NOTES IN CIVIL LAW REVIEW II

Culled primarily from the lectures of Atty. Carla E. Santamaria-Seña

OBLIGATIONS AND CONTRACTS value. If you lost a vehicle worth P1 million, P1

million din hingiin mo.
Q: How is an obligation defined under the Civil Code?
If there is no material value, what happens? For
A: An obligation is a juridical necessity to give, to do, or
example, may non-compete clause. And you
not to do.
violated such non-compete clause – you
worked for the competitor company. How
Q: What are the elements of a valid obligation?
much damages? Dito papasok yung stipulation
A:
for liquidated damags. Thru this stipulation,
1. Active subject (creditor) – one who has the right to
you are assigning a pecuniary value to this
demand the fulfillment of an obligation.
breach of the prestation (non-compete).
2. Passive subject (debtor) – one who may be
demanded to fulfill the obligation.
Q: What if you do not have such a provision for
3. Object/Prestation – the determinate conduct that
liquidated damages? Or what was lost was a
has to be performed by the passive subject.
very old teddy bear na nasa iyo na mula
• Q: What are our choices when it comes to
pagkabata?
object/prestation?
A: Moral damages. This would be the basis of the
A: To give, to do, or not to do.
pecuniary value you would be assigning. If you
• Q: Which among these would be considered a
go by the material worth of a teddy bear you’ve
real obligation?
owned for years, baka negative na because of
A: The obligation to give. How come? Because
depreciation. So, you quantify the value via the
this is the only obligation that may be
sufferings you experienced.
compelled to be performed (by specific
performance). Ang obligation to do, you
So, ultimately, may na-assign pa rin na
cannot compel compliance otherwise, there
pecuniary value sa prestation for purposes of
would be a violation of the constitutional enforcing it against the property of the debtor.
prohibition against involuntary servitude. Kaya
if there is obligation to do and the debtor 4. Juridical tie/Efficient Cause – the vinculum juris
refuses to comply with the obligation to do, or the reason why the obligation exists.
your recourse will be limited to damages. You
• Q: What does this refer to?
do not get the obligation.
A: This is the source of the obligation (law,
• Q: What are the requisites for a valid
contract, quasi-contract, delict, and quasi-
object/prestation?
delict).
A:
a) Physically/legally possible of Q: Is the form of an obligation important?
performance; A: No, as a general rule, because form is required only in
b) Determinate or determinable; and contracts which is one of the sources of obligations. insofar
c) Capable of pecuniary estimation. as contracts are concerned, the law on contracts require
• Q: Why should the prestation be capable of certain forms in order for them to be valid, enforceable,
pecuniary estimation? etc.
A: There are instances when performance of
the very prestation due is no longer possible, Q: Should the obligation have an identified active/passive
kahit obligation to give pa yan. Maaaring na- subject?
dispose na to a buyer in good faith, in which A: No, they need not be named from the outset. So long as
case the only recourse left to the creditor is the active/passive subject are identifiable, it is sufficient.
damages – going after the property of the
debtor. You can only recover such damages as Atty. Seña’s examples: When you have a lottery ticket, the
you may be able to prove. So, you must prove: passive subject is already identified, i.e., the PCSO – the
(1) that you suffered damages; and (2) how one who pays out the money. But you do not have an
much damages you suffered. Kung hindi mo identified creditor yet – the basis for identifying it is the
na-prove si (2), baka nominal damages nalang winning number combination.
ibigay sayo ni court. If you’re speaking of
material objects, they normally have pecuniary Q: Is it possible to have an obligation with no clear passive
subject at the outset?
Daverick Pacumio
UST Faculty of Civil Law
 NOTES IN CIVIL LAW REVIEW II
Culled primarily from the lectures of Atty. Carla E. Santamaria-Seña
A: Yes. An example is in the case of theft, where the active
subject is the victim, but the perpetrator is not yet
identified. Nevertheless, the perpetrator, who is the
passive subject, is already obligated. Another example is an
obligation arising from quasi-delict. In a multiple car
collision, we are certain that someone is responsible, but
we do not know as of yet who is responsible.
If what you have is a real right which is enforceable against
the whole world, it may also happen that you may never
have a definite passive subject because your right may be
enforced against everyone.
Q: Can you give me an example of a real right?
A: Ownership.
Sources of Obligations
Q: Under the law, we have 5 sources of obligations, and
these are:
A:
a) Law – it is a source of obligation because the law
itself creates the obligation.
• Q: What is the basis for the creation of this
obligation?
A: There must be an act or omission that would
come within the scope of the provision within
the law for us to say that an obligation created by
law has come into existence.
• Q: What is the rule when it comes to obligations
arising from law?
A: Obligations arising from law are not
presumed, but must be expressly provided so
that if the law is silent when it comes to such
obligation, the obligation cannot be insisted
upon.
• Example: Obligations between spouses for
support under the Family Code.
• Q: Can you give me an example where an
obligation cannot be insisted upon because of
the absence of a law?
A: For example, a doctor was summoned to attend
to the medical treatment of the daughter-in-law.
The in-laws have no obligation to give support to
the daughter-in-law. The obligation falls on the
spouse (see Art. 194, FC).
• Q: If we are to concede that the law does not
obligate the in-laws, is it possible for that
obligation to exist on the basis of some other
source?
Daverick Pacumio
UST Faculty of Civil Law
A: Yes, if there was a contract between the in-
laws and the doctor, i.e., the in-laws agreed to
pay for the medical treatment of the daughter-
in-law. Here, the in-laws are obligated on
account of the contractual agreement.
• Q: Can the parents be held liable for quasi-
contract?
A: No. Because under the provisions on quasi-
contract, it is the injured person himself who is
liable to the person who has attended to him.
Here, the roles were switched. The daughter-in-
law is the one liable under quasi-contract.
b) Contract
• Q: How is this a source of obligation?
A: Based on the autonomy of the will of the
parties. The obligations arising from contracts
shall have the force of law between the
contracting parties and must be complied with
in good faith. This embodies the principle of
autonomy of will. The parties may stipulate on
such provisions as they may agree upon,
provided they are not contrary to law, morals,
etc. Once they have agreed upon them, this
constitute the law between them.
• Q: Let us say that there is a contract and the
contract has no termination clause. There is no
indication up to when the contract is supposed
to be in effect. What does that mean? Can you
just change your mind and not comply with the
contract?
A: No. This would be contrary to the principle
that contracts serve as the law between the
parties. You cannot just disregard the contract
because the contract, once entered into,
becomes the law between the parties.
c) Quasi-contract – a quasi-contract is a juridical
relation arising from a lawful, unilateral, and
voluntary act (LUV) to the end that no one shall be
unjustly enriched at the expense of another.
• Q: Who is the one being obligated in a quasi-
contract?
A: The beneficiary of the LUV. It is consistent
with the objective of not allowing unjust
enrichment.
• Q: How is this a source of obligation?
A: The law presumes that you (debtor) would not
have wanted to be unjustly enriched at the
expense of the actor (creditor) and that you
would want to reimburse or give back whatever
it is that was received by you on account of the
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actions made by the other person. kaya sa solutio
indebiti, the mistake in payment is the lawful,
unilateral, and voluntary act of the payor. Ikaw
naman as payee, since you do not have the right
to receive the payment, there is a potential for
you to be unjustly enriched if you keep the
money and the law presumes that you do not
want to keep the money because you do not want
to be unjustly enriched that’s why the law gives
you the obligation to give it back.
• Note: If the act does not fall within the
definitions of the law, if it falls within the
definition of a quasi-contract, it is still treated as
such quasi-contract.
• Kinds of quasi-contracts: Most popular:
Negotiorum gestio
o Q: What is negotiorum gestio?
A: A juridical relation w/c takes place when
somebody takes charge of the agency or
management of the business or property of
another w/o any power from the latter
o Officious manager: The one who took
over the abandoned property/business.
o Q: Is the officious manager under the
obligation as well?
A: Yes – to continue the management and
see it through. whoever voluntarily takes
charge of the agency or management of the
business or property of another, without
any power from the latter, is obliged to
continue the same until the termination of
the affair and its incidents, or to require the
person concerned to substitute him, if the
owner is in a position to do so (Art. 2144,
NCC). The officious manager should see it
through to the logical conclusion of the
business/property or until he is replaced by
the owner of the same. In the meantime, he
must take care of the property exercising
ordinary diligence.
o Q: What is the source of this obligation on
the part of the officious manager?
A: Law – Art. 2144, NCC. Dito mo makikita
na the source of the obligations of the
parties are different. On the part of the
owner of the abandoned property/business,
his obligation to reimburse is based on the
lawful, unilateral, voluntary act of the
officious manager. But the obligation of the
officious manager to see it through is based
on the law on negotiorum gestio.
Daverick Pacumio
UST Faculty of Civil Law
o Elements:
a. The business/property must be
abandoned or neglected – kung hindi
yan abandoned/neglected, you are
trespassing;
b. The officious manager must not have
been authorized by the owner – if you
have authority from the owner, it would
be converted into a contract of agency. It
is no longer NG;
c. The officious manager must be
compelled to action not by the prospects
of profit but by the beneficient idea of
averting losses and damages to the
owner of the business/property; and
d. The officious manager must not be
acting under the mistaken notion that
the property belongs to him.
o Q: What obligation is imposed on the
owner of the property for NG?
A: The owner of the property or business
who enjoys the advantages of the same shall
be liable for obligations incurred in his
interest, and shall reimburse the officious
manager for the necessary and useful
expenses and for the damages which the
latter may have suffered in the performance
of his duties (Art. 2150).
o Q: Will the owner be obligated only to the
officious manager?
A: No. The owner may be obligated to
people other than the officious manager
because while the latter is managing the
property, he is authorized under the law to
contract obligations that may bind the
owner. The owner may find himself liable at
the end of NG for obligations contracted in
his name. with regard to the officious
manager himself, the owner is liable to
reimburse him for useful and necessary
expenses as well as for damages that may
have been suffered by the officious manager
in the performance of his obligations. Two-
pronged ang obligation ni owner: (1) other
people – with regard to obligations
contracted by the officious manager in the
owner’s name; and (2) with regard to the
officious manager himself by way of
reimbursement of the useful and necessary
expenses and indemnification of damages
suffered by the officious manager in the
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performance of the management of the
abandoned or neglected property.
o Q: Would it follow that if no benefit
accrued, the owner would no longer liable
to the officious manager?
A: No. There will be reimbursement of
necessary expenses and indemnification of
damages but subject to a condition that:
(1) The officious manager has acted in good
faith, and
(2) The property or business is intact, ready
to be returned to the owner (Art. 2151, NCC).
If there is ratification by the owner of the
acts of the officious manager, it takes the
case out of NG and converts it to agency. If
there is no ratification and there is a benefit,
Art. 2151 applies.
If there is no ratification and there is a
benefit, the owner is obligated to reimburse
the necessary and useful expenses and
indemnification of damages.
If there is no ratification and no benefit as
well, There will still be reimbursement if the
management had for its purpose the
prevention of an imminent and manifest
loss (Art. 2150, 2nd par.).
o Q: What if walang benefit, walang
imminent and manifest danger, will there
be a right to be reimbursed?
A: Yes. There will be reimbursement of
necessary expenses and indemnification of
damages but subject to a condition that:
(1) The officious manager has acted in good
faith, and
(2) The property or business is intact, ready
to be returned to the owner (Art. 2151, NCC).
Solutio indebiti
o Juridical relation w/c takes place when
somebody received something from
another w/o any right to demand for it, and
the thing was unduly delivered to him
through mistake.
o It has a related provision in human
relations, i.e., Art. 22 (accion in rem verso).
Art. 22 also operates on the premise of
unjust enrichment.
o Q: How do we distinguish Art. 22 from Art.
2154?
Daverick Pacumio
UST Faculty of Civil Law
A: In solutio indebiti, there must be
mistake. In Art. 22, mistake is not a
requisite. In Art. 22, there must be no cause
of action for quasi-contract such as solutio
indebiti.
Art. 22 is broader because it is premised on
unjust enrichment, with or without
mistake. If there is mistake, you can still sue
under Art. 22.
o Q: Given that premise, what will make you
sue under Art. 2154 and not Art. 22? What
will stop you from suing under Art. 22?
A: He cannot sue under Art. 22 because of
the barring effect of his remedy under Art.
2154. You can only sue under Art. 22 if there
is no other remedy under the law. Human
relations provisions like Art. 22 are based on
equity and you only resort to equity when
there is no other relief under the law. In this
case, there is a relief – Art. 2154.
o Requisites of SI:
a. Payment to the payor;
b. The payment must be by mistake.
o Q: What kind of mistake are we referring to
here?
A: Mistake in fact or difficult question of
law (Art. 2155).
o Q: If the money paid by mistake belongs to
a third person, what happens?
A: The law says that the payee must advise
the third person of the same and the third
person has one (1) month to claim the same
from the payee (Art. 1984). If he does not do
so, the payee is relieved of the obligation to
return the same. Moreover, the payee may
return the same to the third person (4th
par.)
o Q: What is the obligation of the payee in
case of solutio indebiti?
A: To give back what he has received,
regardless of his good faith or bad faith.
o Q: Do we factor his good faith or bad faith?
A: Yes. If the payee is in bad faith, in
addition to returning what he has received,
he must pay legal interest if what he has
received is a sum of money, or the fruits that
may have been produced by the thing he
received, or the fruits which would have
been produced by the thing he received. In
addition, he is liable for any loss or
impairment of the thing for any cause,
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regardless of the cause for the loss or
impairment. He is also liable for damages to
the person entitled to the return of the
thing until the thing has been recovered
(Art. 2159).
If the payee is in good faith, the payee must
give back what he received and there is no
obligation to pay interest or return the
fruits, except if he had been benefitted. And
when it comes to the loss or impairment of
the thing he received, he will only be liable
to the extent that the same has benefitted
him.
He who in good faith accepts an undue
payment of a thing certain and determinate
shall only be responsible for the
impairment or loss of the same or its
accessories and accessions insofar as he has
thereby been benefited. If he has alienated
it, he shall return the price or assign the
action to collect the sum (Art. 2160).
Whoever in bad faith accepts an undue
payment, shall pay legal interest if a sum of
money is involved, or shall be liable for
fruits received or which should have been
received if the thing produces fruits. He
shall furthermore be answerable for any loss
or impairment of the thing from any cause,
and for damages to the person who
delivered the thing, until it is recovered
(Art. 2159).
d) Delict
e) Quasi-delict
• Requisites for quasi-delicts:
1. There is fault or negligence on the part
of the defendant resulting to a
wrongful act or omission, whether
voluntary or not, and whether criminal
or not;
2. There is damage and injury suffered by
another;
3. There is a direct causal relation bet. the
fault or negligence and the resulting
damage and injury (Proximate Cause).
• Q: What happens if there is a pre-existing
contractual relation between the parties?
Would that mean that we do not have a
Daverick Pacumio
UST Faculty of Civil Law
cause of action based on quasi-delict
anymore?
A: No. There can still be a cause of action
for quasi-delict if the breach of the
contract is tortious in nature (Air France
v. Carrascoso). So, it is possible for you to
have 2 causes of actions: one for
contractual breach and another for quasi-
delict. Parang yung pag an act gives rise to
a cause of action for tort and is likewise a
crime under the RPC.
• Proximate cause: Proximate cause is the
adequate and efficient cause which by the
natural order of events, unbroken by any
efficient intervening cause would produce
the injury and w/o w/c the result thereof
would not have occurred.
• Q: What happens if there was some kind
of negligence on the part of the plaintiff?
A: If the plaintiff is the proximate cause of
his own negligence, then he has no cause
of action against the defendant. If the
plaintiff’s negligence is simply
contributory, it is simply mitigating.
• This was exemplified in a ruling by the SC
involving the deposit of checks. The
corporation entrusted the depositing of
its checks to its employee, someone
named Irene. Irene went to the bank and
filled up the deposit slips. Instead of
depositing the checks to the account of
the corporation, she diverted it to her
husband’s account. She would even fil out
the original deposit slip in the name of her
husband’s account but she would not
similarly fill up the duplicates. After
leaving the bank, she would fill in the
name of the corporation. and the
corporation, based on the deposit slip
filled up by Irene with its name, would be
convinced that she, in fact, deposited the
amount. The bank would send plaintiff
corporation statements of account and it
showed how much money was in the
account of the plaintiff corporation.
however, the plaintiff corporation was not
checking its SOA. Thus, Irene’s scheme
went unnoticed. Here, both the bank and
the plaintiff corporation committed some
kind of negligence. The bank – thru its
employees in accepting the deposit slip
original and the duplicate not being
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properly filled up; the corporation – by
not checking its SOA. SC: Proximate
cause – negligence of the bank thru its
EEs. The EEs should have been alerted
that the duplicate of the deposit slips were
not being filled up by Irene. Irene should
have been required to fill up the
duplicates. Because the teller did not do
so, the bank allowed the diversion of the
funds undetected. However, while the
plaintiff corp. was also negligent in failing
to check its SOA, such negligence is only
contributory – it was not the proximate
cause of the loss of the plaintiff. Only a
mitigation of liability was adjudged.
• Q: Whenever there is a pre-existing
contractual obligation and there is a tort
which is a breach of contract, the plaintiff
has 2 causes of actions: culpa aquiliana
and culpa contractual. How are they
different?
A: Negligence need not be proved in culpa
contractual. This is the main difference.
• Doctrine of Last Clear Chance: where
both parties are negligent but the
negligent act of one is appreciably later in
point of time than that of the other, or
where it is impossible to determine whose
fault or negligence brought about the
occurrence of the incident, the one who
had the last clear opportunity to avoid the
impending harm but failed to do so, is
chargeable with the consequences arising
therefrom.
• It presupposes the presence of negligence on
the part of the defendant. This must be
preceded by negligence on the part of the
Plaintiff. It cannot be invoked where the
plaintiff is guilty of fraud and he is imputing
negligence on the defendant and then
invoking this doctrine of last clear chance.
• Atty. S: There was a case before involving a
drawee bank and a presenting bank. Atty. S.
was a lawyer for the drawee bank. The
presenting bank, who received the check, had
an internal problem with its employees who
were engaged in fraud. The employees
diverted the proceeds of the check to a private
account. In practice, if a check is payable to
the government, there should be a specific
code meant to alert the drawee bank that this
is supposed to go to the government and on
Daverick Pacumio
UST Faculty of Civil Law
the basis of such, the check will be processed
differently and will not be lumped with the
ordinary checks. The check was presented
before a branch of the drawee bank that was
not designated as a BIR-receiving agent. Don
palang, mali na. further, the proceeds were
diverted to a different account. These 2 things
can only happen if the EEs of the presenting
bank were in cahoots with the depositor.
When the check was sent to the drawee bank,
Atty. S’ client failed to input the code to
indicate that it is a government check. The
presenting bank was the one who initiated the
lawsuit. Their theory: the drawee bank had the
last clear chance to prevent the fraud. They
should have been able to detect the fraudulent
scheme. Atty. S’ answer: The doctrine of last
clear chance is inapplicable because this is not
a situation where both parties are negligent –
only the presenting bank, committed fraud.
The worst that they can ascribe to Atty. S’
client is negligence.
• The action for damages will not always be
limited to the actor or the one who committed
the tortuous act – even those who are
vicariously liable may be held liable (see Art.
2180).
• Note: For parents’ liability for the damages
caused by their minor children, note the
ruling in Tamargo v. CA where the SC held
that the decree of adoption should not be
retroacted to the application for adoption for
purposes of making the adoptive parents
liable for damages committed by the adoptive
child during the pendency of the adoption.
The SC held that you only give retroactive
effect for purposes of benefitting the child –
here, to retroact would punish the parents.
• Proximate cause is not similar to the direct
cause. the direct cause is the one that caused
the damage to you. Example: 3-way collision
of vehicles. The vehicle behind you is the
direct cause but it may not necessarily be the
proximate cause because the vehicle behind
you may have been bumped by the vehicle
behind him. The proximate cause is the
negligence of the driver of the vehicle behind
the vehicle behind you. Nevertheless, you
have to sue the second vehicle and the second
vehicle, by way of third-party complaint, will
bring the third vehicle.
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Nature and Effect of Obligations
Three (3) possible prestations: To give, to do, or not to do.
To give
Generic/Indeterminate obligation
Specific/Determinate obligation
Q: Why should we distinguish?
A:
1. A determinate obligation has accessory
obligations which are not available in generic
obligations to give, viz:
a. Obligation to preserve the thing with the
diligence of a good father of a family;
Q: What is diligence of a good father of a
family?
A: That degree of diligence which a
reasonable person would exercise over his
own belongings.
Q: Can the debtor say that he has to take
care of the thing the way he takes care of
his own belongings?
A: No. The debtor may be burara or
messy. This is a subjective standard. The
standard should be objective. In fact, the
parties cannot stipulate on a lower degree
of care because it would render the
obligation nugatory. They can only
provide for a higher degree of care
because otherwise, you would be
sanctioning negligence
In case of banks or common carriers,
extraordinary diligence.
b. Creditor has the right to the fruits of the
object;
Q: What does the law say about this?
A: The creditor has a right to the fruits of
the thing from the time the obligation to
deliver it arises. However, he shall acquire
no real right over it until the same has
been delivered to him (Art. 1164). If you
would read this, you realize that the rule
applicable to the fruits is applicable to the
principal as well. At the time that the
obligation is constituted, the creditor
Daverick Pacumio
UST Faculty of Civil Law
acquires a personal right over the thing
and its fruits. However, no real rights are
acquired until the thing and its fruits are
delivered.
Q: What happens if there is delivery?
A: The creditor acquires the real right
over the thing, i.e., ownership. Upon
delivery, ownership is acquired over the
thing and its fruits. Thus, the rights of the
creditor are converted from personal
rights to real rights which are enforceable
against the whole world.
Personal right: There is a definite
passive subject – a specific person against
whom you may enforce the obligation.
Real right: There is no definite passive
subject – you can enforce the obligation
against anyone.
Delivery: Not limited to actual, but
includes constructive delivery, i.e.,
symbolic delivery, traditio longa manu,
brevi manu, constitutum possessorium,
and even execution of a public document.
Q: A sold B his horse. The horse is already
pregnant with its young. The buyer,
therefore, is also entitled to the young –
the natural fruit is already manifest.
Should A sell the animal anew to C, and
deliver the animal to C, what would be B’s
remedy? May B sue C and demand the
return of the horse to him?
A: No. B cannot enforce his contract with
A against C because that contract only
gives B a personal right which may only be
enforced against the other party to the
contract. B has no cause of action against
C.
However, if B was able to claim the horse,
C can go after B and take back the horse
even if they have no contractual relations
with one another because C is the owner
of the horse by virtue of the delivery of the
horse to him and his right over the horse
is a real right which is enforceable against
the whole world.
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c. Obligation to deliver the accessions and
accessories
Q: What are accessions and accessories?
A: Those attached to the principal and
even though unattached, are necessary to
make the principal complete and
functioning. Example: Car, the key is an
accessory. You cannot use a car without a
key.
Q: Is it possible that a generic obligation
to give becomes a specific obligation to
give?
A: When the subject matter has been
received and accepted by the creditor.
This is because the acceptance of the
creditor indicates that what is delivered to
him is already acceptable to him. Kaso, we
cannot appreciate this properly because
upon acceptance, the obligation is
extinguished already. So, we do not even
need to apply the accessory obligations in
this case because the obligation was
already extinguished.
2. A determinate obligation may be extinguished by
the loss of the thing due if the same is on account
of a fortuitous event, which does not apply in
generic obligation to give
3. Substitute performance does not lie in
determinate obligation to give.
Remedies in case of breach of obligations, two (2)
kinds:
Ordinary Remedies
1. Performance
• Specific Performance; and
• Substitute Performance
In Obligation to Do
• While you cannot compel specific performance
in obligation to do, substitute performance
may be availed of if the prestation is capable of
being done by a third person other than the
debtor.
• If the prestation can be done only by the
debtor, substitute performance cannot be
availed of. The only remedy is damages.
Daverick Pacumio
UST Faculty of Civil Law
In Obligation to Give
• Q: Is specific performance only applicable in
specific obligation to give and not in generic
obligation to give?
A: No. Specific performance is also applicable
to generic obligations to give. Both specific and
substitute performance are available in generic
obligation to give. However, it may not be
practical for you to insist on specific
performance. Example: Papagawa ka bahay.
You source your cement from the debtor. Ayaw
i-deliver kahit bayad na. Would you want
advise your client to go to court to sue such
debtor for specific performance and litigate for
5 years or more? You would not want that. In
the 5 years na nililitigate yung kaso, naka-
binbin yung construction ng bahay mo. It is
impractical. Substitute performance is more
practical. I-source nalang ni client mo yung
cement sa iba and charge the cost to the
original debtor.
2. Rescission (Art. 1191) – setting aside the contract and
parties are reinstated to the status quo before the
obligation was contracted
• Q: Rescission under Art. 1191 should have been
referred to as “resolution” because it is different
from the rescission in Art. 1384. Why?
A: Art. 1191 says that the power to rescind
obligations is implied in reciprocal ones.
Reciprocal obligations are those where the
parties are debtors and creditors of one
another. Performance of one by his obligation
is dependent on the performance of the other.
I will pay if you deliver. Symbiotic relationship.
Now, rescission is inherent in reciprocal
obligation because should there be non-
performance by one party, that serves as a
negative resolutory condition which
extinguishes the obligation. It brings about
resolution. In reciprocal obligations, demand is
not enough – the demand must be coupled
with a showing that the demanding party is
ready or willing to comply with his obligation.
• Q: How should we avail of rescission under Art.
1191?
A:
a. Judicial
b. Extrajudicial
Pero, for the longest time, the default mode is
via judicial action. But this is not practical. Let’s
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say you’re renting a dorm. Marami defects sa
unit. Gusto mo lumayas. Kaso, malamang
nakapag-deposit ka na. Kahit lumipat ka, you
are bound by your contract, and you should
pay. And malamang, hindi ka nakapag-provide
ng provision for extrajudicial rescission. So,
you should have to go to court. Ikaw na
agrabyado, ikaw pa gagastos. Moreover,
patuloy ka pa nagbabayad because your
contract is not yet rescinded. Is this fair? No.
In 2016, the SC changed the rule – the default
now is that you may ask for extrajudicial
rescission even in the absence of stipulation
allowing you to do so (Nissan Car Lease v.
LMCI). The burden is shifted from the plaintiff
to the defendant – the defendant is now the
one who goes to court to question the
rescission. In the meantime, the aggrieved
party is free from the contract.
• Forms of rescission, when required:
a. Contract of sale of real property – only by
judicial action or notarial act
b. Contract of sale covered by the Maceda
Law – only after the grace period was
given by the buyer
• Q: Is rescission available to a contract to sell?
A: No. Unlike a contract of sale which is
reciprocal, in a contract to sell – the non-
payment of the purchase price operates as a
non-fulfillment of the suspensive condition
which prevented the obligation to come into
existence. There is nothing to rescind.
3. Damages (Art. 1170) – obtainable when there is fraud,
• Prescriptive period for rescission under
Art. 1191: 10 years. Since rescission is the
counterpart of specific performance, it is
logical to subject it to a 10-year prescriptive
period.
• Q: Art. 1191 says that the court shall decree the
rescission claimed, unless there be just cause
authorizing the fixing of a period. What does
this mean?
A: It means that the court may give the debtor
more time to comply with the obligation. It is
not enough that you have suffered substantial
breach and that it is the aggrieved party
seeking the rescission – you must show that the
party seeking rescission is able to effect
restitution and the fixing of a period is not
warranted. When you say that the court will fix
the period, it does not mean that the court will
Daverick Pacumio
UST Faculty of Civil Law
just come up with a random period because
under Art. 1197, the period fixed should be the
period the parties had in mind.
• Q: How do we know that the parties intended
to fix a period?
A: Go by the nature and the circumstances of
the prestation (see Art. 1197). If the prestation
is of such kind that it requires a period of time
to complete. For example, Mr. Pacumio’s
undertaking is to build Ms. Aspiras her dream
house. It requires a period of time for Mr.
Pacumio to perform. If Mr. Pacumio and Ms.
Aspiras cannot agree, the court steps in. In
practice, a demand will be made by the creditor
upon the debtor and the debtor would be
unable to perform. The creditor goes to court.
The debtor argues he is not in delay because he
needs more time to fulfill his obligation. The
court goes by your submissions in the case.
The beauty of having the period fixed by the
court is until the period is fixed and until the
period lapses, you cannot be in delay.
• Note: If the breach of the obligation is
attended by fraud, the defendant, per
jurisprudence, will not be entitled to the fixing
of a period to perform the obligation (Sps.
Tiongson v. Emergency Pawnshop). Here, the
buyer issued a check which was drawn against
insufficient funds. The SC held that the buyer
cannot ask for additional period to perform the
obligation because he was guilty of fraud.
negligence, or delay in the performance of the
obligation or performed it in contravention of the tenor
thereof.
• Damages must be premised on:
a) Fraud (dolo incidente) – the deliberate and
intentional evasion of the normal
fulfillment of an obligation.
Q: Can we equate fraud with bad faith?
A: Not necessarily. Fraud in the context of
Art. 1170 is dolo incidente, which is fraud in
the performance of the obligation. Dolo
causante is the fraud in the intention to
deceive or fraud in the constitution of the
obligation. This may be a ground to annul
the contract for vitiation of consent.
Dolo Causante Dolo Incidente
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Deceit employed Presupposes the b) Negligence

to have the existence of an c) Delay
creditor consent obligation which d) Contravention of the tenor of the obligation
to the contract. It may also arise from
vitiates the contracts but not Q: How do you relate these remedies with one another?
consent of the necessarily from A: Performance and rescission cannot be availed of
creditor contracts alone, as simultaneously because they are contradictory. One is for
obligations may enforcement (performance) and one is for setting it aside
arise from law, as though the contract never existed. Thus, you cannot
contract, quasi- avail of them simultaneously. However, damages is
contract, etc. peculiar because you can avail of it: (a) independently; or
Renders the The contract is (b) in conjunction with either performance or rescission.
contract voidable valid but there is
– valid until fraud in the Extraordinary Remedies: You can only resort to this
annulled. performance of the when all else fails. This means that you tried to enforce a
obligation. writ of execution, which was returned unsatisfied. Thus,
you may only avail of this kind of remedy if you are a
Q: May the two concepts overlap? judgement creditor.
A: Yes. For example, you ordered bottles of 1. Accion subrogatoria – you need only prove that
wine. What was delivered to you were fake you have an unsatisfied writ of execution.
bottles of wine. This is dolo incidente. What 2. Accion pauliana – can only be availed of if accion
if, at the outset, you did not know that you subrogatoria is no longer available. You have to
were enticed with fake bottles of wine – show: (a) unsatisfied writ of execution; and (b)
pinakitaan ka ng bottles of wine at accion subrogatoria is unavailable. This is because
pinapaniwala ka na they are real, yun pala accion pauliana is so invasive – you may have a
fake. This is dolo causante. May fraud na sa contract between the judgement debtor and
umpisa palang. It was simply extended to another creditor set aside.
the performance of the obligation kasi
binigyan ka ng fake. Q: How will the good faith or bad faith of the debtor affect
his liability for damages in case of fraud?
Q: What would be your remedy? Damages A: Good faith: Debtor is liable for the natural and
for dolo incidente or annulment for dolo foreseeable consequences of his breach. Bad faith: Debtor
causante? is liable for all damages that may be reasonably attributed
A: It depends on what your client wants. on his act.
If he wants to clear out the contract
between him and the other party, In an old case, people did not have access to the movies
annulment is the way to go. However, in except in case of cinemas. The movie reel was not delivered
annulment, you must prove fraud at the in time for the town fiesta. The issue is whether the debtor
inception, which is tricky. Mahirap i-prove should be liable for the profits of the creditor which he
yung deceit. That goes to the motive or lost? The debtor is in good faith. Hindi naman niya alam
intent of the person. it is a state of mind. na yung purpose is to exhibit the movie during the town
Whereas if your client wishes to move on fiesta. Thus, he argued that he should be limited to the
and seek damages, damages under dolo damages he should have foreseen and should not be liable
incidente may be the way to go combined for extraordinary profits.
with rescission. You just have to show that
the contract was for the delivery of real wine Since fraud is the intentional evasion of an obligation,
and the wines delivered to you were fake. kawani siya ng fault. However, fault may be thru
Thus, there was fraud in the performance of negligence. It is the lesser evil. Nevertheless, fault can be
the obligation. It is simpler, more the basis of damages but the court may mitigate the
straightforward. You do not even establish damages adjudged against the defendant. If the fault is
intention. You just prove breach of contract. attended by bad faith, it amounts to fraud.

Daverick Pacumio
UST Faculty of Civil Law
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Delay
2 concepts:
1. Ordinary delay: Failure of the obligor to comply
with the obligation in time.
2. Legal delay: When there has already been
demand from the obligee for the obligor to comply
with his obligation. Here, there would be legal
consequences. In order for the debtor to be in legal
delay, there must be a demand which may either
be judicial or extrajudicial.
a. Judicial demand: Demand made by the
oblige via a complaint with the court.
Under the Revised Rules on Civil
Procedure, it is more tedious to go to
court because you must attach all the
pieces of documentary and testimonial
evidence. Thus, extrajudicial demand is
more convenient because the sooner you
put your debtor in legal delay, the better.
For example, the thing due was destroyed
thru fortuitous event.
b. Extrajudicial demand: Done orally or in
writing.
Q: Pwede ba thru email, Viber, text?
A: Yes. Under the E-Commerce Act,
electronic documents are the functional
equivalents of a real document.
Q: When can you make a demand?
A: It depends on the kind of obligation. You can only
make a demand when an obligation falls due. In case of
conditional or obligations with a period, you must wait for
the happening of the condition or the period to make a
demand because it is only then that the obligation
becomes due (suspensive condition/period). Exception: if
it is a resolutory condition/period, in which case, the
obligation is immediately demandable and is extinguished
by the happening of the condition/period.
If it is a pure obligation, demand can be made within a
reasonable time after the obligation was constituted.
Reasonable time is not measured by the time that lapsed.
For example, nagpa-xerox si Ms. Ramirez at si Mr. Teves sa
Kooyah. Umutang muna si Ms. Ramirez kay Mr. Teves.
Hindi agad agad pwede bawiin ni Mr. Teves yung pera. Mr.
Teves should wait for a reasonable time for Ms. Ramirez to
achieve her purpose.
No demand, no delay.
Daverick Pacumio
UST Faculty of Civil Law
• Subject to the rule on reciprocal obligations, i.e.,
in reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready
to comply in a proper manner with what is
incumbent upon him. From the moment one of
the parties fulfills his obligation, delay by the other
begins (Art. 1169). Note: The parties in reciprocal
obligations must be debtors and creditors of each
other in the same transaction. Example: Contract
of sale – buyer must pay the seller and the seller
must deliver to the buyer.
Exceptions to the rule on demand (Art. 1169):
1. When the law or the obligation expressly so
provides;
Law
Q: Should the law spell it out that demand is not
required?
A: No.
Q: How can it do so?
A: Example, in taxes, the law provides that the
failure to file and pay income taxes on April 15 shall
result in surcharges and penalties from April 15.
Q: You are obliged to give Mr. Teves a specific
thing and you were supposed to give it yesterday
but you failed. You lost it due to a fortuitous event.
Are you still liable?
A: Generally, no. Except if you are in delay.
However, the fact of delay must be proven. There
is nothing in the obligation which indicates that
demand has been dispensed with. The facts
likewise do not disclose that the law dispensed
with the requirement of demand.
Obligation
Q: Is it enough that parties specify the date of
performance?
A: No. The parties must further expressly stipulate
that the non-performance of the obligation on said
date and time shall put the non-performing party
in default. You have to so provide in the obligation
that demand is not required. “Without need of
demand.”
2. When time is of the essence – when from the
nature and the circumstances of the obligation it
appears that the designation of the time when the
thing is to be delivered or the service is to be
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rendered was a controlling motive for the
establishment of the contract; and
Example: In a wedding, the creditor is the bride
and the debtor agreed to deliver a wedding gown
before the wedding. Time is of the essence – the
debtor cannot deliver the gown after the wedding.
There is no need for the creditor to demand the
debtor to deliver the wedding gown on or before
the wedding day.
Atty. S: Delay as a basis for damages may amount
to either: (a) delay amounting to late
performance or near delay (the obligation may
still be performed) or delay amounting to non-
performance (nagawa man yung obligation, wala
nang silbi). Kung delay in performance, mas maliit
yung damages. Example, wedding gown to be
delivered night before the wedding. It was
delivered 30 minutes before the wedding. This
may be delay amounting to late performance or
near delay kasi naisuot pa naman ni bride.
However, in today’s times, na marami pang che
che bureche before the wedding itself (shoots,
etc.), it may be delay amounting to non-
performance because the bride missed these
opportunities.
3. When demand is useless, as the debtor has made
it beyond his capability to perform the obligation.
Example: The seller made a double sale. The seller
delivered the thing due to the second buyer in
good faith. However, the first buyer must prove
that the seller delivered the thing to the second
buyer in order to prove this exception.
Fortuitous Event
Requisites:
1. The occurrence must be independent of the
human will;
2. It must be impossible to foresee;
3. The occurrence must render the performance of
the obligation to be impossible; and,
4. The debtor must be free from any participation in
the aggravation of the injury to the creditor.
Effect: Extinguishes the obligation. However, it does not
apply to generic obligations to give because genus never
perishes.
Daverick Pacumio
UST Faculty of Civil Law
• Note: Money is generic, even if it may have been
allocated for the payment of a specific obligation.
Example, ikaw si debtor and you withdrew money
from the bank and sunod-sunod yung serial
numbers, which are specified, and habang
papunta ka sa creditor, na-holdap ka. Your
obligation is not extinguished. The loss of the
money even thru fortuitous event did not
extinguish your obligation.
Exceptions to the barring rule of fortuitous event:
1. In those cases expressly specified by law;
2. Declared by stipulation or contract;
3. Nature of the obligation requires the assumption
of risk;
Atty. S: During the onslaught of Ondoy, the
insurance companies denied liabilities on the basis
of the fortuitous event doctrine which was
inserted in the insurance contracts.
4. If the debtor has promised to deliver the same
thing two or more persons who do not have the
same interest;
5. Possessor in bad faith;
6. The debtor contributed the loss of the thing;
7. The obligor is guilty of fraud, negligence or delay
or if he contravened the tenor of the obligation;
and
8. If the obligation arises from a criminal offense and
the loss of the thing due to fortuitous event takes
place, the obligation will not be extinguished
unless the loss occurs after the obligor has offered
to deliver the thing to the obligee and the latter
refused without any justifiable reason (mora
accipiendi).
o Example: In theft, the phone of B was stolen by
A. A was about to return the phone to B, but B
did not want the phone because he did not
want to be contaminated by it.
Extreme Remedies (Art. 1177) – only judgement creditors
may avail of the same because Art. 1177 provides that these
may only be availed of if there is an unsatisfied writ of
execution. The unsatisfied writ of execution presupposes
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that you have gone to court and you have sought to enforce
the judgement in your favor to no avail.
Accion subrogatoria
• Another way for the debtor to hide his assets is to
not act on his credits. Kunwari si debtor, may
demandable sum from Y. ayaw kunin ni debtor
para walang makuha sakanya si creditor. The
creditor may be subrogated to the rights of the
debtor for purposes of collecting Y to the extent of
the obligation owed.
• The only limitation is the right or the right of
action should not be inherently personal to the
debtor. Thus, the right to revoke a donation for
ingratitude cannot be exercised by a creditor
because this is inherently personal to the debtor.
Accion pauliana – can only be availed of if accion
subrogatoria is not available. This is because accion
pauliana is the more invasive remedy as its effect is to set
aside an existing transaction between the debtor and a
third person. The third person here may be in good faith.
Why do we allow this? Because it is premised on fraud.
• Q: In what manner does the debtor try to defraud
the creditor? What is the fraud the debtor is trying
to commit against the creditor?
A: The debtor is trying to hide his assets from the
creditor by putting it beyond the reach of a writ of
execution/attachment. This may be presumed if
the debtor disposes of the properties by onerous
title after a judgement/writ of attachment has
been issued against him (Art. 1387).
If the debtor disposes of the properties by
gratuitous title, they are presumed to be in fraud
of creditors when the donor did not reserve
sufficient property to pay all debts contracted
before the donation (Id.).
• Also rescission but it is different from rescission
under Art. 1191. Accion pauliana is premised on
fraud. Rescission under Art. 1191 is premised on
breach.
• Requisites:
1. There must be a judgment and the creditor is a
judgment creditor – you must litigate first
before you may have a transaction set aside for
being fraudulent. Mabigat siya;
2. There must be a writ of execution issued by the
trial for the satisfaction of judgment;
Daverick Pacumio
UST Faculty of Civil Law
3. There must be failure to satisfy and enforce the
judgment;
4. There must be no other legal remedy available;
and
5. There must be intention to defraud on the part
of the debtor.
Q: Do we look into the good faith or bad faith
of the third person with whom the defrauding
debtor contracted with for purposes of saving
the transaction from accion pauliana?
A:
1. Onerous transactions – if the third
person is in good faith, accion pauliana
does not lie.
2. Gratuitous transactions – accion
pauliana lies regardless of the good
faith or bad faith of the third person.
Q: Why do we distinguish?
A: According to Senator Tolentino, in
gratuitous transfers, the third person did
not give anything. For onerous transfers,
the third person gave something in
consideration of the thing due. Here, the
third person and the judgement creditor is
on the same footing. We have to protect
the third person in good faith.
Q: How do you determine if there is an intention
to defraud?
A: The obligation must be due and demandable.
Timeline:
1. Creditor enters into a transaction with
debtor – there is an obligation
(Transaction 1/Original Transaction).
2. Debtor wanted to defeat the rights of the
creditor and defraud him.
3. Debtor enters into another transaction
with this intention (Transaction
2/Fraudulent Transaction).
4. Litigation between the creditor and
debtor.
5. Judgement which affirms the obligation
must take place after the fraudulent
transaction.
Will the fact that you have the final judgement
after the fraudulent transaction affect your right to
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accion pauliana on the theory that there is no
intention to defraud because the fraudulent
transaction came before the final judgement? SC:
No. We only have to look at whether the original
transaction took place before the fraudulent
transaction. It does not matter that the judgement
comes after the fraudulent transaction.
It may also happen that the transaction intending
to defeat the rights of the creditor may be
simulated (parties do not intend to be bound).
Relative simulation – simulated contract is void
but the real contract is given effect provided it
complies with formalities prescribed by law.
Example: Peborit ka ng nanay mo. Binigyan ka
properties pero para hindi halata, ginawang deed
of sale. Sale is simulated, but the donation is valid.
Absolute simulation – you dispose of a property in
paper but in reality, no such disposition took
place. It is null and void. It is subject to collateral
attack by any interested person. because of this,
we have to qualify the rules on accion pauliana. If
the contract is absolutely simulated, it is a void
contract in which case, the creditor or any
interested party may assail its validity and have it
set aside any time without need of complying with
the requisites of accion pauliana.
This is what happened in Manila Banking Corp. v.
Silverio. Here, the bank attached a property of its
debtor. A writ of attachment is issued before
judgement. Thus, the bank is not yet a judgement
creditor. In the course of the proceedings, the
nephew of the debtor Silverio appeared. He was
asking for the dissolution of the writ of attachment
on the ground that the property was sold to him
by Silverio. His claim, however, was not credible
because the nephew had no financial capacity to
make the purchase. The court denied the
nephew’s motion to have the attachment set aside.
The nephew argued that to deny his motion would
amount to a ruling that the transaction was
fraudulent (kasi attachment issues only if there is
fraud). So, he invoked the requisites of accion
pauliana. SC found the sale of the property to the
nephew as an absolutely simulated contract,
which takes it out of accion pauliana as an extreme
remedy. Thus, it may be assailed as a void contract
for being absolutely simulated.
Daverick Pacumio
UST Faculty of Civil Law
Atty. S: Welcome development because you need
not wait for a final judgement – you need only to
prove that the contract is absolutely simulated.
• Prescription: 4 years from the time the cause of
action arises.
• In Khe Hong Cheng v. CA, the donation and
transfer of the properties were registered more
than 4 years before accion pauliana was brought.
Therefore, there was a hurdle – constructive
notice. So, more than 4 years ago, dapat alam na
daw ni judgement creditor yung transfer and
prescribed na si judgement creditor. The
judgement creditor learned of it only when the
writ of execution was returned unsatisfied. Within
a month, he brought accion pauliana. SC: The rule
on constructive notice does not apply. we consider
when it became possible for the judgement
creditor filed the accion pauliana. It only became
possible when the judgement creditor had the
unsatisfied writ of execution. Dun palang mag-run
yung 4-year period of prescription. Even if the
judgement creditor knew of the transfer more
than 4 years ago, he could not have acted or
pursued accion pauliana because back then, he
was not yet a judgement creditor.
Kinds of Obligations
1. Pure and conditional
2. Obligations with a period
3. Alternative obligations
4. Joint and solidary obligations
5. Divisible and indivisible obligations
6. Obligations with a penal clause
Pure and conditional obligations
Pure obligation
• If it is not subject to a period or a condition.
• Period: Future and certain event
o Q: Are we saying that there is no room for
uncertainty in periods?
A: No. We know that the period is going
to happen, but we do not know when it is
going to happen, e.g. death. It is a
different case if the event upon which the
obligation is hinged is who between two
people will die ahead. If this is the
incident, the thrust here is no longer the
fact of death taking place, but which of
them dies first. It becomes then a future
and uncertain event, a condition.
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o When the debtor says that “I will pay
when my means permit me to do so.” The
law says that this is a period.
• Condition: Future and uncertain event
Kinds of conditions:
o Suspensive – affects the existence of the
obligation. Since it affects the existence of
the obligation, it necessarily affects its
demandability.
o Resolutory – the obligation is
immediately demandable. The resolutory
condition does not have any bearing on
the existence of the obligation because it
presupposes that the obligation is already
existing. It affects the extinguishment of
the obligation because once the
resolutory condition is fulfilled, the
obligation ceases. Same effect with
resolutory period. However, in resolutory
period, we do not know for certain that
the obligation will be extinguished. In a
resolutory period, we are certain that the
period will arrive.
§ The creditor may immediately
make a demand upon the debtor.
o Potestative condition – subject to the will
of either of the parties
§ Potestative conditions which are
subject solely to the will of the
debtor and at the same time
suspensive in character is void.
This is because it renders the
obligation illusory. If you are
going to create an obligation
which is subject to a potestative
condition subject solely to the
will of the debtor and is
suspensive in character, the
debtor may not want the
obligation to exist. If the
obligation is subject to the will of
the creditor, the same result may
not happen because the creditor
is always interested in the
creation of an obligation.
o Casual condition – subject to chance or
the will of a third party
o Mixed condition – subject to the will of
either parties, chance, or will of a third
party
o Possible conditions
o Impossible conditions
Daverick Pacumio
UST Faculty of Civil Law
§ Q: What happens if an obligation
is subjected to an impossible
condition?
A: It nullifies the obligation.
§ Q: Does it matter when the
condition became impossible?
A: Yes. It must be at the
inception – at the time the
obligation was constituted.
§ Q: What happens if the condition
became impossible after the
constitution of the obligation?
A: Qualify whether the condition
is positive (something which
should happen) or negative
(something which should not
happen). If it is positive, the
obligation is extinguished or,
more accurately, it puts an end to
the potential of the obligation to
take effect. If it is negative, the
obligation is rendered effective.
§ There is also a difference between
the effect of an impossible
condition on an ordinary
obligation and the effect of an
impossible condition on a
gratuitous transfers like donation
and testamentary disposition.
§ In gratuitous transfers, the
impossible condition is
considered as not written
because we take into
consideration only the liberality
on the part of the donor/testator.
In ordinary obligations, we take
into consideration the condition.
It forms part of the consideration.
o Conjunctive
o Disjunctive
o Divisible
o Indivisible
• Immediate demandability is the hallmark of a pure
obligation which is defined as one whose
performance does not depend upon a future or
uncertain event, or upon a past event unknown to
the parties. However, immediate demandability is
also a characteristic of obligations subject to a
resolutory condition and those affected by a
resolutory period.
• In the case of obligations subject to suspensive
condition, both the existence and the
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demandability of the obligation depend on the
happening of the future and uncertain event, or a
past event unknown to the parties.
• Thus, between an obligation subject to a
suspensive condition and an obligation subject to
a suspensive period, an action to enforce the
former may be resisted using the stronger
argument that no obligation exists yet pending the
fulfillment of the condition. (Of course, it goes
without saying that an obligation yet to exist is not
demandable.) In an obligation subject to a
suspensive period, the obligation already exists as
there is no uncertainty about the arrival of the
period and only its demandability is in abeyance.
Conditional obligations
Kinds of conditions
• There is no mutual exclusivity as among the
different kinds of conditions. Thus, a condition
may be positive, indivisible, potestative and
suspensive all at once.
• A condition, however cannot be:
a) Physically or legally impossible or against
public policy or good customs. Otherwise,
the obligation is void. Exceptions:
a. Testamentary dispositions where
the impossible condition is
considered as non-written; and
b. In divisible obligations, the
portion not affected by the
condition remains valid
b) Both suspensive and potestative
(dependent solely on the debtor’s will), as
this will render the obligation illusory.
Suspensive condition:
• Determines whether the obligation will come into
existence or not.
• Before fulfillment:
• The creditor cannot enforce the
obligation as his right is still a mere
expectancy but he may bring the
appropriate actions to preserve his right,
e.g., the reservatarios may have the
reserva troncal annotated on the title to
the reservable property. This is based on
Art. 1188.
• The debtor who pays can recover what he
has paid but since Art. 1188, par. 2 is silent
regarding the debtor’s right to recover
Daverick Pacumio
UST Faculty of Civil Law
interest, we apply the provisions on
solutio indebiti
• Fruits: For reciprocal obligations, they
are deemed mutually compensated. For
unilateral obligations, the fruits shall be
for the account of the debtor. For
obligations to do or not to do, the court
determines the retroactive effect (see Art.
1187).
• The complication occurs when the
condition is fulfilled, in which case,
retroactive effect is given to the condition.
If you have an obligation which is subject
to suspensive condition, it comes into
existence at the time the condition is
fulfilled. If the obligation is constituted
last month, which is fulfilled today, pwede
natin sabihin na ngayon palang yan nag-
eexist. However, the law gives retroactive
effect, so that it appears that the
obligation existed at the time of its
condition. Kaya tayo nagkakaroon ng
complication because of the way we treat
the fruits which were earned in the
meantime. That’s why the law qualified
the effects of a suspensive condition with
regard to the fruits. This is thus an
exception to the rule as regards the rule
on fruits laid out in Art. 1164.
• Apply Article 1189 for the rules to be
observed in case of loss, improvement or
deterioration pending fulfillment of the
suspensive condition, viz:
a) If the thing is lost without the fault of
the debtor, the obligation shall be
extinguished;
b) If the thing is lost through the fault of
the debtor, he shall be obliged to pay
damages; it is understood that the
thing is lost when it perishes, or goes
out of commerce, or disappears in such
a way that its existence is unknown or
it cannot be recovered;
c) When the thing deteriorates without
the fault of the debtor, the impairment
is to be borne by the creditor;
d) If it deteriorates through the fault of
the debtor, the creditor may choose
between the rescission of the
obligation and its fulfillment, with
indemnity for damages in either case;
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e) If the thing is improved by its nature,
or by time, the improvement shall
inure to the benefit of the creditor;
f) If it is improved at the expense of the
debtor, he shall have no other right
than that granted to the usufructuary,
viz: (a) limited right of removal; and
(b) right to set off the improvements
against the damages he may have
caused.
§ Q: What kind of thing is covered by
Art. 1189?
A: Specific thing because we do not
speak of loss, deterioration, or
improvement if the thing is generic
because genus never perishes.
§ Note: If what is involved is an
obligation subject to a resolutory
condition, which extinguishes the
obligation and one of the
consequences therein would be
mutual restitution. In such case, we
apply Art. 1189 again, but this time, the
parties will be changing roles – the
creditor becomes the debtor, the
debtor becomes the creditor.
• Upon fulfillment:
• The obligation becomes effective and
enforceable
• The effectivity retroacts to the date of the
constitution of the obligation
• In obligations to give which impose
reciprocal prestations upon the parties,
the fruits and interests shall be deemed to
have been mutually compensated.
• In unilateral obligations to give, the
debtor shall appropriate the fruits and
interests, unless a different intention may
be inferred.
• In obligations to do, the retroactive effect
will be determined by the courts (see Art.
1189, supra).
Resolutory condition
• Before fulfillment:
§ The obligation is immediately effective, but
subject to extinguishment upon the happening
of the condition
§ The performance of the obligation may be
demanded by the creditor
• Upon fulfillment:
Daverick Pacumio
UST Faculty of Civil Law
§ The parties shall return what they have received
under the obligation subject to the rules on loss,
deterioration, and improvement of the thing as
provided in Art. 1189, with the creditor now being
treated as the new debtor
§ For obligations to do or not to do, the effect of
the fulfillment of the resolutory condition will be
determined by the courts
Obligations with a period
• A period or term is future and certain
• A period is usually measured in terms of time (e.g.,
a year or a specific date) but it may also be based
on an event that is certain to happen (e.g., death
but death under certain specific circumstance-
e.g., A dying before B is no longer certain and
thereby becomes a condition). Note that an
obligation where the debtor undertakes to pay
when his means permit him to do so is treated as
an obligation with a period because the
undertaking must be treated as certain to happen
• The period has no effect on the creation of the
obligation but only on its demandability
• The period is presumed to be for the benefit of
both parties, unless the tenor of the obligation
indicates that it is beneficial only to one of the
parties. This means that the creditor cannot insist
on payment in the same way that the debtor
cannot compel the creditor to accept payment
prior to the arrival of the period
• Fruits: Any payment made prior to the arrival of
the period the debtor being unaware of the period
or believing that the obligation has become due
and demandable may be recovered with fruits and
interests. (Note that in this case, we do not take
into account the good faith or bad faith of the
creditor unlike in the case of solutio indebiti as
applied to premature payment in suspensive
conditional obligations).
o Q: How do we treat payment made by a
creditor pending fulfillment of a
suspensive condition?
A: Solutio indebiti, in which case, we
factor in the good faith or bad faith of the
payee.
o Q: However, do we just apply solutio
indebiti automatically with regard to
premature payment of obligations subject
to a suspensive condition?
A: No. Solutio indebiti is payment by
mistake. Premature payment is not
necessarily payment by mistake. You
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apply solutio indebiti if there was mistake
on the part of the debtor.
• Pending the arrival of the period, the loss,
deterioration or improvement of the thing due will
be governed by Article 1189.
• The courts may fix the duration of the period if
(Art. 1197): (a) the obligation does not fix a period,
but from its nature and the circumstances it can
be inferred that a period was intended; (b) when it
depends upon the will of the debtor as for instance
when the law undertakes to pay when his means
permit him to do so; or (c) when rescission is not
proper under Article 1191.
• The period must be based on what the parties
intended. Once fixed by the court, the period
cannot be changed by the parties.
• In the foregoing, the demandability of the
obligation is held in abeyance until the period is
fixed. For this reason, no action to enforce
performance may be filed until the period fixed
lapses. Exception: When such procedure would be
a mere technicality and formality and would serve
no purpose but to delay (CPU v. CA, 316 Phil. 616).
• Atty. S: This is prone to abuse. For example, they
had a contract wherein they contemplated a
period kaso hindi nailagay. Si debtor, tuso, sinabi
na walang period. So, hindi siya gumalaw in the
meantime. 2 years have passed, he did not do
anything. Creditor demands the fulfillment of the
obligation. Debtor argues that the creditor has no
right to make a demand and that he could not be
considered in delay yet. Thus, he told the creditor
to go to court to fix a period.
• In CPU v. CA, the donee was obviously in bad faith.
He received a parcel of land. The donation,
however, was subject to a mode, i.e., that the
parcel of land be the place of the medical arts
building of a college. 50 years have passed, the
donor asked kung bakit wala pa. the donee said,
wala naman kasing period. How can you demand
me? SC: Donee is wrong. Art. 1197 is inapplicable if
such procedure is a mere technicality and
formality and would serve no purpose but to delay.
50 years have passed. There was no more need to
fix the duration of the obligation because the
period, whatever was contemplated, had already
lapsed.
• Take note of the instances when the debtor loses
the right to make use of the period (Art. 1198):
a) When after the obligation has been
contracted, he becomes insolvent, unless
Daverick Pacumio
UST Faculty of Civil Law
he gives a guaranty or security for the
debt;
b) When he does not furnish to the creditor
the guaranties or securities which he has
promised;
c) When by his own acts he has impaired
said guaranties or securities after their
establishment, and when through a
fortuitous event they disappear, unless he
immediately gives new ones equally
satisfactory;
d) When the debtor violates any
undertaking, in consideration of which
the creditor agreed to the period;
e) When the debtor attempts to abscond.
• If the debtor loses the right to make use of the
period, the obligation becomes a pure obligation
which is immediately demandable.
• Note that if the debtor’s own fault damaged the
security, mere impairment is enough to cause the
loss of the period but if the cause is a fortuitous
event, the security must disappear before the
period is lost. If it’s mere impairment caused by a
fortuitous event, the creditor may just ask for
additional security or replacement. Once the
period is lost, the obligation becomes pure and
immediately demandable. This rule also applies to
obligations where a period is intended by the
parties but no period was specified. If the debtor
loses the period under Article 1198, there will be no
need to fix the period anymore and the
demandability of the obligation will no longer be
held in abeyance.
• The law is less tolerant if the damage is caused by
the fault of the debtor.
• Example: A loaned P50,000 to B. The security for
such loan was a laptop. Because of a typhoon, the
laptop was washed away and was irrecoverably
lost. A lost the right to make use of a period.
Alternatively, if because of A’s recklessness, the
laptop was broken, then A likewise loses the right
to make use of the period.
Alternative obligations
• An obligation can have several objects or
prestations, in which case, it may either be
conjunctive or alternative. If it is conjunctive, all
the prestations must be performed. If it is
alternative, the performance of one of the
prestations due will extinguish the obligation. It is
facultative if only prestation is due but the debtor
has the right to substitute it with another.
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• The right of choice belongs to the debtor unless it
has been expressly granted to the creditor. The
choice made does not require the consent or
approval of the creditor but it will not produce any
effect except from the time it is communicated.
• In a facultative obligation, the loss or deterioration
of the thing intended as a substitute, through the
negligence of the obligor does not render him
liable. But once the substitution is made, the
obligor is liable for the loss on account of his delay,
neglience or fraud.
• In facultative obligation, you have one prestation
due, but the debtor may replace it with another
prestation. The debtor is not limited in his choice
of replacement to the said prestations under the
obligation. You can venture outside the obligation.
Unlike in alternative obligations where the debtor
is limited to the choices of prestations.
• Limitations on the debtor’s right to choose:
Unlawful, impossible obligations cannot be
chosen by the debtor. Moreover, the right to
choose is also indivisible – he cannot compel the
creditor to receive one part of a prestation and one
part of another.
• Q: What happens if a debtor chooses unlawful or
impossible obligations?
A: Basically, the debtor gets off scot-free. He need
not perform the obligation anymore.
• Q: Is the giving of the notice intended for the
consent of the creditor?
A: No. Consent to the choice made by the debtor
in alternative obligations is not required. But if
notice has been given, the obligation is
transformed to a pure obligation.
• Effect of loss of the things due or impossibility
of performance of the prestations before the
choice is made known:
o If the choice belongs to the debtor:
§ If all the choices are rendered impossible
due to the fault of the debtor, the creditor
shall have the right to indemnity under Art.
1204, i.e., amount of the last thing/service
which disappeared or became impossible,
plus other damages.
§ If the creditor's fault prevents the debtor
from making a choice, the latter may
rescind the contract with damages
§ If some are lost but several remain, the
obligation subsists regardless of the reason
for the loss and the debtor may choose from
what remains
Daverick Pacumio
UST Faculty of Civil Law
§ If all but one are lost, the obligations
subsists and the debtor must deliver what
remains
§ Q: What if there are 3 prestations: the first
2 became lost or became impossible of
performance due to the fault of the debtor,
and the remaining one became lost or
became impossible due to a fortuitous
event. Will there be any liability?
A: Yes, for some kind of damages. The
obligation is extinguished. Because by the
loss of the 2 previous prestations, the
obligation was converted to a pure
obligation. And no one should be liable for
a fortuitous event.
§ Atty. S: Since the debtor has the right of
choice, whatever he does with the other
prestations are his way of not choosing
them. Making the others lost or impossible
due to his fault can also be taken as his act
of not selecting these prestations for
performance, which is well within his right.
If, after making them impossible, the last
remaining prestation becomes impossible
due to fortuitous event, this is no longer the
debtor’s fault and it cannot be taken against
him. However, there should be liability for
damages.
o If the choice belongs to the creditor:
§ If one of the things is lost through a
fortuitous event, he shall perform the
obligation by delivering that which the
creditor should choose from among the
remainder, or that which remains if only
one subsists;
§ If the loss of one of the things occurs
through the fault of the debtor, the creditor
may claim any of those subsisting, or the
price of that which, through the fault of the
former, has disappeared, with a right to
damages;
§ If all the things are lost through the fault of
the debtor, the choice by the creditor shall
fall upon the price of any one of them, also
with indemnity for damages.
Joint and solidary obligations
Joint obligation
• Each debtor is liable only for a proportionate part
of the debt and each one of the creditors is entitled
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to demand only a proportionate part of the credit
from each debtor
• Presumption is in favor of joint obligations. thus,
when there are multiple subjects, we treat the
obligation as a joint obligation.
• Can be joint active, joint passive, or completely
joint
• There is no mutual agency and mutual guaranty.
For example, A’s debtors are B,C,D, and E. A was
able to collect from B but was unable to collect
from C. A cannot compel D and E to shoulder the
insolvency of C because the obligations of the
debtors are separate and distinct from one
another.
• If no sharing is specified, liability will be divided
equally.
• Example of joint on both sides and there is equal
sharing:
A, B, C – joint creditors (A – 1/3, B – 1/3, C – 1/3)
D, E, F – joint debtors (D – 1/3, E – 1/3, F – 1/3)
Total obligation: 360
360/3 = 120. Each of A, B, and C may only collect
120 from D, E, and F. Specifically, A may collect the
following:
From D: 40
From E: 40
From F: 40
Total of shares collected by A: 120.
Same goes with B and C.
• Example of joint on both sides and there are
different shares:
A, B, C – joint creditors (A – ½, B- ¼, C – ¼)
D, E, F – joint debtors (D – ¾, E – 1/8, F – 1/8)
Total obligation: 64,000
How much can A, creditor with ½ share, demand
from D, E, and F?
Determine how much A is entitled to, i.e. ½ of
64,000 = 32,000. Divide 32,000 among D, E, and F
using the proportions of D, E, and F. Thus, A can
collect the following:
From D: 32,000 divided by ¾1 = 24,000
From E: 32,000 divided by 1/82 = 4,000
From F: 32,000 divided by 1/83 = 4,000
Total: 32,000.
1 3
Share ni D sa obligation.
2
Share ni E sa obligation.
Daverick Pacumio
UST Faculty of Civil Law
Solidary obligation
• Each one of the debtors is liable for the entire
obligation and each one of the creditors can
demand performance of the entire obligation
• Solidarity exists only when the obligation
expressly so states, when the law provides, or
when the nature of the obligation so requires.
• While anyone of the creditors may demand
payment of the entire obligation from any one of
the debtors, demand made by one creditor
restricts the option of the debtor to only making
payment to the demanding creditor.
• Once payment is made, the creditor receiving
payment becomes obligated to deliver the
portions pertaining to his co-creditors. The
solidary obligation is extinguished but a new
obligation arises on the part of the creditor who
received payment in favor of his co-creditors.
• Novation, compensation, confusion, or remission
of the debt made by any of the solidary creditors
or with any of the solidary debtors, shall
extinguish the obligation. The creditor who may
have executed any of these acts shall be liable to
the others for their shares.
• The solidary debtor effecting payment or any of
the modes of extinguishing obligations except
remission will be entitled to reimbursement from
his co-debtors.
• In a solidary obligation, there is mutual agency on
the part of the creditors. There is mutual guaranty
on the part of the debtors.
• Remission extinguishes the obligation but the
debtor in whose favor the remission of the entire
obligation was made cannot demand
reimbursement from his co-debtors. Same rule
applies if payment is made after prescription has
set in or the obligation becomes illegal.
• The debtor whose share was remitted cannot
refuse to reimburse the paying debtor if remission
came after payment of the entire obligation.
• Solidary creditor cannot assign his rights without
the consent of the others.
• Solidary creditor may do whatever is useful to the
others but not what may be harmful to them.
• The other co-debtors must reimburse the paying
solidary co-debtor with interest from the time of
payment except if payment is made before due
date.
Share ni F sa obligation.
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• SOLIDARITY IS NOT LOST EVEN IF THE
DEBTORS ARE NOT UNIFORMLY FOUND.
• The debtor upon whom demand is made is
allowed to invoke defenses, which are derived
from the nature of the obligation and of those
which are personal to him, or pertain to his own
share. With respect to those which personally
belong to the others, he may avail himself thereof
only as regards that part of the debt for which the
latter are responsible.
• In the table presented here, D, upon demand
made by A, may insist on only paying PHP120
corresponding to his portion which is not subject
to any condition. He can invoke E’s defense of
forgery as well as the non-arrival of the period for
F to refuse to pay for their portions. Note,
however, once the period for F arrives, payment
may be demanded from either D or F. E is not
included since he is disputing being bound by the
solidary obligation.
• Example (solidarity on both sides):
Active Passive Total
subject subject obligation: 360
A D 120
B E (forged None pending
signature) fulfillment)
C F (with a 120 less B and
period) F’s portions.
• For mutual agency, the creditors act on behalf of
their co-creditors and can collect the entire
obligation on behalf of the others. Thus, a solidary
creditor cannot assign his right in the obligation
in favor of just any other person without the
consent of his co-creditors.
• For mutual guaranty, all the debtors guarantee the
solvency of their co-debtors, i.e., the insolvency of
a co-debtor shall be borne by the others. Anyone
of the debtors may be made to pay the entire
obligation, subject to the right of the paying
debtor to be reimbursed.
• Example (solidarity on both sides):
A, B, C – solidary creditors
D, E, F – solidary debtors
Total obligation: P360.00.
4
D’s liability to A, B, and C because he is a joint debtor.
Daverick Pacumio
UST Faculty of Civil Law
How much can A recover from D, E, and F? A may
recover the entire 360 from D, E, and F. Same goes
with B and C.
Mixed:
(Solidary active, joint passive)
A, B, C – solidary creditors
D, E, F – joint debtors (D – 1/3, E – 1/3, F – 1/3)
Anyone among A, B, or C may demand from D, E, and F.
However, if for instance A collects from D, he may only
collect what D owes A, B, and C. If he wishes to collect the
entire obligation, he must go after D, E, and F all at once,
viz:
A may collect from D: 360/3 = 120.4 If A wishes to collect
the entire obligation (360), he must sue E and F as well.
Divisible and Indivisible Obligations
• An obligation is indivisible if it is not susceptible
of partial performance.
• The indivisibility of an obligation alone does not
necessarily give rise to solidarity. The presumption
in favor of joint obligations still applies. But to be
clear, it is possible to have an obligation that is
indivisible and at the same time, solidary.
• If an obligation is joint and at the same time,
indivisible, then the right of the creditors may be
prejudiced only by their collective acts, and the
debt can be enforced by proceeding against all of
the debtors. If anyone of the latter should be
insolvent, the others shall not be liable for their
share.
• If there is non-performance, the debtors under the
joint indivisible obligation will be liable for
damages to the creditor but the debtors who may
have been ready to fulfill their promises shall not
contribute to the indemnity beyond the
corresponding portion of the price of the thing or
of the value of the service in which the obligation
consists.
Obligations with a penal clause
• A penal clause is an accessory undertaking of the
debtor to assume greater responsibility in case of
breach.
• It has the dual function of: (a) providing for
liquidated damages and (b) strengthening the
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coercive force of the obligation by the threat of
greater responsibility in case of breach.
• For liquidated damages, proof of actual damages is
dispensed with.
• The penalty takes the place of indemnity for
damages and the payment of interest.
o Exceptions where damages may still be
recovered on top of penalty: (a) when
there is an express stipulation to that
effect; (b) when the obligor having failed
to comply with the obligation also refuses
to pay the penalty, in which case the
creditor is entitled to interest by way of
damages; and (c) when the obligor is
guilty of fraud in the fulfilment of the
obligation.
Extinguishment of Obligations
Q: What are the modes of extinguishing obligations?
A:
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion/merger of the rights of the creditor and
debtor
5. Compensation
6. Novation
These are not exclusive. Art. 1231 itself includes other
modes of extinguishment, including prescription.
However, prescription is not really a mode of extinguishing
the obligation.
Q: Why?
A: Prescription extinguishes only the right of action to
enforce the obligation.
If you don’t have the right of action anymore, it is like there
is no obligation as well because the obligation becomes a
natural obligation. In natural obligations, you are at the
mercy of your debtor.
Payment
Q: What is payment?
A: Payment is the payment of money and the performance
of the obligation. Payment includes all manners of
performing an obligation.
For payment to bring about the extinguishment of an
obligation, the payment must be valid.
Daverick Pacumio
UST Faculty of Civil Law
Validity of payment depends on the manner of payment,
time of payment, who receives payment, who makes
payment, etc.
At the core of validity of payment would be the
determination of whether there is compliance with the
characteristics of payment, viz:
1. Identity
2. Integrity
3. Indivisibility
Integrity
Q: What is integrity of payment?
A: Payment must be complete, in order to be valid.
Q: When we say completeness of payment – what makes
payment complete?
A: It depends on the obligation. The obligation must be
complied with in accordance with its tenor.
We cannot avoid but think that integrity = indivisibility. If
you perform an obligation in part, you are necessarily not
rendering complete performance.
Q: How is integrity different from indivisibility?
A: In integrity, the law envisions that when you perform
and you do not intend to perform the obligation in one
instance and you do not deliver completely, the integrity
of payment is violated. However, if you intend to perform
the obligation and you expect or insist for the creditor to
accept partial performance, the indivisibility of payment is
violated. However, you have the intention to come back
some other day to deliver anew. Nevertheless, in both
cases, hindi pwede.
Exceptions to the integrity of payment:
1. Substantial performance (Art. 1234)
Q: When is there substantial performance?
A: If the obligation has been substantially
performed in good faith, the obligor may recover
as though there had been a strict and complete
fulfillment, less damages suffered by the obligee.
Requisites:
a. Attempt in good faith to perform – this is
central in substantial performance.
b. Obligation must be performed but it was
not performed in accordance with its
tenor – the deviation from the tenor of the
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obligation must be slight and there must
be recognition of damages that may have
been suffered by the creditor.
For example, in a store – may sale. Yung items na
naka-sale, it’s not necessarily new na. siguro may
alikabok na. therefore, there is a deviation but it is
still valid performance because it is substantial
performance.
2. Waiver/estoppel of the creditor (Art. 1235)
Identity
The debtor cannot compel the creditor to receive a
different one, although the latter may be of the same value
or more valuable than that which is due.
Exceptions to identity:
a. Dacion en pago
Q: Why is this an exception to identity?
A: Because instead of paying money, the debtor is
allowed to perform his obligation by giving his
property instead. What is involved is a monetary
obligation which must be paid in money.
However, for dacion en pago, the debtor instead
delivers property and the obligation is
extinguished.
Q: To what extent?
A: The extent of the value of the property
delivered. This is because dacion en pago is
governed by the law on sales – you have to,
therefore, value the property accordingly.
However, it may result in the extinguishment of
obligation if the parties intended it to be.
Q: Can we have dacion en pago even if the
obligation is monetary in character?
A: No. While dacion en pago is akin to novation,
the law specifies its application to monetary
obligations (Art. 1245).
Q: How is dacion en pago different from payment
by cession?
A: In payment by cession, this happens when the
debtor owes several creditors and his properties
are insufficient to cover all his obligations. This is
called insolvency. Kasi sa payment by cession, the
properties of the debtor are ceded to the creditors
– they do not acquire title over the property, but
Daverick Pacumio
UST Faculty of Civil Law
only the right to dispose thereof and apply the
proceeds of the sale to the obligations owed to
them. Pero proportionate lang yung sharing
because hindi nga enough ang properties ni debtor
to cover all his obligations.
b. Facultative obligations
Indivisibility
Unless there is an express stipulation to that effect, the
creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither may
the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting for
the liquidation of the latter (Art. 1248).
The default is complete and full performance in one
instance. Exception nalang yung by installment.
Exceptions to indivisibility:
a. Stipulation to the contrary
b. Debt is in part liquidated and in part unliquidated
c. In solidary obligations where debtors are not
bound by the same terms and conditions
d. In case of compensation of unequal amounts
e. In case there are several guarantors for the same
obligation and they or one of them demands the
benefit of division – this is a situation of co-
guaranty. This is different from sub-guaranty
where a guarantor guarantees another guarantor.
In co-guaranty, several guarantors guaranty a
single guarantee. Parang obligations with multiple
passive subjects lang and the co-guarantors are
presumed to be joint co-guarantors. Pagpunta
sakanila ni creditor, excussion muna shempre. Pag
wala makita sa properties ni debtor, saka lang
babalik sakanila. Pero they can still invoke the
benefit of division, i.e., proportionate lang yung
share nila sa debt.
f. When the work is to be done by parts
g. When the debtor dies and he has several heirs and
the obligation is divisible – the obligation passes
to the heirs but only to the extent of what they
inherited – they are not liable in their personal
capacities. When a person dies and he has several
heirs, the properties he leaves behind shall be co-
owned. So, kung iniwan niya obligations, such
obligations would make the heirs jointly liable. In
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joint liability, a debtor is liable only for his
proportionate share in the obligation.
h. In joint obligations where each debtor is bound to
pay only his proportionate share.
Q: Kailan magiging relevant ang characteristic of
payment?
A: Sa tender of payment – when the debtor makes his offer
to pay. The manifestation of the debtor’s will to pay the
obligation. However, to compel the creditor to accept the
payment, the payment must comply with the
characteristics of a valid payment + other specific
provisions of law.
Example: You make a tender to pay 1/2 of the obligation
lang. Your creditor may rightfully refuse. His refusal is
justified – this does not place him in mora accipiendi.
Example: Obligation to give specific thing pero di mo
sinama accessories. Pag tinanggihan ng creditor yan, he
will be justified such that if the thing is lost due to
fortuitous event, the obligation is not extinguished kasi
walang accessory nung tinender mo. It was violative of the
characteristic of integrity.
Examples of specific provisions on payment: For monetary
obligations, you must pay using legal tender.
Q: What if you pay using a check/manager’s
check/cashier’s check, which are guaranteed by a bank?
A: The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have
been impaired (Art. 1249).
So, when you tendered your payment via check, you
cannot institute an action for consignation because it is not
a valid tender of payment.
Q: Would capacity to act be a factor on the part of the
payee and on the part of the payor?
A: Yes.
On the part of the payor:
• For obligations to give: Payment may only be
made by one who has the free disposal of the thing
due and the capacity to alienate it (Art. 1239). This
is because in obligations to give, there is transfer
of title. This is subject to the exception in Art. 1427,
viz:
Daverick Pacumio
UST Faculty of Civil Law
When a minor between eighteen and twenty-one
years of age, who has entered into a contract
without the consent of the parent or guardian,
voluntarily pays a sum of money or delivers a
fungible thing in fulfillment of the obligation,
there shall be no right to recover the same from
the obligee who has spent or consumed it in good
faith.
o Atty. S: Under RA 6809, the age of
majority is now 18. However, since we are
correlating this with Art. 1239, it is
submitted that this is still applicable
when we are dealing with a minor. Ignore
the ages in Art. 1427.
• For obligations to do and not to do: Not relevant.
After doing something, regardless of the capacity
to act of the payor, the obligation is extinguished.
On the part of the payee: Payment to a person who is
incapacitated to administer his property shall be valid if he
has kept the thing delivered, or insofar as the payment has
been beneficial to him (Art. 1241).
Identity of payor: The following can make payment
a. Debtor
b. Heirs or assigns
c. Third person who has a material interest in the
obligation
Identity of payee: The following can accept payment:
a. Creditor
b. Successors in interest
c. Assigns
d. Any person authorized to receive payment by law
or by stipulation
Q: What is the significance of this list if the law also
provides for a wide range of exceptions to the list?
A: Because it depends on the creditor. Yung listahan sa
batas as to who can make payment – these are the people
who can compel the creditor to accept payment. However,
the creditor may accept payment from whomever.
If payment is made by a third person with the consent of
the debtor, the third person acquires the following rights:
a. Right to be subrogated to the rights of the creditor
– for example, the obligation is secured, the third
person may be subrogated to these accessory
rights.
b. Right to full reimbursement
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If payment is made by a third person without the consent
of the debtor, the third person only acquires the right to
reimbursement insofar as the debtor is benefited.
Q: What happens if there was no intention on the part of
the third person to be reimbursed?
A: The same is treated as a donation which requires
acceptance or consent of the debtor.
Q: Are we changing the rule?
A: No. When we say that there must be acceptance on the
part of the debtor, this is simply to make the donation
valid. It has nothing to do with the validity of payment
because the validity of payment is subject to the rules
aforementioned. Ang effect lang ng lack of acceptance is
there would be no valid donation and the debtor is still
liable to reimburse the third person who made the
payment.
Instances when payment, even if made to someone
who is not the creditor, is valid:
1. Payment made to a third person if it redounded to
the benefit of the creditor (Art. 1241)
There are instances when benefit to the creditor is
presumed, viz:
a. If, after payment, third persons acquired
the creditor’s rights
b. Creditor ratifies such payment to the
third person
c. If by the creditor's conduct, the debtor has
been led to believe that the third person
had authority to receive the payment.
2. Payment made in good faith to any person in
possession of the credit (Art. 1242) – this is usually
exemplified by payment made to people in
possession of promissory notes or checks.
However, they must be payable to bearer or, at
least, validly indorsed to the possessor. Kung yung
check is payable to the order of the original
creditor, and you obtained possession of such, this
is simply possession of the evidence of the credit.
Special forms of payment
1. Application of payment – the designation of the
debt to which should be applied the payment
made by a debtor who owes several debts to the
same creditor. The payment must not be enough
to cover all of the obligations. Kasi kung enough,
the obligation should have been extinguished.
Daverick Pacumio
UST Faculty of Civil Law
Choice of designation: Debtor. However, if he
does not, the creditor may do so. If either party
does not designate, the most onerous shall be the
one where payment should first be applied (e.g.
the obligation secured by a mortgage – because
when you give property as security, the value of
the property would tend to exceed the value of the
obligation. This is most common in banks who
accept collaterals valued at at least 30% more than
the obligation).
2. Cession
3. Tender of Payment & Consignation – tender of
payment, generally, precedes consignation.
Dito papasok yung characteristics of payment
because if the characteristics are present and the
creditor refuses acceptance, then consignation
may be proper.
Consignation: Supposing that there was a valid
tender, or this is an instance contemplated by Art.
1256 where tender is not required, consignation
refers to the act of depositing to the court the
object of the obligation and the court extinguishes
the obligation.
Q: Is it the act of depositing the thing due which
extinguishes the obligation?
A: No. It is the court who extinguishes the
obligation, by declaring that consignation has
been properly made.
Atty. S: Usually, pag may eviction cases and you’re
acting for the defendant, yung lessor, hindi na
tatanggap ng renta para may cause of action siya
for ejectment against the defendant. So, anong
gagawin mo? Under a special law, you can deposit
it in a bank in the name of the lessor. Pero this is
only for eviction cases. In all other cases, you must
go to court.
When tender of payment is not necessary and
consignation is sufficient (Art. 1256):
1. When the creditor is absent or unknown, or
does not appear at the place of payment;
2. When he is incapacitated to receive the
payment at the time it is due;
3. When, without just cause, he refuses to give
a receipt;
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4. When two or more persons claim the same
right to collect;
Q: What ought to be done by the debtor?
A: Interpleader, in addition to effecting the
consignation. The purpose of the
interpleader suit is to determine which
among the creditors has the superior right
or is entitled to collect by making the two
conflicting claimants to litigate among
themselves.
5. When the title of the obligation has been
lost.
Loss of the thing due
Q: How is loss defined?
A: When it perishes, goes out of commerce, and disappears
in such a manner that its existence cannot be found.
Q: How does it extinguish an obligation?
A: It depends on the type of obligation.
For obligations to give a specific thing – it extinguishes the
obligation provided the debtor was not at fault and before
he has incurred delay.5 Note: Saying that the debtor is “not
at fault” does not mean that the loss should be only thru a
fortuitous event. There could be loss due to a non-
fortuitous event but by virtue of the fault of the third
person.
• Exception: When by law or stipulation, the
obligor is liable even for fortuitous events, the loss
of the thing does not extinguish the obligation,
and he shall be responsible for damages. The same
rule applies when the nature of the obligation
requires the assumption of risk.
For obligations to give a generic thing – it does not
extinguish the obligation because genus never perishes.
• Q: How would the exception that the obligation to
give a delimited generic thing be illustrated?
A: When the loss includes those included in the
specific mass or source.
• Here, the end product may be generic but the
source is what limits it. Take away the source,
there is no obligation to speak of anymore.
• But hindi lang naman yung source yung pwede i-
limit. Pwedeng time. For example, parcel of land.
5
This underscores the importance of demand. Demand puts the
debtor in delay.
Daverick Pacumio
UST Faculty of Civil Law
It is still possible to make the crops coming from a
parcel of land delimited on top of specifying that
the crops should come from that land, you may
also specify a specific time. “I promise to deliver
the crops I would harvest this June 2022 from my
land.” Kung nasira yung mga pananim by floods,
while the land may still be there (the source of the
generic thing), extinguished na din yung
obligation.
Art. 1265. Whenever the thing is lost in the possession
of the debtor, it shall be presumed that the loss was
due to his fault, unless there is proof to the contrary,
and without prejudice to the provisions of article 1165.
This presumption does not apply in case of
earthquake, flood, storm, or other natural calamity.
For obligations to do – the obligation is extinguished
if the performance becomes impossible.
• It is not correct to speak of loss in obligations to
do. We speak of impossibility, which may be legal
or physical. A valid prestation is one that is
possible. If what we have is an impossible
prestation, we have a void obligation. Now, we are
still speaking of impossibility in relation to an
obligation to do.
• Q: When should impossibility take place in order
for us to still have a valid obligation but one which
is extinguished, as opposed to a void obligation?
A: Obligation to do is extinguished if the
prestation becomes impossible at the time of the
performance of the obligation. If the impossibility
of performance occurs during the constitution of
the obligation, there is no valid obligation to speak
of – there is no obligation to extinguish.
Q: Do we look at the extent of the loss to extinguish the
obligation?
A: No. We only look at partial loss if the loss is so
important as to render the obligation useless. However,
this is up to the court to decide. The general rule is still that
the loss must be total.
Art. 1267. When the service has become so difficult as
to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in
whole or in part.
• Another means of extinguishing an obligation
pero dito, we do not have absolute impossibility –
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we have difficulty which is manifestly beyond the
contemplation of the parties.
• This is an application of the international law
doctrine of rebus sic stantibus. But this is not
correct. Art. 1267 contemplates difficulty –
difficulty is not always arising from the change in
circumstances. maaaring nabago yung
circumstances from what the parties envisioned
during the constitution of the obligation, but a
change in circumstances does not always make an
obligation difficult to perform. Art. 1267 should be
understood to be an extreme exceptional excuse or
justification to be excused from the performance
of an obligation. You must show that the difficulty
was manifestly beyond the contemplation of the
parties.
• Moreover, Art. 1267 only applies to an obligation
to do because it speaks of service.
• Ilo-ilo Jar Corp. v. COMGLASCO: The lessee here
was hit by the Asian Financial Crisis. What he did
was to remove all of its merchandise from the
leased premises. Upon removal, ayaw niya na rin
magbayad ng rent because of the Asian Financial
Crisis. He was taking refuge in the provisions of
Art. 1267. However, Art. 1267 applies only to
obligations to do. A contract of lease, the
prestation is an obligation to give/to pay. Even if
obligation to give yan, he cannot invoke the Asian
Financial Crisis as a fortuitous event because his
obligation is to pay money – a generic obligation
to give. Walang impact si Asian Financial Crisis
because money is generic and genus never
perishes.
• Naga Telephone Company v. CA: Itong si electric
cooperative, nasa Naga. Mabagal service sa
province. Lumapit sakanila si Naga Telephone Co.
They proposed to use the cooperative’s electric
posts para jan na ikakabit yung telephone lines. In
exchange, bibigyan daw sila ng 10 telephone lines.
Problem was, after they agreed, palaki ng palaki
yung subscription ng telephone company to the
point that they had to replace their electric posts
ever so frequently. Yung electric posts, napuno na
ng cable ng phones – hindi lang within Naga, but
even outside Naga. It became too taxing for Naga
Telephone Co. So, they wanted out of the contract.
They invoked Art. 1267. SC sustained them. Hindi
naisip nila Naga Telephone Co. na magiging ganito
kahirap.
Condonation or Remission of Debts
Daverick Pacumio
UST Faculty of Civil Law
Art. 1270. Condonation or remission is essentially
gratuitous, and requires the acceptance by the
obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules
which govern inofficious donations. Express
condonation shall, furthermore, comply with the
forms of donation.
• This is a waiver executed by the creditor in favor
of the debtor. This is treated as a form of donation
• Another consequence of treating condonation as
donation is that it is subject to the rules on
inofficious donations.
• Q: What is an inofficious donation?
A: A donation where the donor does not leave
sufficient property to accommodate the legitimes
of his compulsory heirs. A donation which exceeds
the free portion. Anything that exceeds the free
portion infringes on the legitime. Matic.
• In implied condonations, the law provides for
illustrations (see Arts. 1271-1273).
• Q: If you have an obligation secured by a pledge
and the thing pledged is voluntarily given by the
pledgee, what happens to the obligation?
A: The accessory obligation of pledge is
extinguished. But the principal obligation is not.
An accessory obligation cannot exist without a
principal but a principal can do without an
accessory obligation such that the extinguishment
of an accessory will not affect the principal
• Should the heirs of the creditor dispute the
implied condonation, the debtor and his heirs may
insist that the delivery to them was by way of
payment and not by condonation. But there must
be proof that such was the case (see Art. 1271).
• Note: Under the Personal Property Security Act,
we no longer have pledge or chattel mortgage.
Confusion or Merger of Rights
Q: What is the crucial element for confusion or merger to
take place?
A: There must be a meeting in one person of the characters
of the debtor and the creditor.
You cannot be the creditor and the debtor at the same
time.
Illustration in case of confusion in joint/solidary
obligations:
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Promissory note si A and B payable to C and D or bearer. C
and D indorsed it back to B. since payable to bearer, there
is merger of creditor and debtor in the person of B. so what
happens? The promissory note is considered partly
extinguished insofar as the portion pertaining to B is
concerned. Pero it will still subsist insofar as the 50,000
liability of A is concerned. Magbabayad pa rin si A.
If it is solidary, A,B,C are the ones who issued the PN. They
delivered it to D (payee). The PN is payable to bearer. In
the course of negotiations, the same PN found its way back
to A. A is now both creditor and debtor. Since this is a
solidary obligation, the obligation is extinguished. But the
story does not end there. What takes place is the need for
reimbursement. B and C must still have to pay A their share
in the obligation.
Compensation
Art. 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors
of each other.
• Occurs when the parties are the debtors and
creditors of each other. Here, we envision two (2)
different transactions. Hindi reciprocal
obligations like sale. There must be at least 2
transaction where the parties are debtors and
creditors of one another. Only those who are
principally bound are allowed to invoke
compensation. Those who are not principally
bound cannot invoke compensation subject to the
exception in case of guarantors – who may invoke
against creditors any claim of compensation
against the debtor.
• Legal: Takes place by operation of law once the
requisites under Art. 1269 are present. The beauty
of this is that the parties need not even be aware
that compensation has taken place.
Requisites:
1. That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
2. That both debts consist in a sum of money, or
if the things due are consumable, they be of
the same kind, and also of the same quality if
the latter has been stated;
Consumable – should be taken to mean
fungible. It must be capable of substitution.
One item is just as good as an equivalent
Daverick Pacumio
UST Faculty of Civil Law
item. The idea is not to require the parties to
pay and to give back. Example: pera. May
utang si A kay B. may utang si B kay A. need
pa ba nila magbigayan ng pera ng buo? No.
One bill is as good as another. They can be
substituted for each other. these objects are
known as fungible objects, not consumable
objects. Consumable objects are those which
cannot be used without being consumed.
This definition has no relation to
compensation.
3. That the two debts be due;
4. That they be liquidated and demandable;
Q: What is liquidated?
A: It means that the value of the obligation
has been established.
5. That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due time
to the debtor.
This means that the payment should not be
made after the debtor has been ordered by
the court to retain the payment. Example:
Court issues a writ of garnishment.
• Conventional: Takes place by agreement. if the
parties need to come to an agreement, it means
that legal compensation is not available and the
agreement cures any absent element in Art. 1269
for legal compensation to take place.
• Judicial: Decreed by court. This is in relation to
the counterclaim the defendant may raise against
the plaintiff. When someone sues you and you also
have a cause of action against the plaintiff, you
may make a counterclaim (permissive and
compulsory). A compulsory counterclaim is that
which arises out of the same transaction subject
matter of the case. A permissive counterclaim is
that which does not arise out of the same
transaction subject matter of the case. Atty. S: If it
is compulsory, no need to pay filing fees. If it is
permissive, you have to pay filing fees kasi distinct
complaint siya. Otherwise, ma-dismiss yung
permissive counterclaim.
• Once you make a counterclaim, the court rules
thereon and in the dispositive portion, there is a
ruling in favor of both the plaintiff and the
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defendant. The court offsets whatever the
defendant may have been entitled to and the
difference is paid by the party liable for the bigger
amount.
• Compensation may be total or partial. Kung mas
malaki yung obligation nung isa kaysa dun sa
obligation nung isa, the obligation is partially
extinguished.
• Q: What happens if there has been an assignment
of credit?
A: If it is with his consent the debtor would no
longer be able to invoke any compensation as
against the new debtor unless he makes a
reservation to do the same at the time notice is
given to him.
If he did not give his consent. There was notice to
him but he did not consent to the assignment then
he would still be allowed to invoke compensation
as against the new creditor. But the compensation
can only pertain to those taking place prior to the
assignment but not those taking place subsequent
to the sale.
o Assignment is still valid and the debtor
may invoke compensation of debts taking
place prior to the assignment but not
those taking place subsequent to the
assignment.
If there was no notice given the debtor may set up
compensation of all credits prior to the sale and
also later ones until he has knowledge of the
assignment.
This is what makes assignment of credit different
from subrogation as a specie of novation. In
subrogation in novation, you need the consent of
all parties. In assignment of credit, there is no
requirement for the consent.
When compensation is improper:
1. When one of the debts arises from
deposit/commodatum
2. When one of the debts arises from a claim
for support
3. When one of the debts arises from civil
liability
Novation
The substitution or alteration of an obligation by a
subsequent one that cancels or modifies the preceding one.
Daverick Pacumio
UST Faculty of Civil Law
In determining whether there is novation, we have to
distinguish between an amendatory agreement and a
new agreement. if it is expressly provided that the parties
are intending to novate, walang problema. But sometimes,
the parties do not expressly say so.
Q: How do we reconcile?
A: The best we can do it to view Art. 1291 as being
applicable to the new obligation intended to extinguish the
original obligation. The new obligation may consist in:
changing the object/principal conditions; substitution of
the debtor; subrogation of the third person to the rights of
the creditor.
Requisites of novation:
1. Valid original obligation
2. Agreement
3. New valid obligation – Art. 1298 speaks of
annulment and ratification. Thus, it speaks of a
voidable old obligation, which is valid until
annulled.
4. New valid obligation must extinguish the old.
Art. 1297. If the new obligation is void, the original one
shall subsist, unless the parties intended that the
former relation should be extinguished in any event.
• So, as long as the parties intended for the old
obligation to be extinguished, the validity of the
new obligation is irrelevant.
• Atty. S: Hindi na novation ito, it is mutual
desistance – the intention of the parties effected
the extinguishment of the obligation.
Q: If the original obligation is subject to
suspensive/resolutory condition, must the new obligation
also take on the same nature?
A: Yes, but the parties may stipulate otherwise. If the
original obligation was subject to a suspensive or
resolutory condition, the new obligation shall be under the
same condition, unless it is otherwise stipulated (Art.
1299).
• Hindi sinabi ng batas na the new obligation must
also be conditional. The law required it to be
under the same condition.
• Q: Why did the law provide for this rule?
A: The new obligation must exist at the time the
old obligation is existing. Ang problem jan is if the
new obligation is pure but it is meant to extinguish
an old obligation subject to a suspensive
condition. You have to wait for the suspensive
condition to be fulfilled to extinguish the old
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obligation. If we follow the default rule to subject
the new obligation to the same condition as the
old, then they come into existence at the same
time and the old obligation may now be validly
extinguished.
• Q: Bawal ba lumihis dito sa default rule?
A: No. However, it may be inconvenient, especially
if subject to suspensive condition yung old
obligation.
Substitution of debtor
• In case of change in the parties, substitution of the
debtor, if you bring in another person as debtor,
mangyayari jan is parang additional debtor lang. if
the new debtor results in the release of the old
debtor, there is novation.
• Must be with the consent of the creditor.
• Expromission – the debtor had no participation at
all in the designation of the new debtor. It may
even be against his will.
• Delegacion – the new debtor is volunteered or
offered by the old debtor.
• The distinction between Expromission and
delegacion is relevant in case of the insolvency of
the new debtor.
o Expromission – no recourse to the old
debtor.
o Delegacion – possible to have recourse
provided: (a) insolvency was already
existing; (b) publicly known; or (c) known
to the old debtor.
Art. 1294. If the substitution is without the knowledge
or against the will of the debtor, the new debtor's
insolvency or non- fulfillment of the obligations shall
not give rise to any liability on the part of the original
debtor.
• If the debtor consents to the expromission, is he
still liable? No. It would be unfair. Si creditor na
nga yung nag-replace at nag-add ng new debtor,
pero si old debtor pa rin gagawing liable.
Q: How do you understand subrogation?
A: The transfer to a third person of the rights of the
creditor.
Q: How is it different from assignment?
A: In subrogation, the consent of all parties is necessary. In
assignment, the debtor’s consent is not necessary – only
notice is required. In subrogation, it cleanses the old
obligation of whatever defects it may have because it is
Daverick Pacumio
UST Faculty of Civil Law
extinguished and replaced by a new one. In assignment, it
does not have such effect.
Q: If you were a lawyer, what would you prefer or advise
your client?
A: It depends on the intention of the parties. It’s easier to
effect an assignment than to do subrogation. In
subrogation, the consent of everyone is required. In
assignment, however, if your intention is to take the
original creditor out of the equation, it is not possible
because the new creditor may still run after the original
creditor. In subrogation, the change in the personality of
the creditor is a means to novate the obligation, which is a
means of extinguishment of the original obligation. In
subrogation, the old creditor is taken out of the picture.
Subrogation may be legal or conventional:
Conventional – by agreement
Legal – not presumed. Art. 1302 provides for instances
where legal subrogation is presumed:
Art. 1302. It is presumed that there is legal subrogation:
1. When a creditor pays another creditor who is
preferred, even without the debtor's knowledge;
2. When a third person, not interested in the
obligation, pays with the express or tacit approval
of the debtor;
• Ang sabi ng batas, the creditor cannot be
compelled to subrogate the paying third
person to his rights because there was no
consent or knowledge on the part of the
debtor.
• Does this mean that the creditor can
choose? He may not be compelled, but he
may agree. But with this provision, we can
now say that while there is no legal
subrogation because there is no approval
of the debtor, there is conventional
subrogation because the creditor is
willing to accept payment.
3. When, even without the knowledge of the debtor,
a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of
confusion as to the latter's share.
• What does the law mean when it says that
a person interested in the obligation? It
means material/economic interest.
Example: Guaranty/Surety, spouse of the
debtor – spouse’s interest is material
because depending on the terms of the
obligation incurred by the debtor-spouse,
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the property regime may be prejudiced
and proceeded against by the creditors.
• Other kinds of interest may be moral,
familial, or reputational. These are not the
ones contemplated by law. Example: Anak
mo nalulong sa online sabong. Kung kani-
kanino na umutang. Gusto mo bayaran.
May his creditors refuse your payment?
Yes. They may be foolhardy for refusing,
but they are justified for doing so under
the law.
Contracts
Q: What is a contract?
A: A meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something
or to render some service (Art. 1305).
• Criticized for being incomplete.
• A juridical convention manifested in legal form, by
virtue of which one or more persons bind
themselves in favor of another, or others, or
reciprocally to the fulfillment of a prestation to
give, to do, or not to do.
Characteristics of a valid contract
Obligatory Force – the contract is the law between the
parties. Compliance is not optional.
Mutuality – the determination of the existence and
execution of the contract cannot be left to the uncontrolled
will of one of the parties. An example is if a lease contract
is allowed to be renewed or extended depending solely on
the willingness or ability of the lessee to continue paying
the increased rentals. In this case, the lessor has been
totally deprived of any say in the continuation of the lease
contract. Walang magagawa si lessor. He has to honor the
contract. Thus, when you craft a contract of lease, you
should say that the renewal shall be subject to the
agreement of the parties.
Relativity – when you have a contract with another
person, all rights and obligations under the contract may
be enforced only against the other contracting party, his
heirs or assigns, subject to certain qualifications:
1. The rights and obligations must be transmissible
by law, nature, or stipulation. Otherwise, the
rights and obligations begin and end with the
parties. Example: Personal rights
2. With regard to the heirs, they should not be liable
beyond the extent of their inheritance.
Daverick Pacumio
UST Faculty of Civil Law
Exceptions to relativity:
1. Stipulation pour autrui – If a contract should
contain some stipulation in favor of a third person,
he may demand its fulfillment provided he
communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or
interest of a person is not sufficient. The
contracting parties must have clearly and
deliberately conferred a favor upon a third person
(Art. 1311).
• A contract which contains a stipulation in
favor of a third person who may demand
fulfillment provided he communicated
his acceptance to the obligor before its
revocation.
• Requisites:
a. Contracting parties deliberately
conferred a favor upon the third
person;
b. No compensation for the
stipulation in favor of the third
person;
c. Stipulation in favor of the 3rd
person should not be the entire
contract but merely a part
thereof;
d. Neither of the parties bear the
legal representation or
authorization of the third person
e. 3rd person communicated his
acceptance to the obligor before
its revocation – acceptance may
be implied, i.e., when the 3rd
person demands fulfillment of
the obligation.
• Example: Third-party liability insurance.
The contract of insurance is between the
insurer and the insured. But in the event
of the happening of the risk insured, the
insurance proceeds go to the beneficiary,
who may demand from the insurer the
delivery of the insurance proceeds. A TPL
is a better example because the benefit is
merely incidental, i.e., it is only one of the
risks assumed. Kasi sa TPL, maraming
risks, e.g., own damage. Among these risks
is if you cause damage to another vehicle.
The insurer in a TPL binds himself to pay
the owner of the damaged vehicle. Kaya
incidental.
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• Note: When you get an insurance on your
life, it is a requirement that there is a
beneficiary. Otherwise, pointless. If it is a
life insurance, this is the entire contract.
2. Contracts creating real rights – example: Mortgage
– a real estate mortgage constitutes a lien on the
property which follows the property wherever it
goes. However, this presupposes compliance with
registration under the Torrens system when you’re
dealing with registered property. If you are the
transferee of a property mortgaged, and the debtor
of the property mortgaged defaults, the property
may be foreclosed and you are helpless to stop the
foreclosure. You cannot invoke relativity or not
being privy to the contract between the debt0r-
transferor and the creditor. However, you may just
say that you should not be held liable for the
obligation. This is the only time you can invoke
relativity.
3. Accion pauliana – generally, only the parties to the
contract may seek remedies before the court with
regard to the contract. It allows a third party
(defaulted creditor) to set aside the contract
between his debtor and the third person.
4. Contractual interference – an exception because a
third person is made liable for the breach of a
contract. Generally, only the parties can be in
breach of a contract and can be held liable for
breach. But if there is contractual interference
because a third person induced a contracting party
to breach the contract, there could be liability for
damages. The basis for liability for damages is the
bad faith of the third person. Jurisprudence tells us
that there can be liability for contractual
interference if there is no legal justification.
• Atty. S: So, pwede tayo mambuyo. We
cannot be held liable for damages if there
is a legal justification. The SC held that
advancement of economic interests is a
legal justification.
• Pero kung makulay yung buhay nung
parties, for example, gusto lang gumanti.
The interference may not have legal
justification. Hindi na siya for economic
gain.
Autonomy – the parties can make such stipulations as
they may deem convenient, provided they are not contrary
to law, customs, morals, and public policy.
• Q: What is an example of against public policy?
A: Mag-asawa pumunta sayo. They wanted you to
draft their agreement whereby they agreed to an
Daverick Pacumio
UST Faculty of Civil Law
open marriage. This means that either party may
have sex with other people outside their marriage.
This is against law, morals.
Pero paano mo i-argue on the basis of public
policy? Saan mo huhugutin yung public policy? Sa
definitions – like Art. 1 of the Family Code where
the policy is the marriage’s nature, consequences,
and incidents is not subject to any stipulation and
is governed by law, except property relations.
Moreover, marriage is an inviolable social
institution, etc.
• Both a curse and a blessing. You give the parties so
much freedom. Pero sometimes, the freedom is
not commensurate to their competence to draft
the contract.
• Atty. S pro-tip: In drafting contracts, as lawyers,
you must have foresight. You must look at the
possibilities that may happen to your client in
drafting the contract. Kung kunwari, hanggang 5
years lang kaya ng client mo, gawin mong 5 years
lang yung contract, subject to renewal.
• “With so much [freedom] comes huge
responsibility.”
Stages in the life of a contract:
a. Preparation – parties negotiate as to the terms and
conditions of the contract
b. Perfection – the meeting of the minds between the
parties
c. Consummation – the performance of the
prestations or obligations.
A contract is perfected by mere consent. Exceptions:
• Real contracts – perfected by delivery
• Formal contracts – required to be in a certain form
in order to be valid or enforceable.
Consent – a crucial element of any contract.
• There must be an offer and an acceptance of the
offer. The acceptance must be unqualified
• If the acceptance is qualified, it constitutes a
counter-offer – a rejection of the offer.
• Q: At what point is the offeror bound by the
acceptance?
A: Upon knowledge by the offeror of the
acceptance by the offeree (Cognition Theory). The
provision of the law presupposes that there is a lag
between the time of acceptance and the time of
knowledge by the offeror of such acceptance.
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• Option: The option may always be withdrawn
unless it is founded on substantial consideration
in which case it ripens into an option contract.
• Must be intelligent and free – the person giving
consent must have capacity to consent to the
contract. To have capacity, there must be capacity
to act. So, minors and insane/demented persons,
and deaf-mutes who do not know how to read or
write are considered incapable of giving consent.
• Absence of vices of consent
o Vices of consent: fraud, mistake,
intimidation, violence, or undue influence
o Mistake as a vice of consent – must
pertain to the substance of the thing or
the conditions which move the parties to
enter into the contract. It must be a
mistake of fact, not a mistake of law.
Exception: Mutual mistake as to a
difficult question of law.
o If mistake pertains to
qualification/identity, it does not vitiate
consent. Unless the qualification/identity
is an essential part of the contract.
o When it comes to violence or
intimidation, it may be carried out by a
person not a party to the contract and it
results in the vitiation of consent of the
parties.
o When it comes to fraud (dolo causante),
the law requires that the
machination/insidious scheme must be
implemented by one of the contracting
parties. Exception: when fraud is
employed by a third person whose
misrepresentation creates a substantial
mistake on the part of the contracting
parties. This was applied in a case where a
third person was able to deceive an old
woman to execute an SPA in his favor in
order to obtain a loan from the bank. In
relation to the bank, such third person
was able to convince the bank that he was
authorized to negotiate for a loan in the
name of the woman and to mortgage the
property belonging to such old woman.
Here, there was fraud committed by a
third person against the parties to the
contract (old woman and the bank). This
was recognized by the SC as a ground to
set aside the contract.
Daverick Pacumio
UST Faculty of Civil Law
o Undue influence – an emotional
blackmail. Exploiting whatever moral
ascendancy one has over another.
Object – the prestation
• Within the commerce of man
• Valid
• Possible
• Determinable
Cause/Consideration
• Q: Is cause/consideration the same as motive?
A: No. We do not look into the motive.
• In a contract of sale, the seller’s cause is the price.
The buyer’s cause is the property to be delivered
to him.
• In a donation, the cause is the liberality of the
donor.
• Q: Is it required for the contract to expressly state
the cause?
A: No, but it must be determinable. But the law
presumes consideration.
• Absence of cause/consideration renders the
contract null and void for being absolutely
simulated.
• A false cause/consideration renders the contract
null and void unless the true cause is established
and it is shown to be valid (Example: A donation
disguised as a sale. The sale is void for being
simulated but the donation may be upheld
provided it complied with all formalities
prescribed by law).
Form of Contracts
General Rule: Contracts are valid in any form.
Exception: If the law prescribes a specific form for its
validity, enforceability, or manner of proof.
Art. 1357. If the law requires a document or other special
form, as in the acts and contracts enumerated in the
following article, the contracting parties may compel each
other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with
the action upon the contract.
• Q: Is this right of action under Art. 1357 available
in all instances where the right form has not been
observed?
A: No. You cannot apply Art. 1357 if your purpose
is to make the contract valid and enforceable or
provable. If your purpose is to have the contract
embodied in a proper form for convenience, this is
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the only time you may avail of Art. 1357. Instances:
Contracts enumerated in Art. 1358.
• Q: What is the status of an oral contract of sale of
real property?
A: Unenforceable because it does not comply
with the Statute of Frauds. Since it is
unenforceable, you cannot compel the other party
to reduce it in writing.
• Q: What is your remedy?
A: Still go to court. Hope that the opposing
counsel did not graduate from UST and fail to
object to your presentation of oral evidence in
proving the existence of the contract of sale. This
is because ratified na yung contract, and the
failure of the other party to object to the
presentation of oral evidence removes the contract
from the Statute of Frauds. Thus, you may now
bring an action to compel the other party to
reduce it into writing and make it a public
document.
Reformation of Instruments
Requisites:
a. Meeting of the minds
b. Instrument does not express the true intention of
the parties
c. Failure to express is due to fraud, mistake,
inequitable conduct, accident, or relative
simulation
They signed an instrument which does not reflect what
they agreed upon. Pwedeng honest mistake. Pwede
namang typographical error. Pero minsan, nasasamahan
ng fraud or inequitable conduct. For these two, usually one
sided. One party committed a mistake and the other did
not say anything kasi may advantage na siya e.
Prescription: 10 years
Exception: If the plaintiff is in possession, it is
imprescriptible.
Classic situation or transaction which justifies reformation
is when a mortgage is made to appear as a contract of sale
with right of repurchase.
• Why is contract of sale with right of repurchase
preferred by the creditors-buyers? Because there is
already a transfer of ownership in contract of sale
with right of repurchase. Moreover, the creditor-
buyer may transfer it to other persons who may be
in good faith. This lessens the chance of the debtor
to recover the property. In mortgage, the creditor
must undergo the process of foreclosure.
Daverick Pacumio
UST Faculty of Civil Law
• Q: How is the debtor being disadvantaged?
A: Since the debtor is strapped for cash, if he
mortgages a property, it is usually way more than
the amount he loaned. Usually, the amount loaned
is P10,000 only, but the property mortgaged would
for instance be valued at P100,000.
Instances when reformation is not allowed:
Art. 1366. There shall be no reformation in the
following cases:
(1) Simple donations inter vivos wherein no condition
is imposed;
(2) Wills;
(3) When the real agreement is void.
Defective Contracts
Note: Just because a contract is defective does not mean it
is invalid.
Classes of defective contracts
a. Rescissible
b. Voidable
c. Unenforceable
d. Void
Among the one, only one is considered legally inexistent
(void contracts). The other three are considered valid
contracts. Yun nga lang, they suffer from defects.
Q: What is the basis for the right of action for each of these
defective contracts?
A:
a. Rescission – the basis is the damage, lesion, or
fraud
Ratification: Passive.
b. Voidable – vitiated consent/lack of capacity to give
consent of one of the parties
c. Unenforceable – non-compliance as to form; lack
of authority to contract or excess of authority to
contract on behalf of another; and incapacity of
both parties to give consent
Atty. S: Comparing unenforceable to voidable,
parang mas okay ang voidable contract.
Consequence of unenforceability: You cannot go
to court to litigate or enforce it. But you can still
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try and go to court to enforce and unenforceable How to Direct Direct Object to Direct
contract. Pero subject to the defense of assail action action parole or
unenforceability available to the defendant. evidence collate
ral
Voidable and unenforceable contract is subject to Who Injured Party Owner or By
ratification. The effect of ratification is to may party or who is guardian of anyon
terminate the right of action. assail creditor incapacit the e
defraud ated or incapacitat
One of the unenforceable contracts is one entered ed guardian ed
into in consideration of marriage. Under the NCC, or party
the requirement that the pre-nup be in writing is whose
imposed for making in enforceable. Thus, an oral consent
pre-nup under the NCC is valid but unenforceable. is
You ratify by performing the contract. In case they vitiated
agree on separation of property, in the settlement When to 4 years 4 years At the time Anyti
of estate, the wife may not claim ½ of the assail from from the party me
properties obtained during the marriage because regainin regainin seeks to
she benefitted by enjoying her separate properties g g enforce
as hers. capacity capacity
or
Contrast this with the FC, where an oral pre-nup cessation
is void because pre-nups must be in writing in of vice of
order to be valid. The wife this time may claim ½ consent
of the properties because the pre-nup is void and Suscepti Yes Yes Yes No
inexistent, not merely unenforceable, and no bility of
amount of ratification may make it valid. ratificati
on
d. Void – lack of essential elements of contract; Who Injured Party Owner or Canno
illegality may party incapacit guardian t be
ratify ated or ratifie
Resciss Voidabl Unenforc Void guardian d.
ible e eable or party
Nature Econom Incapacit Entered Art. whose
and ic y of one into 1409 consent
Defect prejudic or without is
e vitiation authority vitiated
of or in excess
consent of Statute of Frauds
authority
Q: How do we reply with the statute of frauds?
Statute of A: The contract must be in a note, memorandum, or
Frauds writing. The law does not require that it be in a formal
contract. The law requires that there be some note or
Both are memorandum. It can be a series of writings, notes. The
incapacitat party to be bound by the terms written, however, should
ed have signed the note or memorandum.
Validity Valid Valid Valid but Void
until until cannot be or Q: Paano kung ang exchanges is thru email?
rescinde annulled enforced in inexist A: Sufficient as well because under the E-Commerce Act,
d court ent electronic documents are the functional equivalent of
written documents.

Daverick Pacumio
UST Faculty of Civil Law
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Q: In co-ownership, when a co-owner sells without the
consent of the others, the status of the sale of the entire
property co-owned, insofar as jurisprudence is concerned,
is consistent that it is valid insofar as the share of the
selling co-owner is concerned. The remedy for the other
co-owners, according to jurisprudence, is partition. How
would you characterize the sale of the other shares made
by one of the co-owners without the consent of the others?
A: Under the first classification of the Statute of Frauds
(lack of or excess of authority). The sale of the shares of the
other non-consenting co-owners is unenforceable.
However, you cannot just presume that he sold it with the
representation that he is selling it on behalf of the others.
Kung ganun, Art. 1403 is applicable talaga. Pero may
situations kasi na hindi dinidisclose nung selling co-owner
na the property is co-owned. He may represent that he
owns the entire property. Thus, we can apply the prevalent
jurisprudence, i.e., that the sale is valid insofar as the sale
of the selling co-owner’s share is concerned, and the others
may just ask for partition.
Co-heir ka. You sell the co-owned property to a buyer. The
buyer would not know of the co-ownership. When you sell
the co-owned property and you represent yourself as the
owner of the whole, apply the usual rule, i.e., sale is valid
as to the selling co-owner’s share, and the other co-owners
are not bound by the same pursuant to the relativity of
contracts principle. However, once you represent yourself
as the agent of the other co-owners, dito papasok si Art.
1403, i.e., the sale is unenforceable insofar as the share of
the other co-owners are concerned.
But this is subject to a further qualification, i.e., if the sale
is for real property, the law requires that the authority
must be in writing (Art. 1874). If the authority is not in
writing, the contract is null and void (Id.).
Void or inexistent contracts
• Imprescriptible
• May be open to collateral attack
• Given the foregoing, should you just wait until it is
enforced? No. Baka makamatayan na ng parties
yan, and the heirs of the other party to the contract
may enforce it. For example, your signature is
forged. Pero patay ka na by the time inenforce
yung contract ng heirs nung kabila. How could
your heirs prove the fact of forgery in order to
prove that the contract is void? So, it is more
prudent to have it set aside.
Daverick Pacumio
UST Faculty of Civil Law
Art. 1409. The following contracts are inexistent and
void from the beginning:
1. Those whose cause, object or purpose is
contrary to law, morals, good customs, public
order or public policy;
2. Those which are absolutely simulated or
fictitious;
• Relatively simulated: Where parties do
not intend to be bound. In terms of
contracts, the simulated contract is null
and void (example: deed of sale when in
fact donation ang intention). But the true
contract is given effect provided the
formalities are complied with. This is
subject to the further qualification on
inofficious donations.
3. Those whose cause or object did not exist at
the time of the transaction;
4. Those whose object is outside the commerce of
men;
5. Those which contemplate an impossible
service;
6. Those where the intention of the parties
relative to the principal object of the contract
cannot be ascertained;
7. Those expressly prohibited or declared void by
law.
These contracts cannot be ratified. Neither can the
right to set up the defense of illegality be waived.
In pari delicto rule: When the nullity proceeds from the
illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and
both shall be prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or instruments
of a crime shall be applicable to the things or the price of
the contract (Art. 1411).
• There is a deed of donation not compliant with the
formalities. The donor died. The donor’s wife went
to court to set aside the deed of donation. Is the
wife barred from going to court just because the
deed of donation is void? No. It is only when the
nullity proceeds from illegality of the cause or
object of the contract and the act constitutes a
criminal offense that the parties have no recourse
against each other.
• In pari delicto applies only to contracts which are
void for having an illegal cause or object.
• Example: sale of illegal drugs. Nagbayad ka na pero
di nag-deliver sayo. You cannot go to court. You
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can even be held criminally liable. Courts will not Two concepts:
come to your aid except if public policy calls for • Commodatum - one of the parties delivers to
court intervention (e.g. sale of land to foreigners – another, either something not consumable so
pinapayagan ng courts maka-recover even if it is that the latter may use the same for a certain time
illegal under the constitution). and return it.
• Q: Motive is different from cause or consideration. • Mutuum – a contract of loan whereby one of the
Will motive have bearing on the validity of the parties delivers to another, money or other
contract? consumable thing, upon the condition that the
A: None. The law looks at the cause or
same amount of the same kind and quality shall
consideration, not the motive. Exception: When
be given.
the motive is determinant of the purpose of the
contract.
• E. Razon, Inc. v. CA: Art. 1422 – a contract which is
Atty. S: The use of the word “consumable” is misplaced.
the result of a previous illegal contract is also null It must be fungible because we look to the intention of
and void. E. Razon is a stevedoring firm. The ports the parties, i.e., whether they intend the contract to be
are owned by the government. Back then, pre- susceptible of substitution.
EDSA, E. Razon sold 60% of its shares to Alfredo
Romualdez, brother of Imelda Marcos. According Commodatum v. Mutuum
to the SC, the management contract with the Commodatum Mutuum
government was set for renewal. Palakasan. So, Gratuitous – in fact, if May be gratuitous or
thinking that having the brother of the first lady you pay for the use of the onerous.
was a guarantee that they would get the thing, it ceases to be
management contract renewed, E. Razon sold the commodatum – it
shares to Alfredo Romualdez. True enough, the becomes a contract of
management contract was awarded to E. Razon. lease.
Post-EDSA, the award of the contract to E. Razon No transfer of ownership There is transfer of
was being questioned because it was not an arms-
– the bailee is not entitled ownership – since bailee
length deal. The management contract was being
to the right to the fruits, is the owner, he is
assailed and was sought to be struck down for
unless the same is given. entitled to the right to
being null and void. How do you strike it down?
However, if the rights to the fruits
SC: Applied Art. 1422 and held that the contract
was null and void because it was a result of a
the fruits is incidental, it
previous illegal contract. What is such previous may be treated as
illegal contract? There was a contention na E. commodatum. But if it is
Razon only sold the shares because the consent of a principal right, iba na
the seller was vitiated – pinilit at binraso daw sila. yung contract – it may
SC held that vitiated consent only renders the already be a right of
contract voidable. But the SC looked at the sale usufruct.
which was only made to ensure that the
management contract would be renewed. So, yung If bailee fails to return
shares of stock were used as a guaranty na the thing lent, he may be
mabibigyan ng favor si E. Razon. So, motive criminally liable for If bailee fails to pay, he
determined the purpose of the contract. Such sale estafa thru does not incur criminal
of shares gave birth to the present management. If misappropriation liability
the sale of shares would be deemed null and void, Personal in character – Not personal
the management contract resulting from such sale can only be used by the
is also null and void under Art. 1422. bailee or the members of
his household, except if
CREDIT TRANSACTIONS such use is prohibited or
the nature of the thing
LOAN prohibits its use.

Daverick Pacumio
UST Faculty of Civil Law
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Real contract – there
must be delivery
Unilateral
Precarium – if the bailor
may demand the return
of the thing any time
either because: (a) there
is no stipulation as to
length of time of use; or
(b) use is tolerated by the
bailor.
Ordinary expenses for
preservation – for the
account of the bailee.
Extraordinary expenses
for preservation – for the
account of the bailor. In
order, however, to bind
the bailor to pay the
extraordinary expenses,
there must be notice and,
if possible, wait for the
reply of the bailor. It is
only when time is of the
essence that you cannot
afford to wait that bailee
can proceed to incur
extraordinary expenses,
provided there is still
notice.
If the need for the
extraordinary repairs is
occasioned by the actual
use by the bailee, the
bailee has to participate
and contribute half of the
expenses.
Right of retention – right
to keep or withhold
possession of thing
loaned from the bailor
until bailee is reimbursed
for the damages he
incurred on account of a
flaw in the thing loaned,
known to the bailor, and
Daverick Pacumio
UST Faculty of Civil Law
NOTES IN CIVIL LAW REVIEW II
Real contract – there not disclosed to the
must be delivery bailee.
Unilateral
Bailor cannot exempt
himself from this
obligation by
abandoning the thing
with the bailee. This may
be related to the
prohibition against
compensation.
Simple Loan/Mutuum
• Object: Money or fungible thing which is left by
the bailor to the bailee with the obligation to
pay the same amount or same quantity, kind, or
quality, as the things given.
• Q: How may simple loan be onerous?
A: When there is stipulated payment of interest
(conventional interest).
Interest
• Monetary: Interest for use of money
o Accrued from the time the obligation is
constituted.
o There is a principal obligation and the
monetary interest begins to run upon
the delivery of the thing loaned.
o Provided by the parties.
o If parties fail to stipulate in writing,
even if there be an oral agreement, the
oral agreement is null and void.
o Parties may agree on the imposition of
interest only. They can keep the rate of
interest blank. If they do so, it is the
legal rate which is applicable.
o The parties may provide a specific rate
of interest. If there was no stipulated
rate, legal rate is applied (6% for
monetary and compensatory interest
involving loans or forbearance of
money).
o Previously, there was a limit on the rate
of interest (Usury Law), but now, there
is none.
o Before July 1, 2013, there must be a
distinction between loan (12% PA) and
non-loan obligation (6% PA).
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o
But after July 1, 2013, 6% na all
throughout.6
o Courts have the power to strike down
stipulated interest rate if it is
unconscionable.
o Prevailing jurisprudence fixes the
ceiling at 3% per month or 36% PA.
o Justice Leonen’s advocacy, however, is
reasonableness in determining whether
a rate is unconscionable or not.
o If a court has struck down the rate of
interest as unconscionable, the effect is
the obligation remains valid but the
legal rate7 applies. If it is monetary
interest – 12%/6%; if it is compensatory
interest – we look at the nature of the
obligation as to whether it is loan or
non-loan.
o If the monetary interest is struck down
and the legal interest is adopted, the
legal rate of interest applied as
conventional interest will not be subject
to shifts in rates. So, if 2010 yung
obligation, and naapply ang legal rate
back then as monetary interest, the
change brought by BSP Circular No. 799
will not subject it to shifts in interests.
• Compensatory: Interest by way of damages.
o Accrued from the time the debtor is in
delay
o When obligation falls due, demand may
be made and from demand,
compensatory interest accrues.
o Provided in the law (Art. 2212)
o If what is struck down by the court is the
stipulated interest rate for
compensatory interest, the legal rate of
interest which is adopted as
compensatory interest will be affected
by shifts in rates prescribed by BSP
Circular No. 799.
o Compensatory interest due for delay
taking place before July 1, 2013 – 12%.
After July 1, 2013 – 6% nalang.
Example: On December 6, 2004, the Debtors obtained
a loan in the amount of P100,000.00 payable anytime
6 7
So, if asked to compute the rate of interest without a date,
make a qualification as to the rates.
Daverick Pacumio
UST Faculty of Civil Law
from six (6) months to one (1) year and subject to
interest at the rate of ten percent (10%) per month,
payable on or before the end of each month.
Extrajudicial demand was made on November 16, 2006
while an action to collect was filed on July 24, 2007.
(a) Is the stipulated monetary interest of 10% per month
valid?
No. It is unconscionable because it goes beyond 3% per
month ceiling.
(b) if the stipulated monetary interest rate is struck
down, will it mean that no monetary interest may be
recovered anymore?
No. We would be applying the legal rate of 12% per
annum which is applied from the time the loan is
contracted until the same is fully paid. This is not
susceptible to shifts in rate.
(c) what about compensatory interest, will this be due
as well?
Yes. It is due on both the principal and monetary
interest. However, the accrual of compensatory interest
on the principal is from demand (judicial or
extrajudicial), while the accrual of compensatory
interest on the monetary interest is from judicial
demand.
Rate: 12% PA until June 30, 2012; 6% PA from July 1, 2013.
(d) what will the debtors pay?
Debtors must pay the following:
1. Principal obligation
2. Monetary interest on principal – 12% per annum
accruing from December 6, 20048 until full
payment of the loan. Even if the legal rate of
interest was reduced to 6%, the legal rate of
interest for monetary interest is 12% throughout
the time the obligation remains unpaid.
3. Compensatory interest on principal – from time
of extrajudicial demand because it is at that
point that the debtor is in delay (November 16,
2006). Rate: Since it is a loan, 12% PA from 16
Again, kung walang date, qualify.
8
When obli was constituted
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November 2006 until 30 June 2013. From 01 July
2013 until finality of the ruling,9 it is 6% PA.
4. Compensatory interest on monetary interest –
rate of 12% PA from time of judicial demand
(July 24, 2007) to June 30, 2013, rate of 6% PA
from July 01, 2013 until finality of ruling
5. Legal interest of 6% imposed on the total of nos.
1-4 from finality until satisfaction of judgement.
How much must the debtors pay?
The debtors must pay the following:
a) P100,000.00 representing the principal loan
obligation;
b) Monetary interest on the principal loan
obligation at the rate of 12% per annum from
December 6, 2004 until full payment of the loan.
Even though the legal interest for loans was
reduced to 6% per annum, effective July 1, 2013,
the rate of interest here would still be 12% per
annum throughout;
c) There should also be compensatory interest on
the principal obligation from the time of
extrajudicial demand on November 16, 2006 at
the rate of 12% until June 30, 2013 and at the rate
of 6% per annum from July 1, 2013 until finality
of the ruling;10
d) Compensatory interest on the monetary interest
as stated in letter (b) at the rate of 12% per
annum from judicial demand, i.e., July 24, 2007
to June 30, 2013, and thereafter, at the rate of 6%
per annum from July 1, 2013 until finality of the
ruling; and
e) Legal interest at the rate of 6% per annum
imposed on the sums due in letters (a), (b), and
(c) and (d) from the finality of the ruling until
full payment (Isla v. Estorga).
9 10
Pursuant to Eastern Shipping Lines v. CA and Nacar v. Gallery
Frames.
Daverick Pacumio
UST Faculty of Civil Law
The spouse payees insist that the borrower agreed to pay
2.5% interest per month on the loan. They point to the
checks issued to them by the borrower which
supposedly included payment of monthly interest at the
rate of 2.5%.
• Is monetary interest due in this case and if
so, what rate?
Yes. Jurisprudence is clear about the applicable
interest rate if a written instrument fails to
specify a rate, i.e., the legal rate of interest is to
apply. at present, the legal rate of interest is 6%
per annum, but this is subject to Nacar’s ruling
on prospective application.
Applying this, the loan obtained by the
borrower from the spouses is deemed subjected
to conventional interest at the rate of 12% per
annum, the legal rate of interest at the time
the parties executed their agreement.
Moreover, should conventional interest still be
due as of July 1, 2013, the rate of 12% per annum
conventional interest still be due as of July 1,
2013, the rate of 12% interest shall persist as the
rate of conventional interest. This is because the
legal rate of interest, when applied as
conventional interest, shall always be the legal
rate at the time the agreement was executed and
shall not be susceptible to shifts in rate.
• Will the monetary interest due also earn
interest and if so, at what rate?
Yes. Apart from the respondents’ liability fo
conventional interest at the rate of 12% per
annum, outstanding conventional interest – if
any is due from respondents – shall itself earn
legal interest from the time judicial demand was
made by petitioners, i.e., on July 31, 2002, when
they filed their complaint. This is consistent
with Art. 2212.
Consistent with Nacar as well as Rivera v. Sps.
Chua, the interest due on the conventional
interest shall be at the rate of 12% per annum
from July 31, 2002 to June 30, 2013. Thereafter, or
starting on July 1, 2013, this shall be at the rate of
6% pr annum until finality of ruling.
Based on Eastern Shipping v. CA, as modified by Nacar v. Gallery
Frames.
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• Assuming that the checks may be admitted
into evidence to prove that the parties
agreed on 2.5% as rate of interest, should
this rate be honored by the court
considering that it is less than the 3% per
month ceiling that is considered
unconscionable under prevailing
jurisprudence?
No. Even if it can be shown that the parties have
agreed to monthly interest at the rate of 2.5%,
this is unconscionable. In determining whether
the rate of interest is unconscionable, the
mechanical application of pre-established floors
would be wanting. Reasonableness should be
the new standard, i.e., the rate of interest should
not facilitate unjust enrichment at the expense
of another. In this case, the imposition of 2.5%
monthly or 30% annual interest is not
reasonable.
Any deviation from the legal rate of interest
must be reasonable and fair. In cases where the
stipulated interest is more than twice the
prevailing legal rate of interest, it is for the
creditor to prove that this rate is required
by prevailing market conditions. Here,
petitioners articulated no such justification
(Sps. Abella v. Sps. Abella)
This is how J. Leonen justified the finding that
the interest was unreasonable – petitioners here
insist upon the imposition of 2.5% monthly or
30% annual interest. Compounded at this rate,
respondents’ obligation would have more than
doubled – increased to 219.7% of the principal –
by the end of the third year after which the loan
was contracted if the entire principal remained
unpaid. By the end of the ninth year, it would
have multiplied more than tenfold (or increased
to 1,060.45%). In 2015, this would have
multiplied by more than 66 times (or increased
to 6,654.17%). Thus, from an initial loan of only
P500,000.00, respondents would be obliged to
pay more than P33 million. This is grossly unfair,
especially since up to the fourth year from when
the loan was obtained, respondents had been
assiduously delivering payment. This reduces
their best efforts to satisfy their obligation to a
protracted servicing of a rapacious loan.
Daverick Pacumio
UST Faculty of Civil Law
Atty. S: Apply Sps. Abella if the facts are on all
fours with the said case. This case did not gain
enough traction.
Joy, an OFW, was illegally dismissed by her
employer abroad. She sued her agency here and
prevailed. The agency was ordered to return her
placement fee and pay her salaries corresponding
to the unexpired portion of her contract.
How much by way of interest should be imposed on
the placement fee and the unpaid salaries if the
judgement in her favor became final in 2014 or after
BSP Circular No. 799 has come into effect?
The placement fee will earn interest at the rate of 12%
per annum, notwithstanding the existence of Circular
No. 799. This is because Sec. 10 of RA 8042 provides that
unlawfully terminated overseas workers are entitled to
the reimbursement of his/her placement fee with an
interest of 12% per annum. Since BSP circulars cannot
repeal RA 8042, the issuance of Circular No. 799 does
not have the effect of changing the interest on awards
for reimbursement of placement fees from 12% to 6%.
However, the same cannot be said for awards of salary
for the unexpired portion of the unemployment
contract under RA 8042. These awards are covered by
Circular No. 799 because the law does not provide for a
specific interest rate that should apply. (Sameer
Overseas Placement Agency v. Cabiles).
The guidelines on computation of interest laid
down in Eastetn Shipping, as modified by Nacar,
provides in part:
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially,
but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgement of
the court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.
• Trial court awarded P100 on June 19, 2020. The
CA made it P500. Does it mean that you only
accrue interest from the time the CA rendered
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judgement? no. You begin from June 20, 2019.
However, your basis now is P500. If this is
further appealed to the SC who awarded P1000,
same rule applies. You accrue interest from June
19, 2020. However, the basis is now P1000.11
Which court is referred to here? It should be the trial
court but in Bernal v. Villaflor, the interest on actual
damages was reckoned from the time of the CA Decision
because according to the SC, it was at that point that the
amount of damages was reasonably ascertained given
that the same was no longer questioned in petitioner’s
motion for reconsideration with the CA, or in his
petition for review before the SC.
• Basically, the SC reckoned the interest from the
time the CA rendered its decision. Bakit naiba?
Kasi kung nasa CA, it is presupposed that a
judgement was rendered by the trial court. And
applying the Nacar guidelines, we should accrue
interest from the date of judgement of the trial
court. Pero dito, inaccrue niya at binase niya
from the judgement of the CA. The SC departed
from the guidelines.
• So, what is the effect of Bernal v. Villaflor? Atty.
S: Nothing. This may be an oversight. This does
not reverse the En Banc rulings in Nacar.
However, if faced with a question which sounds
like Bernal, then adhere to Nacar, but mention
the ruling in Bernal in passing.
DEPOSIT
Defined: A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but
some other contract.
Q: Who are the parties?
A:
a) Depositor
b) Depositary
Q: Should they be capacitated?
11
Basis is the statement, “The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.”
Daverick Pacumio
UST Faculty of Civil Law
A: It is not really required. However, the incapacity of
one of the parties would affect their respective
obligations as follows:
a) Incapacitated depositor: depositary who is
capacitated shall be subject to the obligations of
depositary and may be compelled by the
guardian or administrator to return the thing or
even by the depositor himself should he have
capacity (Art. 1970).
Q: May he return the same to the incapacitated
depositor?
A: No. It is not a valid performance.
b) Incapacitated depositary: depositor may only
have an action to recover the thing deposited
while it is still in the possession of the
depositary, or to compel the latter to pay him
the amount by which he may have enriched or
benefited himself with the thing or its price.
However, if a third person who acquired the
thing acted in bad faith, the depositor may bring
an action against him for its recovery (Art. 1971).
Wala din naman pinagkaiba sa rules on payment.
Pero, there is a qualification that should this be
transferred to a third person in bad faith, the
depositor may bring an action against such third
person.
Q: What are the kinds of deposit?
A:
a) Extrajudicial deposits, viz:
a. Voluntary – that wherein the delivery is
made by the will of the depositor. A
deposit may also be made by two or
more persons each of whom believes
himself entitled to the thing deposited
with a third person, who shall deliver it
in a proper case to the one to whom it
belongs.
b. Necessary – provided by law or the
courts.
Distinctions:
Voluntary Necessary
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Made by will of Constituted by the If you owe banks, for example, you have loans with the
the parties circumstances bank, the bank may deduct the amount of your loan
provided under the from your deposits. This is compensation. Will the bank
law need your consent? No. creditors and debtors kasi kayo
Depositors have a Depositors have no of each other. However, in the loan contracts, there are
say on whether or say on whether or provisions which allow compensation.
not he may make a not he wants to
deposit deposit Another service offered by banks is the rental of safety
deposit boxes.
Q: What would be the consequence of
necessary deposit? Q: How should we treat the rental of safety deposit
A: Depositor in a necessary deposit does not boxes?
have a choice regarding his depositary. A: A special kind of deposit.
Deposit is based on trust kasi. Just like when
you’re entrusting someone with your things Q: Why is it a special kind of deposit?
in the library. A: Because it is governed by the General Banking Act.

Pag nasa SM kayo, may dala kayong gamit.
Pinapadeposit sa customer service. Nakita
mo yung tao, daming tattoo. Ang lalim ng
eyebags. Nagdalawang isip ka na kung iiwan
mo gamit mo sakanya. However, it is a
necessary deposit. You have no choice on
the matter.
b) Judicial deposit – may involve both movable and
immovable property.
Deposit in banks
Q: Is the term deposit, as used in banks, taken to mean
the same as depositum?
A: No. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan (Art. 1980). By
express provision of law, deposits of money in banks and
similar institutions shall be governed by the provisions
concerning simple loans.
Q: So, what is your relationship with your bank?
A: Debtor-creditor. The bank is the debtor, and you are
its creditor.
Q: When will the obligation of the bank to pay you
become due?
A: It is a pure obligation – therefore, it is immediately
due and demandable. Exception: If time deposit, in
which case, hindi pwedeng anytime ang withdrawal.
Daverick Pacumio
UST Faculty of Civil Law
CA-Agro Industrial Development Corp. v. CA
Facts
Petitioner purchased from spouses Ramon and Paula
Pugao two parcels of land. The titles for the land was
then deposited in a safety deposit bank rented by
petitioner from private respondent Security Bank and
Trust Company (Bank). For this purpose, both signed a
contract of lease which contains a condition saying that
(1) the bank is not a depositary of the contents of the
safe, and has no control or possession of the same and
(2) has no interest in the contents thereby assuming no
liability in connection with the same. Two renters keys
were then given to the renters, one to CA-Agro’s
president, and one to the Pugaos. A guard key remained
in possession of the bank. The safe could only be opened
by the guard key and one of the renter’s keys.
Thereafter, a certain Mrs Ramos offered to buy from
petitioner the parcels of land which entailed the
production of the titles. However, when the box was
opened, it yielded no certificates. RTC rendered a
decision in favor of the Bank which was affirmed by the
CA.
Issue
Whether or not there existed a contract of deposit?
Ruling
No. The contract agreed upon by the parties is a special
kind of deposit not governed by the provisions of the
Civil Code. However, there still exists in the intent of the
contract the primary elements of deposit which was the
safekeeping of the bank of the articles, and the eventual
return of the same. Thus, any stipulation exempting the
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depositary from any liability arising from the loss of the
thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public
policy. Therefore, the stipulations made by the bank
exempting itself from liability are null and void.
However, the bank could not be held liable, mainly
because there is no evidence showing its negligence.
Note that the Pugaos and petitioner each hold a key
which when combined with the guard’s key could open
the box. Without either of their keys, the box would not
be opened.
Atty. S: The bank is insisting that the contract here is
really a lease contract kasi in lease, the possession of the
SDB is surrendered to the lessee. So, the bank has no
interest whatsoever in the contents therein and assumes
absolutely no liability in connection therewith. Pero
sabi ng SC, hindi pwede. The SC cited the old General
Banking Law, which provides that the bank who rents
out SDB is considered a depositary. The disclaimer of
the bank negating its liability as depositary is negated
by the General Banking Act itself. Moreover, this is not
a contract of lease because the bank did not surrender
the full possession of the SDB to the lessee. The bank
still had some measure of possession over the SDB
because the bank has a key to the SDB.
However, Sec. 53 of the New General Banking Law
provides:
Section 53. Other Banking Services. - In addition to
the operations specifically authorized in this Act, a bank
may perform the following services:
53.1. Receive in custody funds, documents and valuable
objects;
53.2. Act as financial agent and buy and sell, by order of
and for the account of their customers, shares,
evidences of indebtedness and all types of securities;
53.3. Make collections and payments for the account of
others and perform such other services for their
customers as are not incompatible with banking
business;
53.4 Upon prior approval of the Monetary Board, act as
managing agent, adviser, consultant or administrator of
Daverick Pacumio
UST Faculty of Civil Law
investment management/advisory/consultancy
accounts; and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted
under Subsections 53.1, 53.2,53.3 and 53.4 as
depositary or as an agent. xxx” (Emphasis supplied).
Hindi sinali si 53.5. This is another way of saying that
renting out SDBs under the new GBL will not be carried
out by the bank as depositary or agent. This was a way
for banks to circumvent the ruling in CA Agro.
Mall parkings
Q: What if parking – how would you justify mall
disclaimers disavowing liability for loss in parking
areas?
A: The contract here is a contract of lease. The mall is
giving or leasing out portions of its properties for use of
its customers. Moreover, wala kasi sa malls yung susi.
So, wala silang kahit na anong measure of possession
over the vehicles. Simply having a vehicle without a key
does not amount to possession. On the other hand,
occupying the parking slot means you have deprived the
mall of its possession of a certain portion of its property.
Exception: Valet parkings
In valet parking, the car owner gives the keys to the valet
attendant hence, it is a contract of deposit.
Obligations of depositary
General Rule: Deposit is gratuitous
Exceptions:
a) If it is so stipulated
b) If the depositary is in the business of storing
goods – example: Warehouseman; Storage
spaces
Q: Obligation not to transfer the deposit – what does
this mean?
A: The depositary cannot delegate his obligation to
someone else, unless he is allowed to do so.
Q: If he is allowed to do so, does this mean that the
depositary is not liable anymore?
A: No. He is liable for loss if the depositary entrusted
the thing to a person who is manifestly unfit.
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Q: Obligation not to change the way of the deposit –
what does this mean?
A: The depositary may change the way of the deposit if
under the circumstances he may reasonably presume
that the depositor would consent to the change if he
knew of the facts of the situation. However, before the
depositary may make such change, he shall notify the
depositor thereof and wait for his decision, unless delay
would cause danger (Art. 1974). Example: Kotse ni Mr.
Manalo, dineposit kay Ms. Santos, who lives in E.
Rodriguez. Si Ms. Santos, nilagay sa garahe niya yung
kotse ni Mr. Manalo. However, bahain ang ERod. So, si
Ms. Santos, nilipat yung kotse ni Mr. Manalo dun sa
Puregold dun sa ERod, which was elevated. Mr. Manalo
had every right to rely on Ms. Santos’ representation
that his car would always be inside her garage. However,
when Ms. Santos changed the way of the deposit, she
was more than justified in doing so because Ms. Santos
should only show that had the depositor known of the
circumstances, he would have changed the way of the
deposit. Dito, walang dud ana kung alam lang ni Mr.
Manalo na babahain yung garahe ni Ms. Santos, papayag
siya na ilipat ng lugar.
Q: Can we have more than one depositor?
A: Yes. A deposit may also be made by two or more
persons each of whom believes himself entitled to the
thing deposited with a third person, who shall deliver it
in a proper case to the one to whom it belongs (Art.
1968).
Q: What if the thing deposited is an indivisible thing?
A: Demand must be made by both depositors. When
there are two or more depositors, if they are not
solidary, and the thing admits of division, each one
cannot demand more than his share.
When there is solidarity or the thing does not admit of
division, the provisions of articles 1212 and 1214 shall
govern. However, if there is a stipulation that the thing
should be returned to one of the depositors, the
depositary shall return it only to the person designated
(Art. 1985).
ARTICLE 1975. The depositary holding certificates,
bonds, securities or instruments which earn
interest shall be bound to collect the latter when it
becomes due, and to take such steps as may be
necessary in order that the securities may preserve
Daverick Pacumio
UST Faculty of Civil Law
their value and the rights corresponding to them
according to law.
The above provision shall not apply to contracts for
the rent of safety deposit boxes.
• Part of the obligation of the depositary to
safekeep and preserve is to collect the interests
which accrue on the instruments contemplated
by this provision. However, if these instruments
are contained in SDBs, obviously, this
obligation is inapplicable to the depositary.
ARTICLE 1977. The depositary cannot make use of
the thing deposited without the express permission
of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing
deposited requires its use, it must be used but only
for that purpose. (1767a)
ARTICLE 1978. When the depositary has permission
to use the thing deposited, the contract loses the
concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the
principal purpose of the contract.
The permission shall not be presumed, and its
existence must be proved. (1768a)
General Rule: Depositary cannot use the thing
Exception:
a) Express permission
b) If the preservation of the thing requires its use,
in which case, it must be used for the purpose of
preserving it.
Q: Supposing there is permission, would this change the
contract?
A: Generally, yes. Exception is if the safekeeping is still
the principal purpose of the contract (Irregular
Deposit). If deposit is not the principal purpose
anymore, the contract may be a commodatum already.
ARTICLE 1979. The depositary is liable for the loss of
the thing through a fortuitous event:
1) If it is so stipulated;
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2) If he uses the thing without the depositor's
permission;
3) If he delays its return;
4) If he allows others to use it, even though he
himself may have been authorized to use the
same.
Since what is required in deposit is an obligation to
deliver a specific thing (thing deposited), the accessory
obligations therein apply.
Q: If the deposit consists of money, the provisions
relative to agents in Art. 1896 shall be applied to the
depositary. What is Art. 1896?
A: The depositary owes interest from the moment he
made use of the money.
Q: What kind of interest is being collected here?
A: Monetary interest – interest for use of money. It is for
the use of the money. Wala pang delay here.
Q: Can there be liability for compensatory interest?
A: Yes. If there is demand by the depositor for the return
of the money, and the depositary delayed in the delivery
of the same. Kung hinihingi mo ay compensatory
interest on monetary interest, there must be judicial
demand. So, kung ikaw yung depositor, ginamit yung
pera mo, wag ka makuntento na the money will earn
interest under Art. 1896. You demand its return so, the
depositary is liable for compensatory interest too.
Thereafter, file a complaint so there would be
compensatory interest on the monetary interest.
Obligations of a Depositor
Note: Even if the depositor has obligations, the contract
of deposit is still unilateral. These obligations on the
part of the depositor are simply incidental.
Moreover, even if a deposit is a real contract, it is
possible to have a consensual agreement to constitute a
deposit which is separate and distinct from the actual
contract of deposit. It is a contract to deposit. This is like
a contract to loan, which is separate and distinct from
the contract of loan, which is a real contract.
Q: What happens if there has been an agreement to
constitute a contract of loan, there is no delivery yet,
12
Applies even if the problem involves a contract to deposit.
Daverick Pacumio
UST Faculty of Civil Law
and one of the parties refuses to deliver? For example,
Ms. Ramacola entered into a contract to loan with Mr.
Santos but Mr. Santos, last minute, refused to deliver
the thing. What is the remedy of Ms. Ramacola?
A: Only an action for damages.12 An action for specific
performance will not lie because if Ms. Ramacola asks
Mr. Santos to execute the contract of loan, this is
equivalent to compulsion of an obligation to do. This is
violative of the Constitutional prohibition against
involuntary servitude.
Atty. S: Some students make the mistake of equating
the obligation under the contract of loan with the
obligation under the contract to loan. This is not true.
First, the obligation to deliver money is not an
obligation to do – it is an obligation to give. Here, in case
only a contract to loan was entered into, we do not even
have an obligation under the contract of loan. Second,
the action for specific performance will not lie because
there is no contract of loan yet. However, there is the
consensual contract to loan. It just so happened that
specific performance does not lie because you cannot
compel the other party to enter into a contract of loan
with you because this time, it involves an obligation to
do (to enter into a contract) which is violative of the
constitutional prohibition against involuntary
servitude.
ARTICLE 1992. If the deposit is gratuitous, the
depositor is obliged to reimburse the depositary for
the expenses he may have incurred for the
preservation of the thing deposited. (1779a)
• Q: Do we make a distinction as to ordinary and
necessary expenses?
A: No. The benefit here is not for the depositary
but only and solely for the depositor. We only
make a distinction as to whether the deposit is
gratuitous or not. if the deposit is gratuitous, the
depositor is obliged to reimburse the depositary
for expenses for preservation. In case the
deposit is onerous, the expenses are deemed
subsumed by the fees paid.
ARTICLE 1993. The depositor shall reimburse the
depositary for any loss arising from the character of
the thing deposited, unless at the time of the
constitution of the deposit the former was not
aware of, or was not expected to know the
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dangerous character of the thing, or unless he
notified the depositary of the same, or the latter
was aware of it without advice from the depositor.
(n)
• Q: When does this obligation arise?
A: If the loss arose from the character of the
thing deposited. Exceptions: (1) depositor was
not aware of the same; (2) depositor was not
expected to know of the dangerous character of
the thing; or (3) depositor notified the
depositary of the same; or (4) depositary was
aware of it without advice from the depositor.
Example: Deposit of a cute but rabid dog. A dog
was deposited and the dog, unknown to the
depositary, was wild and aggressive. Pero
mukhang cute yung dog.
ARTICLE 1994. The depositary may retain the thing
in pledge until the full payment of what may be due
him by reason of the deposit. (1780)
• The right of retention given to depositary is
slightly different from right of retention given to
the bailee. This is because the thing deposited is
considered to be in pledge, and the depositary
may be proceeded against it to satisfy his
monetary claims against the depositor, i.e., to
sell it at public auction and apply the proceeds
thereof to the liability of the depositor (Art.
2112).
• Note: Depositary may not appropriate the
thing deposited/pledged because this would
amount to pactum commissorium.
• The provision of the law regarding right of
retention in deposit is clearer than the provision
of the law regarding the right of retention in
commodatum.
ARTICLE 1995. A deposit is extinguished:
(1) Upon the loss or destruction of the thing
deposited;
(2) In case of a gratuitous deposit, upon the death
of either the depositor or the depositary. (n)
Necessary Deposits
ARTICLE 1996. A deposit is necessary:
(1) When it is made in compliance with a legal
obligation;
Daverick Pacumio
UST Faculty of Civil Law
(2) When it takes place on the occasion of any
calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events. (1781a)
Notes:
Another form of extrajudicial deposit. In a necessary
deposit, as opposed to voluntary deposit, the depositor
does not have the chance to choose his depositary. This
is because necessary deposits are created by law or by
the circumstances.
If the necessary deposit takes place on the occasion of
calamities, under Art. 2168, the safekeeping must be
without the knowledge of the owner in order for the
right of reimbursement of just compensation to arise.
ARTICLE 1998. The deposit of effects made by
travellers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that
notice was given to them, or to their employees, of
the effects brought by the guests and that, on the
part of the latter, they take the precautions which
said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.
(1783)
• Two conditions to make the hotel-keepers
liable:
1) Notice was given to the hotel-keepers
by the guests of the presence of their
valuables; and
2) The guests must have taken precautions
which the hotel-keepers have advised
them.
• Atty. S: If you inform the hotel-keepers that you
have valuables with you, they would probably
ask you to deposit it with the reception and have
it kept in the hotel vault for safekeeping.
ARTICLE 1999. The hotel-keeper is liable for the
vehicles, animals and articles which have been
introduced or placed in the annexes of the hotel. (n)
ARTICLE 2000. The responsibility referred to in the
two preceding articles shall include the loss of, or
injury to the personal property of the guests caused
by the servants or employees of the keepers of hotels
or inns as well as by strangers; but not that which
may proceed from any force majeure. The fact that
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travellers are constrained to rely on the vigilance of
the keeper of the hotel or inn shall be considered in
determining the degree of care required of him.
(1784a)
ARTICLE 2001. The act of a thief or robber, who has
entered the hotel is not deemed force majeure,
unless it is done with the use of arms or through an
irresistible force. (n)
ARTICLE 2002. The hotel-keeper is not liable for
compensation if the loss is due to the acts of the
guest, his family, servants or visitors, or if the loss
arises from the character of the things brought into
the hotel. (n)
ARTICLE 2003. The hotel-keeper cannot free himself
from responsibility by posting notices to the effect
that he is not liable for the articles brought by the
guest. Any stipulation between the hotel-keeper
and the guest whereby the responsibility of the
former as set forth in articles 1998 to 2001 is
suppressed or diminished shall be void. (n)
ARTICLE 2004. The hotel-keeper has a right to
retain the things brought into the hotel by the
guest, as a security for credits on account of
lodging, and supplies usually furnished to hotel
guests. (n)
• The hotel-keeper may retain the things you
have brought by way of security for for credits
on account of lodging, and supplies usually
furnished to hotel guests (e.g. room service,
laundry service).
• Atty. S: Hotels also operate as casinos.
Sometimes, yung casino would be advancing
money to the guests who are gambling. Should
the guests not be able to return what they
borrowed, would it be correct for the hotel to
retain their things as security for these
advances? Under Art. 2004, the answer is no.
this is because the right of retention may only
be exercised under Art. 2004 for lodging
purposes. Expenses in casinos in hotels are
outside the scope of Art. 2004.
• In certain hotels, may 24/7 pawnshops. What is
the purpose? To cater to those gambling inside.
Kasi para pag naubusan sila ng pera, isasangla
nila properties nila para makalaro.
Daverick Pacumio
UST Faculty of Civil Law
Common carriers
• Checked-in baggage: Governed by contract of
carriage. Thus, extraordinary diligence is
required.
• Hand-carried baggage: Governed by the law
on necessary deposits. Only ordinary diligence
is required.
Guaranty
ARTICLE 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship. (1822a)
• Q: Can you give me an overview of the contract
of guaranty?
A: By guaranty, you are giving security for the
principal obligation (can be a loan or some
other contract). The purpose of a guaranty is to
ensure the creditor that in the event the debtor
defaults, the creditor has recourse against the
guarantor.
The guarantor is no different from a third
person who pay for the obligation of another.
So, the rules regarding payment by third person
also applies here, i.e., the consent of the debtor
is not needed. In fact, the guaranty may be
without the debtor’s knowledge or over the
objection of the debtor. It is only the consent of
the creditor which is needed.
The debtor, however, is not totally out of the
picture. Hindi pa siya efas. Hindi lang kailangan
consent ni debtor. Pero in real life, the
guarantor is usually someone (personal
guaranty – guaranty consists of the capacity or
personality of the guarantor) or something (real
guaranty – the security is provided for by
whatever property is given by way of mortgage,
antichresis, pledge, or chattel mortgage, or,
under the PPSA, by way of personal security)
who is offered by the debtor to the creditor.
• Once there is default on the part of the debtor
and the properties of the debtor have been
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exhausted, the guarantor may be made to pay
the creditor. But the story does not end with
payment. This simply extinguishes the
obligation of the debtor to the creditor.
However, the debtor must now indemnify the
guarantor for whatever he has paid and then
some (see Art. 2066).
Guarantor Surety
Subsidiarily liable Solidarily liable with the
debtor
Insurer of the debtor’s Insurer of the debt
solvency.
Q: If a surety is solidarily liable, what is stopping him
from becoming a co-solidary debtor?
A: The co-solidary debtor is a party to the principal
contract; whereas a surety is not a party to the principal
contact.
Characteristics of Guaranty:
1) Consensual – consent required is that of the
creditor and the guarantor. Debtor’s consent,
while ideal, is not necessary.
2) Nominate
3) Gratuitous – is this absolute? No. It may be
onerous. For example, the guarantor requires
payment of fees for his guaranty; or surety
bonds – companies who engage in the business
of providing securities who charge premiums.
4) Accessory – this means that there must be a
valid principal obligation (Art. 2052).
Q: Does this preclude the guaranty of defective
or natural obligations?
A: No. A guaranty may be constituted to
guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a
natural obligation (Art. 2052, 2nd par.).
Q: What is the consequence of constituting a
guaranty for these kinds of obligations
(unenforceable, natural obligations)?
A: The guarantor may not be able to ask
reimbursement from the debtor because he may
not enforce the principal obligation against the
debtor. For natural obligations, if the guaranty
is constituted over the objection of the debtor,
the creditor cannot enforce the principal
obligation against the debtor. But if the
Daverick Pacumio
UST Faculty of Civil Law
guaranty of a natural obligation is at the
instance of the debtor, this is a recognition or
acknowledgement that he is obligated to the
creditor. This is a means of reconstituting the
natural obligation into a civil obligation.
For voidable obligations, walang problema. It is
valid until annulled. Come annulment, there
would be no obligation to speak of. If the
guaranty was at the instance of the debtor, it
may be a ratification of the voidable obligation.
But if the guaranty was at the instance of the
creditor without the consent or knowledge of
the debtor, and the creditor asks for annulment,
then there is no longer any obligation to be
guaranteed. Without such principal obligation,
the guaranty is also extinguished.
For unenforceable obligations, if the guaranty
was at the instance of the debtor, the debtor
may be held in estoppel. If the guaranty was at
the instance of the creditor and without the
consent/knowledge of the debtor, the guarantor
cannot invoke the benefit of excussion against
the creditor. Since the guarantor knew that the
obligation is unenforceable, he should have
expected the possibility na the creditor could
not be able to go to the debtor. So, when the
creditor demands payment from him, the
guarantor is deemed to have waived the benefit
of excussion.
Q: What is a continuing guaranty?
A: A guaranty may also be given as security for
future debts, the amount of which is not yet
known; there can be no claim against the
guarantor until the debt is liquidated. A
conditional obligation may also be secured.
(Art. 2053).
Q: How do we reconcile Art. 2053 (which
provides that a guaranty may be made for future
debts) with Art. 2052 (which requires obligation
in order to have a guaranty)?
A: The moment the amounts are liquidated,
they are deemed to retroact to the moment the
guaranty is created. However, there must, at
least, be an agreement to loan. And once
drawings have been made, there would be a
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perfected contract of loan which is a fulfillment
of the condition for the guaranty to arise.
This is the same principle we observe with
respect to guaranty of conditional obligation.
A continuing guaranty is meant to serve as a
convenient way for the bank and borrower to
continue their transactions without needing to
go thru approvals, etc.
Example: Bank says, “I am loaning you the
amount of P10 million which may be withdrawn
for a period of 10 years.” Hindi mo naman
wiwithdrawin yan ng isang bagsakan. However,
the continuing guaranty would also guaranty
those future withdrawals that may be made.
5) Unilateral
6) Governed by the Statute of Frauds
Q: If the husband guarantees a conditional obligation of
a co-worker, how should you treat such obligation of the
husband? Community or personal obligation?
A: It is a personal obligation because no benefits
accrued to the family. A benefit is presumed if the
obligation is incurred in relation to the
business/livelihood of the obligated spouse. Here, there
is no such presumption because the husband simply
extended a guaranty for the purpose of “pakikisama.”
ARTICLE 2054. A guarantor may bind himself for
less, but not for more than the principal debtor,
both as regards the amount and the onerous nature
of the conditions.
Should he have bound himself for more, his
obligations shall be reduced to the limits of that of
the debtor. (1826)
• Example: A borrowed P10 million from B and
the obligation was not secured by any mortgage.
C guaranteed the payment of A’s debt and to
ensure payment of his guaranty, C mortgaged
his land. If A cannot pay, may B foreclose C’s
land? No. C, the guarantor, bound himself for
more by mortgaging his own property. Yung
obligation ni A was not secured by a mortgage.
Only the guaranty of C. This is proscribed by
Art. 2054. Thus, C’s liability should be reduced
Daverick Pacumio
UST Faculty of Civil Law
to the limits of the debtor’s liability, i.e., P10
million debt.
• Is this a third-party mortgage? No. The
mortgage here does not secure the principal
obligation – it secures the guaranty. A third-
party mortgage should secure the principal
obligation. In this case, the mortgage of C’s
land secures the obligation of the guarantor C to
debtor B.
Sub-guaranty
• A guarantor guaranteeing the guarantor.
• Why is this sub-guaranty needed? Minsan kasi,
may duda pa rin si creditor dun sa guarantor.
Tingin niya, hindi kakayanin ni guarantor.
• A sub-guarantor is different from a co-
guarantor.
Co-guaranty
• In case of co-guaranty, there would be more
than one guarantor guaranteeing the principal
obligation. In case of multiple guarantors, the
default rule is joint liability amongst
themselves.
• However, pwedeng co-guarantors may have
made themselves solidarily liable with the
debtor. So, they will be sureties. However,
amongst themselves, they are only jointly liable.
This means that the creditor may run after the
co-sureties even without running after the
principal debtor first and without the benefit of
excussion kasi solidary liability. since they are
solidarily liable with the principal debtor, would
the creditor be justified in just suing one of
them for the entire obligation? No. The default
rule is they are, among themselves, jointly
liable. So, if you wish to obtain complete relief,
you have to sue them all together. Ang nagkaiba
lang, walang benefit of excussion. Pero they still
have to be sued as a whole pa rin in the absence
of any proof that solidarity among themselves is
provided.
Q: Who may act a guarantor?
A:
1) One who has integrity;
2) Has capacity to bind himself; and
3) Sufficient property to answer for the obligation
he guarantees.
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If the guarantor is convicted at the first instance of a
crime involving dishonesty or should become insolvent,
the creditor may demand another who has all the
qualifications required in the preceding article. The case
is excepted where the creditor has required and
stipulated that a specified person should be the
guarantor (Art. 2057).
Q: What happens if the guarantor loses one of the
characteristics or if the guarantor dies? Would this
extinguish the guaranty?
A: If the guarantor does not die but loses one of the
characteristics under Art. 2057, the creditor may ask for
another guarantor.
It is a different matter if the guarantor dies.
Q: Can it be argued that given the personal
qualifications given by Art. 2057, the death of the
guarantor justifies the extinguishment of the guaranty?
A: No. Guaranty is not personal in nature. In the end,
guaranty involves an obligation to pay in case the debtor
is incapable of doing so. In Estate of Hemady v. Rizal
Insurance, the SC held that the death of the guarantor
does not extinguish the guaranty because: (1) it is not
one of the modes of extinguishing a guaranty; and (2)
guaranty is not personal in nature – it simply involves
an obligation to pay. It does not matter where the
money comes from.
ARTICLE 2058. The guarantor cannot be compelled
to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to
all the legal remedies against the debtor. (1830a)
• Embodies the benefit of excussion.
• Q: How does the guarantor invoke this benefit
of excussion?
A:
(1) the guarantor must set it up as a defense
against the principal creditor upon the
latter’s demand for payment; and
(2) point out to the creditor available property
of the debtor within PH territory sufficient
to cover the amount of the debt (Art. 2060).
• The benefit of excussion is a defense because it
is used to resist collection or demand.
• Conditions to avail of the benefit of
excussion:
1) None of the circumstances under Art.
2059 are present; and
Daverick Pacumio
UST Faculty of Civil Law
2) The conditions under Art. 2060 are
complied with.
• Q: Why does the law require that the properties
to be pointed out by the guarantor be within the
PH?
A: Because if the properties are outside, it would
be more difficult for the creditor to exhaust the
properties and would essentially defeat the
rights of the creditor. Moreover, the court must
be able to exercise jurisdiction over these
properties pointed out. If they are outside the
PH, our courts do not have jurisdiction over
them.
Benefit of Excussion
Q: What is the benefit of excussion?
A: It provides that the guarantor cannot be compelled
to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal
remedies against the debtor (Art. 2058).
Q: If the benefit of excussion is raised, what is the
creditor prevented from doing as against the guarantor?
A: The creditor is prevented from collecting from the
guarantor the principal obligation unless he has proven
he has exhausted the properties of the guarantor.
Q: If the guarantor is sued with the debtor and the
guarantor participated in the action, does the guarantor
waive the benefit of excussion?
A: No. The benefit of excussion shall not be impaired
even if judgement should be rendered against the
debtor and the guarantor in case of appearance by the
latter (Art. 2062).
The ideal set up under the law is for the creditor to first
sue the debtor because the liability of the guarantor is
subsidiary in character. However, the law requires that
notice be given to the guarantor about the filing of the
action against the debtor (see Art. 2062).
Q: What is the purpose of this notice? Is this to acquire
jurisdiction over the guarantor?
A: No. It is simply to notify the guarantor that the action
against the debtor was commenced. However, the
guarantor is not prohibited from participating. He may
voluntarily appear before the court if he chooses to do
so. The guarantor may wish to participate because there
may be defenses that he may set up which put an end to
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the guaranty, example: guaranty is not in writing, or not
expressly made.
Q: What if he receives notice and he sought legal advice
and his lawyer advised him that it is simply a notice and
it does not constitute summons, therefore, he may
choose to ignore it? Will there be a downside?
A: Wala naman. Mangyayari lang is the case will
progress against the debtor alone. In the end, the court
may simply adjudge the debtor liable for the debt. If the
writ is issued and returned unsatisfied, ngayon palang
pupunta si creditor kay guarantor. Guarantor may still
resist by requiring the creditor to prove the guaranty in
which case, the creditor has to relitigate to prove the
existence of the guaranty. So, ang downside is really
multiplicity of suits on the part of the creditor.
Purpose of excussion: To direct the creditor to the
properties of the debtor he may run after.
Instances when benefit of excussion is
inapplicable:
1. If the guarantor has expressly renounced it;
2. If he has bound himself solidarily with the
debtor;
3. In case of insolvency of the debtor;
4. When [the guarantor] has absconded, or cannot
be sued within the Philippines unless he has left
a manager or representative;
Q: Why is this an exception?
A: Because in case the guarantor left a
representative, there would be someone against
whom the creditor may run to in order to
enforce the guaranty.
5. If it may be presumed that an execution on the
property of the principal debtor would not
result in the satisfaction of the obligation (Art.
2059).
Note: In case of judicial bondsman, he is not
entitled to excussion. Moreover, if the subject of the
guaranty is unenforceable or a natural obligation
and the debtor had no participation in securing the
guaranty, the guarantor who knowingly extended
such guaranty can be considered in estoppel – he
may not invoke excussion because the principal
obligation is unenforceable or is natural.
Daverick Pacumio
UST Faculty of Civil Law
For the guarantor to invoke excussion, he has to show
that none of the instances in Art. 2059 are applicable. In
addition, he must comply with Art. 2060, i.e., he must
set it up against the creditor upon the latter's demand
for payment from him, and point out to the creditor
available property of the debtor within Philippine
territory, sufficient to cover the amount of the debt.
Q: Why should the properties be in the PH?
A: Because PH courts cannot acquire jurisdiction over
properties abroad. Moreover, it imposes additional cost
against the creditor which is contrary to the purpose of
a guaranty, i.e. for the benefit of the creditor in securing
the indebtedness.
Q: Does a sub-guarantor also enjoy the benefit of
excussion?
A: Yes. The guarantor of a guarantor shall enjoy the
benefit of excussion, both with respect to the guarantor
and to the principal debtor (Art. 2064).
Q: How is a sub-guarantor supposed to enjoy the benefit
of excussion?
A: The sub-guarantor may point out the properties of
the guarantor should the creditor go to the sub-
guarantor directly without having collected or
attempted to collect from the guarantor.
Benefit of Division
Q: When do we have benefit of division?
A: When we have co-guaranty.
Q: When do you have co-guaranty?
A: When there are two or more guarantors of the same
debtor and for the same debt (Art. 2073). This specific
definition is important because the debtor may have
multiple debts. Moreover, the debt may be divisible and
the co-guarantors secure only specific portions thereof,
i.e., obligation of 1 million, guarantor A guarantees
350,000 and guarantor B guarantees 650,000. There are
2 guarantees here but they are not co-guarantors
because they guaranty specific portions of the
obligation.
The benefit of division reiterates the rule that the
default liability of co-guarantors is joint.
Q: What does the benefit of division indicate?
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A: The guarantor is liable only for the portion of his
guaranty. Should there be several guarantors of only one
debtor and for the same debt, the obligation to answer
for the same is divided among all. The creditor cannot
claim from the guarantors except the shares which they
are respectively bound to pay, unless solidarity has been
expressly stipulated.
The benefit of division against the co-guarantors ceases
in the same cases and for the same reasons as the benefit
of excussion against the principal debtor (Art. 2065).
But nothing prevents co-guarantors from being
solidarily liable among themselves. Note: If they are
solidary with the debtor, they are co-sureties. But co-
suretyship does not mean they are solidarily liable
amongst themselves. They are only solidarily liable with
the debtor.
Q: When is the benefit of division inapplicable?13
A:
1. When the co-guarantors expressly renounce it;
2. When the co-guarantors bound themselves
solidarily;
3. In case of insolvency of the debtor;
4. When the co-guarantor has absconded, or
cannot be sued within the Philippines unless he
has left a manager or representative; and
5. If it may be presumed that an execution on the
property of the principal debtor would not
result in the satisfaction of the obligation.
Q: Supposing the guarantor has paid the creditor. What
happens?
A: The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
1) The total amount of the debt;
2) The legal interests thereon from the time the
payment was made known to the debtor, even
though it did not earn interest for the creditor;
3) The expenses incurred by the guarantor after
having notified the debtor that payment had
been demanded of him;
4) Damages, if they are due (Art. 2066).
13
This is just a rewording of Art. 2059 made applicable in case of
co-guaranty.
Daverick Pacumio
UST Faculty of Civil Law
Q: Is there any condition before the guarantor may ask
for reimbursement?
A: The guarantor must notify the debtor first before
making payment.
Q: Should he fail to give notice, does this defeat the
right of the guarantor to be reimbursed?
A: Not necessarily. However, it gives rise to the
following consequences: First, if the guarantor should
pay without notifying the debtor, the latter may enforce
against him all the defenses which he could have set up
against the creditor at the time the payment was made
(Art. 2068). Second, if the guarantor has paid without
notifying the debtor, and the latter not being aware of
the payment, repeats the payment, the former has no
remedy whatever against the debtor, but only against
the creditor.14 Nevertheless, in case of a gratuitous
guaranty, if the guarantor was prevented by a fortuitous
event from advising the debtor of the payment, and the
creditor becomes insolvent, the debtor shall reimburse
the guarantor for the amount paid (Art. 2070).
Q: Apart from notice, is there any other condition
before the guarantor may ask for reimbursement?
A: If the debt was for a period and the guarantor paid it
before it became due, he cannot demand
reimbursement of the debtor until the expiration of the
period unless the payment has been ratified by the
debtor (Art. 2069).
Q: Can we ask for the return of the money from the
creditor?
A: Yes because it is solutio indebiti.
Q: Aside from return, what other matter may be asked
by the guarantor from the creditor?
A: Fruits or interest.
Q: What constitutes the amount for reimbursement?
A: The indemnity comprises:
1) The total amount of the debt;
2) The legal interests thereon from the time the
payment was made known to the debtor, even
though it did not earn interest for the creditor;
3) The expenses incurred by the guarantor after
having notified the debtor that payment had
been demanded of him;
14
A case for solution indebiti because the guarantor is mistaken
in making payment.
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 NOTES IN CIVIL LAW REVIEW II
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4) Damages, if they are due (Art. 2066).
Q: May these provisions be modified by the parties?
A: Yes. In fact, parties usually do. This agreement is
called an indemnity agreement. They may want to
provide for other stipulations to govern the right of the
guarantor to recover from the debtor. In case of
indemnity agreement, the guarantor can ask for the
debtor to post a collateral.
Atty. S: Why would parties resort to this? Kasi, there
may be an instance where the collateral the debtor may
be able to secure is unsatisfactory to the creditor but
satisfactory to the guarantor. Example: debtor’s
supposed collateral is a land in Bukidnon. Pero si
creditor taga-Luzon. Sakto si guarantor taga-Bukidnon
din.
Total amount for the debt
Q: Is there a qualification to this?
A: Yes. If the guarantor has compromised with the
creditor, he cannot demand of the debtor more than
what he has really paid (Art. 2067, 2nd par.).
Q: Any other qualification?
A: If the guaranty is constituted without the debtor’s
consent or knowledge, the guarantor may only recover
insofar as the debtor has been benefitted.
Legal interests
Q: What kind of interest does the law refer to here?
Atty. S: The law is not clear. But from “even though it
did not earn interest for the creditor,” it may be
presumed that it is compensatory.
ARTICLE 2071. The guarantor, even before having
paid, may proceed against the principal debtor:
1) When he is sued for the payment;
2) In case of insolvency of the principal debtor;
3) When the debtor has bound himself to
relieve him from the guaranty within a
specified period, and this period has expired;
4) When the debt has become demandable, by
reason of the expiration of the period for
payment;
5) After the lapse of ten years, when the
principal obligation has no fixed period for
its maturity, unless it be of such nature that
Daverick Pacumio
UST Faculty of Civil Law
it cannot be extinguished except within a
period longer than ten years;
6) If there are reasonable grounds to fear that
the principal debtor intends to abscond;
7) If the principal debtor is in imminent danger
of becoming insolvent.
In all these cases, the action of the guarantor is to
obtain release from the guaranty, or to demand a
security that shall protect him from any
proceedings by the creditor and from the danger of
insolvency of the debtor.
• Q: What reliefs are given to the guarantor in
Art. 2071?
A:
a) Obtain release from the guaranty; or
b) Demand a security that shall protect
him from any proceedings by the
creditor and from the danger of
insolvency of the debtor.
Effects of Guaranty as between Co-Guarantors
When we have co-guarantors, their liability is joint and
not solidary. If this is the case, there is no right of
reimbursement from other co-guarantors kasi
consistent with joint liability, the paying co-guarantor
pays only his portion.
ARTICLE 2073. When there are two or more
guarantors of the same debtor and for the same
debt, the one among them who has paid may
demand of each of the others the share which is
proportionally owing from him.
If any of the guarantors should be insolvent, his
share shall be borne by the others, including the
payer, in the same proportion.
The provisions of this article shall not be applicable,
unless the payment has been made in virtue of a
judicial demand or unless the principal debtor is
insolvent.
• Art. 2073 provides for the right of the co-
guarantor who pays the whole amount to
demand reimbursement from the others. You
apply this if solidarity is stipulated upon.
• However, even if solidarity is not stipulated
upon: (a) if payment by one of co-guarantors
of the entire obligation is made on account
of a judicial demand; or (b) on account of
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 NOTES IN CIVIL LAW REVIEW II
Culled primarily from the lectures of Atty. Carla E. Santamaria-Seña

the fact that the principal debtor is • The PPSA’s full implementation is conditioned
insolvent. upon the issuance of its implementing rules and
• Moreover, in case of the default rule (joint regulations and the establishment of a new
liability), there is no mutual guaranty. registry (wherein security interests created under
However, under Art. 2073, there is mutual the PPSA may be registered).
guaranty, i.e., other co-guarantors are liable for • The implementing rules and regulations of the
the share of the insolvent co-guarantor. This is PPSA (“IRR”) were published last November 18,
another exception and applies only if we have 2019 and came into effect on December 3, 2019.
joint co-guarantors and one of them pays by However, the registry has not yet been established.
The Land Registration Authority was required to
virtue of judicial demand or because of the
establish the registry within six months from the
insolvency of the principal debtor.
publication of the PPSA Rules.
• The period from February 9, 2019 until the
Atty. S: Kung nagbayad yung co-guarantors under Art.
establishment of the registry by the LRA is deemed
2073, bakit sa co-guarantors sila mag-ask ng to be the Transition Period.
reimbursement? Hindi sa debtor? Does this mean the • Atty. S: The PPSA was enacted in order for loans
debtor is exemptd from reimbursing? The obligation to be more accessible for small and medium
here arises primarily on the part of the co-guarantors. business organizations and enterprises.
Kasi nga, may mutual guaranty. Second reason, • The PPSA creates a uniform set of rules for using
practicality kasi it is more likely that you could collect personal property as security.
from the co-guarantors rather than the principal debtor. • Perfection: Comes after the creation of the
One of the conditions for the applicability of Art. 2073 security agreement. This differs from the
is that the debtor be insolvent. traditional mode of perfection of contracts.
• The law also expanded what may be given as
ARTICLE 2074. In the case of the preceding article, collaterals.
the co-guarantors may set up against the one who o Even future property may be given by way
paid, the same defenses which would have pertained of collateral provided: the security
to the principal debtor against the creditor, and interest is not created unless the borrower
which are not purely personal to the debtor. acquires rights in it or the power to
encumber it.
Extinguishment of Guaranty • The PPSA allows pactum commissorium. The
creditor can simply retain the collateral as
ARTICLE 2079. An extension granted to the debtor payment for the secured obligation.
• Security Interest: Includes the right of a buyer of
by the creditor without the consent of the
accounts receivable, and the lessee of the goods for
guarantor extinguishes the guaranty. The mere
a period of less than one (1) year.
failure on the part of the creditor to demand
payment after the debt has become due does not of
Repealed under PPSA As clarified under the
itself constitute any extension of time referred to
IRR
herein. Arts. 2085-2123 (provisions Arts. 2085-2092 are
• Q: Why is this a mode of extinguishing the common to pledge and repealed but only insofar
guaranty? provisions on pledge as they are applicable to
A: Because it extends the guaranty – it becomes including prohibition movable property. (Atty.
more onerous for the guarantor. against pactum S: Pactum commissorium
commisorium) still exists insofar as real
THE PERSONAL PROPERTY SECURITY ACT estate mortgage is
concerned)
The PPSA Arts. 2127 (provision under Arts. 2127 is amended
• The Personal Property Security Act (“PPSA”) was REM on accession, insofar as it may be
enacted on August 17, 2018 and it took effect on improvements and fruits) inconsistent with the
February 9, 2019. PPSA

Daverick Pacumio
UST Faculty of Civil Law
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 NOTES IN CIVIL LAW REVIEW II
Culled primarily from the lectures of Atty. Carla E. Santamaria-Seña

Arts. 2140-2141 (Provision
on chattel mortgage)
Arts. 2241 (special
preferred credits with
respect to movables)
Arts. 2243 (recognition of
credits under 2241 and
2243 as liens)
Arts. 2246-2247
(provisions on preference
Repealed
Articles 2241, 2243, and
2246 – 2247 of Civil Code
of the Philippines, insofar
as the preferences created
by these provisions are
inconsistent with the
priority rights of the
secured creditor perfected
of credit with regard to pursuant to the PPSA and
movables) their Rules.
Chattel Mortgage Law PD Repealed.
1529 (specifically, Sections
114-116) on the registration
of chattel mortgages.

Daverick Pacumio
UST Faculty of Civil Law
Page 56 of 90
 NOTES IN CIVIL LAW REVIEW II
Culled primarily from the lectures of Atty. Carla E. Santamaria-Seña
Pledge v. Chattel Mortgage v. Security Agreement under the PPSA
Atty. S: Before we move on to the PPSA, let’s first go back to the security agreement we will be saying goodbye to, i.e., pledge
and chattel mortgage.
Pledge
Subject matter Movables susceptible of
possession include
incorporeal rights evidenced
by documents.
Ownership over the Pledgor must be the owner
subject matter
Extent of security Pledge extends to interests
and earnings of things
pledged in the absence of
contrary stipulation
Form of validity Perfected by delivery; no
need for registration
Binding effect on third Binding if the description of
person the thing pledged and the
date of the pledge are in a
public instrument.
Security for future A pledge may stand as
obligations security for future
advancements
Future property as Not allowed given the need
collateral for delivery
Prohibitions against Applies except under Arts
pactum commissorium 2112, 2118
Manner of disposition of Public sale only
the security
Right to recover None even if the contrary is
deficiency stipulated
Right to the surplus None unless it is otherwise
stipulated
Right of redemption None
Daverick Pacumio
UST Faculty of Civil Law
Chattel Mortgage
Personal property
Mortgagor must be the
owner
Mortgage only extends to
the property described in the
instrument
No need for delivery but
registration is required for
validity
Registration also binds third
persons.
A chattel mortgage cannot
secure future obligations
Not allowed
Applies
Public sale – private sale by
agreement of the parties
The creditor may recover
Exception: Recto Law
Mortgagor is entitled
None
Security Agreement under
the PPSA
All forms of tangible or
intangible asset or personal
property except ships and
aircrafts.
The grantor must have legal
right over the asset given as
security.
Security interest extends to
proceeds, commingled
assets, replacements,
products
Security must be in writing.
Registration is required for
perfection.
Binding if perfected. (Atty.
S: Perfection is not only by
way of registration under
PPSA)
Security Agreement may
secure future obligations
Allowed
Does not apply / Secured
Creditor is allowed to retain
the collateral
Public or private sale
The creditor may recover
unless otherwise agreed
The grantor is entitled
There is right of redemption
 NOTES IN CIVIL LAW REVIEW II
Culled primarily from the lectures of Atty. Carla E. Santamaria-Seña
Transition period
So, what happens to the pledges and chattel
mortgages that were created and had not been
terminated prior to the effectivity of the PPSA?
They may be considered as prior interest which remain
effective between the parties even if its creation did not
comply with the creation requirements of the PPSA and its
IRR. However, a security interest that is renewed or
extended by a security agreement or other
transaction made or entered into on or after the
effectivity of the PPSA is not deemed a prior interest.
CONTINUITY OF PERFECTION
A prior interest that was perfected under prior law
continues to be deemed perfected under the PPSA until
the earlier of: (a) the time the prior interest ceases to be
perfected under the prior law (for instance, if the thing
pledged is returned by the pledgee to the pledger) or (b)
the beginning of the full implementation of the PPSA.
(Section 8.03, IRR) So, if the PPSA is fully implemented
with the establishment of the Registry, the perfection
of the prior interest ceases unless the perfection
under the prior law satisfies the perfection
requirements of the PPSA.
What is the option of the secured creditor with a prior
interest?
He should comply with the Registration requirements of
the IRR before the perfection of his prior interest ceases
under Section 8.03. This way, the prior interest continues
to be perfected under the IRR from the time it was
perfected under the prior law. Furthermore, he can also
claim priority on the basis of the registration, if any, of the
prior interest under the prior law. So, if a chattel mortgage
was registered prior to the effectivity of the PPSA its
perfection is deemed to continue from the time of its
registration under the CML and its priority will be based
on the date of its registration under the CML. (In this case,
there may even be no need to register the Chattel Mortgage
anew during the transition Period considering that the
registration will also be in accordance with the CML
pending the establishment of the Registry.) [Section 8.08
in relation to Section 8.08(b)]
What good does it serve the secured creditor if its
prior interest is deemed to have never ceased to be
perfected from the time of its perfection under the
prior law?
Daverick Pacumio
UST Faculty of Civil Law
In this case, the priority of his prior interest as against the
rights of a competing claimant that likewise arose before
the effectivity of the PPSA will be determined under the
prior law.
How can the secured creditor with prior interest do
this?
This should not be a problem because a written agreement
between a grantor and a secured creditor creating a prior
interest is sufficient to constitute authorization by the
grantor of the registration of a notice covering assets
described in that agreement under the IRR.
Priority Among Prior Interest and Conflicting
Security Interest
General Rule: The priority of conflicting security interests
will be determined during the Transitional Period in
accordance with the provision of the PPSA.
Except that the priority of a prior interest as against
the rights of a competing claimant is determined by
the prior law if:
(i) The security interest and the rights of all competing
claimant arose before the effectivity of the PPSA; and
(ii) The priority status of these rights has not changed
since the effectivity of the PPSA.
The priority status of a prior interest has changed only if:
(i) It was perfected when the PPSA took effect, but ceased
to be perfected; or
(ii) It was not perfected under prior law when the PPSA
took effect and was only perfected under the PPSA.
Enforcement of Prior Interest
(a) If any step or action has been taken to enforce a prior
interest before the effectivity of the PPSA and these Rules,
and such prior interest falls within Section 8.02(b) (i.e.,
perfected not in accordance with the IRR), enforcements
may continue under the prior law or may proceed under
the PPSA and these Rules.
(b) Subject to subsection (a) of this Rule, prior law shall
apply to a matter that is the subject of proceedings
before a court before the effectivity of the PPSA.
What law governs security interests created during
the TP?
Creation of Security Interest. – All security interest
created during the Transitional Period are governed by the
PPSA.
How do we perfect security interests during the
Transition Period?
The perfection of all existing security interest created
during the Transitional Period shall be governed by the
PPSA. Provided, however, that during the Transitional
Period, registration of the security agreement with the LRA
shall be in accordance with Section 4 of Act No. 1508,
otherwise known as “The Chattel Mortgage Law”. The LRA
shall also determine a system of provisional registration of
such agreements during such Transitional Period.
Security Interest: A security interest is property right in
collateral that secured payment or other performance of an
obligation, regardless of: whether the parties have
denominated it as a security interest, and regardless of:
the type of asset, the status of the grantor or secured
creditor, or the nature of the secured obligation.
By definition in the law, a security interest includes the
right of a buyer of accounts receivable and a lessor of goods
under an operation lease for not less than one (1) year for
purposes of registration and priority only. (Secs. 3i and 3j,
PPSA)
How is a security interest created?
A security interest is created by:
(a) A security agreement or
The security agreement may provide for the creation of a
security interest in a future property, but the security
interest in that property is created only when the grantor
acquires rights in it or the power to encumber it.
(b) The lease of [goods] under an operating lease for
not less than one (1) year, or
(c) The sale of an account receivable, unless otherwise
stipulated by all the parties in the document of sale.
Form of security agreement
1. A security agreement must be contained in a
written contract signed by the parties.
“Writing” includes electronic records – it only
has to be in writing and signed by the parties.
Moreover, the agreement need not be contained in
a single document – it may be contained in a series
of writings.
2. It may consist of one or more writings that,
when taken together, establish the intent of
the parties to create a security interest.
3. The security agreement must identify the
secured obligation and the collateral. A
description of collateral shall be considered
sufficient, whether it is specific or general, if
it reasonably identifies the collateral. A
description such as “all personal property,”
“all equipment,” “all inventory,” or “all
personal property within a generic category”
of the grantor shall be sufficient.
4. The security agreement shall likewise provide
for the language to be used in agreements and
notices. The grantor shall be given the option
to have the agreement and notices in Filipino.
The Department of Finance (DOF) shall
prepare model agreements in plain English
and Filipino.
5. Where applicable, the security agreement or
control agreement must be under oath and
shall include the date and time of its
execution for purposes of determining the
date of perfection of the security interest.
• Note: Control agreement is not the same
as security agreement. You apply this in
relation to deposit accounts,
intermediated securities. It is supposed to
give instructions to the banking
institution with whom the deposits are
kept. Example: Si Mr. Dulay may deposits
sa Pacumio Bank. Binigay niya as
collateral kay Ms. Ramirez yung deposits
niya by way of control agreement. In the
control agreement, Pacumio Bank is
bound to comply with Ms. Ramirez’
instructions in the event Mr. Dulay
defaults in his payment.
• Requirement of date: Kasi there may be
several security interests for one asset. We
determine priority on the basis of the
date.
• Exception: In the aforementioned
example, let’s say wala si Ms. Ramirez. If
Mr. Dulay has an outstanding obligation
with Pacumio Bank and he gives his
account as collateral, there is no need
for a control agreement. it is enough
that there is a security agreement.
Who are the parties to a security agreement?
Secured creditor – a person that has a security interest.
For purposes of registration and priority only, it
includes a buyer of an account receivable and a lessor to
goods under an operating lease for not less than one (1)
year.
Grantor –
1. The person who grants a security interest in
collateral to secure its own obligation or that of
Page 59 of 90
 another person – note: there may be a third
person who may act as a grantor;
2. A buyer or other transferee of a collateral that
acquires its right subject to a security interest – the
security interest becomes a lien which follows the
property wherever it goes. It is akin to a third
person buying a mortgaged property. Exception:
A buyer in good faith who acquires the collateral
in the ordinary course of business would acquire it
free of the security interest if he did not know
about it. Exception to the exception: If the
security agreement is registered, in which case,
there would no longer be good faith on the part of
the buyer.
3. A transferor in an outright transfer of an
accounts receivable; or
4. A lessee of goods.
What may serve as collateral under the PPSA?
A security interest may be created over all forms of tangible
or intangible asset or personal property except ships and
aircrafts.
Tangible asset — means any tangible movable asset.
Except in Rules 3.07, 3.08, 4.09, and 6.05, this term
includes money, negotiable instruments, negotiable
documents and certificated non-intermediated securities
but only if the mere possession of such instruments results
in the ownership of the underlying rights or property
embodied by them in accordance with the laws governing
such instruments.
• As a general rule, money negotiable instruments,
etc. are tangible assets.
• Certificated non-intermediated securities: shares
of stock covered by a stock certificate without an
intermediary. Example: Pacumio Corp.,
stockholder si Mr. Dulay, issues a stock cert. in
favor of the latter. This stock cert. is an example
of a certificated non-intermediated security.
Intangible asset — means any movable property other
than a tangible asset including, but not limited to,
investment property, deposit accounts, commodity
contracts, and receivables.
• Commodity contracts: Shares of stock in the PSE
Tangible and Intangible Assets under the PPSA
(a) Rights arising from contracts, including but not limited
to:
1. Securities
2. Commodity contracts
15
Rule 3.08, Implementing Rules of the PPSA.
3. Lease of goods including financial leases and operating
leases for a period of not less than one (1) year
(b) Equipment
(c) Inventory
(d) Deposit accounts
(e) Negotiable instruments
(f) Negotiable documents of title
(g) Consumer goods
(h) Intellectual property
(i) Livestock
(j) Receivables
(k) Fixtures, accessions, and commingled goods, or
(l) Future property or after-acquired assets.
ANY TANGIBLE MOVABLE ASSET EXCLUDING SHIPS
AND AIRCRAFTS
A security interest in an account receivable shall be
effective notwithstanding any agreement between the
grantor and the account debtor or any secured creditor
limiting in any way the grantor’s right to create a security
interest: Provided, Nothing in this section affects the right
of a buyer to create a security interest over the account
receivable. Provided, further: that any release of
information is subject to agreements on confidentiality.15
A security interest must be perfected by taking any
one of the steps described below to make it effective
against third persons
REGISTRATION
(For all kinds of assets)
POSSESSION EITHER ACTUAL OR CONSTRUCTIVE
(For tangible assets)
EXCEPT debtor or grantor cannot take possession for the
creditor for purposes of perfecting or maintaining the
collateral
If you’re going to effect perfection thru possession, the
debtor cannot take possession on your behalf.
EXECUTION OF CONTROL AGREEMENT
(For intangible assets)
MERE EXECUTION OF THE SECURITY AGREEMENT
(No further acts required for deposit-taking institution
(DTI) or intermediary with security interest in deposit
account maintained with them)
CONTROL THROUGH NOTATION
(For non-intermediated electronic securities)
Page 60 of 90
Parang non-intermediated certificated securities but in faith. No good faith if the security interest was
this case, electronic securities lang. registered prior to acquiring the property.
Example: Nabili mo sa tindahan yung collateral.
Modes of perfection applicable to each specific You have no way of knowing if there is a security
collateral interest created. Your good faith will save you
from the application of the general rule above.
Registr Posses Contr Creati Cont Exception: if the security interest was registered.
aton sion ol on of rol
agree Securit thro Extensions of Security Interest
ment y ugh 1. Product – a security interest may be extended over raw
Agree notat materials but the security interest’s value is limited to the
ment ion value of the raw materials prior to its conversion into a
(In product. Example: security interest was created over raw
favor materials valued at P50,000. It was converted into a
of DTI product, naging P200,000. The security interest is only for
or P50,000 lang.
INT) 2. Proceeds
Tangible YES YES NO NO NO 3. Commingled Funds
Assets 4. Commingled Mass
(GR) 5. Accession
Intangibl YES NO YES NO NO 6. Replacement – not automatic. There must be a
e Assets stipulation extending the security interest to the
(GR) replacement.
Interme YES NO YES NO NO
diated Summary of Rules on Extension of Security Interest
Securitie
s PROCEEDS:
Deposit YES NO YES YES NO
Account The security interest shall extend to its identifiable or
s traceable proceeds and will be continuously perfected in
Non- YES NO YES NO YES the collateral act without need of any further act if the
intermed proceeds are in the form of money, accounts
iated receivable, negotiable instruments or deposit
electroni accounts. Otherwise, the security interest in the
c proceeds must be perfected as may be appropriate
securitie within 15 days from the time the grantor receives them
s (Example: if the proceeds are in the form of tangible
Interme YES NO YES NO NO property, you effect perfection thru possession. Example:
diated Collateral disposed of thru barter. The proceeds is tangible
Electroni asset. Thus, the security interest is perfected thru
c possession.)
Securitie
s COMMINGLED PROCEEDS:
If the proceeds are commingled with other funds or
Extent of security interest money, the security interest shall extend to the
commingled money or funds to the extent that the
GR: Security Interest continues notwithstanding sale, proceeds are traceable. The security interest in the
lease, or disposition of the collateral. Kaya the grantor in a commingled funds or money shall be limited to the
security agreement includes even the buyer or transferee amount of the proceeds immediately before they were
of the collateral. commingled.
XPNs:
1. As otherwise agreed upon by the parties; and ACCESSION:
2. Any party who obtains, in the ordinary course A perfected security interest in a movable property which
of business, any movable property containing has become a fixture, or has undergone accession or
a security interest shall take the same free of commingling shall continue provided the movable
such security interest provided he was in good property involved can still be reasonably traced.

Page 61 of 90
 secured creditor is 2. SI perfected obtaining
COMMINGLED MASS: the DTI or by the food or
A security interest in a tangible asset that is commingled Intermediary conclusion of a medicine for
in a mass extends to the mass but will be limited to the (Note: you cannot control the livestock
same proportion of the mass as the quantity of the compel DTI to agreement shall have
encumbered asset bore to the quantity of the entire mass execute a control 3. SI priority over
immediately after the commingling. Note: The tangible agreement because perfected by any other
asset here excludes money, negotiable instruments and it, in effect, would registration security
certificated non-intermediated securities. Bakit excluded make such DTI a interest in the
si money? Because it may happen na ma-devalue yung common creditor) Intermediated livestock,
money. For example, a P1,000 was commingled with P20 3. SI perfected in a Securities except for a
bills. Devalued yung P1,000 bill. deposit account or perfected
investment 1. SI perfected purchase
TANGIBLE ASSETS WITH RESPECT TO WHICH property by a by the money SI in
INTELLECTUAL PROPERTY IS USED. control agreement. conclusion of a the livestock if
A security interest in a tangible asset with respect to which Priority among control notice is given
intellectual property is used does not extend to the control agreement to the holder of
intellectual property and a security interest in the agreements is (Why is control the conflicting
intellectual property does not extend to the tangible asset. determined by agreement perfected SI in
their dates. needed in the same
Summary of Rules for Determining Priority 4. SI perfected by intrmediated livestock
registration. securities? before the
General Rule: Priority is determined based on the time Because it grantor
of registration of a notice or perfection by other would allow the receives
means, without regard to the order of creation of the creditor to possession of
security interests and liens, or to the mode of perfection manage your the food or
except as provided in Sections 6.02 to 6.05 of these portfolio or medicine.
Rules. securities).
• In PPSA, we have two (2) stages: (a) Creation; and 2. SI perfected
(b) Perfection, which includes registration. For by registration
example, a security interest is created in favor of
Mr. Pacumio prior to it being created in favor of By Operation of Law Purchase Money
Mr. Dulay. However, it was Mr. Dulay who was Security Interest16
first able to register the same. Priority is given to Priority and Right of A purchase money
Mr. Dulay. Retention. — A person security interest in
who provides services or equipment and its
Investment Electronic Tangible materials with respect to proceeds/consumer
Property/Deposit Securities Assets the goods, in the ordinary goods shall have priority
Accounts Embodied in course of business, and over a conflicting security
Instruments retains possession of the interest, if a notice
1. Right to set- off Non- 1. SI in a goods shall have priority relating to the purchase
in favor of DTI intermediated security over a perfected security money security interest
against Securities certificate/ interest in the goods until is registered within/not
grantor’s right to instrument or payment thereof. later than three (3)
funds in a deposit 1. SI perfected negotiable business days after the
account is by a notation of document Effect of Grantor's grantor receives
preferred over a the security perfected by Insolvency. — Subject to possession of the
security interest interests in the possession the applicable insolvency equipment/consumer
therein. books 2. SI perfected law, a security interest goods.
2. SI in a deposit maintained for by perfected prior to the
account with the purpose by registration commencement of A purchase money
regard to which or behalf of the 3. SI in insolvency proceedings security interest in
the issuer livestock for in respect of the grantor inventory, intellectual

16
Mukhang hindi naman daw itatanong sa Bar, per Atty.
S.
Page 62 of 90
 shall remain perfected property or livestock
and retain the priority it shall have priority over a
had before the conflicting perfected
commencement of the security interest in the
insolvency proceedings. same inventory,
intellectual property or
During insolvency livestock if:
proceedings, the (i) The purchase money
perfected security security interest is
interest shall constitute perfected by possession of
a lien over the the inventory/livestock, or
collateral. acquisition of rights to
intellectual property; and
(ii) Before the grantor
receives possession of the
inventory or livestock, or
acquires rights in
intellectual property, the
purchase money secured
creditor gives written
notification to the holder
of the conflicting
perfected security interest
in the same types of
inventory, livestock, or
intellectual
property.
Steps in the enforcement of the security interest
1. The debtor incurs in default.
2. The secured creditor effects repossession of the
collateral unless the security interest was perfected
through possession in which case, your creditor
would already be in possession of the collateral.
3. The repossession may be done without judicial
process if: (a) so stipulated in the security
agreement AND (b) the possession can be taken
without a breach of the peace.
4. If the collateral is a fixture, the secured creditor, if
it has priority over all owners and mortgagees,
may remove the fixture from the real property to
which it is affixed without judicial process. The
secured creditor shall exercise due care in
removing the fixture.
5. If, upon default, the secured creditor cannot take
possession of the collateral without breach of the
peace, he must apply with the courts for an order
granting him possession of the collateral. The
secured creditor must prove that a default has
occurred under the security agreement and that
the secured creditor has a right to take possession
of the collateral.
6. The secured creditor must give notice of the
intended disposition not later than ten (10) days
before the disposition. The requirement to send a
notification under this section shall not apply if
the collateral is perishable or threaten to decline
speedily in value or is of a type customarily sold on
a recognized market.
7. The proceeds of disposition shall be applied in the
following order:
(i) The reasonable expenses of taking, holding,
preparing for disposition, and disposing of the
collateral, including reasonable attorney’s fee and
legal expenses incurred by the secured creditor;
(ii) The satisfaction of the obligation secured by
the security interest of the enforcing secured
creditor; and
(iii) The satisfaction of obligations secured by any
subordinate security interest or lien in the
collateral if a written demand and proof of the
interest are received before distribution of the
proceeds is completed.
8. The secured creditor shall account to the grantor17
for any surplus, and, unless otherwise agreed, the
debtor is liable for any deficiency.
Enforcement of the security interest in special cases
As previously mentioned, after default, a secured creditor
may sell or otherwise dispose of the collateral, publicly or
privately, in its present condition or following any
commercially reasonable preparation or processing.
XPNs:
1. Recovery in special cases which applies in the following:
a. Security interest in an account receivable;
b. Security interest in a negotiable document
perfected by possession;
c. Security interest in a deposit account maintained
by the secured creditor (e.g., a secured interest in
a deposit account in favor of the deposit taking
institution);
d. Other cases of a security interest in a deposit
account perfected by a control agreement.
Atty. S: Why no need to foreclose? Because these security
interests have for their subject money. Alangan naman i-
foreclose mo yung money.
2. Retention by the Secured Creditor of the Collateral in
full or partial extinguishment of the obligation. After
default, the secured creditor may propose to the debtor
and grantor to take all or part of the collateral in total or

17
Law used the word “grantor” because the grantor is the
owner of the collateral.
Page 63 of 90
partial satisfaction of the secured obligation – this is
basically pactum commissorium. The PPSA basically
allowed pactum commissorium for personal property
securities.
Disposition of the Collateral18
1. In disposing of collateral, the secured creditor
shall act in a commercially reasonable
manner,19 i.e., in conformity with commercial
practices among dealers in that type of property.
Commercial reasonableness is not negated merely
because a better price could have been obtained
by disposition at a different time or by a different
method from the time and method selected by the
secured creditor.
2. Unless otherwise provided, notice must be given
not later than ten (10) days before disposition of
the collateral to the people given the right to
redeem. The notice must identify the grantor and
the secured creditor; describe the collateral; state
the method of intended disposition; and state the
time and place of a public disposition or the time
after which other disposition is to be made. Notice
shall be by registered mail, private courier,
electronically, or through any means where
receipt of the notice can be established by a
disinterested third party.
3. The collateral may be disposed of by public sale or
by extrajudicial means. If it is extrajudicial, the
secured creditor may select the method, manner,
time, place and other aspects of the sale or other
disposition, lease or license, including whether to
sell or otherwise dispose of, lease or license
encumbered assets individually, in groups or
altogether. The disposition must be in good faith
and must satisfy the commercial reasonableness
requirement. Judicial dispositions shall be
governed by rules promulgated by the Supreme
Court.
4. The winning bidder must fully pay the bid price at
the conclusion of the auction. Otherwise, the
collateral may be awarded to the next highest
bidder.
5. The secured creditor may buy the collateral at any
public disposition, or at a private disposition but
only if the collateral is of a kind that is customarily
sold on a recognized market or the subject of
widely distributed standard price quotations.
Recovery in special cases
18
Mukhang hindi naman daw itatanong or magfofocus sa
Bar dito, per Atty. S.
Upon default, the secured creditor may without judicial
process:
For ACCOUNTS RECEIVABLES, instruct the account
debtor of an accounts receivable to make payment to the
secured creditor, and apply such payment to the
satisfaction of the obligation secured by the security
interest after deducting the secured creditor's reasonable
collection expenses. On request of the account debtor, the
secured creditor shall provide evidence of its security
interest to the account debtor when it delivers the
instruction to the account debtor.
For NEGOTIABLE INSTRUMENT PERFECTED BY
POSSESSION, proceed as to the negotiable document or
goods covered by the negotiable document;
For DEPOSIT ACCOUNT MAINTAINED BY THE
SECURED CREDITOR (DTI), apply the balance of the
deposit account to the obligation secured by the deposit
account;
For OTHER CASES OF A SECURITY INTEREST IN A
DEPOSIT ACCOUNT PERFECTED BY A CONTROL
AGREEMENT, instruct the deposit-taking institution to
pay the balance of the deposit account to the secured
creditor's account by providing:
i. a copy of the security agreement that creates or provides
for a security interest; and
ii. the secured party's affidavit stating that a default has
occurred, and that the secured party is entitled to enforce
the security interest non-judicially.
Retention of the collateral (Pactum Commissorium)
(a) After default, the secured creditor may propose to the
debtor and grantor to take all or part of the collateral in
total or partial satisfaction of the secured obligation,
and shall send a proposal to:
1. The debtor and the grantor;
2. Any other secured creditor or lien holder who, five
(5) days before the proposal is sent to the debtor and the
grantor, perfected its security interest or lien by
registration; and
3. Any other person with an interest in the collateral
who has given a written notification to the secured creditor
before the proposal is sent to the debtor and the grantor.
(b) The secured creditor may retain the collateral in
the case of:
1. A proposal for the acquisition of the collateral
in full satisfaction of the secured obligation,
unless the secured creditor receives an
objection in writing from any person entitled
19
The standard observed in the disposition of collateral.
Page 64 of 90
 to receive such a proposal within twenty (20)
days after the proposal is sent to that person –
in case of proposal for full satisfaction, the
objection must be in writing in order for the
secured creditor to be barred from retaining the
collateral; or
2. A proposal for the acquisition of the collateral
in partial satisfaction of the secured
obligation, only if the secured creditor
receives the affirmative consent of each
addressee of the proposal in writing within
twenty (20) days after the proposal is sent to
that person – in case of proposal for partial
satisfaction, there must be affirmative consent in
order for the secured creditor to effect retention in
partial satisfaction.
(c) A proposal for the retention of the collateral is
sufficient if it includes:
1. A statement of the amount required at the time
the proposal is given to satisfy the secured
obligation, including interest and the reasonable
cost of enforcement, and the amount of the
secured obligation that is proposed to be satisfied;
2. A statement that the secured creditor proposes to
acquire the encumbered asset described in the
proposal in total or partial satisfaction of the
secured obligation;
3. A statement of the date after which the secured
creditor will acquire the encumbered asset.
Right of Redemption
WHO MAY REDEEM?
Any one of the following is entitled to redeem the collateral
by paying or otherwise performing the secured
obligation in full, including the reasonable cost of
enforcement.
(1) The grantor;
(2) Any other secured creditor or lien holder who, five
(5) days before the date notification is sent to the
grantor, held a security interest or lien in the
collateral that was perfected by registration; and
(3) Any other person from whom the secured creditor
received notification of a claim of an interest in the
collateral if the notification was received
before the secured creditor gave notification
of the proposed disposition to the grantor.
WHEN IS REDEMPTION UNAVAILABLE?
The right of redemption may be exercised, unless:
1. The person entitled to redeem has, after the
default, waived in writing the right to redeem;
2. The collateral is sold or otherwise disposed of,
acquired or collected by the secured creditor
or until the conclusion of an agreement by the
secured creditor for that purpose – the moment
the collateral is sold, disposed of, there can be no
redemption anymore. This means that this is not
really a right of redemption, but rather, an equity
of redemption; and
3. The secured creditor has retained the collateral.
WHEN SHOULD THE RIGHT OF REDEMPTION BE
EXERCISED?
Under the PPSA, the right of redemption will be
unavailable if:
The collateral is sold or otherwise disposed of, acquired or
collected by the secured creditor or until the conclusion of
an agreement by the secured creditor for that purpose.
Taking this in conjunction with –
SECTION 7.12. Right of Buyers and Other Third
Parties. —
1. If a secured creditor sells the collateral under
this Chapter, the buyer shall acquire the
grantor's right in the asset free of the rights of
any secured creditor or lien holder.
2. If a secured creditor leases or licenses the
collateral under this Chapter, the lessee or licensee
shall be entitled to the benefit of the lease or
license during its term.
3. If a secured creditor sells, leases or licenses the
collateral not in compliance with this Chapter, the
buyer, lessee or licensee of the collateral shall
acquire the rights or benefits described in
subsections (a) and (b) of this section: Provided,
that it had no knowledge of a violation of this
Chapter that materially prejudiced the rights of
the grantor or another person.
Real Estate Mortgage
Be mindful of the effects of the PPSA. The PPSA
repealed, probably unwittingly, provisions pertaining to
REM. However, this ‘oversight’ was tried to be rectified
in the IRR, by providing for qualifications in the repeal.
Q: What is a real estate mortgage?
A: It is a contract in which the debtor guarantees to the
creditor the fulfillment of a principal obligation,
subjecting for the faithful compliance therewith a real
property in case of non-fulfillment of said obligation at
the time stipulated.
Q: What may be the subject of a REM?
A:
1) Immovable properties; and
Page 65 of 90
 2) Alienable rights over immovables.
These real rights over real properties are also classified
as immovable properties.
Example of immovable property: Parcel of land;
Building over the parcel of land.
• The mortgage of the land also includes the
building, on the principle that the accessory
(building) follows the principal (land).
Exception: If there is a stipulation exempting
the accessory/accession from being covered by
the mortgage.
• Q: What if you wish to mortgage the building
only, on the assumption that the ownership of
the building is different from the ownership of
the land?
A: It is valid because a building, on its own, is likewise
an immovable property under the Civil Code, which
may be mortgaged.
• Therefore, in determining whether REM is
proper, you have to determine whether the
object of the mortgage is properly an
immovable under the provisions of the law.
Example of real right over immovable property: Right of
usufruct over real property.
• Q: What about easements? May easements be
mortgaged?
A: No. Easements are inseparable from the property on
which they are attached. It has no separate existence
from the dominant estate.
• Q: Are there conditions under which easements
may be mortgaged?
A: Yes, but the mortgage on the easement is only in
relation to the mortgage of the dominant estate because
the easement attaches on the dominant estate.
Q: What would be the consequence if REM is
constituted over personal property?
A: Generally, it renders the REM invalid. Nevertheless,
it is binding upon the parties because of estoppel, but it
cannot prejudice the interest of third persons. How is
this possible? Because the definition of immovable
under the Civil Code includes those which are generally
movable, but are immobilized by incorporation, i.e.,
paintings, sculptures, etc.
Q: When do we invoke estoppel? And when do we insist
on the invalidity of the REM?
Atty. S: Look who is assailing the contract. If the
contract of REM is being assailed by either of the parties,
you may properly use estoppel to uphold the validity of
the REM as between them because they both treat the
property as an immovable. If the contract of REM is
being assailed as invalid by a third person, you should
abide by the general rule, i.e., that REM over personal
property is invalid.
Q: What are the characteristics of mortgage?
A:
1) Real right
2) Accessory contract
3) Indivisible – a partial satisfaction of the
obligation does not entitle the mortgagor to
have the mortgage dissolved in part as well
unless several properties are given by way of
mortgage and each one secures only a
determinate portion of the obligation.
4) Real property
5) Limitation on ownership
o Q: How is it a limitation on ownership?
A: Because the mortgage creates a lien on the property,
which follows such property despite the change in
ownership thereof. The lien follows the ownership of
the property. The transferee of a property mortgaged
stands the risk of losing the property once it is
foreclosed.
o Q: Can there be a prohibition against a
subsequent mortgage?
A: Yes, provided there is a stipulation. In fact, this is
usual for banks. If you give registered lands as collateral,
the banks get the owners’ duplicate copies of title.
o What is the significance of a subsequent
mortgage? The rights of the original
mortgagee is preferred over the rights of
the second/subsequent mortgagee
because the subsequent mortgagee/s
acquire only the right of redemption.
6) There can be no prohibition on the disposition
of the mortgaged property by the mortgagor –
this extends even beyond foreclosure, provided
it is still within the period of redemption. You
might ask, why would you even buy a foreclosed
property? Because desperado na si mortgagor.
Usually, the property mortgaged would be sold
by the mortgagor for a lower price. Example: P10
million yung property, but it was foreclosed and
sold for P3 million. The mortgagor may look for
a third-person buyer to buy his property for P5
million.
Requisites for a valid mortgage:
1) Constituted to secure a principal obligation;
2) The mortgagor is the absolute owner of the
thing mortgaged;
3) The person constituting the mortgage has free
disposal of the thing mortgaged, or in the
Page 66 of 90
 absence thereof, that he be legally authorized to
make the mortgage;
4) The mortgage must be recorded in the Registry
of Property; and
o This requirement means that the
mortgage be embodied in a public
document because it cannot be
registered if it is not embodied in a
public document.
o Q: What is the purpose of registration?
A: To notify third persons that a lien in the form of a
mortgage exists over the real property subject of the
mortgage.
o While the law says that registration is a
requirement for validity, an
unregistered mortgage is still binding as
between the parties.
o Q: What would be the extent of this
validity? Would this be enough to
include the validity of the right of the
mortgagee to foreclose on the
mortgage?
A: Yes. Otherwise, it would render this rule invalid.
5) The mortgage must be constituted over real
property but a real estate mortgage over
personal property may be considered as valid
between the parties, unless it will be prejudicial
to the interest of third persons.
Kinds of Mortgage:
1) Conventional mortgage – the parties came to an
agreement to constitute a mortgage.
2) Legal mortgage – that which the law requires to
be constituted.
o Example: the credits enumerated under
Art. 2242 create legal mortgages.
o Q: How do we reconcile the creation of
legal mortgages under Art. 2242 with
the provisions of Art. 2125?
A: Art. 2242 creates a legal mortgage
over properties. And persons usually
wouldn’t know that this lien would be
existing. To address this situation, Art. 2125
commands that if a legal mortgage is
established by law in favor of the
mortgagee, the latter acquires no right
other than the right to demand the
execution and formalization of a document.
According to Senator Tolentino, “to have a
legal mortgage is to have, not the real
20
See Art. 1603, NCC.
encumbrance or charge on the properties of
the debtor whose obligation is secured by it
or the mortgage already constituted, but
solely the right to compel another to
execute the same.”
3) Equitable mortgage – sale with a right of
repurchase.20
Extent of mortgage: The mortgage extends to the
natural accessions, to the improvements, growing fruits,
and the rents or income not yet received when the
obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations,
amplifications and limitations established by law,
whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.21
• Sometimes, banks would even ask their debtors
to insure the property mortgaged and constitute
themselves (the banks) as the beneficiary.
Remedies available to the mortgagee:
1) Collection; or
2) Foreclosure
Note: These remedies are mutually exclusive in that
bringing an action to collect precludes the mortgagee
from foreclosing the mortgage.
Atty. S: Therefore, once the obligation becomes due,
you may want to opt to make an extrajudicial demand.
Because a judicial demand would preclude you from
foreclosing.
In relation to BP 22: Pero, in real life, minsan they
require their debtors to issue postdated checks. The
creditors are then provided with leverage, i.e., the threat
of bringing a criminal action for BP 22 against the
debtors. However, under the Rules on Criminal
Procedure, civil actions for BP 22 are instituted on the
criminal actions and cannot be prosecuted separately
from the latter. In cases for BP 22, the civil action is
always instituted in the criminal action.
• Q: Would this have an impact on the rights of
the creditor on the mortgage?
Atty. S: Yes because of the implied institution
of the civil action with the criminal action, once
the creditor files a criminal action for BP 22, it
precludes him from foreclosing on the
mortgage.
21
Art. 2127, NCC.
Page 67 of 90
 property and would entitle the purchaser to the
Foreclosure issuance of a writ of possession, as well as consolidation
of title to the property.
Judicial Foreclosure: Governed by Rule 68 of the Rules
of Court. Redemption price: Purchase price + 1% interest per
• Benefits: In case of deficiency, the mortgagee- month + assessments and taxes paid + 1% interest per
creditor may collect by simply filing a motion. month on the latter. Note: In case the mortgagee is a
bank, the redemption price is not limited to the
Extrajudicial Foreclosure: Can only be availed of only purchase price, but would be based on the mortgage
if there is a stipulation allowing for the same. contract, which is usually drafted by the bank.
• Atty. S: Ginagawa in practice, the mortgagors
Redemption file an action for judicial redemption and ask for
the fixing of the redemption price. An action for
Equity of Redemption v. Right of Redemption judicial redemption is deemed equivalent to a
tender of the redemption price. This tolls the
Equity of Redemption Right of Redemption running of the redemption period if it is
A right exercised prior to A right exercised after exercised in good faith.
the sale to do away with the option sale.
the need to sell the Growing crops, even though attached to the soil, are
properties. It is exercised personal property for purposes of the Chattel Mortgage
after the mortgagor Law. However, the latter has been repealed by the PPSA.
defaults but before the So, how do you treat growing crops? If you are to give
sale or the confirmation them as a collateral, what vehicle to do you use? PPSA
of the sale by the court. or REM?
It can only be exercised in It can only be exercised in Author’s submission: It is submitted that growing
judicial foreclosure extrajudicial foreclosure. crops are real properties under Art. 415 (2), NCC.
Except: If the mortgagee Therefore, if given as collaterals, they would have to be
is a bank or a lending made the subject of a contract of REM.
institution, in which
case, there is the right of Antichresis
redemption regardless of
whether the foreclosure By the contract of antichresis the creditor acquires the
is judicial/extrajudicial. right to receive the fruits of an immovable of his debtor,
Period of redemption: Period of redemption: with the obligation to apply them to the payment of the
90-120 days from service One (1) year from the interest, if owing, and thereafter to the principal of his
of court judgement, or registration of the credit.
even beyond, provided: certificate of sale. Until
it is before the the certificate of sale is Formal Contract: It is a formal instrument. The
confirmation of sale by registered, the one (1) amount of the principal and the interest must be
the court. year period does not specified in writing. Otherwise, the contract of
begin to run. Exception: antichresis is void. It is interesting kung ibabangga natin
If the mortgagee is a bank ‘to sa provisions of the law on interest because under the
or a lending institution Civil Code, it is enough that the parties specified that
and the mortgagor is a interest should be due, even without specifically
juridical person, the stipulating on the rate thereof.
period of redemption is
only three (3) months. Real Contract: Since the antichretic creditor is entitled
to receive the fruits, he has to acquire possession over
Q: If a mortgagor exercises his right of redemption, does the property. This makes antichresis different from REM
he recover his ownership over the mortgaged property? because in the former, there is transfer of possession.
A: No. The mortgagor did not lose ownership in the first
place. However, his failure to redeem puts an end to the Obligation of the Antichretic Creditor: In return, the
mortgagor’s ownership rights over the mortgaged antichretic creditor is obligated to preserve the property

Page 68 of 90
and pay the taxes and the necessary repairs for the
preservation of the property.
• Q: If the antichretic creditor gives up
possession, will this extinguish the antichresis?
A: No. It only extinguishes his obligation to pay the
taxes and the necessary repairs for the preservation of
the property. The essence of the antichresis is the right
to receive the fruits and to apply it to the interest and
thereafter to the principal of the loan. The antichretic
creditor need not have possession of the property in
order to do this.
Remedies of the Antichretic Creditor in case of
insufficiency of the fruits: If the fruits are insufficient
to pay off the entire obligation, the creditor does not
acquire ownership over the property, but acquires the
right to: (a) ask for the payment of the debt; or (b) ask
for the sale of the property.
themselves. Since sufficient naman, bayad buo.
There is an excess of P5 million. This P5 million
would be applied to ordinary preferred credits
under Art. 2244. Kung may matitira pa, saka
palang mababayaran si Aling Toyang. Pag wala
nang natira, wala na makukuhang bayad si Aling
Toyang.
Similarly, if property A is insufficient to pay all
special preferred credits, the deficiency will be re-
classified as ordinary preferred credits, if it would
fall under any of the instances under Art. 2244.
However, if it would not fall under the same, they
are re-classified as common credits.
2) Ordinary Preferred Credits
3) Common Credits
CLASSIFICATION OF CREDITS:

CONCURRENCE AND PREFERENCE OF CREDITS NB: The repeal of Arts. 2241 (special preferred credits with
respect to movables), 2243, and 2246-2247 was tempered by
the IRR of PPSA to be only to the extent that these provisions
When do we apply these rules?
are inconsistent with the priority rights of the secured
• If you have a debtor with two (2) or more creditors
creditor perfected pursuant to the PPSA.
and he cannot pay in full. Because if he can, we do
1. Special Preferred Credits under Articles 2241 and
not need to bother ourselves with these rules on
2242;
concurrence and preference of credits.
2. Ordinary Preferred Credits under Article 2244;
• There must be some kind of proceeding, where all
and
creditors are gathered to determine their rights
3. Common Credits under Article 2245.
and obligations in a binding manner, like
Settlement of Estate Proceedings, Insolvency
Article 2241. With reference to specific movable
Proceedings, and Liquidation of Property Regimes
property of the debtor, the following claims or liens
under the Marriage. In all of these, creditors are
shall be preferred:
required to be notified.
(1) Duties, taxes and fees due thereon to the State or
Ano yung pinaghahati-hatian? It can be patrimony
any subdivision thereof – enjoy absolute preference over
(totality of the rights, obligations, and properties of the
all special preferred credits. After satisfying, all other
debtor when alive), or estate (patrimony less the rights
credits are satisfied.
extinguished by death).
(2) Claims arising from misappropriation, breach of
Classification of Credits:
trust, or malfeasance by public officials committed in
1) Special preferred credits – special because the
the performance of their duties, on the movables,
property is somehow “reserved” for certain
money or securities obtained by them;
obligations. this is because the property should be
• For Arts. 2241, 2242, 2244, take note of the
applied first to these special preferred credits, to
quaifications in the provisions.
the exclusion of all others.
• Here, there is no requirement that the movables,
money, or securities be obtained by
Example: Pedro owns property A (worth P15
misappropriation, malfeasance, or nonfeasance.
million). May utang si Pedro kay Aling Toyang na
P500,000. Subject din si property A sa unpaid
(3) Claims for the unpaid price of movables sold, on
purchase price (P5 million), real estate mortgage
said movables, so long as they are in the possession of
(P3 million), at unpaid taxes (P2 million). Yung
the debtor, up to the value of the same; and if the
utang kay Aling Toyang, excluded pa. property A
movable has been resold by the debtor and the price is
should be applied first to the unpaid taxes. Next,
still unpaid, the lien may be enforced on the price; this
babayaran yung unpaid purchase price and the
right is not lost by the immobilization of the thing by
real estate mortgage. Walang preference among
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destination, provided it has not lost its form,
substance and identity; neither is the right lost by the
sale of the thing together with other property for a
lump sum, when the price thereof can be determined
proportionally;
• PPSA has a similar provision.
• This speaks of traceability or identifiability.
(4) Credits guaranteed with a pledge so long as the
things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the
things pledged or mortgaged, up to the value thereof;
• Under the PPSA, we no longer have pledge or
chattel mortgage. However, since the rules for
creating a security agreement is in any form, you
may have a security agreement which
approximates a pledge or chattel mortgage. Only,
these transactions are treated as ordinary security
agreements governed by the PPSA.
(5) Credits for the making, repair, safekeeping or
preservation of personal property, on the movable
thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods
manufactured or the work done;
• Relevant in relation to RA 6715 – law which
provides for absolute preference of laborers’
wages.
(7) For expenses of salvage, upon the goods salvaged;
• ‘Salvage’ means goods recovered from loss at sea.
(8) Credits between the landlord and the tenant,
arising from the contract of tenancy on shares, on the
share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried,
for the price of the contract and incidental expenses,
until their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished
to travelers by hotel keepers, on the movables
belonging to the guest as long as such movables are in
the hotel, but not for money loaned to the guests;
• Tied up with necessary deposits.
(11) Credits for seeds and expenses for cultivation and
harvest advanced to the debtor, upon the fruits
harvested;
(12) Credits for rent for one year, upon the personal
property of the lessee existing on the immovable
leased and on the fruits of the same, but not on money
or instruments of credit;
• In the PPSA, the term ‘secured creditor’ includes
contracts of lease for not less than one (1) year.
(13) Claims in favor of the depositor if the depositary
has wrongfully sold the thing deposited, upon the
price of the sale.
In the foregoing cases, if the movables to which the
lien or preference attaches have been wrongfully
taken, the creditor may demand them from any
possessor, within thirty days from the unlawful
seizure. (1922a)
• This last paragraph which gives the creditor the
power to demand the return of the movables is not
applicable if the debtor has already disposed of the
movable in favor of a third person. stated
otherwise, for this provision to apply, the movable
must still be in the possession of the debtor.
Article 2242. With reference to specific immovable
property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred, and
shall constitute an encumbrance on the immovable or
real right:
(1) Taxes due upon the land or building;
• Also enjoy absolute preference.
(2) For the unpaid price of real property sold, upon the
immovable sold;
(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and
contractors, engaged in the construction,
reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the
construction, reconstruction, or repair of buildings,
canals or other works, upon said buildings, canals or
other works;
Pars. 3 and 4: Whenever there is construction, the claims
of laborers and suppliers of materials enjoy preference or
lien on the construction itself. If the unpaid wages or
monetary claims do not fall under Art. 2241 (6), and 2242
(3 and 4), they enjoy absolute preference under RA 6715.
(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of
real property when the law authorizes
reimbursement, upon the immovable preserved or
improved;
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(7) Credits annotated in the Registry of Property, in
virtue of a judicial order, by attachments or
executions, upon the property affected, and only as to
later credits;
• Therefore, there is a hierarchy as to credits
annotated in the Registry, based on their dates.
(8) Claims of co-heirs for warranty in the partition of
an immovable among them, upon the real property
thus divided;
(9) Claims of donors or real property for pecuniary
charges or other conditions imposed upon the donee,
upon the immovable donated;
(10) Credits of insurers, upon the property insured, for
the insurance premium for two years. (1923a)
Article 2244. With reference to other property, real and
personal, of the debtor, the following claims or credits
shall be preferred in the order named:
Note: The workers’ money claims do not subject the
property of the employer to a lien. Ang nag-create lang ng
lien would be those falling under Ar. 2241 (6) and Art. 2242
(3). What is the effect of RA 6715? It is to place these money
claims to the top of the hierarchy. Kahit man walang
property upon which it is considered a lien, it is put on top
of Art. 2244.
(1) Proper funeral expenses for the debtor, or children
under his or her parental authority who have no
property of their own, when approved by the court;
(2) Credits for services rendered the insolvent by
employees, laborers, or household helpers for one year
preceding the commencement of the proceedings in
insolvency;
(3) Expenses during the last illness of the debtor or of
his or her spouse and children under his or her
parental authority, if they have no property of their
own;
(4) Compensation due the laborers or their dependents
under laws providing for indemnity for damages in
cases of labor accident, or illness resulting from the
nature of the employment;
(5) Credits and advancements made to the debtor for
support of himself or herself, and family, during the
last year preceding the insolvency;
(6) Support during the insolvency proceedings, and for
three months thereafter;
(7) Fines and civil indemnification arising from a
criminal offense;
(8) Legal expenses, and expenses incurred in the
administration of the insolvent's estate for the
common interest of the creditors, when properly
authorized and approved by the court;
(9) Taxes and assessments due the national
government, other than those mentioned in articles
2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province, other
than those referred to in articles 2241, No. 1, and 2242,
No. 1;
(11) Taxes and assessments due any city or
municipality, other than those indicated in articles
2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by
a quasi-delict;
(13) Gifts due to public and private institutions of
charity or beneficence;
(14) Credits which, without special privilege, appear in
(a) a public instrument; or (b) in a final judgment, if
they have been the subject of litigation. These credits
shall have preference among themselves in the order
of priority of the dates of the instruments and of the
judgments, respectively. (1924a)
Example:
Mortgage credit, claims of furnishers of materials were not
fully satisfied. If we are to re-classify them, we have to
examine Art. 2244 to see if either of them would fall under
ordinary preferred credits.
Par. 14 refers to credits which appear in a public
instrument. A mortgage must be registered, and thus, must
be in a public instrument. Therefore, the unpaid mortgage
credit may be classified as an ordinary preferred credit
under Art. 2244 (14) because it appears in a public
instrument.
How about the furnishers of the materials’ claims? They do
not. therefore, their claims would be treated as common
credits. So, between the mortgage credit and the claims,
mas mauuna bayaran ang mortgage credit before the
claims of the furnishers of the materials.
IMPORTANT THINGS TO REMEMBER:
• Preferred credits enjoy preference with respect to
specific movables or immovables EXCLUDE all
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 others to the extent of the value of the property to
which the preference refers.
• If there are two or more credits with respect to the
same specific property, they shall be satisfied pro
rata after the payment of the taxes and
assessments upon the property.
• The excess, if any, after the payment of preferred
credits shall be added to the free property which
the debtor may have for the payment of other
credits.
• Ordinary preferred credits must be satisfied ahead
of common credits and as among themselves, in
accordance with the hierarchy set in Art. 2244.
• The obligation of one bank to another arising from
electronic transactions made through networking
among banks, or linkages thereof with other
entities of networks and vice versa shall be
considered absolute and shall not be subjected to
the process of preference of credits [Sec. 16(2), E-
Commerce Act].
• Securities Market Participants (brokers, etc.) – for
purposes of investor protection, trade-related
claims are deemed to have absolute priority over
all other claims of whatever nature or kind, insofar
as trade-related assets are concerned. Trade-
related assets – assets used by SMPs in the
ordinary course of business.
• Articles 2241 and 2242 do not give the order of
preference or order of payment. They merely
enumerate the credits which enjoy preference
with respect to specific movable or immovable
properties. With respect to the same specific
movable or immovable, creditors, with the
exception of the State, merely concur. There is no
preference among them.
• The last paragraph of Art. 2241 applies only when
the right of ownership in such property continues
in the debtor, and therefore, it is not applicable to
cases where the debtor has parted with his
ownership therein, as where e has sold the
property.
• Articles 2241 and 2242 only find application when
there is concurrence of credits, i.e., when the same
specific property of the debtor is subjected to the
claims of several creditors and the value of such
property is insufficient to pay in full all the
creditors.
• Here, the question of preference would arise.
There will be a need to determine which of the
creditors will be paid ahead of others.
Fundamental tenets of due process will dictate
that this statutory lien should then only be
enforced in the context of some kind of
proceeding where the claims of all preferred
creditors may be bindingly adjudicated, such as
insolvency proceedings.
• In contrast with Articles 2241 and 2242, Article
2244 creates no liens on determinate property,
which follows such property. What Article 2244
creates are simply rights in favor of certain
creditors to have the cash and other assets of the
insolvent applied in certain sequence or order of
priority.
SALES
Almost everyone may enter into a contract of sale.
Among those prohibited from selling to each other would
be husband and wife.
Q: What is the exception to the rule that they cannot sell?
A:
1. When a separation of property was agreed upon in
the marriage settlements; or
2. When there has been a judicial separation or
property under Article 191.
Therefore, husband and wife cannot sell to one another if
they are governed by ACP or CPG.
Q: Why not?
A: To prevent the circumvention of the prohibition on
donation; and to prevent the spouses from defrauding the
creditors of the ACP/CPG.
Q: How will the prohibition protect these creditors?
A: In both ACP/CPG, there is a presumption that anything
acquired during the marriage is presumed to be ACP/CPG.
These properties answer for the charges against the
ACP/CPG. In CPG, it has to be shown that in addition to
absence or insufficiency, all the other obligations have
been satisfied already. So, mahihirapan ang creditors to
obtain payment because the properties are transformed.
These properties are cut off from the properties of the
debtor-spouse.
The prohibition extends to sales in legal redemption,
compromises, and renunciations. It also extends to
common-law spouses (Cruz v. CA).
Q: Who are the other people prohibited from selling to one
another?
A:
1. The guardian, the property of the person or
persons who may be under his guardianship;
2. Agents, the property whose administration or sale
may have been entrusted to them, unless the
consent of the principal has been given;
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 3. Executors and administrators, the property of
the estate under administration;
4. Public officers and employees, the property of
the State or of any subdivision thereof, or of any
government-owned or controlled corporation, or
institution, the administration of which has been
entrusted to them; this provision shall apply to
judges and government experts who, in any
manner whatsoever, take part in the sale;
5. Justices, judges, prosecuting attorneys, clerks
of superior and inferior courts, and other officers
and employees connected with the
administration of justice, the property and
rights in litigation or levied upon an execution
before the court within whose jurisdiction or
territory they exercise their respective functions;
this prohibition includes the act of acquiring by
assignment and shall apply to lawyers, with
respect to the property and rights which may be
the object of any litigation in which they may take
part by virtue of their profession.
6. Any others specially disqualified by law.22
For the first three (3), they may be “ratified” through the
execution of new contracts once the prohibition ceases to
be applicable. The prohibition extends to both in-person
transactions and those conducted through a conduit.
The SC has ruled that the scope of the prohibition does not
extend to the son of a lawyer who falls under the
prohibition, unless there is a showing that the son acts as
a conduit of the father. Therefore, relationship of father
and son will not make either a conduit of the other.
Subject Matter of Sale
Q: What may be the subject matter of a contract of sale?
A:
1. Existing or has possibility to come into existence;
2. Licit;
3. Determinate or determinable.
Q: May a generic thing be subject matter of a sale?
A: Yes, once the subject matter is delivered and accepted
by the creditor or the buyer. Once the creditor accepts it,
the thing which was previously a generic thing is now
segregated from others of the same kind kasi it has been
accepted. They came to an agreement that the thing is the
subject matter of the sale.
Q: May I sell something which I do not own yet?
22
Art. 1491, NCC.
A: Yes, provided that the ownership is acquired during the
delivery.
Emptio rei speratae: Sale of thing which is capable of
future existence.
Emptio spei: Sale of hope or expectancy. Example: Lotto
ticket.
Emptio rei: Sale of vain hope. This is void. Example: Sale
of a lotto ticket which is already drawn; Jueteng – pre-
determined na yung mananalo. Walang chance yung mga
tumataya.
Q: How do we distinguish a contract involving things to be
manufactured from a contract for a piece of work?
A: In a contract involving things to be manufactured, the
seller is engaged in the manufacture of the same in the
ordinary course of business. In a contract for a piece of
work, the seller is not ordinarily engaged in the
manufacture of the same.
Reason for distinction: Remedy. In contract for piece of
work, it is an obligation to do, which cannot be enforced
thru specific performance. If it is a contract of sale, it may
be enforced thru specific performance.
Q: What kind of contract is a contract of sale?
A: A consensual contract. It is perfected upon the meeting
of the minds between the parties.
Q: What should they agree on?
A:
1. Subject matter; and
2. Price
Q: What about the manner of payment? Must this be
agreed upon?
A: Not necessarily. Because for as long as the
characteristics of identity, integrity, and indivisibility of
payment is complied with, the payment is valid. It is only
when the parties agreed to depart from these
characteristics and did not provide for the manner of
partial payments where we can say that there is no
perfected contract of sale.
Stages in a Contract of Sale
1. Negotiation
2. Perfection
3. Performance or Consummation
Negotiation
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 • There may be transactions that exist which would
not readily mean that the parties would eventually
enter into a contract of sale.
• There is offer, counter-offer, and acceptance.
Q: What is an offer?
A: An invitation to enter into a contract of sale.
Q: What should be set forth in the offer?
A: Anything.
Q: If an offer is made to you, what can you do?
A: Accept absolutely – there is a perfected contract. Make
a counter-offer – there is a rejection of the offer.
Q: Should the acceptance be express?
A: No. It may be implied (see Art. 1320). For example:
Paying the purchase price.
Q: Is there an expiration date attaching to the offer?
A: An offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before
acceptance is conveyed (Art. 1324).
Perfection of a contract starts with offer. The acceptance of
the offer must be unqualified. If qualified, it constitutes a
counter-offer.
The offer may be comprised of a promise.
Option
Q: If a promise to sell is made, what kind of option does
this result into?
A: Option to sell. You are also giving an option to buy.
Q: If a promise to buy is made, what kind of option does
this result into?
A: Option to buy.
If the promise is accepted, we have an option. This gives
the offeree the right to buy or sell.
Q: If you made an promise to sell. Will this limit your rights
as an offeror?
A: Yes. You grant the right to the offeree to buy. The
consequence on your part will be limiting your right to
make an offer which consists of offering to sell only to the
offeree.
Q: How long does the option last?
A: It depends on the agreement. the offeree must, however,
wait until the period lapses.
Q: What will be the consequence of breach of this promise
to sell?
A: If what you have is an option without a separate
consideration, breach of such promise would make you
liable for damages under the provisions of the law on
human relations, i.e., Art. 19, NCC – the abuse of rights
principle, in conjunction with Art. 20 or 21. Note: In this
stage, the remedy for asking for damages presupposes that
there is abuse of right. This means hindi porket inalok niya
sa iba, there would automatically be liability under Art. 19.
It must come within the context of abuse of rights, i.e., it is
for the sole purpose of causing damage. The abuse of rights
in this case may be by making the offeree believe that the
property intended to be sold is his for the taking, and
which caused the latter to take up loans in order to buy the
property, and the offeror withdrew his promise just to
inconvenience or humiliate him.
Q: Why are we limited to the provisions on human
relations?
A: Because there is no contract yet. There is no contract to
enforce by way of damages. We are forced to sue under the
provisions on human relations because there is no contract
between the parties yet.
Q: What should happen in order for there to be a contract
between them?
A: There must be a separate consideration for the grant of
the option, in which case, it ripens into an option
contract.
Q: Would the presence of such consideration prevent the
offeror from breaking his promise?
A: No. But such breaking of the promise will make him
liable for damages, this time for breach of contract. Instead
of suing under the provisions of human relations, he will
bring his suit under the provisions of a contract.
If you have an option contract, you do not have to go thru
the problem of making it under the provisions of abuse of
rights. You only have to prove: (a) a contract; and (b) a
breach of such contract.
Q: What if it is a mutual promise to buy and to sell? Would
this amount to a contract of sale?
A: No.
Example of promise to buy and sell: A promises to buy a
dog for P5,000 on 24 June 2022 and B promises to sell the
dog on 24 June 2022 for such amount.
Q: What prevents it from becoming a contract of sale?
A: Because what was agreed upon was only a promise. They
did not agree to buy and sell. They only promised to sell
and to buy. This promise, however, may be mutually
enforced. The parties may be compelled to perform their
undertakings in this contract, but not by judicial action.
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Note: It is enough for a contract of sale to come into
existence if there is a meeting of the minds on the subject
matter and the price.
Q: If an option contract is breached because the offeror has
sold the subject matter of the option to someone else, is
specific performance available?
A: No. To enforce a promise to sell or to buy would be
enforcing an obligation to do, because you are basically
asking the parties to make good on their promise to sell or
to buy. You are compelling the other party to enter into a
contract of sale with you, which is violative of the
Constitutional prohibition against involuntary servitude.
The consideration supporting the option contract should
not amount to earnest money.
Q: Why?
A: Because in case the consideration is an earnest money,
it would indicate that there is a perfected contract of sale
and specific performance may lie. Not just perfected, but
also a partially performed contract of sale because there
has already been partial payment.
Earnest Money v. Option Money
Earnest Money Option Money
Forms part of the purchase Money given which is a
price distinct consideration for
an option contract
Given when there is a Applies to a sale which is
perfected contract of sale not yet perfected
Payor must pay the Optionee need not pay any
balance of the purchase balance. He merely forfeits
price the option money, except
if there is a stipulation
allowing him to recover,
wholly or partially, the
option money.
Right of First Refusal: A promise to sell at some future
time, conditioned on the eventual decision of the promisor
to, in fact, sell. However, at present, there is no intention
to sell yet.
Example: In a contract of lease, there was a provision
stating that in case the lessor decides to sell the property
leased, the lessee shall have the right to first buy it.
Q: If you would compare the right of first refusal to an
option contract, which of the two would be more
‘enforceable’?
A: The option contract. This is because damages may be
recovered in case of breach of an option contract. However,
the right of first refusal is enforceable only if embodied in
a contract. This is because there is not even an intent to
sell in a right of first refusal. In right of first refusal, what
we have is only the identity of the subject matter and the
promise to sell in the future. Mas may potential to come
into existence si option contract.
If the right of first refusal is breached, however, you can
only ask for damages under the provisions of human
relations. Parang option lang yan.
Equatorial v. Mayfair: The right of first refusal was made a
basis not only for specific performance or damages, but
also for accion pauliana to rescind the contract between
the lessor who granted the right of first refusal and the
third party-buyer, to whom the lessor sold the property.
Facts:
Mayfair Theater, Inc. was a lessee of portions of a building
owned by Carmelo & Bauermann, Inc. Their lease contracts
contained a provision granting Mayfair a right of first
refusal to purchase the subject properties. However, before
the contracts ended, the subject properties were sold by
Carmelo to Equatorial Realty Development, Inc. which
prompted Mayfair to file a case for the annulment of the
Deed of Absolute Sale between Carmelo and Equatorial,
specific performance, and damages.
Issue: W/N rescission is available?
Ruling: YES. In the instant case, the right of first
refusal is an integral part of the contracts of lease. The
consideration is built into the reciprocal obligations
of the parties. To rule that a contractual stipulation such
as that found in paragraph 8 of the contracts is governed
by Article 1324 on withdrawal of the offer or Article 1479 on
promise to buy and sell would render ineffectual or
"inutile" the provisions on right of first refusal so
commonly inserted in leases of real estate nowadays. The
Court of Appeals is correct in stating that Paragraph 8
was incorporated into the contracts of lease for the
benefit of Mayfair which wanted to be assured that it
shall be given the first crack or the first option to buy
the property at the price which Carmelo is willing to
accept. It is not also correct to say that there is no
consideration in an agreement of right of first refusal.
The stipulation is part and parcel of the entire
contract of lease. The consideration for the lease
includes the consideration for the right of first
refusal. Thus, Mayfair is in effect stating that it consents
to lease the premises and to pay the price agreed upon
provided the lessor also consents that, should it sell the
leased property, then, Mayfair shall be given the right to
match the offered purchase price and to buy the property
at that price.
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Atty. S: We have a contract of lease with a right of first
refusal, which is part of the provisions of the contract.
Therefore, there is a contract between the parties and there
is a consideration given for this right of first refusal, i.e., the
same consideration for the principal contract. The lease
contract was violated and under it, the lessee has this right.
Such violation is enough to justify the rescission of the
contract between the lessor and the third person.
• So, what do you do when confronted with this
issue? You only apply Equatorial if the facts are on
all fours with the facts of the case. otherwise, apply
the general rule, i.e., that only damages under
human relations may be available for breach of a
right of first refusal, not rescission.
Contract of Sale vs. Contract to Sell
Contract to Sell: A preparatory contract where the
ownership of the subject matter remains with the seller
pending the fulfillment of the suspensive condition,
usually the full payment of the purchase price.
Q: If there is non-payment of the purchase price, what
should the seller do to get out of the contract?
A: Nothing. The non-payment of the purchase price is a
non-fulfillment of the suspensive condition which would
have perfected the contract of sale.
Contract of Sale
Q: What is the effect of non-payment of purchase price in
a contract of sale?
A: It entitles the seller to enforce the contract of sale, i.e.,
rescission, specific performance, damages. Moreover, the
seller becomes an unpaid seller.
Q: Is rescission available in a contract to sell?
A: No. The non-fulfillment of the suspensive condition
prevents a contract from arising. There is, therefore, no
contract to rescind.
Example of a contract to sell: I am selling you this parcel of
land for P1 million payable in installments for 12 months,
and upon full payment of the purchase price, I would be
compelled to execute a deed of absolute sale.
Jurisprudence settles it that if there is a contract and the
seller executes a deed of sale once the purchase price has
been made, it is a contract to sell.
However, in contract to sell, if the purchase price is not
paid, the remedy is not rescission – it is simply to consider
the contract (the contract of sale) as never having arisen at
all. This is because in a contract to sell, the full payment of
the purchase price is the positive suspensive condition
which gives rise to a contract of sale.
For contract of sale, if the purchase price is not paid,
rescission is available because the parties are the reciprocal
debtors and creditors of one another. The non-payment of
the purchase price is a negative resolutory condition which
brings about the extinguishment of the contract of sale. By
extinguishment, it is presupposed that a contract of sale
really existed.
Atty. S: Be careful in appreciating the conditions in a
contract.
Contract to Sell: The condition affects the perfection of
the contract.
Conditional Contract of Sale: The condition affects the
performance of the contract.
• Example of conditional contract of sale: There is a
contract of sale. The property is a prime lot, but it
is occupied by squatters. If you are the one
negotiating the sale, the condition may be for the
seller to eject the squatters. The buyer undertakes
to pay only if the seller gets rid of the squatters in
his property. The seller is obligated that upon his
delivery of the property, the same is already free of
squatters.
• Q: What if the seller breached this obligation?
A: Where the obligation of either party to a
contract of sale is subject to any condition which
is not performed, such party may refuse to proceed
with the contract or he may waive performance of
the condition (Art. 1545).
Forms of Contract of Sale
There is no requirement for the observation of certain
forms for its validity, subject to the Statute of Frauds, viz:
1) Sale that by its terms cannot be performed within
one (1) year from the making thereof;
2) Sale of goods, chattels, or things in action for a
price not less than P500;
3) Sale of real property or of an interest therein.
Q: Oral contract of sale of a parcel of land. Status?
A: Valid but unenforceable. Thus, you cannot avail of Art.
1357 to compel the other party to observe the proper form.
However, if you the sale of a parcel of land is in a private
document, you have a valid and enforceable contract of
sale which allows you to compel the other party to have it
in a public document under Art. 1357.
Note: In case of sale of parcel of land by an agent, the
authority of the latter must be in writing. Otherwise, the
sale is void.
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Performance or Consummation Stage
Obligations of the Seller
1) Delivering the thing sold
2) Extend warranties to the sale
Q: What is the purpose of delivery?
A: To transfer possession and ownership of the thing sold
to the buyer.
Q: How is delivery effected?
A:
1. Actual – physically transferring possession of the
property to the buyer.
2. Constructive
a. Tradition through public instrument;
o You have to be mindful of the
execution of the contract of sale.
If one of them is embodied in a
public instrument, there is
already delivery of property to the
other party, whose contract is in
a public instrument.
o Q: When will it not ripen to
delivery?
A: When the contrary is
stipulated; or when the seller is
not in possession of the property.
b. Tradition symbolica – when, in lieu of
transferring physically the items subject
matter of the sale, the buyer is provided
the key to where the subject matter is
deposited. Example: Kaban kaban na sako
ng bigas, it will be more practical to give
the buyer the key to the warehouse;
c. Tradition brevi manu;
d. Tradition longa manu;
e. Tradition constitutum possessorium;
f. Quasi-tradition.
Delivery which does not vest ownership:
1. Delivery on sale or return – ownership transfers to
the buyer but not to use the property sold, but to
sell it to the public. Example: Consignment in
department stores. For you not to pay, you agree
to pay only those which you are able to sell. Yung
mga hindi mo naibenta, pwede mo ibalik.
2. Delivery on sale or approval – ownership transfers
only upon approval or the lapse of the period of
approval.
3. Delivery where seller reserves title or ownership –
Example: You paid via credit card. The seller
reserves ownership until payment has actually
been effected.
4. Delivery to courier – Example: Lazada or Shopee.
o Q: When do we consider the items as
actually delivered to the buyer?
A: Generally, delivery to the courier is
delivery to the buyer because the courier
is deemed the bailee of the buyer for
purposes of transportation. Exception:
There is an indication of intention to the
contrary. Sa Shopee, parang ganon kasi
pagka-deliver, the courier is required to
take a picture of you with the item/parcel.
It ma b intention to the contrary because
the seller is acknowledging its potential
liability for damages.
Note: If there is a bill of lading covering the goods
which states that it is deliverable to the
seller/agent or to the order of the seller/agent, the
title remains in the seller.
Article 1477. The ownership of the thing sold shall be
transferred to the vendee upon the actual or
constructive delivery thereof.
• Ownership is required only during delivery
because it is at that point that he is obliged to
transfer ownership and one cannot transfer
ownership of something which he does not have.
• Exceptions:
1. When the owner is, by his conduct, precluded
from denying the seller's authority to sell
(estoppel);
2. When the contrary is provided for in
recording laws;
o Example: Mr. Depano has property
registered in his name through a
forged deed of sale. Mr. Depano forged
Ms. Duran’s signature and was able to
convince the RD that there was
transfer in Mr. Depano’s name. Under
the Torrens System, persons relying on
Mr. Depano’s title would be protected.
A buyer in good faith and for value can
rely on what is written/not written in
the Torrens title. If Mr. Depano sells
the property to a buyer in good faith
and for value, the Torrens System
protects that person when ordinarily,
the third person should not acquire
any rights to the property as Mr.
Depano, in fact, did not acquire any
right over the property.
3. When the sale is made under the statutory
power of sale or under the order of a court of
competent jurisdiction – Because it is a forced
sale. This usually takes place in execution
sales. We are, therefore, relying on the court’s
authority.
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 4. When the sale is made in a merchant's store
in accordance with the code of commerce and
special laws – to protect the economy;23
o Q: How does this protect our
economy?
A: Because to hold otherwise would
essentially compel the buyers in
merchants stores or markets, or
instance, to check the ownership of the
properties the seller is selling. They
would constantly be put on guard. This
would not be conducive in a free
market. These merchant stores are
informal establishments. You would
not really have an assurance where
they got their wares. It is possible that
these merchants would not have title
over what they are selling. But you
would not want to stop people from
buying kasi kahit maliit silang
establishments, they complete the
framework of our economy.
Tumatakbo yung pera dun.
o Atty. S: The defense of relativity of
contracts or lack of privity to the
contract between the buyer and the
seller is a weak defense because the
rightful owner has a real right over his
property, which is enforceable against
you. So, you have to consider and raise,
as a defense, this exception.
5. Under Art. 1506, the sale by a seller who at the
time of delivery had voidable title to the thing
delivered.
o Because the title of the seller is valid
until it is set aside. Moreover, if the
buyer is in good faith, for value, and
without notice of the seller's defect of
title, he acquires title over such goods
without the defect.
o Q: What if the three (3) requisites are
not complied with or knew that the
seller’s title is defective?
A: The buyer ‘inherits’ the defect of
the seller’s title.
Double Sales
Rules on double sales
• Movable property: The person who first took
possession in good faith has title. In movable
properties, possession in the concept of an owner
is equivalent to title.
• Immovable property:
23
Art. 1505, NCC.
1. The person who first registered in good
faith;
2. The person who first acquires possession
in good faith; or
3. The person who has oldest title.
1. The person who first registered it in good faith
Q: When should good faith exist in order to allow the
rights of the first buyer to be defeated by the rights of the
second buyer?
A: At the time of registration, under the law. But
according to Atty. S: Good faith must exist both at the
time of acquisition and at the time of registration.
This is because if there is bad faith at the time of
acquisition, which may be before the registration, then the
registration is automatically in bad faith. However, there
may be an instance when even if you are in good faith at
the time of the perfection of the contract, you become in
bad faith before registration, i.e., nalaman ni second buyer
na may first buyer pala. This also tells us that the first buyer
has the power to end the good faith of the second buyer by
letting the second buyer know of the first sale before
registration. Kung ikaw si first buyer at nalaman mong may
second sale, you may opt to register, but you may just
check kung registered na yung second sale, at kung hindi
pa, ipakita mo lang kay second buyer na may deed of sale
in your favor as first buyer. This is sufficient to put the
second buyer in bad faith.
The rule is still first in time, first in right. Art. 1544
simply provides for exceptions. The first buyer, being the
first in time, has stronger title over the second buyer. It is
the second buyer who has to comply strictly with the
provisions of Art. 1544.
Elements of Double Sale:
1. The two (or more) sales transactions must
constitute valid sales
2. The two (or more) sales transactions must pertain
to exactly the same subject matter
3. The two (or more) buyers at odds over the rightful
ownership of the subject matter must each
represent conflicting interests
4. The two (or more) buyers at odds over the rightful
ownership of the subject matter must each have
bought from the very same seller
Res perit domino: The owner bears the risk.
ARTICLE 1504. Unless otherwise agreed, the goods
remain at the seller's risk until the ownership therein
is transferred to the buyer, but when the ownership
therein is transferred to the buyer the goods are at the
Page 78 of 90
buyer's risk whether actual delivery has been made or
not, except that:
1) Where delivery of the goods has been made to
the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership
in the goods has been retained by the seller
merely to secure performance by the buyer of
his obligations under the contract, the goods
are at the buyer's risk from the time of such
delivery;
2) Where actual delivery has been delayed
through the fault of either the buyer or seller
the goods are at the risk of the party in fault.
Q: What principle is embodied in Art. 1504?
A: Res perit domino. The basis for the assumption of risk
of loss is ownership.
Exceptions to res perit domino:
1. If the delivery is made to the buyer for the purpose of
transferring the risk even though the title still remains with
the seller – the purpose of retention of the title is to secure
performance of the obligation.
2. Where actual delivery has been delayed through the fault
of either the buyer or the seller, in which case, the risk will
be placed upon the party at fault, and there’s no justification
for such delay
Art. 1504 used the term goods, which refer to chattels. We
associate these with documents of title, or items which are
transacted using bills and documents.
However, we have Art. 1480, viz:
ARTICLE 1480. Any injury to or benefit from the thing
sold, after the contract has been perfected, from the
moment of the perfection of the contract to the time
of delivery, shall be governed by articles 1163 to 1165,
and 1262.
This rule shall apply to the sale of fungible things,
made independently and for a single price, or without
consideration of their weight, number, or measure.
Should fungible things be sold for a price fixed
according to weight, number, or measure, the risk
shall not be imputed to the vendee until they have
been weighed, counted, or measured and delivered,
unless the latter has incurred in delay.
• Speaks of fungible things.
• Art. 1262 refers to loss of determinate thing.
• In the last paragraph, we go back to res perit
domino because the last par. of Art. 1480 speaks of
delivery.
Article 1262. An obligation which consists in the
delivery of a determinate thing shall be extinguished
if it should be lost or destroyed without the fault of the
debtor, and before he has incurred in delay.
When by law or stipulation, the obligor is liable even
for fortuitous events, the loss of the thing does not
extinguish the obligation, and he shall be responsible
for damages. The same rule applies when the nature of
the obligation requires the assumption of risk.
• Applies to obligations to deliver determinate
things.
• Art. 1262 only speaks of the obligation to deliver as
being extinguished. It did not say that the entire
obligation is extinguished.
• Q: If the thing is lost without the fault of the seller,
would the buyer still be obligated to pay?
A: No. A contract of sale involves a reciprocal
obligation, where the performance by one is
dependent on the readiness of the other to comply
with what is due him. If the seller is no longer
ready to comply with his obligation, the buyer
should not be compelled to comply with his. This
is Senator Tolentino’s view.
However, Justice Paras is of a contrary view and
submits that the obligation of the seller to deliver
is extinguished, but the obligation [of the buyer]
to pay is not extinguished” as the necessary
consequence even when the underlying contract is
reciprocal because “this happens only when the
seller is able to deliver but does not. In such a case,
the buyer is not required to pay, for lack of
reciprocity. It is different if the law excuses the
seller, but not the buyer.” Buyer should pay even if
he does not receive the object lost through a
fortuitous event, since “there was a cause or
consideration, at the time the contract was
perfected, the thing purchased still existed.”
Warranties
Express warranty: any affirmation of fact or any promise
by the seller relating to the thing is an express warranty if
the natural tendency of such affirmation or promise is to
induce the buyer to purchase the same, and if the buyer
purchases the thing relying thereon.
Implied warranty: an affirmation inherent in the contract
of sale, and provided by law.
Q: May we have a contract of sale without certain implied
warranties?
A: Yes. Example: Sale of a second-hand car; Sale in an “as
is/where is” basis; Sale of products at a lower price. In these
Page 79 of 90
instances, the buyer should know that there are ‘defects’ in
the thing.
Kinds of Implied Warranties
1) Warranty Against Eviction
It is two (2)-tiered: (1) warranty that the seller had title
at the time when ownership is to pass; and (2) the buyer
is guaranteed to enjoy the legal and peaceful possession
from the time the thing is delivered.
(1) warranty as to title – the seller only has to have title
at the time he has to make delivery because this is the
moment he has to pass title. One cannot pass what one
does not have.
(2) warranty to let the buyer enjoy legal and peaceful
possession – the seller warrants that the buyer will not
be evicted.
Requisites for the Warranty Against Eviction:
(DFPC)
1. Purchaser has been Deprived of the whole or
part of the thing sold;
2. Eviction is by Final judgement;
3. Basis is a right Prior to the sale, or an act
imputable to the seller; and
Example: Art. 1551 – if the property is sold for
non-payment of taxes due, and not made
known to the buyer before the sale, there is
warranty for breach of warranty against
eviction. Pasok naman sa requisites of eviction.
4. Seller has been summoned and made a Co-
defendant in the suit for eviction at the
instance of the buyer.
Note: Eviction does not have to be total. It may be
partial.
Warranty against eviction may be enforced against a
judgement debtor. Let’s say a mortgage was foreclosed,
the purchaser at the auction sale will also be enjoying
this warranty against eviction.
Q: Does warranty against eviction apply to judicial
sales?
A: Yes, unless the order of the court states that the
vendor is exempt from warranty against eviction.
Q: When does eviction take place?
24
Art. 1549, NCC.
25
Id.
A: When there is a final judgement.
Q: The vendee was ran off the premises by a person
claiming to be the owner. May he sue for breach of
warranty against eviction?
A: No. It is not by final judgement. it is not a judicial
eviction. It is just physical eviction.
Q: When do we have a final judgement?
A: When there is a disposition of the case on the merits.
The vendee need not appeal from the decision in order
that the vendor may become liable for eviction.24
Q: What if the handling of the case was simply bad and
the matter could have been overturned had it been
appealed, would this be taken against the buyer?
A: No. The vendee is not required to appeal from the
decision in order to hold the vendor liable for eviction.25
However, the vendee should implead the vendor as his
co-defendant. Otherwise, this warranty is waived.26
Q: What happens once the seller is impleaded?
A: The seller defends his title over the property so as to
prevent eviction from even taking place.
Instances When Vendor is not liable for the
Warranty Against Eviction:
1. Adverse possession that was commenced
before the sale but was completed after the sale
(Art. 1550);
2. Express waiver on the part of the buyer (At.
1554) – Note: the vendor must be in good faith.
And even in case the seller is in good faith, the
effect is dependent upon the knowledge of the
buyer of the risks of waiving this warranty, viz:
Kinds of Waivers:
a. Consciente – if the waiver is made
without knowledge of the risk of
eviction and the assumption of the
consequences. It has been said that
consciente is not really a waiver. Why?
Because a waiver is a voluntary
relinquishment of a known right.
Here, the vendee has no knowledge
and cannot be said to have assumed
the risk of eviction. Therefore, if there
is consciente and eviction takes place,
the vendee shall pay the value the
thing sold had at the time of eviction.
b. Intencionada – if the waiver is made
with the knowledge of the risk of
26
Art. 1558, NCC.
Page 80 of 90
 eviction and the assumption of the
consequences.
3. The property is sold for nonpayment of taxes
due and the buyer knew of the risk attached to
the property with regard to the potential
foreclosure for nonpayment of taxes (Art. 1551);
and
4. If the judgement decreeing judicial sale
exempts the vendor from warranty against
eviction (Art. 1552).
Rights of the vendee in case of eviction
• Total eviction: Only indemnity as provided for
under Art. 1555
Art. 1555. When the warranty has been agreed
upon or nothing has been stipulated on this point,
in case eviction occurs, the vendee shall have the
right to demand of the vendor:
1. The return of the value which the thing
sold had at the time of the eviction, be it
greater or less than the price of the sale;
2. The income or fruits, if he has been
ordered to deliver them to the party who
won the suit against him;
3. The costs of the suit which caused the
eviction, and, in a proper case, those of
the suit brought against the vendor for the
warranty;
4. The expenses of the contract, if the
vendee has paid them;
5. The damages and interests, and
ornamental expenses, if the sale was made
in bad faith.
Q: How come for item no. 5, the law only made
mention of ornamental expenses?
A: Because in this instance, we would apply the
law on accession (builder in good faith). The
recovery of ornamental expenses is an exception
to the rule in builder in good faith because
ornamental expenses are not recoverable as a
matter of right – the law only gives a limited right
of removal. And it is only when the owner defeats
the right of removal of the builder in good faith,
would the law provide for reimbursement.
There can be no rescission because the buyer
evicted cannot retain what he has bought.
• Partial eviction: (a) If a part of the thing sold, but
the part lost is of such importance in relation to
the whole, that the vendee would not have bought
the property without said lost part; or (b) if two (2)
or more things are sold for a lump sum, and it
appears that the vendee would not have purchased
one without the other. The remedies of the buyer
are:
o Rescission
o Indemnity (Art. 1555).
Even in partial eviction, there must be a final
judgement.
Q: If there is no final judgement evicting the
buyer, what remedy does the buyer have? Let’s say
the purchase price is payable by installments.
A: ARTICLE 1590. Should the vendee be disturbed
in the possession or ownership of the thing
acquired, or should he have reasonable grounds to
fear such disturbance, by a vindicatory action or a
foreclosure of mortgage, he may suspend the
payment of the price until the vendor has caused
the disturbance or danger to cease, unless the
latter gives security for the return of the price in a
proper case, or it has been stipulated that,
notwithstanding any such contingency, the
vendee shall be bound to make the payment. A
mere act of trespass shall not authorize the
suspension of the payment of the price.
Therefore, the option to suspend payment is
available. If the disturbance, however, does not
amount to a court action, as in mere trespass, Art.
1590 is inapplicable.
Q: Why not?
A: Because warranty against eviction does not
apply in case of mere trespass. Therefore, Art. 1590
contemplates a threat of court or judicial action,
e.g., threat of foreclosure of mortgage. Moreover,
as owner, you have to defend your title in case of
trespass under the Doctrine of Self-Help.
Q: There is an accion reivindicatoria vs. the
vendee, the latter filed a MTD after including the
vendor as co-defendant. The MTD was denied.
Such denial became final. Is this sufficient
compliance for the warranty against eviction to
attach?
A: No. Denial of the MTD is simply an
interlocutory order. It is not the final judgement
contemplated by law. There is still something
more to be done.
2) Warranty Against Hidden Defects
Requisites of Hidden Defects
1. Defect must be hidden
2. Defect must exist at the time the sale was made
3. Defect must ordinarily have been excluded
from the contract
Page 81 of 90
 4. Defect, must be important (render the thing
unfit for the use for which it was intended or
considerably decreases fitness)
5. Action must be instituted within the statute of
limitations
6. Reasonable notice to the seller
3) Warranty Against Non-Apparent Servitudes - If the
immovable sold should be encumbered with any non-
apparent burden or servitude, not mentioned in the
agreement, of such a nature that it must be presumed
that the vendee would not have acquired it had he been
aware thereof, he may ask for the rescission of the
contract, unless he should prefer the appropriate
27
indemnity.
Exception: If the servitude is registered, because
registration is constructive notice.
Exception to the exception: If there is an express
warranty that the thing is free from all burdens and
encumbrances.
Example of non-apparent servitude: Easement of lateral
and subjacent support; Right of way which is
intermittent, i.e., walang visible path, kapag
natatabunan na ng talahib yung supposed right of way.
Remedies in breach of warranty against non-
apparent servitude:
1. Rescission – within one (1) year from execution
of contract of sale
2. Indemnity – within one (1) year from execution
of contract of sale
Note: (1) and (2) may be enforced within one (1)
year from the execution of the deed of sale.
However, after one (1) year, only damages may be
asked for.
3. Damages – after one (1) year from the execution
of the contract of sale; one (1) year from the
discovery of the servitude or burden.
Q: Would it be possible to bring an action for
damages on this warranty after four (4) years
from execution of the deed of sale?
A: Yes, if the servitude was discovered on the
third year after the sale.
4) Warranty of Fitness and Merchantability (Art. 1562)
Fitness: There is a particular purpose for which the
thing is to be used
27
Art. 1560, NCC.
Merchantable quality: There is fitness for a general
purpose.
ARTICLE 1565. In the case of a contract of sale by
sample, if the seller is a dealer in goods of that kind,
there is an implied warranty that the goods shall be free
from any defect rendering them unmerchantable which
would not be apparent on reasonable examination of
the sample
• Another instance of warranty of merchantability.
Remedies in breach of warranty of fitness and
merchantability:
1. Withdraw from the contract; and
2. Demand a proportionate reduction of the
price
Note: With damages in either case.
Prescription: 6 months from delivery of the thing sold.
Note: A stipulation waiving this liability is valid if the
vendor is in good faith, i.e., that he did not know of
the hidden defects.
Q: What if the thing suffering from hidden defects is
lost? (see Arts. 1568 and 1569)
A:
• If the loss is by reason of the hidden defect:
o And the vendor was aware: the vendor
bears the loss and shall return the price
and refund the expenses of the contract.
o And the vendor was not aware: the
vendor must return the price with interest
and reimburse the expenses.
o Difference, per Atty. S: The ‘loss’ is more
broad. It may be more than the price.
• Loss of thing with hidden defects in case of
fortuitous event:
o Seller is in good faith: Price paid less the
value of the thing when lost.
o Seller is in bad faith: Same + damages.
Animals
The warranty against hidden defect is inapplicable in
case of sale of animals which are condemned.
• Example: The animal is dying, but his sickness
is not contagious.
The sale of animals suffering from contagious diseases
is void.
Redhibitory defect: A defect which cannot be
detected, even through professional inspection.
Page 82 of 90

Remedy: Rescission and proportionate reduction,
which must be exercised within 40 days form delivery.
However, if the veterinarian relied upon was unable to
detect the defect thru negligence or incompetence, the
veterinarian is likewise liable.
Q: Are there persons who are not liable under these
warranties?
A: Yes. These article shall render liable a sheriff,
auctioneer, mortgagee, pledgee, or other person professing
to sell by virtue of authority in fact or law, for the sale of a
thing in which a third person has a legal or equitable
interest.
Obligations of the buyer:
1) Payment - at the time, place and manner
stipulated in the contract.
Q: When is interest on the purchase price
required?
A: Art. 1589. The vendee shall owe interest for the
period between the delivery of the thing and the
payment of the price, in the following three cases:
1) Should it have been so stipulated;
2) Should the thing sold and delivered
produce fruits or income;
3) Should he be in default, from the time of
judicial or extrajudicial demand for the
payment of the price.
2) Acceptance – the buyer must be afforded time to
examine the thing delivered to him. It is only after
examination, that there can be acceptance.
If the vendee makes it necessary for the vendor to
deliver via courier, and the terms of the delivery is via
COD, the right to examine may not be exercised until
the purchase price has been paid.
Q: When is the buyer deemed to have accepted the
goods?
A: ARTICLE 1585. The buyer is deemed to have accepted
the goods when he intimates to the seller that he has
accepted them, or when the goods have been delivered
to him, and he does any act in relation to them which
is inconsistent with the ownership of the seller, or
when, after the lapse of a reasonable time, he retains
the goods without intimating to the seller that he has
rejected them.
Art. 1586. In the absence of express or implied
agreement of the parties, acceptance of the goods
by the buyer shall not discharge the seller from
liability in damages or other legal remedy for
breach of any promise or warranty in the contract
of sale. But, if, after acceptance of the goods, the
buyer fails to give notice to the seller of the breach
in any promise of warranty within a reasonable
time after the buyer knows, or ought to know of
such breach, the seller shall not be liable therefor.
Art. 1587. Unless otherwise agreed, where goods are
delivered to the buyer, and he refuses to accept
them, having the right so to do, he is not bound to
return them to the seller, but it is sufficient if he
notifies the seller that he refuses to accept them. If
he voluntarily constitutes himself a depositary
thereof, he shall be liable as such.
Q: What if the buyer has cause to reject the goods, e.g.,
hidden defects? Should the buyer return it?
A: No. It is enough for the buyer to notify the seller that
he is refusing acceptance. It is incumbent, then, on the
seller to retrieve the goods from the buyer.
Q: What if the buyer constitutes himself as depositary,
would this be wise?
A: No. He takes it upon himself to be subjected to the
obligations of a depositary, e.g., the obligation to
preserve the thing and return it intact.
Remedies of a Seller in case of Fear that the Purchase
Price is Not Paid or in case such Purchase Price is Not
Paid
ARTICLE 1591. Should the vendor have reasonable
grounds to fear the loss of immovable property sold
and its price, he may immediately sue for the
rescission of the sale.
Should such ground not exist, the provisions of article
1191 shall be observed. (1503)
Q: When will this happen?
A: Example, si seller nadeliver niya na kay buyer, na-
rehistro na ni buyer and the seller has reasonable grounds
to belief that he might be defrauded by the buyer who may
sell the property to a buyer in good faith. The seller stands
to lose both the property and the purchase price.
Q: What if the reasonable belief pertains only to non-
payment of purchase price?
A: The seller may rescind under Art. 1191.
ARTICLE 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure
to pay the price at the time agreed upon the rescission
of the contract shall of right take place, the vendee
may pay, even after the expiration of the period, as
long as no demand for rescission of the contract has
been made upon him either judicially or by a notarial
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act. After the demand, the court may not grant him a
new term. (1504a)
Important points for Art. 1592: First. Under Art. 1592, in
case of rescission of sale of immovables, it must be thru (1)
judicial; or (2) notarial act. Second, until rescission is
effected in such manner, the buyer may continue to pay
until after the expiration of the period. This is a shortcut to
Art. 1191 because in Art. 1191, pwede ma-deny pa yung
action ni seller for rescission. Dito sa Art. 1592, so long as
the contract of sale involves immovable property, the
vendee may continue paying even after the expiration of
the period for him to pay.
Remedies in case of Breach of Contract of Sale
ARTICLE 1599. Where there is a breach of warranty by
the seller, the buyer may, at his election:
(1) Accept or keep the goods and set up against the
seller, the breach of warranty by way of recoupment in
diminution or extinction of the price;
(2) Accept or keep the goods and maintain an action
against the seller for damages for the breach of
warranty;
(3) Refuse to accept the goods, and maintain an action
against the seller for damages for the breach of
warranty;
(4) Rescind the contract of sale and refuse to receive
the goods or if the goods have already been received,
return them or offer to return them to the seller and
recover the price or any part thereof which has been
paid.
When the buyer has claimed and been granted a
remedy in anyone of these ways, no other remedy can
thereafter be granted, without prejudice to the
provisions of the second paragraph of article 1911.
Where the goods have been delivered to the buyer, he
cannot rescind the sale if he knew of the breach of
warranty when he accepted the goods without protest,
or if he fails to notify the seller within a reasonable
time of the election to rescind, or if he fails to return
or to offer to return the goods to the seller in
substantially as good condition as they were in at the
time the ownership was transferred to the buyer. But
if deterioration or injury of the goods is due to the
breach or warranty, such deterioration or injury shall
not prevent the buyer from returning or offering to
return the goods to the seller and rescinding the sale.
Where the buyer is entitled to rescind the sale and
elects to do so, he shall cease to be liable for the price
upon returning or offering to return the goods. If the
price or any part thereof has already been paid, the
seller shall be liable to repay so much thereof as has
been paid, concurrently with the return of the goods,
or immediately after an offer to return the goods in
exchange for repayment of the price.
Where the buyer is entitled to rescind the sale and
elects to do so, if the seller refuses to accept an offer of
the buyer to return the goods, the buyer shall
thereafter be deemed to hold the goods as bailee for
the seller, but subject to a lien to secure the payment
of any portion of the price which has been paid, and
with the remedies for the enforcement of such lien
allowed to an unpaid seller by article 1526.
(5) In the case of breach of warranty of quality, such
loss, in the absence of special circumstances showing
proximate damage of a greater amount, is the
difference between the value of the goods at the time
of delivery to the buyer and the value they would have
had if they had answered to the warranty.
Q: Why would the buyer want to keep the goods?
A: Because the seller would want to save himself from
expenses.
With regard to no. (4), we are talking about partial
rescission or breach of warranty against hidden defects.
Q: What is the consequence of the buyer opting to rescind?
A:
• If he has not paid the purchase price: the buyer is
no longer liable for the purchase price. He may
return or offer to return the thing.
• If he has paid the purchase price: the seller must
repay the purchase price concurrently with the
return of the thing or immediately after the offer
to return the goods have been made.
• If the seller refuses to accept the goods: the buyer
may retain the goods as a bailee for the seller.
Since the buyer is asking for repayment, he has the
rights of an unpaid seller.
With regard to no. (5), the seller may ask for damages.
• Measure of damages: the difference between the
value of the goods at the time of delivery to the
buyer and the value they would have had if they
had answered to the warranty. This means the
difference between the value of the goods at the
time of delivery and the value of the goods had
there been no breach of warranty as to quality.
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Example: You bought a TV which is defective. The
purchase price is P60,000 but because of the breach of
warranty as to quality, it is worth only P5,000. The
damages recoverable = P55,000.
Recto Law
ARTICLE 1484. In a contract of sale of personal
property the price of which is payable in installments,
the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the
vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay
cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if
one has been constituted, should the vendee's failure
to pay cover two or more installments. In this case, he
shall have no further action against the purchaser to
recover any unpaid balance of the price. Any
agreement to the contrary shall be void.
Q: To what contracts does the Recto Law apply?
A:
a) Sale of movable property on installments;
b) Contracts purporting to be leases of personal
property with option to buy (Art. 1485) – ratio:
because contract of lease with option to buy
approximates a contract of sale of movables on
installments.
Q: What is a sale by installments?
A: A sale which involves at least three (3) or more
payments, per jurisprudence.
Remedies under the Recto Law:
a) Exact fulfillment
b) Cancellation of the sale – if there are 2 or more
installments unpaid
c) Foreclosure of chattel mortgage – if there are 2 or
more installments unpaid and a chattel mortgage
is one has been constituted. Note: This departs
from the rule on mortgages because here, the
secured creditor may not recover deficiency.
Q: What if after one failed installment, you filed a
complaint na for specific performance and then there are
subsequent installments unpaid?
A: Amend your complaint.
Q: What if the buyer manifested his inability to make
subsequent payments?
A: You may now enforce the payment of the entire
obligation.
Q: What is the consequence of cancelling the sale?
A: Mutual restitution.
Q: Will there be an exception to this rule?
A: Yes. In case there is a stipulation that the installments
or rents paid shall not be returned to the vendee or lessee
shall be valid insofar as the same may not be
unconscionable under the circumstances (Art. 1486).
Q: What could be the rationale for forfeiture?
A: The installments received by the vendor are considered
as reasonable rentals for the use by the vendee of the goods
sold.
Q: Why is deficiency not recoverable in case of foreclosure
of chattel mortgage under the Recto Law?
A: Because normally, a property sold during an auction sale
is usually sold for a low price. It would be unfair for the
buyer na nawalan na nga siya ng property, tapos
magbabayad pa sila ng utang. This is to prevent this
situation.
Q: What remedy is most favorable under the Recto Law?
A: Specific performance. This is because it allows the
unpaid seller to recover the entire unpaid purchase price
without any limitation. As opposed to cancellation,
mawawalan pa si seller – ibabalik na niya yung binayad
sakanya and then baka nag-depreciate pa yung personal
property in the hands of the buyer. Personal property
depreciates easily, as opposed to real property which
appreciates. More so in foreclosure, where the seller is not
allowed to recover deficiency.
Q: When do we say that the other remedies have been let
go?
A: Judicial demand – when you file an action in court for
specific performance, you are foregoing the foreclosure of
the mortgage.
Q: If the sale by installment is covered by a check, and the
check bounced, what is the effect of the filing of a criminal
case for a bouncing checks law on the other remedies?
A: The seller is deemed to have elected specific
performance because the civil action arising from a
criminal action under BP 22 cannot be instituted
separately.
Maceda Law
Republic Act 6552, entitled the “Realty Installment Buyer
Protection Act” (also the “Maceda Law”), provides for
certain protection to particular buyers of real estate
payable on installments. The law declares as “public policy
to protect buyers of real estate on installment payments
against onerous and oppressive conditions.
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Q: What kind of immovable properties are subject of the
Maceda Law?
A: Residential properties.
Purpose: To protect the buyer who cannot afford to
purchase real property on cash and installment basis.
a. If buyer has paid at least 2 years of installments
then defaults:
• Buyer has right to a grace period of 1 month per
year of installment payment made BUT the buyer
may only avail of the grace period once every 5
years
• Buyer has right to the refund of Cash Surrender
Value (CSV): 50% of total amount paid + 5% for
every year after the first 5 years of installments
BUT total CSV should not be greater than 90% of
total amount paid.
• After the lapse of the grace period, buyer is given
a notice of cancellation or demand for rescission
by notarial act, effective 30 days from the buyer’s
receipt thereof AND only upon full payment of
CSV
b. If buyer has paid less than 2 years of installments:
• Grace period of at least 60 days
• After the lapse of the grace period, buyer is given
a notice of cancellation or demand for rescission
by notarial act, effective 30 days upon receipt
thereof
c. During the grace period, the buyer shall also have
the right:
• To sell or assign his rights, evidenced in a notarial
instrument
• To update his account
• To pay in advance any installment, or the full
unpaid balance of the price, without any interest,
and to have such full payment of the purchase
price annotated in the certificate of title covering
the property.
Extinguishment of Sale
a) Same causes for extinguishment of ordinary
contracts
b) Conventional redemption
c) Legal redemption
Conventional Redemption: Conventional redemption
shall take place when the vendor reserves the right to
repurchase the thing sold, with the obligation to comply
with the provisions of article 1616 and other stipulations
28
Art. 1601, NCC.
which may have been agreed upon.28 It is also called a
pacto de retro sale.
• In case of exercise of a right of repurchase, mere
tender is sufficient. There is no need to effect
consignation.
Equitable Mortgage: A transaction which, although it
lacks the formality/denomination of a contract of
mortgage, the manifest intention of the parties is to have
the property secure an existing obligation
ARTICLE 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is
unusually inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period
of redemption or granting a new period is executed;
(3) When the purchaser retains for himself a part of the
purchase price;
(4) When the vendor binds himself to pay the taxes on
the thing sold;
(6) In any other case where it may be fairly inferred
that the real intention of the parties is that the
transaction shall secure the payment of a debt or the
performance of any other obligation.
In any of the foregoing cases, any money, fruits, or
other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall
be subject to the usury laws.
(1) When the price of a sale with right to repurchase is
unusually inadequate
If the price is too low for the property being sold, and there
is a loan obligation, perhaps the transaction is an equitable
mortgage.
(2) When the vendor remains in possession as lessee or
otherwise
Hindi kasi madalas mangyari na the vendor remains in
possession of the property sold.
(3) Extension of the period of redemption
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(4) When the purchaser retains for himself a part of the
purchase price
Bakit niya i-retain yung part of the purchase price? Because
if we look at it from the perspective that the buyer is the
creditor, the retention by the creditor of the purchase price
is basically the equivalent of the interest on the loan of the
debtor.
(5) Payment of taxes due by the vendor
(6) Any other case
Atty. S: Creditors prefer pacto de retro sale in order to
circumvent the prohibition on pactum commissorium.
Remedy in case of existence of equitable mortgage:
Reformation of instrument.
Legal Redemption
Three kinds of legal redemption:
a) Legal redemption by a co-owner (Art. 1620);
b) Legal redemption by a co-heir (Art. 1088); and
c) Legal redemption by owners of adjoining rural
lands/urban lands (Arts. 1621-1623).
Difference between Art. 1620 and 1088:
Art. 1620 Art. 1088
The sale consists of an The sale is the hereditary
interest in some particular right itself, fully or in part,
property or properties of and in the abstract sense,
the inheritance without specifying any
particular object.
If the price is excessive, This option is not given to
redeeming co-owners may redeeming co-heirs Art.
only pay reasonable price. 1088.
DAMAGES
Damages: Damages is the sum of money which the law
awards or imposes as a pecuniary compensation, a
recompense or satisfaction for an injury done or wrong
sustained as a consequence either of a breach of a
contractual obligation or a tortious act.
The injury or wrong must arise from a violation of some
right. If it does not, there can be no recovery of damages
under the principle of damnum absque injuria.
If the exercise of a right is in good faith, there can be no
liability for damages. However, if you are exercising your
right for no other reason than to injure another person, you
can be liable for damages under the Abuse of Rights
Principle.
Kinds of damages:
1. Mental
2. exemplary
3. nominal
4. temperate
5. actual
6. liquidated
Actual Damages
Article 2199. Except as provided by law or by
stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by
him as he has duly proved. Such compensation is
referred to as actual or compensatory damages.
Compensation or damages for an injury that will put the
injured party in the position in which he had been before
he was injured. They pertain to such injuries or losses that
are actually sustained and susceptible of measurement.
Exception to requirement of proof:
1. Law
2. Stipulation – Example: parties executed a MOA.
The parties stipulated that a statement of account
detailing the damages for the claims to be
recovered is enough for recovery of actual
damages.
Article 2216. No proof of pecuniary loss is necessary in
order that moral, nominal, temperate, liquidated or
exemplary damages, may be adjudicated. The
assessment of such damages, except liquidated ones,
is left to the discretion of the court, according to the
circumstances of each case.
Bakit singled out ang liquidated damages dito? Because in
case of liquidated damages, you only have to prove: (a) the
contract; and (b) the breach thereof.
What does the law mean when it says that no proof of
pecuniary loss is required? Does this dispense with the
requirement to adduce proof absolutely? No. It means that
there must at least be some basis for the award of damages.
For instance, when it comes to moral damages, the
claimant is presented on the stand about what he
experienced, e.g., moral anguish, wounded feelings,
sleepless nights, etc.
2 factors comprising actual damages:
1. Actual loss (damnum emergens); and
2. Lost profits (lucrum cessans)
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Note: According to the SC, damnum emergens is no
different from lucrum cessans.
Actual loss is easy because all you have to prove is the
market value of the thing lost. There is no room for
speculation.
How do you prove lost profits?
In one case, the SC said that lost profits should not be
granted on the basis of speculation. It is enough that there
is reference to some reasonably definite standard such as
established experience or direct inference from known
circumstances. to justify actual or compensatory damages,
it is necessary to prove the same with competent proof and
on the best evidence available by the injured party the
amount of loss. Example: A is claiming for lost profits. He
can use the earnings of his business in the recent months
as basis.
What does the law require of the injured party?
Exercise the diligence of a good father of a family.
Example: Kung nakagat ka ng aso, linisin mo yung sugat
mo. Magpa-turok ka ng anti-rabies.
Extent of damages:
For contracts and quasi-contracts
• Good faith – natural and probable consequences
of the breach of the obligation and which the
parties have foreseen or could have reasonably
foreseen at the time the obligation was
constituted. The underscored portion provides for
a limitation, i.e., that the damages should have
been foreseeable.
• Bad faith – all damages which may be reasonably
attributed to the non-performance of the
obligation. It does not matter whether the same
were foreseeable or not.
For crimes and quasi-delicts: Same rule as in breach of
contract/quasi-contract in bad faith. This is because Art.
2202 provides that in crimes and quasi-delicts, the
defendant shall be liable for all damages which are the
natural and probable consequences of the act or omission
complained of. It is not necessary that such damages have
been foreseen or could have reasonably been foreseen by
the defendant. Note: In crimes, the damages may be
increased or decreased depending on aggravating or
mitigating circumstances.
What comprises lost profits:
1. Loss or impairment of earning capacity – it may be
temporary or permanent (in which case the person
must have died).
Formula: Net earning Capacity = Life Expectancy
x [Gross Annual Income – Living Expenses (50%
of gross annual income, if Living Expenses cannot
be determined)]
Life Expectancy = 2/3 (80 – age of the deceased)
Final formula: 2/3 (80 – age of the deceased) x
[Gross Annual Income – Living Expenses (50% of
gross annual income, if Living Expenses cannot be
determined)]
Gross annual income is proven through payslips,
income tax returns, among others.
GR: The rule, however, is there must be
documentary evidence.
Exception: (1) deceased was self-employed and
earning less than the minimum wage; or (2)
deceased was employed as a daily-wage earner
earning less than the minimum wage.
In case of death, the following can be recovered:
Article 2206. The amount of damages for death
caused by a crime or quasi-delict shall be at
least three thousand pesos, even though there
may have been mitigating circumstances. In
addition:
(1) The defendant shall be liable for the loss of
the earning capacity of the deceased, and the
indemnity shall be paid to the heirs of the
latter; such indemnity shall in every case be
assessed and awarded by the court, unless the
deceased on account of permanent physical
disability not caused by the defendant, had no
earning capacity at the time of his death;
(2) If the deceased was obliged to give support
according to the provisions of article 291, the
recipient who is not an heir called to the
decedent's inheritance by the law of testate or
intestate succession, may demand support
from the person causing the death, for a period
not exceeding five years, the exact duration to
be fixed by the court;
(3) The spouse, legitimate and illegitimate
descendants and ascendants of the deceased
may demand moral damages for mental
anguish by reason of the death of the deceased.
2. Injury to plaintiff’s business standing or
commercial standing – Example: May business ka,
then may nag-Tiktok nirereklamo yung pagkain
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 mo. Hindi naman totoo. You therefore have a
cause of action for damages. Your basis would be
the injury suffered by your business reputation.
Before, yung sa Jollibee, twalya yung naging
chicken.
Article 2207. If the plaintiff's property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury
or loss, the aggrieved party shall be entitled to recover
the deficiency from the person causing the loss or
injury.
This provides for the right of subrogation. This is common
in cases of motor vehicle mishaps. Normally, sinasabi na
mag-claim nalang sa insurer. Pero hindi nagtatapos kapag
binayaran ng insurer. The insurer will be subrogated to the
rights of the insured and may claim from the negligent
party causing the loss. However, the insurer may raise the
premiums paid depending on you, e.g., kung ikaw lagi ka
nababangga, the insurer may increase the premiums you
are paying because you are not a good driver.
Atty. S: There is also a rule here that provides for co-
participation. For example: In case 20,000 ang proceeds,
8,000 ang babayaran mo.
Article 2208. In the absence of stipulation, attorney's
fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendant's act or omission has
compelled the plaintiff to litigate with third persons or
to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against
the plaintiff;
(4) In case of a clearly unfounded civil action or
proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiff's plainly valid,
just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household
helpers, laborers and skilled workers;
(8) In actions for indemnity under workmen's
compensation and employer's liability laws;
(9) In a separate civil action to recover civil liability
arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and
equitable that attorney's fees and expenses of
litigation should be recovered.
In all cases, the attorney's fees and expenses of
litigation must be reasonable.
Moral Damages
Article 2217. Moral damages include physical suffering,
mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Though incapable of
pecuniary computation, moral damages may be
recovered if they are the proximate result of the
defendant's wrongful act for omission.
Only a human being may experience these.
However, may a juridical person recover moral damages?
GR: No.
XPN: Chevron Philippines v. Mendoza (June 2020): A
corporation may recover damages if its reputation is
debased resulting in social humiliation.
Can moral damages be recovered for breach of contract?
No. If you would look at Art. 2219, which enumerates the
instances when moral damages are recoverable, it does not
include breach of contract.
XPNS:
1. Breach of contract of carriage in case death results;
or
2. The breach of contract was attended by bad faith.
Nominal Damages
Nominal damages are adjudged in order that a right of the
plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for
the purpose of indemnifying the plaintiff for any loss
suffered by him (Art. 2221).
Cannot co-exist with compensatory damages, or with
temperate damages.
Example: Breach of non-compete clause which does not
provide for liquidated damages; Failure to follow
procedural due process in termination of employment.
Temperate Damages
Temperate or moderate damages, which are more than
nominal but less than compensatory damages, may be
recovered when the court finds that some pecuniary loss
has been suffered but its amount cannot, from the nature
of the case, be provided with certainty (Art. 2224)
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Provided when the court finds that some pecuniary loss
has been suffered but its amount cannot be proved with
certainty.

Liquidated Damages

Already discussed.

Exemplary or Corrective Damages

Exemplary damages or corrective damages are imposed, by

way of example or correction for the public good, in
addition to the moral, temperate, liquidated or
compensatory damages (Art. 2229)

Article 2234. While the amount of the exemplary

damages need not be proved, the plaintiff must show
that he is entitled to moral, temperate or
compensatory damages before the court may consider
the question of whether or not exemplary damages
should be awarded. In case liquidated damages have
been agreed upon, although no proof of loss is
necessary in order that such liquidated damages may
be recovered, nevertheless, before the court may
consider the question of granting exemplary in
addition to the liquidated damages, the plaintiff must
show that he would be entitled to moral, temperate or
compensatory damages were it not for the stipulation
for liquidated damages.

Pointers for demand letter:

• Put all of your facts in the letter. Para kapag
tinanggap ng kalaban at hindi niya sinagot or
hindi niya dineny yung pertinent facts favorable to
you, you may use it as an admission;
• Do not make it too detailed because baka magamit
pa laban sayo.

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