between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance
of a prestation different from that due.296 (c) Effect:
The dation in payment extinguishes the obligation to
the extent of the value of the thing delivered, either
as agreed upon by the parties or as may be proved,
unless the parties by agreement, express or implied,
or by their silence, consider the thing as equivalent to
the obligation, in which case the obligation is totally
extinguished.297 In other words, a dation in payment
2,1 Art. 1251, par. 3, NCC.

292Art. 1251, par. 4, NCC.
293Art. 1251, par. 1,NCC.
2wArt. 1251, par. 2, NCC.
29sFort Bonifacio Development Corp. v. Yllas Lending Corp., 567 SCRA 454.
296Lo v. KJS Eco-Formwork System Phil., Inc., G.R. No. 149420, Oct. 8,2003.
2”Lopez v. Court of Appeals, 114 SCRA 671.
PART 1: OBLIGATIONS
does not necessarily mean total extinguishment of the

obligation. The obligation is totally extinguished only
when the parties, by agreement, express or implied, or
by their silence, consider the thing as equivalent to the
obligation.2”
11.9.2 Cession: (a) Concept: Cession or assignment consists
in the abandonment of the totality of the property of the
debtor in favor of the creditors in order that the same
may be applied for the satisfaction of their credits.2”
(b) Distinguished from Dation in Payment: (1) dation
in payment transfers the ownership over the thing
alienated to the creditor; whereas in cession, only
the possession and administration are transferred to
the creditors; (2) dation in payment does not require
plurality of creditors; whereas cession requires plurality
of creditors; (3) in dation in payment, the debtor must
not be insolvent; whereas cession presupposes the
existence of insolvency on the part of the debtor; (4)
dation in payment involves specific thing or property;
whereas cession involves the totality of the property •
of the debtor; and (5) dation in payment may totally
extinguish the obligation and result in the release of the
debtor; whereas in cession, the assignment only releases
the debtor from responsibility for the net proceeds of
the thing assigned, unless there is stipulation to the
contrary?”
11.9.3 Tender of Payment and Consignation: (a) Rule: Tender
of payment, even i f valid, does not by itself produce legal
payment, unless it is completed by consignation?01 The
effect of a valid tender of payment is merely to exempt
the debtor from payment of interest (compensatory)
and/or damages?02 (b) Distinctions Between Tender
of Payment and Consignation: Consignation is the act
of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or
2”Caltex Philippines, Inc. v. Intermediate Appellate Court, G.R. No. 72703, Nov. 13,1992.
2w8 Manresa 321; Art. 1255, NCC.
’“Art. 1255, NCC.
301 Philippine National Bank v. Relativo, 92 Phil. 203, G.R. No. L-5298, Oct. 29,1952.
mId.
refuses to accept payment, and it generally requires

a prior tender of payment. Tender is the antecedent
of consignation, that is, an act preparatory to the
consignation, which is the principal, and from which are
derived the immediate consequences which the debtor
desires or seeks to obtain. Tender of payment may be
extrajudicial, while consignation is necessarily judicial,
and the priority of the first is the attempt to make a
private settlement before proceeding to the solemnities
of consignation.305 (c) When Consignation Without
Tender of Payment Sufficient: Consignation generally
requires a prior tender ofpayment.304 But in the following
instances, consignation alone shall result in the release
of the debtor from his responsibility: (1) when creditor
is absent; (2) when creditor is unknown; (3) when
creditor does not appear at the place of payment; (4)
when creditor is incapacitated to receive the payment at
the time it is due; (5) when, without just cause, creditor
refuses to give a receipt; (6) when two or more persons
claim the same right to collect; and (7) when the title
of the obligation has been lost.305 (d) Requisites for
Valid Consignation: (1) there was a debt due; hence, in
instances where no debt is due and owing, consignation
is not proper,306 such as in cases of right of redemption
since the right to redeem is a right, not an obligation;30’
(2) the creditor to whom tender of payment was made
refused to accept it, or because he or she was absent
or incapacitated, or because several persons claimed
to be entitled to receive the amount due or because
the title to the obligation had been lost; (3) previous
notice of the consignation had been given to the person
interested in the performance of the obligation (not only
the creditor must be notified but all persons interested
in the fulfillment of the obligation, such as guarantors,
sureties and third-party mortgagors); (4) the amount due
””Meat Packing Corporation of the Philippines v. Sandiganbayan, 259 SCRA 409; B.E.
San Diego, Inc. v. Alzul, G.R. No. 169501, June 8,2007.
304Art. 1256, par. 1,NCC.
305Art. 1256, par. 2, NCC.
’’'’’Legaspi v. Court of Appeals, 142 SCRA 82.
’’’’immaculate v. Navarro, 160 SCRA 211.
I
PART 1: OBLIGATIONS
was placed at the disposal of the court; and (5) after

the consignation had been made, the person interested
was notified of the action (not only the creditor must
be notified but all persons interested in the fulfillment
of the obligation, such as guarantors, sureties and third-
party mortgagors). This requisite is fulfilled by the
service of summons upon the defendants together with
a copy of the complaint therein. The foregoing essential
requisites must be complied with fully and strictly in
accordance with the provisions of Articles 1256 to 1261
of the NCC. Substantial compliance is not enough.™1
(e) When Debt Considered Extinguished: Consignation
is completed at the time the creditor accepts the same
without objections, or, if he objects, at the time the court
declares that it has been validly made in accordance
with law.30’ The consignation has retroactive effect.
The payment is deemed to have been made at the time
of the deposit of the money in court, or when it was
placed at the disposal of the judicial authority.310 (f)
Withdrawal By Debtor of Deposit: Before the creditor
has accepted the consignation or before a judicial
declaration that the consignation has been properly
made, the debtor may withdraw the thing or the sum
deposited as a matter of right, allowing the obligation
to remain in force.311 But after the creditor has accepted
the consignation or after a judicial declaration that the
consignation has been properly made, the debtor may
no longer withdraw the same without the consent of the
creditor. In such a situation, if the creditor authorizes
the debtor to withdraw the thing or sum deposited, he
loses every preference which he may have over the
thing and the co-debtors, guarantors, and sureties shall
be released.312 (g) Effects If Consignation is Valid: (1)
it produces the effect of payment, thereby releasing
the debtor from all responsibility;313 (2) the accrual of
“Soco v. Militants, 123 SCRA 160.

“’Reisenbeck v. Court of Appeals, G.R. No. 90359, June 9, 1992.
3luRamos v. Sanio, 451 SCRA 103 (2005); Jespajo Realty and Development Corp. v. CA,
390 SCRA 27 (2002); Riesenbeck v. Court of Appeals, 209 SCRA 656 (1992).
3"Art. 1260, par. 2, NCC.
3l2Art. 1261, NCC.
313Art. 1256, par. 1, NCC; Ponce de Leon v. Santiago Syjuco, Inc., 90 Phil. 311.
interest on the obligation is suspended from the moment

of consignation; (3) the loss of the thing or amount
consigned occurring without the fault of the debtor
before the acceptance of the consignation by the creditor
or its approval by the court should be for the account of
the creditor;514 (4) since the consignation has retroactive
effect, the fruits, products, and interest of the thing
consigned shall belong to the creditor from the moment
the consignation was made; and (5) the expenses of
consignation shall be charged against the creditor.515
(h) Effects If Consignation is Invalid: (1) the obligation
remains and there is no suspension of the accrual of the
interest; and (2) it is the consignor who shall bear the
loss;516 and (3) the expenses of consignation shall be for
the account of the debtor.517
11.9.4 Application of Payment: (a) Requisites: (1) there exist
only one debtor and one creditor; (2) between them,
there be several obligations; (3) the various debts be of
the same kind; (4) the debts are all due, except when:
(i) the parties so stipulate; or (ii) the application is
made by the party for whose benefit the term has been
constituted;5"' and (5) the payment made is not sufficient
to cover all obligations, (b) Right to Make Application
Initially Belongs to Debtor: To the debtor corresponds
in the first instance the right to determine to which debt
his payment should be applied.51’ But such right must be
exercised by the debtor at the time of payment,520 and
not afterwards.521 And once the right is exercised, such
application is irrevocable and the debtor has no more
right to change his application of payment.522 However,
the debtor cannot make an application of payment in the
5l4Sia v. Court of Appeals, 92 Phil. 355.

515Art. 1259, NCC.
’“Chua Kay v. Lint Chang, 54 O.G. 26.
5l7Art. 1259, NCC.
’'“Art. 1252,par. l.NCC.
’’’Art. 1252, par. 1, NCC; Texas Company, Inc. v. Marfil, (C.A.), 39 O.G. 1238.
5mM.
52lPowell v. National Bank, 54 Phil. 54.
522Bachrach Garage and Taxicab Co. v. Golingco, 39 Phil. 912.
PART I: OBLIGATIONS
following manner: (1) that will violate the agreement;’23

(2) he cannot make a partial payment of any of the debts,
in violation of the rule in Article 1248; or (3) if the debt
produces interest, he cannot apply his payment to the
principal without paying first the interest, in violation of
the rule in Article 1253. (c) If Debtor Did Not Exercise
Right: Where the debtor has not expressly elected any
particular obligation to which the payment should be
applied at the time of making the payment, the creditor
may make such application.’24 However, in order for the
application made by the creditor to be valid and lawful,
the following requisites must be present: (1) the creditor
expresses such application in the corresponding receipt
that he issued; and (2) the debtor must have assented
to such application, as shown by his acceptance of the
receipt without protest.’23 Ultimately, therefore, the
application by a creditor depends upon the debtor’s
acquiescence.’26 (d) Application By Operation of Law:
When neither the debtor nor the creditor has specified
to which of the several debts the payment should be
applied or if application cannot be inferred from other
circumstances, the following rules should be applied:
(1) the payment should be applied first to the debt which
is most onerous to the debtor; or (2) if the debts due
are of the same nature and burden, the payment should
be applied to all of them proportionately.’2’ (e) Debts
More Onerous to Debtor: (1) Guaranteed debts are
deemed to be more onerous to the debtor than those not
guaranteed, and are entitled to priority in the application
of the debtor’s payments;”8 (2) where one debt bears
interest and the other does not, even if the latter should
be the older obligation, the former is considered as
“’Premiere Development Bank v. Central Surety & Insurance Co., Inc., 579 SCRA 359
(21)09).
’"Art. 1252, par., NCC.
Traders Insurance & Surety Company v. Dy Eng Giok, 55 O.G. 5546.
“Traders Insurance & Surety Company v. Dy Eng Giok, supra.
“’Art. 1254, NCC.
“Traders Insurance & Surety Company v. Dy Eng Giok, 55 O.G. 5546; see also Com
monwealth v. Far Eastern Surety & Insurance Company, 83 Phil. 305 and Hongkong & Shanghai
Banking Corp. v. Aldanese, 48 Phil. 990.
more onerous;329 (3) where there are various debts, the

oldest ones are more burdensome, and payments should
■ be applied to them before the more recent ones;330 and
(4) when a person has two debts, one as sole debtor
and another as solidary co-debtor, his more onerous
obligation to which first payments are to be applied is
the debt as sole debtor.331
12) Extinguishment of Obligations: Loss

12.1 As Applied to Obligations To Give: Only an obligation to deliver
a determinate thing (determinate obligation) can be extinguished
by reason of loss. An obligation to deliver a generic thing
(generic obligation), on the other hand, cannot be extinguished
by reason of loss332 because the genus of a thing can never perish
(genus nunquamperil). For example, an obligation to pay money
is generic; therefore, it is not excused by fortuitous loss of any
specific property of the debtor.333
12.1.1 Concent of Loss in Determinate Obligations: It is
understood that the thing is lost when: (1) it perishes, (2)
goes out of commerce, or (3) disappears in such a way
that its existence is unknown or it cannot be recovered.334
12.1.2 Requisites for Loss of Specific Thine Due: (1) the loss
occurs without the fault of the debtor; (2) the loss occurs
prior to the debtor incurring delay; and (3) there is no
law or stipulation holding the debtor liable even in case
of fortuitous event, or that the nature of the obligation
does not require the assumption of risk.335 Hence, the
debtor must not have obligated himself to deliver the
same thing to two or more persons who do not have the
same interest; otherwise, he shall be responsible for the
loss of the thing by reason of fortuitous event until he
has effected the delivery.336
329Menzi & Co. v. Quing Chuan, G.R. No. L-46278, Oct. 26, 1939.
”°Philippine National Bank v. Venigulh, 50 Phil. 253.
’’’Commonwealth v. Far Eastern Surety & Insurance Company, 83 Phil. 305; citing 8
Manresa, 4,h ed., p. 290.
”2Art. 1263, NCC.
’’’Ramirez v. Court of Appeals, 98 Phil. 225, 228 (1956).
334Art. 1189(2), NCC.
335Art. 1262, NCC.
”6Art. 1165, par. 3, NCC.
PART 1: OBLIGATIONS
12.1.3 Presumption that Loss is Due to Debtor’s Fault: It is

presumed that the loss was due to the fault of the debtor
whenever the thing is lost in his possession?” However,
the presumption does not apply in case of earthquake,
flood, storm, or other natural calamity?”
12.1.4 When Law Provides for Liability Even for Fortuitous
Event: (1) The obligor delays or has promised to deliver
the same thing to two or more persons who do not
have the same interest;”’ (2) the possessor in bad faith
in every case;”0 (3) if the common carrier negligently
incurs in delay in transporting the goods, a natural
disaster shall not free such carrier from responsibility;341
(4) the borrower who uses the thing for a purpose
different from that intended, delays its return, receives
the thing under appraisal, lends it to a third person,
or saves his property instead of the thing borrowed;342
(5) the depositary who uses the thing without the
depositor’s permission, delays its return, or allows
others to use it;343 (6) the negotiorum gestor or officious
manager who undertakes risky transactions, prefers his
interest to that of the owner, fails to return the property
after demand by the owner, or assumes management
in bad faith;344 and (7) when the obligation to deliver
a determinate thing proceeds from a criminal offense,
unless prior to its loss the person who should receive it
refused acceptance without justification.343
12.2 As Applied to Obligations To Do: An obligation to do is lost:
(1) when the prestation becomes legally or physically impossible
without the fault of the debtor;346 or (2) when, by reason of an
unforeseen event, the service has become so difficult as to be
manifestly beyond the contemplation of the parties?4’
’’’Art. 1265, NCC.

33"M.
33’Art. 1165, lust par., NCC.
“Art. 552, par. 2, NCC.
341 Art. 1740, NCC.
342Art. 1942, NCC.
343Art. 1979, NCC.
“Art. 2147, NCC.
“Art. 1268, NCC.
“Art. 1266, NCC.
"’Art. 1267, NCC.
12.2.1 Article 1266 Applicable Only to Obligation To Do:

Article 1266 of the Civil Code is applicable only to
obligations “to do,” which include all kinds of work
or service. The obligation to pay rentals or deliver the
thing in a contract of lease falls within the prestation
“to give”; hence, it is not covered within the scope of
Article 1266.148 In Article 1266, the performance of
the obligation to do must be possible at the time of the
perfection of the contract; otherwise, the contract is void
because it contemplates of rendition of an impossible
service."’ The performance becomes impossible only
during the consummation stage.
12.2.2 Doctrine of Unforeseen Events: (a) Requisites for
Application of Article 1267: (1) the event or change
in circumstances could not have been foreseen at the
time of the execution of the contract; (2) it makes the
performance of the contract extremely difficult but not
impossible; (3) it must not be due to the act of any of the
parties; and (4) the contract is for a future prestation.lw
The difficulty of performance under Article 1267 of
the Civil Code should be such that one party would be
placed at a disadvantage by the unforeseen event. Mere
inconvenience, unexpected impediments, or increased
expenses do not suffice to relieve the debtor from a bad
bargain.”1 fbl Applicability: The doctrine of unforeseen
events should apply only to risks that are manifestly
beyond the contemplation of the parties, or to those
absolutely exceptional changes of circumstances, where
equity demands assistance for the debtor.”2 It does not
apply to risks that are already known, or should have
been known, to the parties when they entered into their
contractual relations.
""f’NCC v. CA, G.R. No. 116896, May 5, 1997.

"’Art. 1409(5), NCC.
”Tagaytay Realty, Inc. v. Gacutan, 761 SCRA 87 (2015).
”2PNCC v. CA, 272 SCRA 183 (1997).

PART 1: OBLIGATIONS
13) Extinguishment of Obligations: Condonation or Remission
13.1 Concept: It is gratuitous on the part of the creditor, but it requires

acceptance by the debtor to be valid.’” It is either in the form
of donation inter vivos or legacy, depending on its effectivity.
Whether donation or legacy, it must not be inofficious.
13.1.1 Donation Inter Vivos: When the creditor intended the

condonation to become effective during his lifetime.
13.1.2 Legacy of Condonation of Debt: When the creditor
intended the condonation to become effective upon his
death.
13.2 When Condonation is Donation:
13.2.1 How Made: Either expressly or impliedly.’” Acceptance
by the debtor must be made during the lifetime of the
creditor; otherwise, the donation is not perfected.
13.2.2 If Made Expressly: It must conform with the formalities
of ordinary donation in Articles 748 and 749;’”
otherwise, it is void.
13.2.3 Presumption of Condonation: When a private document
evidencing a credit is found in the possession of the
creditor, it gives rise to a presumption that the creditor
voluntarily delivered the document to the debtor and
such voluntary delivery gives rise to a presumption of
the condonation of the indebtedness.”6 The presumption
can be rebutted by proving that there was no voluntary
delivery.
13.3 When Condonation is Legacy:
13.3.1 As to Form: It must comply with the formalities of a last
will and testament.
13.3.2 Tinting of Acceptance: The acceptance by the debtor
can only be made after the death of the creditor.
’’’Art. 1270, NCC.

’"Art. 1270, par. 1,NCC.
’’’Art. 1270, par. 2, NCC.
’"Art. 1271, par. l.NCC.
14) Extinguishment of Obligations: Merger or Confusion

14.1 Concent:
14.1.1 Definition: Confusion or merger is the meeting in one
person ofthe qualities of creditor and debtor with respect
to the same obligation.357 It exists when the characters of
creditor and debtor are merged in the same person.358
14.1.2 Requisites: (1) it must take place in the person of the
principal creditor and principal debtor;359 hence, if the
merger involves the creditor and the guarantor, the
obligation is not extinguished;360 and (2) it must be
complete and definite, because if it is not complete, the
obligation still subsists.361
15) Extinguishment of Obligations: Compensation

15.1 Concept:
15.1.1 Definition: It is a mode ofextinguishing to the concurrent
amounts the obligations of persons who, in their own
right and as principals, are reciprocally creditors and
debtors of each other.362
15.1.2 Kinds: (1) Legal - that which takes place ipsojure when
all the requisites of law are present;363 (2) Voluntary -
that which occurs when the parties agree to the mutual
extinguishment of their credits or to compensate their
mutual obligations even in the absence of some of the
legal requisites;364 (3) Judicial - that which takes place
when the court allows the set off or counterclaim of the
defendant as against the claim of the plaintiff; and (4)
Facultative - when it can be claimed by the party who
can oppose it and who is the only party prejudiced by the
compensation, as happens when one of the obligations
has a period for the benefit of one party alone and the
35’4 Sanchez Roman, 421.

3s‘Art. 1275, NCC.
3!9Art. 1276, NCC.
“M
3612 Castan, 60.
J“PNB Madecor v. Uy, 363 SCRA 1128 (2001); Art. 1278, NCC.
363Mavesl (USA), Inc. v. Sampaguila Garment Corp., G.R. No. 127454, Sep. 21,2005.
364M.
BOOK IV. — OBLIGATIONS AND CONTRACTS •Sil
PARTI: OBLIGATIONS
latter renounces the period with the effect of making the

obligation due and therefore compensable.363 In legal,
voluntary, and judicial compensation, there must be the
confluence of the characters of the mutual debtors and
creditors. Without this, the contracting parties cannot
stipulate, in case of voluntary compensation, as to the
compensation of their obligations, for then the legal tie
that binds contracting parties to their obligations would
be absent. At least one party would be binding himself
under an authority he does not possess.366
15.2 I.egal Compensation:
15.2.1 Requisites: (1) The parties must be creditors and debtors
of each other in their own right and as principals363 —
hence, taxes cannot be subject to compensation for the
simple reason that the government and the taxpayer
are not creditors and debtors of each other,368 for debts
are due to the Government in its corporate capacity,
while taxes are due to the Government in its sovereign
capacity;36’ that there can be no valid compensation
between the debt of corporation X to the stockholders
of corporation Y under a contract of loan and the
obligation of corporation Y to corporation X for the
payment of the purchase price in a contract of sale, for
the reason that both corporations are not mutually bound
as creditors and debtors in their own name because a
corporation has a personality distinct and separate from
its stockholders;3™ but a bank has the right to set off
a deposit in its hands to extinguish the indebtedness
owed to it by the same depositor,331 because, as to fixed,
savings, and current deposits of money in banks and
similar institutions, the relationship between banks
3683 Casual, 8"' ed„ pp. 298-299.

366CKH Industrial and Development Corp. v. Court ofAppeals, 272 SCRA 333,348 (1997).
’"’Art. 1278, NCC.
,MPhilex Mining Corp. v. Commissioner of Internal Revenue, 294 SCRA 687 (1998),
tiling Cordero v. Gouda, 18 SCRA 331 (1966). See also South African Airways v. Commissioner
of Internal Revenue, 612 SCRA 665 (2010) and Caltex Philippines, Inc. v. Commission on Audit,
208 SCRA 726 (1992).
wld., tiling Commissioner of Internal Revenue v. Palanca, 18 SCRA 496 (1966).
3TOCHK Industrial and Development Corp. v. CA, supra.
37,Gullas v. Philippine National Bank, 62 Phil. 519(1935).
and depositors has been held to be that of creditor and

debtor;’72 (2) that both debts consist in a sum of money,
or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been
stated;3’3 (3) that both debts be due374 —if one of the
debts is payable on demand and there is no demand yet,
there can be no legal compensation because such debt
is not yet due;375 (4) that both debts be demandable and
liquidated”8 —hence, if one of the debts is a natural
obligation, there can be no legal compensation because
a natural obligation is not legally demandable; and a
debt is liquidated when its existence and amount are
determined,377 or when the amount is determinable
by inspection of the terms and conditions of relevant
documents;37' and (5) that neither of the debts be subject
to any lien, retention, or suit instituted by third persons of
which notice has been communicated in due time to the
debtor.37’ By “in due time” should be meant the period
before legal compensation was supposed to take place,
considering that legal compensation operates so long
as the requisites concur, even without any conscious
intent on the part of the parties.38" A controversy that
is communicated to the parties after that time may no
longer undo the compensation that had taken place by
force of law, lest the law concerning legal compensation
be for naught.381
’’’Associated Bank v. Tan, 446 SCRA 2X2 (2004), citing Consolidated Bank & Trust Corp,
v. CA, 410 SCRA 562 (2003); Guingona Jr. v. City Fiscal of Manila, 128 SCRA 577 (1984);
Serrano v. Central Bank of lite Phils., 96 SCRA 96 (19X0). See also Nisce v. Equitable PCI Bank,
Inc., 516 SCRA 231 (2007).
3,3Art. 1279(2), NCC.
’"Art. 1279(3), NCC.
”’PNB Madecor v. Uy, 363 SCRA 1128 (2001).
"‘Art. 1279(4), NCC.
’’’Philippine Trust Co. v. Roxas. 772 SCRA 339 (2015). citing First United Constructors
Corporation, v. Bayanihan Automotive Corporation, 713 SCRA 354, 367 (2014).
’’’Soriano v. People, 703 SCRA 536 (2013), citing Raquel-Santos v. CA, 592 SCRA 169,
196 (2009). See also Selegna Management and Development Corporation v. United Coconut
Planters Bank, 489 SCRA 125. 138 (2006).
’’’Art. 1279(5), NCC.
”"PNB Madecor v. Uy, supra.
Mld.
PART 1: OBLIGATIONS
15.2.2 Effects of Legal Compensation: When all the requisites

above are present, compensation takes effect by operation
of law, and extinguishes both debts to the concurrent
amount, even though the creditors and debtors are not
aware of the compensation.”2 Legal compensation
operates even against the will of the interested parties
and even without their consent. Since this compensation
takes place ipsojure, its effects arise on the very day on
which all its requisites concur. When used as a defense,
it retroacts to the date when its requisites are fulfilled.”’
15.2.3 Debts Not Subject to Legal Compensation: (1) when
one of the debts arises from a depositum; (2) when one
of the debts arises from the obligations of a depositary
or of a bailee in commodatum; (3) when one of the debts
arises from a claim for support due by gratuitous title;’"
(4) when one of the debts consists in civil liability
arising from a penal offense;”’ and (5) when one of the
debts consists in the claim of Government for payment
of taxes.
16) Extinguishment of Obligations: Novation
16.1 Concept:
16.1.1 Definition: Novation is the extinguishment of an

obligation by the substitution or change of the obligation
by a subsequent one which extinguishes or modifies
the first, either by changing the object or principal
conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of
the creditor.”''
16.1.2 Extinctive or Modificatory; In its broadest concept,
novation is either extinctive or modificatory. It is
extinctive, also called total novation, when an old
“’All. 1290, NCC.

’"Hunk of the Philippine Islands v. Court of Appeals, 255 SCRA 571; see also Trinidad v.
Acapulco, G.R. No. 147477, June 27, 2006.
’"Art. 1287, NCC.
’"’Art. 1288, NCC.
’"Ajax Marketing & Development Corp. v. Court of Appeals, G.R. No. 118585, Sep. 14,
1995.
I
obligation is terminated by the creation of a new

one that takes the place of the former. It is merely
modificatory, also called partial novation, when the
old obligation subsists to the extent that it remains
compatible with the amendatory agreement.387 Stated
otherwise, there is partial novation when there is only
a modification or change in some principal conditions
of the obligation. It is total, when the obligation is
completely extinguished.388
16.2 Extinctive Novation:
16.2.1 Requisites: (1) There must be a previous valid
obligation - it is only when the original obligation is
void that the novation also becomes void. There will
be a valid novation even if the original obligation
is voidable in two instances: (i) when there has been
a ratification of the obligation prior to the novation
inasmuch as ratification cleanses the obligation of its
defects from the very beginning; or (ii) if the defect
can be claimed only by the debtor because when he
consents to the novation, he renounces his right to annul
the old obligation."’ The previous obligation need not
be civil, it may be a case of a natural obligation. Hence,
a prescribed debt is a natural obligation which is a
sufficient consideration for the new contract.3” (2) There
must be an agreement of the parties concerned to a new
contract - when there is neither a valid new contract nor
a clear agreement between the parties to a new contract,
there is no novation. Without the new contract, the old
contract is not extinguished.3” (3) There must be the
extinguishment of the old contract - the extinguishment
of the old obligation by the new one is a necessary
"7Sime Darby Pilipinas, Inc. v. Goodyear Philippines, 651 SCRA 551 (2011); Adriatico
Consortium, Inc. v. Land Bank of the Phil., 609 SCRA 403 (2009); Sim v. MB. Finance Corp.,
508 SCRA 556 (2006); Fabrigas v. San Francisco del Monte, Inc., 476 SCRA 247 (2005); Garcia
v. Llamas, 417 SCRA 292 (2003); Babst v. CA, 350 SCRA 341 (2001); Quinto v. People, 305
SCRA 708, 714 (1999).
"*Ong V. Bogdalbal, 501 SCRA 490 (2006), citing IV Tolentino, Commentaries andJuris
prudence on the Civil Code ofthe Philippines, 1991 cd„ p. 382.
"’Art. 1298, NCC.
""Villaruel v. Estrada, 71 Phil. 140 (1940).
’’’Country Bankers Insurance Corp. v. Lagman, 653 SCRA 765 (2011).
PART 1: OBLIGATIONS
element of extinctive novation which may be effected

either expressly or impliedly?” (4) There must be the
validity of the new contract3” - if the new obligation is
void, the extinguishment of the original obligation is not
realized,394 because that which is null and void cannot
produce any effect.395 However, even when there is no
novation because of the nullity of the new obligation,
Article 1297 also provides that the original obligation
is deemed extinguished if “the parties intended that the
former relation should be extinguished in any event."
16.2.2 Kinds of Novation: (a) As to Essence: (1) Objective
Novation - also called real novation, occurs when there
is a change of the object, cause, or principal conditions
of an existing obligation; (2) Subjective Novation - also
called personal novation, occurs when there is a change
of either the person of the debtor, or of the creditor in
an existing obligation; (3) Mixed Novation - when the
change of the object, cause, or principal conditions of
an obligation occurs at the same time with the change
of either in the person of the debtor or creditor.3W (b) As
to Form or Constitution: (1) Express - when the new
obligation declares in unequivocal terms that the old
obligation is extinguished; (2) Implied - when the new
obligation is incompatible with the old one on every
point.39’
16.2.3 Objective Novation: A novation is objective if the
change involves the cause, object, or any principal
conditions.39’ Hence, the novation is merely modificatory
39-’PNB v. Soriano, 682 SCRA 243 (2012); Reyes v. BP1 Family Savings Bank, Inc., 486
SCRA 276 (2006).
’’’Wellex Group, Inc. v. U-Land Airlines Co., Lid., 745 SCRA 563 (2015); PNB v. Soriano,
682 SCRA 243 (2012); Heirs of Servando Franco v. Gonzales, 675 SCRA 96 (2012); Transpacific
Battery Corp. v. Security Hank & Trost Co., 587 SCRA 230 (2009); Valenzuela v. Kalayaan
Development & Industrial Corp., 590 SCRA 380 (2009).
)94Art. 1297, NCC.
’”8 Manresa, 439-440.
’"Ajax Marketing & Development Corp. v. CA, 248 SCRA 222(1995), citing Cochingyan,
Jr. v. R & B Surely and Insurance Co., Inc., 151 SCRA 339, 349 (1987).
’’’Wellex Group, Inc. v. U-Land Airlines Co., Ltd., 745 SCRA 563 (2015), citing Arco Pulp
and Paper Co. v. Lim, G.R. No. 206806, June 25, 2014; Spouses Bautista v. Pilar Development
Corporation, 312 SCRA 611 (1999).
’’“Art. 1291(1), NCC.
where the change brought about by any subsequent

agreement is merely incidental to the main obligation,
such as a change in the interest rate, an extension of
time to pay”9 or a change in the period to comply with
the obligation. Such a change in the period would only
be a modificatory (or partial) novation, since the period
merely affects the performance, not the creation of the
obligation.4™ An obligation to pay a sum of money is
not novated by an instrument that expressly recognizes
the old, or changes only the terms of payment, or adds
other obligations not incompatible with the old ones, or
the new contract merely supplements the old one.401 The
novation is not extinctive, but merely modificatory.
16.2.4 Substitution of Debtor: (a) Release of debtor: In order
to change the person of the debtor, the old one must
be expressly released from the obligation, and the third
person or new debtor must assume the former’s place in
the relation.402 Without the express release of the debtor
from the obligation, any third party who may thereafter
assume the obligation shall be considered merely
as co-debtor or surety. If there is no agreement as to
solidarity, the first and the new debtor are considered
obligated jointly.40’ (b) Exnromision or Deleeacion-.
(1) Expromision - When the initiative for the change
does not emanate from the old debtor and it may even
be made without his knowledge or consent, since it
consists in a third person assuming his obligation. As
’"Foundation Specialist, Inc. v. Betonval Ready Concrete, Inc., 596 SCRA 697 (2009);
Aquinlcy v. Tibong, 511 SCRA 414 (2006). See also Heirs ol'Servando Franco v. Gonzales, 675
SCRA 96 (2012), citing California Bus Lines, Inc. v. State Investment House, Inc., 418 SCRA 297
(2003); Garcia, Jr. v. CA, 191 SCRA 493 (1990).
■""Ong V. Bogfialbal, 501 SCRA 490 (2006), citing Inchausti & Co. v. Yulo, 34 Phil. 978,
986 (1914); Zapanta v. de Rotaeche, 21 Phil. 154, 159(1912).
■“'PNB v. Soriano, 682 SCRA 243 (2012); Transpacific Battery Corp. v. Security Bank &
Trust Co., 587 SCRA 230 (2009); Aguilar v. Manila Banking Corporation 502 SCRA 354 (2006);
Spouses Reyes v. BPI Family Savings Bank, Inc., 486 SCRA 276 (2006).
“Philippine Savings Bank v. Maitalac, 457 SCRA 203 (2005), citing Garcia v. Llamas,
417 SCRA 292 (2003). See also Aquinlcy v. Tibong, 511 SCRA 414 (2006); Ajax Marketing &
Development Corp. v. CA, 248 SCRA 222 (1995), citing Lopez v. CA, 114 SCRA 671 (1982) and
Mercantile Insurance Co., Inc. V. CA, 196 SCRA 197 (1991).
4“’Aquinlcy v. Tibong, 511 SCRA 414 (2006) and Ajax Marketing & Development Corp,
v. CA, 248 SCRA 222(1995).
PART 1: OBLIGATIONS
such, expromision absolutely requires the consent of

the third person (or new debtor) and the creditor. The
consent of the old debtor, however, is not indispensable
because it can be made even without his knowledge
or consent. (2) Delegation - When the debtor offers
and the creditor accepts a third person who consents
to the substitution so that the intervention and the
consent of these three persons are necessary and they
are respectively known as delegante (original debtor),
delegatario (creditor), and delegado (new debtor).4"
Whether the substitution of debtor is by expromision or
delegation, the effect is the same, that is, the release
of the original debtor from the obligation. Exception:
In delegation, if the new debtor fails to perform the
obligation by reason of his insolvency, the action can
be revived against the original debtor in two instances:
(1) when the insolvency of the new debtor was already
existing and of public knowledge at the time the old
debtor delegated his debt; or (2) when such insolvency
was already existing and known to the old debtor at the
time he delegated his debt.40’
16.2.5 Subrogation: (a) Definition and Kinds: It is defined as the
transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights.406 It may either be:
(1) Legal Subrogation - that which takes place without
agreement but by operation of law because of certain
acts; and (2) Conventional Subrogation - that which
takes place by agreement of parties.40’ (b) Instances of
Legal Subrogation: (1) when a creditor pays another
creditor who is preferred, even without the debtor’s
knowledge; (2) when a third person, not interested in
the obligation, pays with the express or tacit approval
of the debtor; or (3) when, even without the knowledge
of the debtor, a person interested in the fulfillment of
the obligation pays, without prejudice to the effects of
■‘"Testate Estate of Mota v. Serra, 47 Phil. 464 (1925).

"’Art. 1295, NCC.
"“Licaros v. Gatmaitan, 362 SCRA548 (2001) and Chemphil Import and Export Corp.
Court of Appeals, 251 SCRA 257(1995).
"7<Z
confusion as to the latter’s share.408 (c) Conventional

Subrogation: Conventional subrogation of a third person
requires the consent of the original parties (the original
creditor and debtor) and of the third person (the new
creditor).409 It is a new contractual relation based on the
mutual agreement among all the necessary parties.410 (d)
Distinctions Between Conventional Subrogation and
Assignment of Credit: (1) in conventional subrogation,
the debtor’s consent is necessary; in an assignment of
credit, the consent of the debtor is not necessary in order
that the assignment may fully produce the legal effect;411
(2) subrogation extinguishes an obligation and gives
rise to a new one; assignment refers to the same right
which passes from one person to another;412 and (3) the
nullity of an old obligation may be cured by subrogation,
such that the new obligation will be perfectly valid;
but the nullity of an obligation is not remedied by the
assignment of the creditor’s right to another. If the
intention of the parties is that the agreement would
not become valid and effective in the absence of the
debtor’s consent, the transaction is one of conventional
subrogation and not an assignment of credit. Hence, if
not consented to by the debtor, there is no conventional
subrogation and it may not be treated as an assignment
of credit.41’ If the creditor’s right is transferred to a third
person without requiring the debtor’s consent for its
validity, the transaction is merely an assignment of the
credit.414
“Art. 1302, NCC.

“Art. 1301, NCC.
4l0Licaros v. Gatmaitan, supra.
4UIV Tolentino, Civil Code ofthe Philippines, 1996 ed., p. 402, cited in Ledonio v. Capitol
Development Corp., 526 SCRA 379 (2007).
mld.
4l’Licaros v. Gatmaitan, 362 SCRA 548 (2001).
4l4Rodriguez v. CA, 207 SCRA 553 (1992) and Ledonio v. Capitol Development Corp.,
526 SCRA 379 (2007).
PART 2: CONTRACTS
PART 2: CONTRACTS
17) Basic Concepts
17.1 Concept:
17.1.1 Definition: A contract is a meeting of minds between
two persons whereby one binds himself, with respect to
the other, to give something or to render some service.4”
It may also be defined as "a juridical convention
manifested in legalform, by virtue ofwhich one or more
persons bind themselves in favor of another or others,
or reciprocally, to thefidfillment ofa prestation to give,
to do, or not to do.",'t
17.1.2 Important Classifications: (a) As to Perfection: (1)
Consensual - that which is perfected by mere consent;
and (2) Real - that which is perfected not by mere
consent but by the delivery of the object of the contract,
(b) As to Its Name: (1) Nominate - that which is
distinguished by a particular or special name in the Civil
Code, like sale, lease, and deposit; and (2) Innominate
- that which is recognized in the Civil Code, but not
specially named or classified therein. These contracts
shall be regulated by the stipulation of the parties, by
the provisions of Obligations and Contracts, by the rules
governing the most analogous nominate contracts, and
by the customs of the place.417 There are four kinds of
innominate contracts: (i) do ut des—I give that you give;
(ii) do utfacias—1 give that you do; (iiij/acio ut des—I
do that you give; and (iv) facio ut facias—1 do that you
do. (c) As to Degree of Dependence: (1) Principal - that
which can exist independently of other contracts, like
a contract of loan; (2) Accessory - that which cannot
exist without a valid principal contract, like guaranty,
pledge, mortgage, and antichresis; and (3) Preparatory
- that which is not an end by itself but only a means
for the execution of another contract, like agency and
4liArt. 1305, NCC.

4l6Jardine Davies, Inc. v. Court of Appeals, 333 SCRA 684, 692-694, citing 4 Sanchez
Roman 148-149.
4l7Art. 1307, NCC.
the contract of option, (d) As to Cause: (1) Onerous

— that where the cause is understood to be, for each
contracting party, the prestation or promise of a thing or
service by the other,418 like sale; (2) Remuneratory - that
where the cause is the service or benefit for which the
remuneration is given;41’ and (3) Gratuitous - that where
the cause is the mere liberality of the benefactor,420 like
commodatum, (e) According to Risk Involved: (1)
Commutative - that in which each of the contracting
parties gives and receives an equivalent or there is a
mutual exchange of relative values, like sale; and (2)
Aleatory - that in which each of the parties or both
reciprocally bind themselves to give or to do something
in consideration of what the other shall give or do upon
the happening of an event which is uncertain, or which
is to occur at an indeterminate time,421 like the contract
of insurance.
17.2 Fundamental Characteristics:
17.2.1 Obligatory Force of Contracts: It simply means that
“obligations arising from contracts have the force
of law between the contracting parties and should be
complied with in good faith.”422 To be obligatory, the
contract must be perfected, valid, and enforceable.
17.2.2 Autonomy of Contracts: Also known as freedom of
contracts. It simply means that the contracting parties
are accorded the liberality and freedom to establish such
stipulations, clauses, terms, and conditions as they may
deem convenient, provided the same are not contrary
to law, morals, good customs, public order, or public
policy."’ Such freedom is protected by the Constitution
which commands: (1) no person shall be deprived of
life, liberty, or property without due process of law;424
4l!Art. 1350, NCC.
"“Art. 1350, NCC.

"'Art. 2010, NCC.
422Art. 1159, NCC.
"’Art. 1306, NCC.
"4Sec. I, Art. Ill, 1987 Phil. Constitution.
■
PART 2: CONTRACTS
and (2) no law shall be passed impairing obligation of

contracts?25
17.2.3 Mutuality of Contracts: It simply means that the
“contract must bind both the contracting parties; its
I validity or compliance cannot be left to the will of
one of them.”226 The ultimate purpose is to render
void a contract containing a condition which makes
its fulfillment dependent solely upon the uncontrolled
will of one of the contracting parties?27 For example,
even if the loan agreement gave the creditor a license
to increase the interest rate at will during the term of
the loan, that license would have been null and void for
being violative of the principle of mutuality essential
in contracts425 because the rate of interest is a vital
component of the agreement?2’ However, contracts of
adhesion—one in which one of the parties imposes a
ready-made form of contract, which the other party may
accept or reject, but which the latter cannot modify410 —
have been declared as binding as ordinary contracts, the
reason being that the party who adheres to the contract
is free to reject it entirely?11
17.2.4 Relativity of Contracts: (a) Concent: The principle of
relativity of contracts provides that contracts can only
bind the parties who entered into it, and it cannot favor
or prejudice a third person, even if he is aware of such
contract and has acted with knowledge thereof.412 (b) But
including heirs and assiens: A contract also binds the
heirs and assigns of the contracting parties. The general
rule is that heirs are bound by contracts entered into by
their predecessors-in-interest, except when the rights
and obligations arising therefrom are not transmissible
by (1) their nature, (2) stipulation, or (3) provision of
"5See. 10, Art. Ill, 1087 Phil. Constitution.

"‘Art. 1308, NCC.
"’Allied Banking Corporation v. CA, 284 SCRA 357, 363-364 (1998).
"’Philippine National Bank v. CA, 196 SCRA 536, 544-546(1991).
"’Philippine National Bank v. CA, 238 SCRA 20 (1994).
4J0Geraldez v. CA, 230 SCRA 320 (1994)
"'Philippine Commercial and International Bank v. CA, 255 SCRA 299,307.
"’Integrated Packaging Corp. v. Court of Appeals, 333 SCRA 170(2000); Art. 1311, par.
I, NCC.
law.433 As a rule, therefore, he who contracts does so for

himself and his heirs.434 For example, a contract of lease
is generally transmissible to the heirs of the lessor or
lessee. Consequently, the successors-in-interest of the
lessee are entitled to the benefits, while that of the lessor
are burdened with the duties and obligations, which
said covenants conferred and imposed on the original
parties.433 (c) Exceptions to relativity of contracts: (1)
Stipulation pour autrui™ - it is a stipulation in favor
of a third person conferring a clear and deliberate
favor upon him, and which stipulation is merely a
part of a contract entered into by the parties, neither
of whom acted as agent of the third person, and such
third person may demand its fulfillment provided that
he communicates his acceptance to the obligor before
it is revoked.43’ Its requisites are the following: (i) there
must be a stipulation in favor of a third person; (ii) the
stipulation must be a part, not the whole of the contract;
(iii) the contracting parties must have clearly and
deliberately conferred a favor upon a third person, not a
mere incidental benefit or interest; (iv) the third person
must have communicated his acceptance to the obligor
before its revocation; and (v) neither of the contracting
parties bears the legal representation or authorization
of the third party.438 Once the third person accepts the
benefit, he will acquire the right to proceed against
the contracting parties even if he is not a party to the
contract. (2) Third persons may be affected by contracts
creating real rights when they come into possession of
the object of the contract,439 as for example, a recorded
lease is binding upon the purchaser who did not take any
part in the execution of the lease contract440 or a contract
433An. 1311, par. 1, NCC; DKC Holdings Corporation v. Court of Appeals, 329 SCRA
666, 672 (2000).
434Eleizegui v. Lawn Tennis Club, 2 Phil. 309, 313 (1903).
"’Estate of Llenado v. Llenado, G.R. No. 145736, March 4,2009.
416Art. 1311, par. 2, NCC.
"’Florentino v. Encarnacion, Sr., 79 SCRA 193, 201 (1977); Associated Bank v. CA, 291
SCRA 511 (1998).
43!Young v. CA, 169 SCRA 213,219 (1989); citing Florentino v. Encarnacion, Sr., supra.
"’Art. 1312, NCC.
440Art. 1676, NCC.
PART 2: CONTRACTS
of mortgage duly registered is binding upon third

persons.441 (3) Creditors acquire the right to rescind the
contract entered into by the debtor with a third person
if that contract is intended to defraud him.442 (4) Tort
interference - any third person who induces another to
violate his contract shall be liable for damages to the
other contracting party,443 if the following requisites
are present: (i) the existence of a valid contract; (ii)
knowledge on the part of the third person ofthe existence
of contract; and (iii) interference of the third person is
without legal justification or excuse.444 A third person
can be held liable for tort interference even if he does
not know the identity of one of the contracting parties.
The law does not require that the responsible person
shall have known the identity of the injured person.443
18) Perfection and Essential Requisites of Contracts

18.1 Perfection of Contracts:
18.1.1 Stages of Contracts: (1) Negotiation - or preparation
begins when the prospective contracting parties
manifest their interest in the contract and ends at the
moment of their agreement; (2) Perfection - or birth of
the contract occurs when they agree upon the essential
elements thereof; and (3) Consummation - which is the
last stage, occurs when the parties fulfill or perform the
terms agreed upon in the contract, culminating in the
extinguishment thereof.446
♦"Arts. 2125, par. 1 and2126,NCC.

**2Arts. 1313 and 1381(3), NCC.
443Art. 1314, NCC.
44,'So Ping Bun v. Court of Appeals, 314 SCRA751, 758 (1999).
♦"Gilchrist v. Cuddy, 29 Phil. 542.
“Sagun v. ANZ Global Services and Operations (Manila), Inc., 801 SCRA 243 (2016);
SM Investments Corp. v. Posadas, 776 SCRA219 (2015); Robem Development Corp. v. People’s
Landless Association, 693 SCRA 24 (2013); C.F. Sharp & Co.. Inc. v. Pioneer Insurance & Surety
Corp., 666 SCRA 210 (2012); International Freeport Traders, Inc. v. Danzas Intercontinental, Inc.,
640 SCRA 621 (2011); XYST Corp. v. DMC Urban Properties Development, Inc., 594 SCRA 598
(2009); Rockland Construction Company, Inc. v. Mid-Pasig Land Development Corp., 543 SCRA
596 (2008); Central Cement Corp. v. Mines Adjudication Board, 542 SCRA 277 (2008); Navarra
v. Planters Development Bank, 527 SCRA 562 (2007); Moreno, Jr. v. Private Management Office,
507 SCRA 63 (2006).
18.1.2 How Perfection ofContracts Takes Place: The perfection

of a contract takes place upon the concurrence of
the essential elements thereof.447 A contract which is
consensual as to perfection is so established upon a
mere meeting of minds, i.e., the concurrence of offer and
acceptance, on the object, and on the cause thereof.44*
Stated otherwise, a consensual contract is perfected by
mere consent.44’ A contract which requires, in addition
to the above, the delivery of the object of the agreement
is commonly referred to as a real contract.450 There are
only four contracts classified as real contracts under the
Civil Code, which requires delivery of the object of the
contract for its perfection, as follows: (1) pledge, (2)
commodatum, (3) mutuum, and (4) deposit. All other
contracts are consensual, or perfected by mere consent.
18.1.3 Kinds of Elements of Contracts: (1) Essential - those
necessary for the very existence of the contract itself
and the absence of any one of said elements will prevent
the creation or existence of a contract, such as the
object, cause, consent, and delivery of the object; (2)
Natural - those which are not essential for the existence
of a contract but they are presumed to exist in certain
contracts, unless there is an express stipulation to the
contrary, such as the warranties against eviction and
hidden defects in a contract of sale; and (3) Accidental
- those which exist only when the parties expressly
provide for them, such as the clauses, terms, and
conditions that the parties may agree upon, provided
they are not contrary to law, morals, good customs,
public order, or public policy.451
18.1.4 Essential Requisites of Contracts: For consensual
contracts, there are three essential elements or requisites:
(1) consent; (2) object; and (3) cause. For real contracts,
there are four essential requisites: (1) consent; (2)
object; (3) cause; and (4) delivery of the object.
44,Ang Yu Asuncion v. CA, 238 SCR A 602 (1994).

“ZrZ
44’XYST Corp. v. DMC Urban Properties Development, Inc., 594 SCRA 598 (2009).
450Ang Yu Asuncion V. CA, supra.
45lArt. 1306, NCC.
PART 2: CONTRACTS
18.2 Consent:
18.2.1 How Manifested: Consent is manifested by the meeting
of the offer and acceptance upon the thing and the cause
which are to constitute the contract.452 Thus, an offer
that is not accepted does not give rise to consent, and
the contract does not come into existence.45’
18.2.2 Offer: (a) Concent: It is defined as “an expression of
willingness to contract on certain terms, made with
the intention that it shall become binding as soon as it
is accepted by the person to whom it is addressed.”454
Thus, an offer refers to a unilateral proposition which
one party makes to the other for the celebration of
the contract.455 (b) Requisites for effective offer: (1)
the offeror must have a serious intention to become
bound by his offer; (2) the terms of the offer must be
reasonably certain,455 definite, and complete, so that the
parties and the court can ascertain the terms of the offer;
and (3) the offer must be communicated by the offeror
to the offeree, resulting in the offeree’s knowledge of
the offer, (c) Instances not considered as offers: (1) as
a rule, business advertisements of things for sale are
not offers but mere invitations to make an offer457 —the
positive response to such advertisement is what may be
considered as the offer; (2) advertisements for bidders
are not considered as offers but simply invitations to
make proposals458 —the bid proposals or quotations
submitted by the prospective suppliers are the offers and
the reply of the proposer, the acceptance or rejection of
the offers;45’ and (3) display of goods with a price ticket
attached in a shop window or on a supermarket shelf is
not an offer to sell but an invitation for customers to make
an offer to buy. (d) When Offer is Terminated: (1) by
revocation or withdrawal - the offer may be withdrawn
452 Art. 1319, NCC.

’’’Gamboa v. Gonzales, 17 Phil. 381.
’’’G.H. Treitel, The Law ofContract, IO’1 cd., p. 8.
’’’Paredes v. CA, 463 SCRA 504 (2005).
’’’Art. 1319, par. l.NCC.
’’’Art. 1325, NCC.
458Art. 1325, NCC.
’’’Jardine Davies, Inc. v. CA, 333 SCRA 684 (2000).
or revoked by the offeror, as a rule, at any time prior

to the perfection of the contract;460 however, where a
period is given to the offeree within which to accept
the offer and the same has a separate consideration, a
contract of “option” is deemed perfected, and it would
be a breach of that contract to withdraw the offer during
the agreed period;461 (2) by rejection of the offer by the
offeree or when he makes a counter-offer—because
a counter-offer is a rejection of the original offer and
the simultaneous making of a new offer; (3) by the
death, insanity, insolvency, or civil interdiction of
either the offeror or the offeree prior to perfection of
the contract;462 (4) by expiration of the period fixed for
the acceptance of the offer;463 (5) by the supervening
illegality of the proposed contract prior to perfection;
and (6) by the destruction of the subject matter prior to
perfection, (e) Option Contract: (1) Concept: An option
is a preparatory contract in which one party grants to the
other, for a fixed period and under specified conditions,
the power to decide, whether or not to enter into a
principal contract. It binds the party who has given the
option, not to enter into the principal contract with any
other person during the period designated, and, within
that period, to enter into such contract with the one to
whom the option was granted, if the latter should decide
to use the option. It is a separate agreement distinct from
the contract which the parties may enter into upon the
consummation of the option.464 (2) If not supported by
consideration: If the period is not itself founded upon
or supported by a consideration, the option does not
become a contract. Thus, the offeror is still free and has
the right to withdraw the offer before its acceptance,
or, if an acceptance has been made, before the offeror’s
coming to know of such fact, by communicating that
460Ang Yu Asuncion v. CA, 238 SCRA 602, 613 (1994); citing Luudico v. Arias, 43 Phil.
27.
461 Ang Yu Asuncion v. CA, supra.
462Art. 1323, NCC.
463Art. 1321, NCC.
464Carcellcr v. Court of Appeals, 302 SCRA 718, 724 (1999).
PART 2: CONTRACTS
withdrawal to the offeree.4" (3) When option becomes

contract: Where a period is given to the offeree within
which to accept the offer and the same is founded
I upon or supported by a separate consideration, a
contract of “option” is deemed perfected.466 Since the
option becomes a contract, the offeror is bound by the
agreement and may not withdraw the offer during the
period agreed upon. Thus, it will be a breach of that
contract (of option) to withdraw the offer during the
agreed period.467 (4) Consideration in option contract:
By the very nature of an option contract, the same is an
onerous contract for which the consideration must be
something of value, although its kind may vary.468 The
consideration need not be monetary but could consist
of other things or undertakings. (5) Option money
distinguished from earnest money: (i) earnest money is
part of the purchase price, while option money is the
money given as a distinct consideration for an option
contract; (ii) earnest money is given only where there
is already a sale, while option money applies to a sale
not yet perfected; and (iii) when earnest money is given,
the buyer is bound to pay the balance, while when
the would-be buyer gives the option money, he is not
required to buy.46’
18.2.3 Acceptance of Offer: (a) Must be absolute: To be
effective, an acceptance must be absolute.470 An
acceptance is considered absolute and unqualified when
it is identical in all respects with that of the offer so
as to produce consent or a meeting of the minds.47'
A qualified acceptance, or one that involves a new
4"Ang Yu Asuncion, supra, citing Art. 1324, Civil Code and Atkins, Kroll & Co. v. Cua,
102 Phil. 94; see also Rural Bunk of Paniflaque, Inc. v. Remolado, 135 SCRA 409; Sanchez v.
Rigos, 45 SC RA 368.
466Ang Yu Asuncion v. CA, supra.
“’/</.
46HVilIamor v. Court of Appeals, G.R. No. 97332, 10 October 1991, 202 SCRA 607, 615;
Bible Baptist Church v. Court of Appeals, 444 SCRA 399 (2004); Eulogio v. Sps. Apeles, G.R.
No. 167884, Jun. 20, 2009.
46’Adelfa Properties, Inc. v. CA, 240 SCRA 565, 584 (1995).
470Art. 1319, l“par., NCC.
47lTalampas, Jr. v. Moldcx Realty, Inc., 758 SCRA 666 (2015) and Traders Royal Bank v.
Cuison Lumber Co., Inc., 588 SCRA 690 (2009).
proposal, constitutes a counter-offer172 and is a rejection

of the original offer. Any modification or variation from
the terms of the offer annuls the offer.473 (b) Manner of
Acceptance: The offeror may fix the time, place, and
manner of acceptance, all of which must be complied
with.474 An acceptance which is not made in the manner
prescribed by the offeror is not effective but constitutes
a counter-offer which the offeror may accept or reject.473
In the absence of any manner of acceptance fixed by
the offeror in his offer, an acceptance may be express
or implied476 and, if an offer has been made through
an agent, it is deemed accepted from the time the
acceptance is communicated to said agent.477 (c) When
acceptance binds offeror: The contract is perfected only
from the time an acceptance of an offer is made known
to the offeror.478 This is known as the cognition theory
being followed by the Civil Code, (d) Withdrawal of
acceptance: For a contract to arise, the acceptance
must be made known to the offeror. Accordingly, the
acceptance can be withdrawn or revoked before it is
made known to the offeror.47’
18.2.4 Capacity to Give Consent: (a) Persons incanable of
giving consent: (1) Minors480 - where the minors who
entered into the contract have already passed the age
of puberty and adolescence in such a way that they
could misrepresent and actually did misrepresent
themselves as having reached the age of majority
(active misrepresentation), they cannot, upon reaching
the age of majority, annul the contract on the ground
of minority inasmuch as they are already in estoppel;-""
but if the minor was guilty merely of constructive or
472Art. 1319, par. l.NCC.

473ABS-CBN Broadcasting Corp. v. CA, 301 SCRA 572.
4,4An. 1321, NCC.
473Malbarosa v. CA, G.R. No. 125761, April 30,2003.
"‘Art. 1320, NCC.
4,7&eArt. 1322, NCC.
4,8Art. 1319, par. 2. NCC.
479Jardinc Davies, Inc. v. CA, supra; Oesmer v. Paraiso Development Corp., G.R. No.
157493, Feb. 5, 2007.
4“Art. 1327(1), NCC.
481Mercado v. Espiritu, 37 Phil. 215.
PART 2: CONTRACTS
passive misrepresentation, or when the document

signed by him did not contain such statement that he is
already of legal age, he may still annul the contract upon
reaching the age of majority;4"2 (2) insane or demented
persons4"3 - but contracts entered into during a lucid
interval are valid;484 (3) deaf mutes who do not know
how to write;483 (4) those in a state of drunkenness or
during a hypnotic spell;488 (5) persons suffering from
the accessory penalty of civil interdiction;48’ and (6)
incompetents under guardianship, (b) Effects of old aire
and physical infirmity: A person is not incapacitated
to contract merely because of advanced years or by
reason of physical infirmities. Only when such age or
infirmities impair his mental faculties to such extent as
to prevent him from properly, intelligently, and fairly
protecting his property rights that he is considered
incapacitated.4"8 (c) Effect of illiteracy: An illiterate is
not incapable of giving consent to a contract. However,
when an illiterate alleges mistake or fraud in giving his
consent, the burden is on the party interested in enforcing
the contract to prove that the terms thereof have been
fully explained to the former in a language understood
by him;4"’ otherwise, the contract is voidable. It is the
party invoking the benefits of Article 1332 who has the
burden of proving that he really is unable to read or that
the contract is written in a language not understood by
him. Only after sufficient proof of such facts may the
burden of proving that the terms of the contract had
been explained to the disadvantaged person be shifted
to the party enforcing the contract.4™
18.2.5 Vices of Consent: (a) Mistake: In order that mistake
may invalidate consent, it is necessary that: (1) it should
refer to the substance of the thing which is the object
“‘Brugunzu v. Villa-Abrille, 105 Phil. 456.

“‘Art. 1327(2), NCC.
“‘Art. 1328, NCC.
“’Art. 1327(2), NCC.
“‘Art. 1328, NCC.
“’Art. 34, RPC.
“"Loyola v. Court of Appeals, 326 SCRA 285.
“’Art. 1332, NCC.
‘■"Sales v. Court of Appeals, 211 SCRA 858, 864 (1992).
of the contract4’1 - which includes mistake over the

essence or the substantial qualities of a thing (error in
substantia) which affects not the identity of the thing
but the materials which compose it, as for example, the
purchase of an object which is gold plated in the belief
that it is really gold; mistake over determinate attributes
or characteristics of a thing foreign to its matter,
but which has been understood as essential by the
contracting parties (error in substantia), as for example,
a painting by Goya is bought and the painting is not of
Goya; and mistake as to amount (error in quantitate)
which refers to mistake as to the extension or dimension
of the object and differs from the mistake of account
which is simply a mistake in the computation or in a
mathematical operation;4’2 or to those conditions which
have principally moved one or both parties to enter into
the contract,453 or to the identity or qualifications ofone of
the parties when the same have been the principal cause
of the contract454 —for mistake as to the qualification of
one of the parties to vitiate consent, the mistake must be
either with regard to the identity or with regard to the
qualification of one of the contracting parties and the
identity or qualification must have been the principal
consideration for the celebration of the contract;"3 (2)
it must be excusable and not one that could have been
avoided by the party alleging it456 —an error so patent
and obvious that nobody could have made it, or one
which could have been avoided by ordinary prudence, or
a mistake that is caused by manifest negligence, cannot
be invoked by the one who made it in order to annul
his contract;4” and (3) it must generally be a mistake of
fact and not mistake of law. Ordinarily, a mistake of law
does not vitiate consent. By way of exception, mistake
of law may invalidate consent if the following requisites
are present: (i) the mistake must be with respect to the
4,1 Art. 1331, par. l.NCC.

451IV Caguioa, Comments and Cases on Civil Law, 1983 cd., p. 523.
4,1Art. 1331, par. l.NCC.
4MArt. 1331,par. 2, NCC.
"’Roman Catholic Church v. Panic, 669 SCRA 234 (2012).
"‘Art. 1333, NCC; Domingo Realty, Inc. v. CA, 513 SCRA 40 (2007).
"’Domingo Really, Inc. v. CA, supra.
PART 2: CONTRACTS
legal effect of an agreement; (ii) it must be mutual;

and (iii) the real purpose of the parties must have been
frustrated.4’8 (b) Violence: In order that violence may
vitiate consent and be a ground for annulment of a
contract, the following requisites must be present: (1)
the force employed is either serious or irresistible; and
(2) it must have been the determining cause of consent.
It is not necessary that the force be always irresistible.4”
Such violence will annul the obligation, although it may
have been employed by a third person who did not take
part in the contract.™ (c) Intimidation: In order that
intimidation may vitiate consent and render the contract
invalid, the following requisites must concur: (1) that
the intimidation must be the determining cause of the
contract, or must have caused the consent to be given;
(2) that the threatened act be unjust or unlawful; (3) that
the threat be real and serious, there being an evident
disproportion between the evil and the resistance which
all men can offer, leading to the choice of the contract
as the lesser evil; and (4) that it produces a reasonable
and well-grounded fear from the fact that the person
from whom it comes has the necessary means or ability
to inflict the threatened injury.401 The intimidation
will annul the obligation, although it may have been
employed by a third person who did not take part in
the contract.'02 However, a threat to enforce one’s claim
through competent authority, if the claim is just or legal,
does not vitiate consent.’02 (d) Undue Influence: In order
for undue influence to vitiate consent, the following
requisites must be present: (1) a person who can be
influenced; (2) the fact that improper influence was
exerted; and (3) submission to the overwhelming effect
of such unlawful conduct.’04 (e) Fraud: In order that
fraud may vitiate consent and be a cause for annulment
4”Art. 1334, NCC.

4”Art. 1335, NCC.
’““Art. 1336, NCC.
’“'De Leon v. CA, 186 SCRA 345 (1999); Binua v. Ong, 727 SCRA 59 (2014); and BP1 v.
Fernandez, 768 SCRA 563 (2015).
’“’Art. 1336, NCC.
’“’Art. 1335, par. 4, NCC.
’“Loyola v. CA, 326 SCRA 285 (2000).
of contract, the following must concur: (1) it must

have been employed by one contracting party upon the
other’® - as a rule, therefore, misrepresentation by a
third person does not vitiate consent;506 exceptions: (i)
when the third person causes the fraud in connivance
with, or at least with the knowledge, without protest,
of the favored contracting party, the contract may be
annulled,507 and (ii) a contract may also be annulled on
the ground of vitiated consent if deceit by a third person,
even without connivance or complicity with one of the
contracting parties, resulted in mutual error on the part
of the parties to the contract;508 (2) it must have induced
the other party to enter into the contract509 — it must be
causal fraud (dolo causante), meaning the fraud must
be the determining cause of the contract, or must have
caused the consent to be given,510 because if the fraud is
merely incidental (dolo incidente), or those which are
not serious in character and without which the other
party would still have entered into the contract, the
person employing fraud is only liable to pay damages;5"
(3) it must have been serious512 - the fraud is serious
when it is sufficient to impress, or to lead an ordinarily
prudent person into error; that which cannot deceive a
prudent person cannot be a ground for nullity;513 and (4)
it must have resulted in damage and injury to the party
seeking annulment.514 Silence or concealment, by itself,
does not constitute fraud, unless there is a special duty
to disclose certain facts, or unless according to good
“Arts. 1342 and 1344, NCC.

“Hill v. Veloso, 31 Phil. 160(1915).
™Id.
“Rural Bank of Caloocan, Inc. v. CA, 104 SCR A 151 (1981); Co v. CA, 193 SCR A 198
(1991).
“Art. 1338, NCC.
5I0Fontana Resort and Country Club, Inc. v. Tan, 664 SCRA 382 (2012); Archipelago
Management and Marketing Corp. v. CA, 299 SCRA 43 (1998); Samson V. CA, 238 SCRA 397
(1994).
511 Art. 1344, par. 2, NCC; Geraldcz v. CA, 230 SCRA 320 (1994).
5l2Art. 1344, par. 1,NCC.
5bECE Realty and Development, Inc. v. Mandap, 734 SCRA 76 (2014) and Carganillo v.
People, 735 SCRA 677 (2014).
5l4Alcasid v. CA, 237 SCRA 419 (1994); Constantino v. Court of Appeals, 264 SCRA 59;
Rural Bank of Sta. Maria, Pangasinan v. Court of Appeals, 314 SCRA 255,270 (1999).
I
PART 2: CONTRACTS
faith and the usages of commerce the communication

should be made.5'5 Thus, when the seller has knowledge
of a material fact which, if communicated to the
buyer, would render the sale unacceptable, or at least,
substantially less desirable, the non-disclosure of such
fact would amount to fraud.516
18.3 Object of Contract:
18.3.1 Possible Object of Contracts: (1) all things which are
not outside the commerce of men, including future
things; (2) all rights which are not intransmissible; or
(3) all services which are not contrary to law, morals,
good customs, public order, or public policy.517
18.3.2 Requisites: (1) it must be within the commerce of
men;518 (2) it must be real or possible, either physically
or legally;51’ (3) it should be licit, or not contrary to law,
morals, good customs, public order, or public policy;520
and (4) it should be determinate or determinable, as to
its kind.521
18.3.3 Rule as to Future Inheritance: As a rule, no contract may
be entered into upon future inheritance.521 Contracts
entered into upon future inheritance are void.522 For
inheritance to be considered “future,” succession must
not have been opened at the time of the contract.524 A
contract may be classified as a contract upon future
inheritance prohibited under the second paragraph of
Article 1347 of the Civil Code where the following
requisites concur: (1) the succession has not yet been
opened; (2) the object of the contract forms part of the
inheritance; and (3) the promisor has, with respect to
"'"Art. 1339. NCC; Riviera Filipina, Inc. v. CA, 380 SCRA 245 (2002) and Rural Bank of
Stu. Maria, Pangasinan v. CA, 314 SCRA 255, 270 (1999).
’"Guinhawa v. People, 468 SCRA 278 (2005).
’"Art. 1347, NCC.
""Art. 1347, NCC.
’"Art. 1348, NCC.
520Art. 1347, NCC.
521 Art. 1349, NCC.
522Art. 1347, par. 2, NCC.
’“Arroganle v. Deliarte, G.R. No. 152132, July 24, 2007.
524J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 11,2005.
the object, an expectancy of a right which is purely

hereditary in nature.525 Exception: The law allows,
however, a person to make a partition of his estate by an
act inter vivos, provided that the legitime of compulsory
heirs is not prejudiced.526 This is the exception to the
rule prohibiting contracts upon a future inheritance.527
18.4 Cause of Contract:

18.4.1 Cause and Motive: (a) Cause: The cause or
consideration is the why of the contracts, the essential
reason which moves the contracting parties to enter
into the contract.52* (b) Distinguished from Motive:
The particular motives of the parties in entering into a
contract are different from the cause thereof.529 Cause
is the essential reason for the contract, while the
latter are the particular reasons of a contracting party
which do not affect the other party and which do not
preclude the existence of a different consideration. To
clarify by an example: A thing purchased constitutes
the consideration (cause) for the purchaser and not
the motives which have influenced his mind, like its
usefulness, its perfection, its relation to another, the
use thereof which he may have in mind, etc., a very
important distinction, which precludes the annulment of
the contract by the sole influence of the motives, unless
the efficacy of the former had been subordinated to
compliance with the latter as conditions.550 Ordinarily,
therefore, a party’s motives for entering into a contract
do not affect the contract.5’1 Exception: The motive may
be regarded as causa when it predetermines the purpose
of the contract.5’2 Stated otherwise, the motive may
be regarded as the causa when the realization of such
iuld.‘, see also Arrogante V. Deliarte, supra.

526Art. 1080, NCC.
“’J.L.T. Agro, Inc. v. Balansag, supra.
“’Gonzales v. Trinidad, 67 Phil. 682; Villamor v. CA, 202 SCRA 607; Domingo v. CA. 367
SCRA 368, 379 (2001); Bible Baplisl Church v. CA, 444 SCRA 399 (2004); Eulogio v. Apeles,
576 SCRA 561 (2009).
“’Art. 1351, NCC.
“°8 Manresa 618-619, cited in Gonzales v. Trinidad, 67 Phil. 682.
5JIUy v. CA, 314 SCRA 69 (1999).
“2E. Razon, Inc. v. Philippine Ports Authority, 151 SCRA 223 (1987).
I
PART 2: CONTRACTS
motive or particular purpose has been made a condition

upon which the contract is made to depend.’" In this
situation, the illegality of the motive shall render the
contract void’34 because the motive is also the cause.
18.4.2 Requisites for Cause: (1) It must exist - But cause is
presumed to exist in a contract although not stated,
unless the contrary is proved.’3’ However, if it is proven
that the cause did not exist at the time of the transaction,
the contract is void.”6 (2) It must be true - The statement
of a false cause in contracts shall render them void,”7
unless it can be proven that they were founded upon
another cause which is true and lawful.”1 If the price
is simulated, the sale is void, but the act may be shown
to have been in reality a donation, or some other act or
contract.”’ Hence, a deed of sale, in which the stated
consideration had not in fact been paid, is null and
void.’40 On the other hand, if the consideration or price
stated in the contract is true except that it is not paid,
the contract is valid and results in a right to demand the
fulfillment or cancellation of the obligation.541 Thus, it
is not the act of payment of price that determines the
validity of a contract of sale.542 (3) It must be licit - a
contract where the cause is contrary to law, morals,
good customs, public order, or public policy is void541
and produces no effect whatever.544
18.4.3 Effect of Lesion or Inadequacy of Cause: Lesion or
inadequacy of cause does not invalidate a contract,
unless there has been fraud, mistake, or undue
’’’Philippine National Construction Corp. V. CA, 272 SCRA 183 (1997).

”4Art. 1409(1), NCC.
’’’Art. 1.354, NCC.
”‘Art. 1409(3), NCC.
’’’Art. 1353, NCC; Javier v. Court of Appeals, 183 SCRA 171.
”’M.
’’’Art. 1471, NCC.
’"Rongiivilln v. CA, 294 SCRA 289 (1998); Yu Bun Guan v. Ong, G.R. No. 144735, Oct.
18,2001; Ocejo, Perez & Co. v. Plores, 40 Phil. 921.
54 'Buenaventura v. Court of Appeals, 416 SCRA 263 (2003); see also Balatbat v. Court of
Appeals, 261 SCRA 128 (1996).
’42/rZ
’4’Art. 1409(1), NCC.
544Art. 1352, NCC.
influence.545 But in the following cases, lesion is a

ground for rescission of the contract: (1) when the ward
suffers lesion by more than one-fourth (%) of the value
of the property in contracts entered into by guardians on
behalf of wards;546 (2) when the absentee suffers lesion
by more than one-fourth (!4) of the value of the property
in contracts entered into by legal representatives on
behalf of absentees;547 or (3) in partition among co-heirs,
when any one of them received things whose value is
less than one-fourth (!4) than the share to which he is
entitled.548
19) Forms of Contracts, Reformation, and Interpretation of

Contracts
19.1 Forms of Contracts:
19.1.1 Effect of Formalities: (a) Rule: Contracts are obligatory,
meaning both valid and enforceable, in whatever form
they may have been entered into, provided all the
essential requisites for their perfection are present."’
(b) Exceptions: Form becomes an indispensable
requirement: (1) when the law requires a certain form
to make the contract valid; or (2) when the law requires
a certain form in order that it may be enforceable or in
order that it may be proved in a certain way.55"
19.1.2 Contracts which Require Form for Validity: (1) in
donation of personal property where the value exceeds
P5.000, both the donation and the acceptance must
be writing; otherwise, the donation is void;551 (2) in
donation of real property, both the donation and the
acceptance must be in a public instrument; otherwise,
the donation is void;552 ( 3) in donation propter nuptias,
same formalities applicable to ordinary donations
"’Art. 1355, NCC.

54‘Art. 1381(1), NCC.
"’Art. 1381(2), NCC.
"‘Art. 1098, NCC.
"’Art. 1356, NCC.
"'Art. 748, NCC.

552Art. 749, NCC.
1
PART 2: CONTRACTS
are required; otherwise, the donation propter nuptias

is void;”3 (4) in express condonation intended to be
effective during the lifetime of the creditor, both the
condonation and the acceptance must comply with
the formalities applicable to ordinary donations;
otherwise, the condonation is invalid;”4 (5) in contracts
of partnership where real properties are contributed as
capital, there must be an inventory of the real properties
contributed, signed by the parties, and attached to a
public instrument; otherwise, the contract of partnership
is void;”3 (6) in agency to sell a parcel of land or any
interest therein, the authority of the agent is required to
be in writing; otherwise, the sale by the agent is void;”6
(7) any stipulation between the common carrier and the
shipper or owner limiting the liability of the former for
the loss, destruction, or deterioration of the goods to
a degree less than extraordinary diligence must be in
writing and signed by the shipper or owner; otherwise,
the stipulation is not valid;”’ (8) in antichresis, it is
necessary that the amount of the principal and of the
interest of the principal obligation should be specified in
writing; otherwise, the contract of antichresis is void;”'
(9) in sale or transfer of large cattle, the same must
be registered with the city/municipal treasurer and a
certificate of transfer must be issued; otherwise, the sale
or transfer is not valid;”’ and (10) in chattel mortgage,
the personal property must be recorded in the chattel
mortgage registry; otherwise, the chattel mortgage is
not valid.'60
19.1.3 Contracts Which Require Form for Enforceability
(Statute of Frauds): (a) Contracts itovemed by Statute
of Frauds: (I) an agreement that by its terms is not to
be performed within a year from the making thereof is
’’’Art. S3. FC, in relation to Arts. 748 and 749, NCC.

534Art. 1270, par. 2, NCC.
333 Art. 1773, in relation to Art. 1771, NCC.
”6Art. 1874, NCC.
’’’Art. 1744(1), NCC.
’’“Art. 2134, NCC.
’’’Act No. 1147, otherwise known as the Cattle Registration Act.
’“Art. 2140, NCC.
required to be in writing to be enforceable under the

Statute of Frauds’6' - applies only to agreements not
to be performed on either side within a year from the
making thereof62 and the test to determine whether an
oral contract is enforceable under the one-year rule of
the Statute of Frauds is whether, under its own terms,
performance is possible within a year from the making
thereof;’61 (2) any special promise to answer for the
debt, default, or miscarriage of another’" - referring
to the contracts of guaranty proper and suretyship; (3)
an agreement in consideration of marriage,’6’ such as
marriage settlement;’66 (4) sale of goods, chattels, or
things in action at a price not less than P500 - the Statute
covers both tangible and intangible personal property’"
and also covers the assignment of choses in action;
hence, an assignment of a credit over P500 is governed
by the Statute of Frauds;’68 (5) sale of real property or
any interest therein or lease of real property for more
than a year,569 including an agreement for its renewal;’"
(6) representation as to the credit of a third person;”'
and (7) an express trust concerning an immovable or
any interest therein’" - the latter is also in the nature
of a statute of frauds.”1 (b) Requirement of formality
tinder Statute of Frauds: Those contracts must be
in writing or, if not in writing, there be some note or
memorandum thereof in writing subscribed by the party
charged’74 (or the party against whom enforcement is
“'Art. I403(2)(a), NCC.

’“National Bank v. Philippine Vegetable Oil Co., 49 Phil. 857, 867 (1927).
’"U.S.-Blue Valley Creamery Co. v. Consolidated Produels Co, C.C. A. Mo., 81 F.2d 182.
’"Art. 1403(2)(b), NCC.
’“Art. 1403, par. 2(c), NCC.
’“Art. 77, FC;
’“IVTolentino, CivilCode ofthe Phil., 1991 ed., 623.
citing Ysmael v. Hoskins, 50 Phil. 132.
’“Art. 1403, par. 2(e), NCC.
’"Fernandez v. Court of Appeals, 166 SCRA 577 (1998); Inter-Asia Services Corp. (Inter
national) v. Court of Appeals, 263 SCRA 408 (1996).
“'Art. 1403, par. 2(f), NCC.
’"Art. 1443, NCC.
“’Pefialbcr v. Ramos, 577 SCRA 509 (2009).
’"Art. 1403(2), NCC.
/'
PART 2: CONTRACTS
sought)—the note or memorandum must contain the

name of the parties, the terms and conditions of the
contract, and a description of the property sufficient to
render it capable of identification’-’ and must contain
the essential elements of the contract expressed with
certainty7 that may be ascertained from the note or
memorandum itself, or some other writing to which it
refers or within which it is connected, without resorting
to parol evidence.’-6 (c) Principles zo'.emrz Sta’-te
of Frauds: (1) the form required under the Statute of
Frauds is for evidentiary purposes only; ~ 'nentx, if
the parties permit a contract to be proved, whhout any
objection, it is then just as binding as if the Statute has
been complied with;’*’ (2) the Statute of Frauds applies
only to executory contracts'*’ and it does not apply
to contracts which have been completely or partially
performed;”0 (3) the Statute of Frauds does not apply to
actions which are neither for violation of a contract nor
for the performance thereof;”1 (4) the Statute of Frauds
may be invoked only by a party to the oral contract not
by a stranger thereto;”2 (5) the defense of the Statute of
Frauds can be waived either by; (i) failing to object to
the presentation of oral evidence to prove the contract
or (ii) accepting benefits under the contract;”’ and (6) the
Statute of Frauds refers to specific kinds of transactions
and cannot apply to any other transaction that is not
enumerated in Articles 1403(2) and 1443.’"
’’’Swedish Match, AB v.CA,441 SCRA 1 (2004).riling Litonjuav. Fernandez,427SCRA

478 (2004).
’’’Swedish Match, AB v. CA, supra, 16, citing Gallemil V. Tabilaran, 20 Phil. 241 (1911).
citing Dumalagan v. Bolifer, 33 Phil. 471 (1916).
”9Mactan-Cebu International Airport Authority v. Tudtud, 571 SCRA 165 (2008), riling
Asia Production Co., Inc. v. Pao, 205 SCRA 458,467 (1992).
’“/</. Also in Asia Production Co., Inc. v. Pao, 205 SCRA 458,467 (1992), riling Almirol
v. Monserml, 48 Phil. 67, 70; Robles v. Lizarraga Hermanos, 50 Phil. 387; Diana v. Macalibo, 74
Phil. 70; Yuneza v. CA. 572 SCRA413 (2008); Swedish Match, AB v.CA,441 SCRA 1 (2004).
’“'Asia Productions Co., Inc. v. Patio, 205 SCRA 458, 467 (1992), riling Facturan v.
Sabanal, 81 Phil. 512 (1948) and Eusebio v. Sociedad Agricola del Balarin, 16 SCRA 569 (1966).
’“Art. 1408, NCC; Ayson v. CA, 97 Phil. 965.
’’’Art. 1405, NCC.
’"Cruz v. J.M. Tuason & Co., Inc., 76 Phil. 543, 555 (1977); Western Mindanao Lumber
Co, Inc. v. Medalle, 79 SCRA 703,706 (1977); Rosencor Development Corp. v. Inquing, G.R. No.
140479, March 8,2001.
416 PRE-BAR REVIEWER IN CIVIL LAW'
19.1.4 Contracts Which Require Form for Convenience Onlv:

(a) Contracts required to be in public document under
Article 1358: (1) acts and contracts which have for
their object the creation, transmission, modification,
or extinguishment of real rights over immovable
property,5*’ such as a contract of real estate mortgage;
(2) cession, repudiation, or renunciation of hereditary
rights or of those of the conjugal partnership of gains;’**
(3) 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;5*7 and (4) cession of actions or rights proceeding
from an act appearing in a public document.-'7* AU other
contracts where the amount involved exceeds P50O
must appear in writing, (b) Purpose of requirement in
Article 1358: The provision of Article 1358 of the Civil
Code on the necessity of a public document is only for
convenience, not for validity or enforceability.’*’ Non-
compliance with formal requisites does not adversely
affect the validity of the contract or the contractual
rights and obligations of the parties.”0 (c) Remedy for
non-comnliance with formality under Article 1358:
For contracts which are required to be in a public
document under Article 1358, the contracting parties
may compel each other to observe that form and this
right may be exercised simultaneously with the action
upon the contract.”1 But in order for this remedy to be
exercised, it is necessary that the following requisites
must concur: (1) the contract must have already been
perfected;”2 (2) the contract must have been valid as to
form;’” and (3) the contract must have been enforceable
’"Art. 1358(1), NCC.

’“Art. 1358(2), NCC.
’“’Art. 1358(3), NCC.
’“Art. 1358(4), NCC.
“'DaiIon V. CA, 182 SCRA 892; Caoili v. CA, 314 SCRA 345 (1999); Cenido v.
Apacionado, 318 SCRA 688 (1999); Aguscn v. CA, 325 SCRA 504 (2000); Peflalosa v. Santos,
363 SCRA 545, 558-559 (2001).
”°Agasen v. CA, 325 SCRA 504 (2000); Londres v. CA, 394 SCRA 133.
”'Art. 1357, NCC.
”!M.
’’’Art. 1356, NCC.
PART 2: CONTRACTS
under the Statute of Frauds.”* Thus, when a contract is

enforceable under the Statute of Frauds, and a public
document is necessary for its registration in the Registry
of Deeds, the parties may avail themselves of the right
under Article 1357.”’
19.2 Reformation and Interpretation of Contracts:
19.2.1 Concept and Requisites: (a) Definition: Reformation
is defined as a remedy in equity, whereby a written
instrument is made or construed so as to express or
conform to the real intention of the parties, where some
error or mistake has been committed.”4 (b) Requisites
of Reformation: (1) there must have been a meeting
of the minds of the parties to the contract; (2) the
instrument does not express the true intention of the
parties; and (3) the failure of the instrument to express
the true intention of the parties is due to mistake, fraud,
inequitable conduct, or accident.”7 If the mistake is
mutual, the instrument may be reformed if the following
requisites are present: (1) the mistake should be of fact;
(2) the same should be proved by clear and convincing
evidence; and (3) the mistake should be common to
both parties to the instrument.”8
19.2.2 Instances Where Instalment May Not Be Reformed:
(1) if mistake, fraud, inequitable conduct, or accident
has prevented a meeting of the minds of the parties—
instead, the remedy is annulment of the contract and
not reformation;”* (2) in simple donations inter vivos
wherein no condition is imposed;4™ (3) in wills;401 (4)
”*W.
’’’Art. 1406, NCC.
’“B.F. Corporation v. Form-Eze Systems, Inc., 813 SCRA 155 (2016); Multi-Ventures
Capital and Management Corp. v. Stalwart Management Services Corp., 526 SCRA 420 (2007);
Quiros v. Arjona, 425 SCRA 57 (2004); Huibonhoa v. CA, 320 SCRA 625 (1999).
”’B.F. Corporation v. Form-Eze Systems, Inc., supra, citing Multi-Ventures Capital and
Management Corp. v. Stalwart Management Services Corp., supra. See also Quiros v. Arjona,
supra, and National Irrigation Administration v. Gamit, supra.
’’“Bank of the Philippine Islands v. Fidelity & Surely Co., 51 Phil. 57.
’"Art. 1359, par. 2, NCC.
““Art. 1366, NCC.
mld.
1
when the real agreement is void;602 (5) when one of the

parties has brought an action to enforce the instrument,
he cannot subsequently ask for its reformation;60’ and (6)
when the contract is unenforceable because of failure to
comply with the Statute of Frauds.
19.2.3 Some Important Rules of Interpretation: (a) Contra Pro
ferentem (construe against drafting party) - the inter
pretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity,60*
applicable in contracts of adhesion;605 (b) Principle of
Effectiveness - where two interpretations of the same
contract language are possible, one interpretation hav
ing the effect of rendering the contract meaningless,
while the other interpretation would give effect to the
contract as a whole, the latter interpretation must be
adopted;606 (c) Complementary-contracts-construed-to-
gether doctrine - an accessory contract must be read in
its entirety and together with the principal agreement,
based on Article 1374 of the Civil Code;60’ (d) Ejusdem
generis — however general the terms of a contract may
be, they shall not be understood to comprehend things
that are distinct and cases that are different from those
upon which the parties intended to agree.609
20) Defective Contracts

20.1 Classification of Contracts as to Defects:
20.1.1 Perfectly Valid: If the contract does not suffer from any
defect.
mId.
“’Art. 1367, NCC.
“’Art. 1377, NCC.
“’Wood Technology Corp. v. Equitable Banking Corp., 451 SCRA 754 (2005).
“‘Art. 1373, NCC; Philippine National Bank v. Utility Assurance & Surety Co., Inc., 177
SCRA 393 (1989).
“’Philippine Bank of Communications v. Lim, 455 SCRA 714 (2005), citing Rigor v.
Consolidated Orix Leasing and Finance Corp., 387 SCRA 270 (2002); Southeast Asia Shipping
Corp. V. Seagull Maritime Corp., 414 SCRA 419, 428 (2003); and Velasquez v. CA, 309 SCRA
539(1999).
mld.
“’Art. 1372, NCC.
PART 2: CONTRACTS
20.1.2 Defective Contracts: In the order of their defects, from

least to most defective: (1) Rescissible Contract - it
is considered valid, binding, and effective until it
is rescinded and contains all the requisites of a valid
contract and are considered legally binding, but by reason
of injury or damage (lesion) to either of the contracting
parties or to third persons, such as creditors, it is
susceptible to rescission at the instance of the party who
may be prejudiced thereby;"0 (2) Voidable Contract -
one in which the essential requisites for validity under
Article 1318 are present,6" but may be annulled because
of want of capacity or the vitiated consent of one of the
parties; however, before such annulment, the contract is
existent, valid, and binding, hence, considered effective
and obligatory between parties,612 but it may be rendered
perfectly valid by ratification, which can be express or
implied;613 (3) Unenforceable Contract - that which
cannot be enforced by a proper action in court, unless
it is ratified, because either it is entered into without
or in excess of authority or it does not comply with
the Statute of Frauds or where both of the contracting
parties do not possess the required legal capacity;614
prior to ratification, the contract is valid but it cannot be
enforced by a proper action in court, but once ratified,
either expressly or impliedly, it is rendered perfectly
valid and becomes obligatory between the parties; and
(4) Void or Inexistcnt Contract - one which has no
force and effect from the very beginning; hence, it is as
if it has never been entered into and cannot be validated
either by the passage of time or by ratification.616
"‘Justice Vitug, Dissenting Opinion in Equatorial Really Development, Inc. v. Mayfair

Theater, Inc., G.R. No. 133879, November 21,2001.
‘"Francisco v. Herrera, G.R. No. 139982, November 21,2002.
‘"First Philippine Holdings Corp. v. Trans Middle East (Phils.), Equities, Inc., 607 SCRA
605 (2009), citing M WSS v. CA, 297 SCRA 287 (1988).
‘"Francisco v. Herrera, G.R. No. 139982, November 21,2002.
‘"Mercado v. Allied Banking Corporation, 528 SCRA 444 (2007), cited in Iglesia Filipina
Independiente v. Heirs of Bernardino Taeza, 715 SCRA 138(2014).
‘"Francisco v. Herrera, G.R. No. 139982, November21, 2002.
20.2 Rescissible Contracts:

20.2.1 Distinctions Between Rescission in Articles 1191
and 1381: (1) the rescission under Article 1191 is on
account of breach of contract (more properly called
“resolution”); while the rescission under Article 1381
is by reason of lesion or economic prejudice;616 in
other words, the rescission under Article 1191 is not
predicated on injury to economic interests of the party
plaintiff but on the breach of faith by the defendant that
violates the reciprocity between the parties; while in
the rescission under Article 1381, the cause of action
is subordinated to the existence of lesion or economic
prejudice because it is the raison d ‘etre as well as the
measure of the right to rescind;617 (2) in Article 1191,
the contract is perfectly valid; in Article 1381, the
contract is defective; (3) the rescission in Article 1191
applies exclusively to reciprocal obligations; while
in Article 1381, the rescission applies to all kinds of
obligations arising from contracts, whether the same
be reciprocal in character or not; (4) the rescission
in Article 1191 is a principal action which seeks the
resolution or cancellation of the contract; while in
Article 1381, the rescission is only a subsidiary remedy,
meaning, it cannot be instituted except when the party
suffering damage has no other legal means to obtain
reparation for the same6'8 —consequently, the four-year
prescriptive period provided for in Article 1389 of the
Civil Code applies only to rescission as a subsidiary
remedy and not to rescission as a principal action under
Article 1191,619 which prescribes within 10 years from
the time the right of action accrues;620 (5) in Article
1191, only a contracting party can be injured and can
maintain an action for rescission; while in Article 1381,
6I6ASB Realty Corp. v. Ortigas & Company Limited Partnership, 777 SCRA 447 (2015).
6l7Concurring Opinion of J.B.L. Reyes, Universal Food Corp. v. CA, 33 SCRA I (1970),
cited in Pryce Corp. v. Philippine Amusement and Gaming Corp., supra, and Cannu v. Galang,
supra.
6l8UnIad Resources Development Corp. v. Dragon, 560 SCRA 63 (2008); Cannu v. Galang,
459 SCRA 80; Iringan v. CA, 366 SCRA 41 (2001); Ong v. CA, 310 SCRA I (1999).
6l9lringan v. CA, supra, and Unlad Resources Development Corp. v. Dragon, supra.
mId.
PART 2: CONTRACTS
even a third person can become an injured party in the

rescission contemplated under Article 1381, as in the
case of contracts in fraud of the creditor; and (6) in
Article 1191, the court has discretionary power not to
grant the rescission if there be just cause for the fixing of
a period for the performance of the obligation;"' while
in Article 1381, the court must order the rescission once
the ground is proven.
20.2.2 Nature of Rescissible Contracts under Article 1381:
(1) these contracts are valid and enforceable, therefore
obligatory, until they are rescinded by a competent
court;622 (2) while these contracts are valid and
obligatory, they cause pecuniary lesion or prejudice to
one of the contracting parties or to a third person, for
which reason the law grants the remedy of rescission to
protect the injured party from all injury and damage that
the contract may cause, or to protect some incompatible
and preferential right created by the contract;"’ (3)
the defect of a rescissible contract under Article 1381
may not, however, be cleansed by ratification although
the right of action for rescission may be lost by way
of extinctive prescription;"’ and (4) the defect of a
rescissible contract cannot be attacked collaterally but
must be set up in an independent civil action and only
after a full blown trial.62’
20.2.3 Requisites for Rescission to Prosper: (1) the action
for rescission must originate from any of the causes
specified in Articles 1381 and 1382;“ (2) the party
suffering damage and who is asking for rescission has
no other legal means to obtain reparation for the damage
suffered by him;62’ (3) the person demanding rescission
must be able to return what he may be obliged to
restore if rescission is granted by the court628 —but this
"'Art. 1191, par. 3, NCC.

"’Art. 1380, NCC.
"’Aquino v. Tarledo, 31 Phil. 517.
"’Art. 1389, NCC.
"’Air France v. CA, 245 SCRA 485 (1995).
616Art. 1380, NCC; see also Aquino v. Tafledo, supra and Kongo v. Abastillas, 74 Phil. 176.
"’Art. 1383, NCC.
"“Art. 1385, 1" par., NCC.
requisite does not apply to a creditor suing for rescission

under Article 1381, paragraph 3, because he received
nothing from the contract which he seeks to rescind; (4)
the things which are the object of the contract must not
be legally in the possession of third persons who did not
act in bad faith;62’ and (5) the action for rescission must
be filed within four years from the accrual of the right of
action610 —the four-year prescriptive period commences
to run: (i) from the termination of the ward’s incapacity, I
for contracts entered into by guardians on behalf of 1
the ward;611 (ii) from the time that the domicile of the
absentee is known, for contracts entered into by the
legal representative on behalf of the absentee;612 and
(iii) for contracts in fraud of creditors, only when the
creditor discovers that he has no other legal remedy for
the satisfaction of his claim against the debtor other
than an action pauliana—in other words, an action
pauliana presupposes the following: (i) a judgment
against the debtor; (ii) the issuance by the trial court of
a writ of execution for the satisfaction of the judgment,
and (iii) the failure of the sheriff to enforce and satisfy
the judgment of the court.613
20.2.4 Specific Contracts which are Rescissible: (a) Contracts
entered into bv guardians or legal representative where
ward or absentee suffers lesion: (1) contract is entered
into by a guardian on behalf of the ward or by the legal
representative; (2) the ward or the absentee suffers
lesion by more than one-fourth (!4) of the value of the
things which are the object thereof;634 (3) the contract
must not have been approved by the court; otherwise,
the contract is perfectly valid;61’ and (4) the contract
must not involve disposition or encumbrance of the
real property of the ward or of the absentee; otherwise,
the contract is not merely rescissible but unenforceable
“’Art. 1385,2"1 par., NCC.

““Ari. 1389, NCC.
611 Art. 1389, par. 2, NCC.
mId.
611Khe Hong Cheng v. Chua, 355 SCRA 701 (2001).
“Arts. 1381(1), (2), NCC.
“’Art. 1386, NCC.
J
PART 2: CONTRACTS
under Article 1403(1) if entered into without judicial

approval, even if there is no lesion.™ (b) Contracts in
fraud of creditor: (1) Presupposes existence of valid
contracts: Contracts which are rescissible under Article
1381(3) are valid contracts, albeit undertaken in fraud
of creditors, and not absolutely simulated, because the
latter is not merely rescissible but inexistent, albeit
undertaken as well in fraud of creditors.6” They differ, as
follows: (i) absolute simulation implies that there is no
existing contract, no real act executed; while fraudulent
alienation means that there is a true and existing
transfer or contract; (ii) the former can be attacked by
any creditor, including one subsequent to the contract;
while the latter can be assailed only by the creditors
before the alienation; (iii) in absolute simulation, the
insolvency of the debtor making the simulated transfer
is not a prerequisite to the nullity of the contract; while
in fraudulent alienation, the action to rescind, or action
pauliana, requires that the creditor cannot recover in
any other manner what is due him; and (iv) an action
to declare a contract absolutely simulated does not
prescribe (Articles 1409 and 1410); while an action
pauliana to rescind a fraudulent alienation prescribes
in four years (Article 1389)."’8 (2) Requisites of Action
Pauliana-. The rescissory action to set aside contracts
in fraud of creditors is known as action pauliana.0* In
order to prosper, it must satisfy the following requisites:
(i) the plaintiff asking for rescission has a credit prior
to the alienation, although demandable later; (ii) the
debtor has made a subsequent contract conveying a
patrimonial benefit to a third person; (iii) the creditor
has no other legal remedy to satisfy his claim; (iv) the
act being impugned is fraudulent; (v) the third person
who received the property conveyed, if it is by onerous
"’"Rules 95, 96, and 107, Rules of Court; Neri v. Heirs of Hadji Yusop Uy and Julpha Ibra
him Uy, 683 SCRA 553 (2012).
"’’Manila Banking Corporation v. Silverio, 466 SCRA 438.
"’’Siguan v. Lim, 318 SCRA 725, 735 and MBTC v. International Exchange Bank, 655
SCRA 263 (2011).
title, has been an accomplice in the fraud;"0 and (vi)

the conveyance must not be absolutely simulated."' (3)
Contract in violation of right of first refusal (RFR’l is in
fraud of creditor: A contract entered into in violation of
a right of first refusal of another person is rescissible"2
and considered in fraud of the creditor because the term
creditors in Article 1381(3) of the New Civil Code is
broad enough to include the obligee under an option
contract as well as under a right offirst refusal, sometimes
known as a right of first priority."3 (4) Presumption of
fraud: Fraud is presumed in the following: (i) there is
alienation of property by gratuitous title by the debtor
who has not reserved sufficient property to pay his
debts contracted before such alienation; or (ii) there is
alienation of property by onerous title made by a debtor
against whom some judgment has been rendered in any
instance or some writ of attachment has been issued.
The decision or attachment need not refer to the property
alienated and need not have been obtained by the party
seeking rescission."4 (5) Badges of fraud: (i) the fact
that the consideration of the conveyance is fictitious or
is inadequate; (ii) a transfer made by a debtor after suit
has begun and while it is pending against him; (iii) a
sale upon credit by an insolvent debtor; (iv) evidence
of large indebtedness or complete insolvency; (v) the
transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed
financially; (vi) the fact that the transfer is made between
father and son, when there are present other of the above
circumstances; and (vii) the failure of the vendee to take
exclusive possession of all the property."5 (c) Contracts
over things under litigation: (1) the defendant, during the
pendency of the case, enters into a contract which refers
to the thing subject of litigation; and (2) the said contract
^Supra.
“'Manila Banking Corporation v. Silverio, supra.
“'Rosencor Development Corp. v. Inquing. 354 SCRA 119, 136; Conculada v. CA, 367
SCRA 164, 172; Riviera Filipina, Inc. v. CA, 380 SCRA 245,260.
“'Equatorial Realty Development, Inc. v. Mayfair Theater, Inc,, 264 SCRA 483 (1996).
“'Art. 1387, NCC; China Banking Corporation v. Court of Appeals, 327 SCRA 378, 386.
“5Oria v. Mcmicking, 21 Phil. 243, 250-51 (1912).
J
PART 2: CONTRACTS
was entered into without the knowledge and approval

of the litigants or of a competent judicial authority."6
(d) Payment made under state of insolvency: any
payment made by an insolvent debtor of an obligation
the fulfillment of which could not be compelled at the
time of the payment is considered fraudulent and is,
therefore, rescissible."’
20.2.5 Right of First Refusal: (a) Concept: Aright offirst refusal
is a contractual grant, not of the sale of a property, but
of the first priority to buy the property in the event the
owner sells the same."8 Such grant may be embodied in
a separate contract, in which case it must be supported
by its own consideration distinct and separate from the
consideration supporting the contemplated contract,
or it may only be a part of a certain contract, such as
when it is one of the provisions in a lease contract. In
the latter case, the right of first refusal is an integral
and indivisible part of the contract of lease making
the consideration for the lease the same as that for the
right of first refusal."’ (b) Distinguished from Option:
while both create an exclusive privilege to enter into
a contract with someone else, they differ as follows:
(1) an option or an offer would require, among other
things, a clear certainty on both the object and the cause
or consideration of the envisioned contract,in other
words, there is a definite offer; while in a right of first
refusal, while the object might be made determinate,
the exercise of the right, however, would be dependent
not only on the grantor’s eventual intention to enter
into a binding juridical relation with another but also
on terms, including the price, that obviously are yet
to be later firmed up;‘!1 (2) in an option, the exercise
"“Art. 1381(4), NCC; Ada v. Bnylon, 678 SCRA293 (2012).

"'Art. 1382, NCC.
"“Polytechnic University of the Philippines v. Golden Horizon Realty Corp., 615 SCRA
478 (2010), citing Roscncor Development Corporation v. Inquing, supra. Also in Villegas v. CA,
499 SCRA 276 (2006).
"'Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996).
“wAng Yu Asuncion v. CA, 238 SCRA 602 (1994).
a'Id., cited in Polytechnic University of the Philippines v. Golden Horizon Realty Corp.,
615 SCRA 478 (2010).
of the privilege is always for a fixed period; while in

a right of first refusal, the period for the exercise of
the privilege may either be definite or indefinite; 652
and (3) in an option, being an onerous contract, the
consideration must be something of value, although its
kind may vary;653 while in right of first refusal, the grant
may either be gratuitous or onerous, except that a party
to a contract cannot unilaterally withdraw a right of
first refusal that stands upon valuable consideration.654
(c) Effect of violation of RFR: (1) If grantor entered
into contract with third person: The contract can be
rescinded if the third person acted in bad faith (or with
knowledge of the existence of the RFR);“5 however, if
the third person acted in good faith, the contract may
not be rescinded656 and the remedy of the grantee is
simply to recover damages from the grantor. (2) Upon
rescission of contract: the grantor may now be directed
to comply with his obligation to sell the property to the
grantee under the same terms and conditions that it had
been sold to a third person. In other words, there should
be identity of terms and conditions to be offered to the
buyer holding the right of first refusal.657
20.2.6 Effects of Rescission: (I) It has the effect of unmaking
a contract, or its undoing from the beginning, and not
merely its termination.658 (2) Hence, the necessary
consequence of rescission is mutual restitution, that is,
the parties to a rescinded contract must be brought back
to their original situation prior to the inception of the
contract; hence, they must return what they received
pursuant to the contract.65’ (3) Mutual restitution is also
“’Tuazon v. Del Rosario, 637 SCR A 728 (2010).

6,3Villamor v. CA, 202 SCRA 607,615 (1991); Bible Baptist Church v. CA, 444 SCRA 399
(2004); Eulogio v. Apeles, 576 SCRA 561 (2009).
654PUP v. Golden Horizon Really Corp., supra.
“’Guzman, Bocaling and Co, Inc. v. Bonnevie, 206 SCRA 668 (1992); Equatorial Realty
and Development, Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996); and Litonjua v. L&R
Corporation, 320 SCRA 405 (1999).
“‘Rosencor Development Corporation v. Inquing, 354 SCRA 119 (2001).
“’Parahaque Kings Enterprises, Inc. v. CA, 268 SCRA 727 (1997).
““Unlad Resources Development Corp. v. Dragon, 560 SCRA 63 (2008).
“’Art. 1385, NCC; Forest Hills Golf & Country Club v. Vertex Sales and Trading, Inc.,
692 SCRA 706 (2013).
PART 2: CONTRACTS
required in cases involving rescission under Article

1191.660
20.2.7 Who May Bring Action and Against Whom: The action
for rescission may be brought by: (1) the person who is
injured by the rescissible contract, that is, the ward or
absentee, the creditors damaged or the plaintiff in case
a thing in litigation is alienated by defendant; (2) the
heirs of the above persons; and (3) the creditors of the
aforesaid persons by virtue of Article 1177 of the Civil
Code.661 On the other hand, the action may be brought
against the following: (a) the author of the injury and his
successors in interest; and (b) third persons who have
acquired in bad faith the property alienated in fraud of
creditors.662
20.3 Voidable Contracts:
20.3.1 Concent. Characteristics, and Remedy: (a) Concept:
Voidable or annullable contracts are existent, valid, and
binding, although they can be annulled because of want
of capacity or the vitiated consent of one of the parties.
However, before such annulment, they are considered
effective and obligatory between parties.663 Hence, it is
valid until it is set aside and its validity may be assailed
only in an action for that purpose. They can be confirmed
or ratified.664 (b) Characteristics: (1) it is existent, valid,
and binding and produces all its civil effects, until it is
set aside by a final judgment of a competent court in an
action for annulment;665 (2) however, it suffers from a
defect in the form of vitiation of consent by lack of legal
capacity of one of the contracting parties, or by mistake,
“"Gotesco Properties, Inc. v. Fajardo, 692 SCRA 319 (2013); Unlad Resources
Development Corp. v. Dragon, 560 SCRA 63 (2008); Laperal v. Solid Homes, Inc., 460 SCRA
375 (2005); Velarde v. CA, 361 SCRA 56 (2001); Co v. CA, 312 SCRA 528 (1999).
“'IV Caguioa, Comments and Cases on Civil Law, 1983 ed., p. 604.
mId.
“’First Philippine Holdings Corp. v. Trans Middle East (Phils.) Equities, Inc., 607 SCRA
605 (2009); The Estate of Pedro C. Gonzales v. The Heirs of Marcos Perez, 605 SCRA 47 (2009);
Famanila v. CA, 500 SCRA 76 (2006).
“M WSS v. CA, 297 SCRA 287,300 (1998), citing IV Tolentino, Civil Code ofthe Philip
pines, 1991 ed., p. 596.
665Art. 1390, par. 2, NCC; Suntay v. Conjuangco-Suntay, 300 SCRA 760,771 (1998); First
Philippine Holdings Corp. v. Trans Middle East (Phils.) Equities, Inc., supra.
violence, intimidation, undue influence, or fraud;666

(3) it may be rendered perfectly valid by ratification,
which can be express or implied, such as by accepting
and retaining the benefits of a contract;667 (4) it is also
susceptible of validation by prescription since the action
for the annulment of contract prescribes in four years;661
and (5) it cannot be attacked collaterally; its validity
can only be assailed directly either by an action for that
purpose or by way of a counterclaim.669 (c) Remedy
of Annulment: To annul means to reduce to nothing;
annihilate; obliterate; to make void or of no effect; to
nullify; to abolish; to do away with.670 Hence, a contract
that is annulled presupposes that it subsists but later
ceases to have legal effect when it is terminated through
a court action.671 In annulment, it is the judgment of the
court that produces the invalidity of the contract. It is to
be distinguished from declaration of nullity of contracts.
Null and void means that something does not^exist from
the beginning.672 Thus, a void contract is invalid from the
beginning and in declaring its nullity the court simply
declares a status or condition which already exists from
the very beginning.673
20.3.2 Two Kinds of Voidable Contracts: (1) where one of the
parties is incapable of giving consent to a contract676
—if both parties are incapable of giving consent to
a contract, the contract is not merely voidable but
unenforceable;675 and (2) where both parties are capable
of giving consent to a contract, but the consent of one
is vitiated by mistake, violence, intimidation, undue
influence, or fraud.676
“‘Art. 1390, NCC.

“’Francisco v. Herrera, 392 SCRA 317 (2002); Art. 1390, par. 2, NCC.
“‘Art. 1391, NCC.
“’Llacerv. Muilozde Bustillo, 12 Phil. 328 (1908); Rone v. Claro, 91 Phil. 250(1952); IV
Tolentino, Civil Code ofthe Philippines, 1991 ed., p. 598.
670Suntay v. Conjuangco-Suntay, supra, citing Nuguid v. Nuguid, 123 Phil. 1305 (1966).
"'Id.
mld.
mId.
676Art. 1390(1), NCC.
"’Art. 1403, par. 3, NCC.
"‘Art. 1390(2), NCC.
PART 2: CONTRACTS
20.3.3 Personality to File Annulment and Prescriptive Period-

(a) Who can file for annulment: Before a party can
have the necessary standing to institute an action for
annulment, he must either be: (1) the party obliged
principally or subsidiarily in the contract which he
seeks to annul677 —by way of exception, a person who
is not a party obliged principally or subsidiarily under
a contract may exercise an action for annulment of the
said contract if: (i) he is prejudiced in his rights with
respect to one of the contracting parties; and (ii) he can
show detriment which would positively result to him
from the contract in which he has no intervention;676
(2) he must be the party suffering from incapacity to
give consent or the victim of intimidation, violence,
undue influence, fraud, or mistake—persons who are
capable cannot allege the incapacity of those with
whom they contracted; nor can those who exerted
intimidation, violence, or undue influence, or employed
fraud, or caused mistake based their action upon these
flaws of the contract.67’ (b) Prescriptive period: The
period of prescription is four years and it commences
to run, as follows: (1) from the time the defect ceases
if the ground for annulment is vitiation of consent by
intimidation, violence, or undue influence616 and it
cannot be interrupted by an extrajudicial demand made
by the party whose consent was vitiated;611 (2) from
the time of the discovery if the ground for annulment
is vitiation of consent by mistake or fraud617 —if the
fraudulent conveyance is registered in the Register of
Deeds, the discovery of fraud is reckoned from the time
the document was registered in the Register of Deeds in
view of the rule that registration is notice to the whole
world;6*3 (3) from the time the minor reaches the age of
majority or 18 years of age if the ground for annulment
" ' Art. 1397, NCC.

6 "Teves v. People’s Homesite &. Housing Corp-, 23 SCRA 1141.
‘’’Art 1397, NCC.
““'Art. 1391, par. 2, NCC.
“'Miailhe v. CA, G.R. No. 108991, March 20. 2001.
*^ld.
"“’Metropolitan Fabrics, Ine. v. Prosperity Credit Resources. Ice.. 719 SCRA 29-> <201-H.
is want of capacity by reason of minority;"4 and (4)

from the time the guardianship ceases if the ground for
annulment is want of capacity other than minority."5
20.3.4 Ratification: (a) Concept: Ratification or confirmation
refers to the act of or means by virtue of which efficacy
is given to a contract which suffers from a vice of
curable nullity."6 (b) How Made: It may be effected
expressly or tacitly. A tacit ratification is the execution
of an act which necessarily implies an intention to
waive the right to annul,"’ such as by accepting and
retaining the benefits of a contract.688 (c) Requisites:
(1) the contract has all the essential requisites, but it is
tainted with a vice which is susceptible of being cured;
(2) it should be effected by the person who is entitled
to do so under the law—the right to ratify the defect
of the contract belongs only to the party who has the
right to bring the action for annulment,although
such ratification may also be effected by the guardian
of the incapacitated person,650 and it does not require
the conformity of the contracting party who has no
right to bring the action for annulment;651 (3) it should
be effected with the knowledge of the vice or defect65’
—before a contract can be ratified, knowledge of its
existence must be brought to the parties who have
authority to ratify it or circumstances must be shown
from which such knowledge may be presumed;655 and
(4) the cause of the nullity or defect should have already
disappeared.654 (d) Effects of Ratification: The effect of
ratification is retroactive. It cleanses the contract from
684Art. 1391, par. 3, NCC, in relation to Art. 236, FC.

tK/d.
6868 Manresa, S'6 ed., Bk. 2, p. 665, cited in Jurado, Obligations and Contracts, 1987 ed.,
p. 533.
“’Art. 1393, NCC.
“‘Francisco v. Herrera, 392 SCRA 317 (2002).
“’Arts. 1394 and 1395, NCC.
650Art. 1394, NCC.
651 Art. 1395, NCC.
"’Art. 1393, NCC.
653Yu Chuck v. Kong Li Po, 46 Phil. 608 (1924).
“’Art. 1393, NCC.
j PART 2: CONTRACTS
all its defects from the moment it was constituted,6”

thereby extinguishing the action to annul a voidable
contract.696 It results, therefore, that after a contract
is validly ratified, no action to annul the same can be
maintained based upon defects relating to its original
validity.6”
20.3.5 Effects of Annulment: (a) General Rule: If a
voidable contract is annulled by a final judgment of
a competent court, the contract is invalidated from
the very beginning. Since the contract is declared
void at inception, the parties shall be restored to their
original status prior to the inception of the contract as
if no contract has been made, thus, upon annulment,
the parties should be restored to their original position
by mutual restitution.6’6 As a consequence, as long as
one of the contracting parties does not restore what in
virtue of the decree of annulment he is bound to return,
the other cannot be compelled to comply with what is
incumbent upon him.699 (b) Exception: When the defect
of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make
any restitution except insofar as he has been benefited
by the thing or price received by him.™
20.4 Unenforceable Contracts:
20.4.1 Concept. Nature, and Characteristics: (a) Concent:
Those contracts which cannot be enforced by a proper
action in court, unless they are ratified, because either
they are entered into without or in excess of authority or
they do not comply with the Statute of Frauds or both
of the contracting parties do not possess the required
legal capacity.™1 (b) Nature and Characteristics: (1) It
is a valid contract although it cannot be sued upon or
695Art. 1396, NCC.

696Art. 1392, NCC.
"’Tang Ah Chun v. Gonzales, 52 Phil. 180(1928).
"“Art. 1398, NCC; Cadwallader & Company v. Smith, Bell & Company, 7 Phil. 461
(1907).
‘"’Art. 1402, NCC.
’"Art. 1399, NCC.
™’Iglesia Filipina Indepcndiente v. Heirs of Bernardino Taeza, 715 SCRA 138 (2014),
citing Mercado v. Allied Banking Corp., 528 SCRA 444 (2007).
be enforced by a proper action in court because of its

defect. (2) The defect of the contract consists of either:
(i) it is entered into without or in excess of authority;
(ii) it does not comply with the Statute of Frauds; or
(iii) both of the contracting parties are incapable of
giving consent to a contract. (3) Since an unenforceable
contract, though valid, is not enforceable by a proper
action in court, it is not binding or obligatory between
the parties, unless the contract is ratified. But unlike a
void contract which is not susceptible to ratification, an
unenforceable contract can be ratified. (4) The defect
is purely a matter of defense. There is no action that
may be filed to set aside the contract and the contract
is not susceptible of validation by prescription. (5) The
defense that the contract is unenforceable is available
only to the contracting parties. The contract cannot be
assailed by third persons.702
20.4.2 Three Kinds of Unenforceable Contracts: (a)
Unauthorized Contracts: (1) Rule: Contracts entered
into in the name of another person by one who has been
given no authority or legal representation or who has
acted beyond his powers are unenforceable,705 not void.
If the principal does not ratify the contract, it may not
be enforced against him. If he ratifies the contract, the
ratification retroacts to the day when the agent entered
into such contract. Contracts entered into by guardians on
behalf of the ward or by legal representatives on behalf
of the absentee involving disposition or encumbrance
of real property of the ward or of the absentee without
judicial approval are unenforceable.’" (2) Exception:
An unauthorized contract involving the sale of a parcel
of land is not merely unenforceable but void ab initio
because the law requires the authority of the agent to
be in writing, in case of agency to sell a parcel of land
or any interest therein; otherwise, the sale is void.705
Thus, the sale of a parcel of land made by the son on
’“Art. 1408, NCC.

’“Art. 1403, par. 1, NCC.
’“Rules 95, 96, and 107, Rules of Court; Neri v. Heirs of Hadji Yusop Uy and Julplia
Ibrahim Uy, 683 SCRA 553 (2012).
’“Art. 1874, NCC; Delos Reyes v. CA, 313 SCRA 632 (1999).
PART 2: CONTRACTS
behalf of his father but without the latter’s consent or

authority is void because of failure to comply with the
requirement of Article 1874.’“ (b) Contracts Which
Violate the Requirement of Statute of Frauds: "7 See the
I discussions in supra 19.1.3. (c) Contract Where Both
Parties are Incapacitated: Where only one of the parties
is incapable of giving consent to a contract, the contract
is merely voidable;™5 but if both parties are incapable
of giving consent to a contract, the contract is not
voidable but unenforceable.™’ In either case, however,
the contract may be ratified. In a contract which is
unenforceable because both parties are incapacitated,
the ratification on the part of one of the contracting
parties "shall give the same effect as ifonly one of them
were incapacitated,thereby making the contract
merely voidable. If ratification is made on the part of
both parties, "the contract shall be validated from the
inception.
20.5 Void or Inexistent Contracts:
20.5.1 Concept and Characteristics: (a) Concept: A void or
inexistent contract is one which has no force and effect
from the beginning, as if it has never been entered
into, and which cannot be validated either by time
or ratification.717 A void contract produces no effect
whatsoever either against or in favor of anyone; it
does not create, modify, or extinguish the juridical
relation to which it refers.71’ (b) Characteristics: (1)
As a rule, they produce no legal effects whatsoever
in accordance with the principle "quod nullum est
nullum producit effectum";w hence, it does not create,
’“Delos Reyes v. CA, supra.

707Art. 1403, par. 2, NCC.
’“Art. 1390(1), NCC.
’“Art. 1403, par. 3, NCC.
’'“Art. 1407, par. I, NCC.
’"Art. 1407, par. 2, NCC.
7,2Heirs of Policarpio M. Ureta, Sr. v. Heirs of Liberate M. Ureta, supra, citing Tongoy
v. CA, 123 SCRA 99 (1983). See also Yun Kwan Byung v. Philippine Amusement and Gaming
Corp., 608 SCRA 107 (2009) and Manila Banking Corp. v. Silverio, 466 SCRA 438 (2005).
7l4/d.
modify, or extinguish the juridical relation to which it

refers.”5 The exception to this rule is when the void
contract has already been performed and the principle
of in pari delicto is applied. Under this principle, the
guilty parties to an illegal contract cannot recover from
one another and are not entitled to affirmative relief.”6
Thus, the contract, though void, has produced an effect.
(2) They are not susceptible of ratification7” and, as
between the parties to the contract, the validity cannot
be given to it by estoppel; thus, it is immaterial that
the parties initially acted to implement the contract,
believing in good faith that the same was valid.”” (3)
The right to set up the defense of inexistence or absolute
nullity cannot be waived or renounced.7” (4) The action
or defense for the declaration of their inexistence or
absolute nullity is imprescriptible720 —however, the
right to have a contract declared void ab initio may be
barred by laches although not barred by prescription.”'
(5) The inexistence or absolute nullity of a contract
cannot be invoked by a person whose interests are not
directly affected.722 Stated otherwise, 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.
20.5.2 Contracts Which are Void or Inexistent: (a) Illegal
Contracts: Those whose cause, object, or purpose is
contrary to law, morals, good customs, public order,
or public policy”1 —cause is ordinarily different from
motive and, as a rule, the motive or particular purpose
”5W.
”6Art. 1412(1), NCC; Gonzalo v. Tamale, Jr., 713 SCRA 224 (2014).
’’’Heirs of Policarpio M. Ureta, Sr. v. Heirs of Liberalo M. Ureta, 657 SCRA 555 (2011),
ci‘ing Tongoy v. CA, 123 SCRA 99 (1983).
”“Nool v. CA, 276 SCRA 149(1997).
’’’Heirs of Policarpio M. Ureta, Sr. v. Heirs of Liberalo M. Ureta, supra, citing Tongoy v.
CA, supra.
’’"Art. 1410, NCC.
”'MWSS v. CA, 297 SCRA 287 (1998).
’’’Heirs of Policarpio M. Ureta, Sr. v. Heirs of Liberate M. Ureta, 657 SCRA 555 (2011),
C“‘"S Tongoy v. CA, 123 SCRA 99 (1983).
’’’Art. 1409(1), NCC.
■

PART 2: CONTRACTS
of a party in entering into a contract does not affect

the validity nor existence of the contract.724 ( 1 ) Cause
Distinguished from Motive: Cause is the essential
reason which moves the contracting parties to enter into
it. In other words, the cause is the immediate, direct,
and proximate reason which justifies the creation of an
obligation through the will of the contracting parties.723
On the other hand, motive is the particular reason of a
contracting party which does not affect the other party.726
(2) When motive becomes cause: The motive may be
regarded as causa when "it predetermines the purpose
of the contract.,rnl In other words, when the realization
of such motive or particular purpose has been made a
condition upon which the contract is made to depend,
then the motive becomes the cause.72* When they blend
to that degree, and the motive is unlawful, then the
contract entered into is null and void.72’ (b) Absolutely
Simulated Contract: Those which are absolutely
simulated or fictitious.710 (1) Concept: In absolute
simulation there appears to be a valid contract but there is
actually none because the element of consent is lacking
because the parties do not actually intend to be bound
by the terms of the contract.711 As a result, an absolutely
simulated or fictitious contract is void, and the parties
may recover from each other what they may have given
under the contract.712 As a consequence, a contract of
purchase and sale is null and void and produces no
“Philippine National Construction Corp. v. CA, 272 SCRA 183, 193 (1997); Uy v. CA,
314 SCRA 69 (1999).
723Uy V. CA, 314 SCRA 69 (1999), citing Basic Books (Phil.), Inc. v. Lopez, 16 SCRA
291 (1966).
“M.
’’’Liguez v. CA, 102 Phil. 577 (1957); E. Razon Inc. V. Philippine Ports Authority, 151
SCRA 233 (1987) and Uy v. CA, supra.
“Philippine National Construction Corp. v. CA. 272 SCRA 183,193 (1997).
“Olegario v. Court of Appeals, 238 SCRA 96 (1994), citing E. Razon, Inc. v. Philippine
Ports Authority, 151 SCRA 233 (1987).
7)0Art. 1409(2), NCC.
’’'Clemente v. CA, G.R. No. 175483, October 14, 2015.
“Valerio v. Refresca, 485 SCRA 494, 500-501 (2006); Heirs of Policronio M. Urela, Sr.
v. Heirs of Liberato M. Urcta, 657 SCRA 555 (2011); Villaceran v. De Guzman, 666 SCRA 454
(2012); Tanchuling v. Cantela, 774 SCRA 406 (2015).
effect whatsoever where it appears that the same is

without cause or consideration which should have been
the motive thereof, or the purchase price which appears
thereon as paid but which in fact has never been paid
by the purchaser to the vendor.’" The most protuberant
index of absolute simulation of contract is the complete
absence of an attempt in any manner on the part of the
ostensible buyer to assert rights of ownership over the
subject properties.™ (2) Distinguished from Relative
Simulation: In relative simulation, however, the parties
conceal their true agreement.’35 In this kind ofsimulation,
the essential requisites of a contract are present and
the simulation refers only to the content or terms of
the contract.736 There are two juridical acts involved in
relative simulation: the ostensible act and the hidden
act. The ostensible act is the contract that the parties
pretend to have executed while the hidden act is the true
agreement between the parties.’37 A relative simulation
binds the parties to their real agreement “when it does
not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public
order, or public policy.”738 (c) Contracts Whose Cause
or Object Did Not Exist: Those whose cause or object
did not exist at the time of the transaction.73’ Thus, a
contract entered into upon future inheritance is void.740
The Court defined future inheritance as any property
or right not in existence or capable of determination at
the time of the contract, that a person may in the future
acquire by succession.741 Likewise, in a contract of lease,
although the lessor need not be the owner of the property
being leased, he should have a right (e.g., either as a
’"Tanchuling v. Cantata, 774 SCRA 406 (2015), citing Cruz v. Bancom Finance
Corporation, 429 Phil. 224,233 (2002).
’"Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberalo M. Ureta, supra.
m/M. 1345, NCC.
’"Valerio v. Refresca, supra.
’"Villegas v. Rural Bank of Tanjay, Inc. (2009), citing IV Tolentino, Civil Code of the
Philippines, 1991 ed., p. 516.
’“Art. 1346, NCC.
’"An. 1409(3), NCC.
’“Arrogante v. Deliarte, 528 SCRA 63 (2007).
’•"Blasv. Santos, 111 Phil. 503(1961).
J
PART 2: CONTRACTS
usufructuary or a lessee) or at least an authority (e.g., as

an agent of the owner, usufructuary, or lessee) to lease it
out; otherwise, the contract is void because the cause or
object did not exist at the time of the transaction.742 (d)
Objects outside commerce of men: Those whose object
is outside the commerce of men.74’ Thus, the following
things may not be the object of a contract because
they are not susceptible of appropriation, therefore,
outside the commerce of men: (1) Properties of public
dominion are outside the commerce of men.744 They
cannot be subject to sale, disposition, or encumbrance;
any sale, disposition, or encumbrance of such property
of the public dominion is void for being contrary to law
and public policy.745 They cannot likewise be leased or
otherwise be the subject matter of contracts.74'1 Hence,
the right of the public to use public property may not
be bargained away through contract.747 For example,
public streets cannot be converted into flea markets and
leased to private individuals;748 the submerged lands
in the Manila Bay area, which are declared to be part
of the State’s inalienable natural resources, cannot be
alienated to a private entity;74’ and properties officially
declared military reservations become inalienable
and outside the commerce of men and may not be the
subject of a contract or of a compromise agreement.750
(2) Sacred things, common things like the air and the
sea, and res niillius, as long as they have not been
appropriated.751 (3) Rights which are intransmissible
’•’Ballesteros v. Abion, 482 SCRA 23 (2006) and Berccro v. Capitol Development Corp.,
519 SCRA 484 (2007).
74,Art. 1409(4), NCC.
’••Manila International Airport Authority v. CA, 495 SCRA 591 (2006), citing Municipality
ofCavitev. Rojas, 30 Phil. 602(1915); walso Dacanay v. Asistio, Jr„ 208 SCRA404.411 (1992).
’•’Navy Officers’ Village Association, Inc. v. Republic, 764 SCRA 524 (2015).
’•“Dacanay v. Asistio, supra, ciling Villanueva v. Castaileda and Macalino, 15 SCRA 142;
Municipality of Cavite v. Rojas, 30 Phil. 602; Espiritu v. Municipal Council of Pozomtbio, 102
Phil. 869; and Muyot v. De la Puente, 48 O.G. 4860.
’•’Dacanay v. Asistio, supra.
™ld.
’•’Chavez v. Public Estates Authority, 384 SCRA 152 (2002).
’’"Republic v. Bacas, 710 SCRA 411 (2013).
”*3 Manresa, 690-692.
may not also be the object of a contract because they

are also considered outside the commerce of men, such
as: (i) purely personal rights, i.e., patria potestas or
marital authority, the status and capacity of persons, and
honorary titles and distinctions; and (ii) public offices,
inherent attributes of the public authority, and political
rights of individuals, such as the right of suffrage.”2 (e)
Contracts Involving Impossible Service: Impossible
things or services cannot be the object of contracts.”’
The rule is based on the maxim impossibilium nulla
obligatio est (There is no obligation to do impossible
things). An impossible service is that which is beyond
the ordinary power of man or that which is against
the law, morals, good customs, public order, or public
policy. As to impossible services, the impossibility
may either be absolute, when nobody can perform it;
or relative, when it cannot be performed because of
the special conditions or qualifications of the obligor.
The absolute impossibility nullifies the contract. As to
relative impossibility, the effects thereof shall depend
on whether the same is temporary or permanent. If
temporary, it does not nullify the contract, such as
when a partner agrees to contribute to the partnership
a sum more than what his means allow; if permanent,
it nullifies the contract, such as blindness in a contract
which requires the use of eyesight.”4 (f) Intention
Cannot Be Ascertained: Those where the intention of
the parties relative to the principal object of the contract
cannot be ascertained.”’ The rule is echoed in Article
1378, paragraph 2, which states: “if the doubts 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."
(g) Expressly Prohibited or Declared Void By Law:
An example of a contract expressly prohibited by law
is any stipulation which contravenes the prohibition
”2IV Tolentino, Civil Code ofthe Philippines, 1991 ed„ p. 521.

™Art. 1348, NCC.
7548 Manresa 685.
’’’Art. 1409(6), NCC.
I
PART 2: CONTRACTS
against pactum commissorium.On the other hand,

examples of contracts expressly declared void by law
are those contracts which failed to comply with the
formalities required by law for their validity, such as
those mentioned in Articles 748, 749, 1773, 1744(1),
1874, 2134, and 2140 of the Civil Code and Act No.
1147.
20.5.3 Principle of In Pari Delicto: (a) Applicability; The
principle of in pari delicto applies only to contracts
with an illegal cause, subject matter,”7 or purpose,”’
whether the attendant facts constitute an offense or
misdemeanor or whether the consideration involved is
merely rendered illegal.”’ It does not apply to inexistent
contracts,760 or to fictitious or simulated contracts.761 (b)
Statement of the Rule: The principle of in pari delicto
provides that when two parties are equally at fault, the
law leaves them as they are and denies recovery by
either one of them.762 No suit can be maintained for its
specific performance, or to recover the property agreed
to be sold or delivered, or the money agreed to be paid,
or damages for its violation, and no affirmative relief of
any kind will be given to one against the other. Each must
bear the consequences of his own acts. They will be left
where they have placed themselves since they did not
come into court with clean hands.761 (c) Exceptions: The
rule is subject to the following exceptions that permit
the return of that which may have been given under a
void contract to: (a) the innocent party (Arts. 1411-1412,
Civil Code); (b) the debtor who pays usurious interest
(Art. 1413, Civil Code); (c) the party repudiating the
void contract before the illegal purpose is accomplished
’’"Arts. 2088 and 2137, NCC.

’’’Heirs of Poliearpio M. Ureta, Sr. v. Heirs of Liberate M. Ureta, 657 SCRA 555 (2011),
citing Sta. Romana v. Imperio, 122 Phil. 1001, 1007 (1965) and IV Tolentino, Civil Code ofthe
Philippines, Vol. IV, p. 634, (2002).
”“Modina v. CA, 317 SCRA 696, 702-703 (1999) and Yu Bun Guan v. Ong, 367 SCRA
559(2001).
”’/</.
7“M.
76lHeirs of Poliearpio M. Ureta, Sr. v. Heirs of Liberate M. Ureta, supra.
762Yu Bun Guan v. Ong, supra.
’“Bercero v. Capitol Development Corp., 519 SCRA 484 (2007).
or before damage is caused to a third person and ifpublic

interest is subserved by allowing recovery (Art. 1414,
Civil Code); (d) the incapacitated party if the interest
of justice so demands (Art. 1415, Civil Code); (e) the
party for whose protection the prohibition by law is
intended if the agreement is not illegal perse but merely
prohibited and if public policy would be enhanced by
permitting recovery (Art. 1416, Civil Code); and (f)
the party for whose benefit the law has been intended
such as in price ceiling laws (Art. 1417, Civil Code) and
labor laws (Arts. 1418-1419, Civil Code).7" Another
exception to the rule is where the application of the in
pari delicto rule would violate well-established public
policy.7" In Gonzalo v. Tarnate, Jr.,'UA the Court held
that the principle of pari delicto cannot be applied if
it would contravene the public policy on prevention of
unjust enrichment. However, the recovery on the basis
of unjust enrichment cannot apply to a foreigner who
acquired private lands in the Philippines in violation of
the Constitutional prohibition.767
’"Hulst v. PR Builders, Inc., 532 SCRA 74 (2007).

’“Pajuyo v. CA, 430 SCRA 492 (2004) and Gonzalo v. Tamale, Jr., 713 SCRA 224 (2014).
luSupra.
767prenzel v. Catio, 406 SCRA 55 (2003), cited in Beumer v. Amores, 686 SCRA 770
(2012).

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BOOK IV.

— OBLIGATIONS AND CONTRACTS

'Art. 1156, NCC.

“Art. 1158, 1“ sentence, NCC.

"Art. 2142, NCC.

express agency shall be produced, even if the business

-’■’Art. 2149, NCC.

assumes the management in bad faith;30 (v) is manifestly

"Art. 2147, NCC.

unduly delivered to him; and (5) the objective is to

’’Art. 2154, NCC.

obliged to give support to the deceased, the former may

“Art. 2165, NCC.

or injury to another is evidently the foundation of the

’“Banal v. Tadeo, Jr.. 156 SCR A 325.

2.6.2 Distinguished from Delict: (1) crimes affect the public

extra contractual (culna aauiliana); (1) in the first, the

3) Kinds of Obligations: Civil and Natural

“Art. 1423, NCC.

3.2.2 May Be Converted Into Civil Obligation: A natural

“Ans. 2052, par. 2 and 2086, NCC.

expressly stipulated in writing.71 However, if the

4) Kinds of Obligations: Real and Personal

71 Art. 1956, NCC.

4.1.2 Two Kinds of Real Obligations: (1) Determinate

’’Art. 1460, l“par.,NCC.

is subject to a suspensive condition, in which case, the

"'Art. 1181, NCC.

poor or in contravention of the tenor of the obligation;”

5.2 Mora or Delay:

’“Cortes V. CA. G.R. No. 126083, July 12,2006.

5.2.3 Requisites of Mora Accioiendi-. (1) An offer of

is tantamount to fraud. Hence, any waiver of an action

"’Art. 1173, in relation to Art. 1171, NCC.

5.4.3 Exceptions to Fortuitous Event: The obligor remains

6) Kinds of Obligations: Pure, Conditional, and With a Term

l2°Art. 1174, NCC.

of the obligation; (3) Possible and Impossible - effect

l2!Art. 1181. NCC.

'"Art. 1189(1), NCC.

removal can be done without injuring the thing due.'34

'34Art. 1189(6), in relation to Art. 579, NCC.

accrual of the right of action, for written contracts144 or

l44Art. 1144(1), NCC.

deemed constructively fulfilled.152 This is the doctrine

'“Art. 1186, NCC.

that some event will not happen at a determinate time

"“Art. 1185, NCC.

event which will necessarily happen but the date of its

'“Art. 1193, par. 3, NCC.

left to the exclusive will of the debtor,1® such as when

7) Kinds of Obligations: Alternative and Facultative Obligations

7.2 Alternative Obligation:

,,5Art 1200, par. l.NCC.

with him, he can simply choose from the remaining

'“Art. 1205(2), NCC.

“jointly and severally,”1” "“junto o separadamente"m

save the thing or business from imminent danger;’” and

’“Art. 2146, par. 2, NCC.

BOOK IV. — OBLIGATIONS AND CONTRACTS 363

8.2.2 Each Share Distinct From Olhers: The most essential

2l2Art. 1208, NCC.