20120612140639870_Civil Law Volume III (Obligation and Contracts)

TABLE OF CONTENTS BOOK IV OBLIGATIONS AND CONTRACTS TITLE I — OBLIGATIONS

Chapter 1 — GENERAL PROVISIONS Article Article Article Article Article Article Article

1156 1157 1158 1159 1160 1161 1162

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

1 1 1 1 1 1 2

Chapter 2 — NATURE AND EFFECT OF OBLIGATIONS Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1163 1164 1165 1166 1167 1168 1169 1170 1171 1172 1173 1174 1175 1176 1177 1178

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

iii

4 4 4 4 4 4 4 5 5 5 5 6 6 6 6 6

Chapter 3 — DIFFERENT KINDS OF OBLIGATIONS Section 1 — Pure and Conditional Obligations Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1179 1180 1181 1182 1183 1184 1185 1186 1187 1188 1189 1190 1191 1192

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

27 28 28 28 28 28 28 29 29 29 29 30 30 31

Section 2 — Obligations with a Period Article Article Article Article Article Article

1193 1194 1195 1196 1197 1198

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

38 39 39 39 39 39

Section 3 — Alternative Obligations Article Article Article Article Article Article Article Article

1199 1200 1201 1202 1203 1204 1205 1206

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

43 43 44 44 44 44 44 45

Section 4 — Joint and Solidary Obligations Article Article Article Article Article Article

1207 1208 1209 1210 1211 1212

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... iv

48 48 49 49 49 49

Article Article Article Article Article Article Article Article Article Article

1213 1214 1215 1216 1217 1218 1219 1220 1221 1222

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

49 49 49 49 50 50 50 50 50 51

Section 5 — Divisible and Indivisible Obligations Article 1223 Article 1224 Article 1225

........................................................................... ........................................................................... ...........................................................................

55 56 56

Section 6 — Obligations with a Penal Clause Article Article Article Article Article

1226 1227 1228 1229 1230

........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

57 57 58 58 58

Chapter 4 — EXTINGUISHMENT OF OBLIGATIONS GENERAL PROVISIONS Article 1231

...........................................................................

61

Section 1 — Payment or Performance Article Article Article Article Article Article Article Article Article Article

1232 1233 1234 1235 1236 1237 1238 1239 1240 1241

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... v

62 62 62 62 62 62 62 63 63 63

Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1242 1243 1244 1245 1246 1247 1248 1249 1250 1251 1252 1253 1254 1255 1256 1257 1258 1259 1260 1261

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

63 63 63 64 64 64 64 64 65 65 78 78 78 80 81 82 82 82 82 82

Section 2 — Loss of the Thing Due Article Article Article Article Article Article Article Article

1262 1263 1264 1265 1266 1267 1268 1269

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

85 85 85 85 86 86 86 86

Section 3 — Condonation or Remission of the Debt Article Article Article Article Article

1270 1271 1272 1273 1274

........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

89 90 90 90 90

Section 4 — Confusion or Merger of Rights Article 1275 Article 1276 Article 1277

........................................................................... ........................................................................... ........................................................................... vi

91 91 91

Section 5 — Compensation Article Article Article Article Article Article Article Article Article Article Article Article Article

1278 1279 1280 1281 1282 1283 1284 1285 1286 1287 1288 1289 1290

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

92 92 92 93 93 93 93 93 93 93 94 94 94

Section 6 — Novation Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1291 1292 1293 1294 1295 1296 1297 1298 1299 1300 1301 1302 1303 1304

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

97 97 97 97 98 98 98 98 98 98 98 98 99 99

TITLE II — CONTRACTS Chapter 1 — GENERAL PROVISIONS Article Article Article Article Article Article Article Article Article Article

1305 1306 1307 1308 1309 1310 1311 1312 1313 1314

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... vii

106 106 106 106 106 106 106 107 107 107

Article 1315 Article 1316 Article 1317

........................................................................... ........................................................................... ...........................................................................

107 107 107

Chapter 2 — ESSENTIAL REQUISITES OF CONTRACTS GENERAL PROVISIONS Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1318 1319 1320 1321 1322 1323 1324 1325 1326 1327 1328 1329 1330 1331 1332 1333 1334 1335 1336 1337 1338 1339 1340 1341 1342 1343 1344 1345 1346 1347 1348 1349 1350 1351 1352 1353 1354 1355

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

viii

119 123 123 123 123 123 123 123 124 124 124 124 124 124 124 124 125 125 125 125 125 125 125 126 126 126 126 126 126 133 133 133 134 134 134 134 135 135

Chapter 3 — FORM OF CONTRACTS Article 1356 Article 1357 Article 1358

........................................................................... ........................................................................... ...........................................................................

137 137 138

Chapter 4 — REFORMATION OF INSTRUMENTS (n) Article Article Article Article Article Article Article Article Article Article Article

1359 1360 1361 1362 1363 1364 1365 1366 1367 1368 1369

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

143 143 143 143 144 144 144 144 144 144 144

Chapter 5 — INTERPRETATION OF CONTRACTS Article Article Article Article Article Article Article Article Article Article

1370 1371 1372 1373 1374 1375 1376 1377 1378 1379

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

146 147 147 147 147 147 147 147 147 148

Chapter 6 — RESCISSIBLE CONTRACTS Article Article Article Article Article Article Article Article Article Article

1380 1381 1382 1383 1384 1385 1386 1387 1388 1389

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ix

150 150 151 151 151 151 151 152 152 152

Chapter 7 — VOIDABLE CONTRACTS Article Article Article Article Article Article Article Article Article Article Article Article Article

1390 1391 1392 1393 1394 1395 1396 1397 1398 1399 1400 1401 1402

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

158 158 158 159 159 159 159 159 159 159 159 160 160

Chapter 8 — UNENFORCEABLE CONTRACTS (n) Article Article Article Article Article Article

1403 1404 1405 1406 1407 1408

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

163 165 165 165 165 165

Chapter 9 — VOID OR INEXISTENT CONTRACTS Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1409 1410 1411 1412 1413 1414 1415 1416 1417 1418 1419 1420 1421 1422

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

168 169 169 169 169 170 170 170 170 170 170 170 171 171

TITLE III — NATURAL OBLIGATIONS Article 1423 Article 1424

........................................................................... ........................................................................... x

176 176

Article Article Article Article Article Article

1425 1426 1427 1428 1429 1430

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

176 176 176 177 177 177

TITLE IV — ESTOPPEL (n) Article Article Article Article Article Article Article Article Article

1431 1432 1433 1434 1435 1436 1437 1438 1439

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

180 180 180 180 180 180 180 181 181

TITLE V — TRUSTS Chapter 1 — GENERAL PROVISIONS Article 1440 Article 1441 Article 1442

........................................................................... ........................................................................... ...........................................................................

190 190 190

Chapter 2 — EXPRESS TRUSTS Article Article Article Article

1443 1444 1445 1446

........................................................................... ........................................................................... ........................................................................... ...........................................................................

192 192 192 192

Chapter 3 — IMPLIED TRUSTS Article Article Article Article Article Article Article Article Article Article Article

1447 1448 1449 1450 1451 1452 1453 1454 1455 1456 1457

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

xi

193 193 194 194 194 194 194 194 194 195 195

SPECIAL CONTRACTS TITLE VI — SALES Chapter 1 — NATURE AND FORM OF THE CONTRACT Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1458 1459 1460 1461 1462 1463 1464 1465 1466 1467 1468 1469 1470 1471 1472 1473 1474 1475 1476 1477 1478 1479 1480 1481 1482 1483 1484 1485 1486 1487 1488

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

199 199 199 199 200 200 200 200 200 200 201 201 201 201 201 201 202 202 202 203 203 203 203 203 203 204 204 204 204 204 204

Chapter 2 — CAPACITY TO BUY OR SELL Article Article Article Article

1489 1490 1491 1492

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xii

205 205 205 206

Chapter 3 — EFFECTS OF THE CONTRACT WHEN THE THING SOLD HAS BEEN LOST Article 1493 Article 1494

........................................................................... ...........................................................................

224 224

Chapter 4 — OBLIGATIONS OF THE VENDOR Section 1 — General Provisions Article 1495 Article 1496

........................................................................... ...........................................................................

224 224

Section 2 — Delivery of the Thing Sold Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1497 1498 1499 1500 1501 1502 1503 1504 1505 1506 1507 1508 1509 1510 1511 1512 1513 1514 1515 1516 1517 1518 1519 1520 1521 1522 1523 1524 1525 1526 1527 1528 1529

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... xiii

225 225 225 225 225 225 226 227 227 228 230 230 231 231 231 232 232 232 233 233 233 233 234 234 244 245 245 246 246 246 247 247 247

Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1530 1531 1532 1533 1534 1535 1536 1537 1538 1539 1540 1541 1542 1543 1544 1545 1546 1547

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248 248 249 249 250 251 251 251 251 251 252 252 252 252 253 264 264 265

Subsection 1 — Warranty in Case of Eviction Article Article Article Article Article Article Article Article Article Article Article Article Article

1548 1549 1550 1551 1552 1553 1554 1555 1556 1557 1558 1559 1560

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

265 265 266 266 266 266 266 266 267 267 267 267 267

Subsection 2 — Warranty Against Hidden Defects of or Encumbrances Upon the Thing Sold Article Article Article Article Article Article Article Article

1561 1562 1563 1564 1565 1566 1567 1568

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... xiv

268 268 268 268 269 269 269 269

Article Article Article Article Article Article Article Article Article Article Article Article Article

1569 1570 1571 1572 1573 1574 1575 1576 1577 1578 1579 1580 1581

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

269 269 269 270 270 270 270 270 270 271 271 271 271

Chapter 5 — OBLIGATIONS OF THE VENDEE Article Article Article Article Article Article Article Article Article Article Article Article

1582 1583 1584 1585 1586 1587 1588 1589 1590 1591 1592 1593

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

281 281 281 282 282 282 282 282 286 287 287 287

Chapter 6 — ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS Article Article Article Article Article Article

1594 1595 1596 1597 1598 1599

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

306 307 307 308 308 308

Chapter 7 — EXTINGUISHMENT OF SALE Article 1600

...........................................................................

313

Section 1 — Conventional Redemption Article 1601 Article 1602

........................................................................... ........................................................................... xv

313 313

Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article Article

1603 1604 1605 1606 1607 1608 1609 1610 1611 1612 1613 1614 1615 1616 1617 1618

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

314 314 314 314 315 315 315 315 315 315 315 316 316 316 316 316

Section 2 — Legal Redemption Article Article Article Article Article

1619 1620 1621 1622 1623

........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

324 324 324 324 325

Chapter 8 — ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS Article Article Article Article Article Article Article Article Article Article Article Article

1624 1625 1626 1627 1628 1629 1630 1631 1632 1633 1634 1635

........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ........................................................................... ...........................................................................

330 330 330 330 330 331 331 331 331 331 331 332

Chapter 9 — GENERAL PROVISIONS Article 1636 Article 1637

........................................................................... ...........................................................................

xvi

335 336

TITLE VII — BARTER OR EXCHANGE Article Article Article Article

1638 1639 1640 1641

........................................................................... ........................................................................... ........................................................................... ...........................................................................

xvii

337 337 337 337

CIVIL LAW By

JOSE C. VITUG, LL.B., LL.M., M.N.S.A. Senior Professor, Philippine Judicial Academy Formerly an Associate Justice of the Supreme Court of the Philippines

Volume III (Articles 1156-1641)

Second Edition 2006

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Philippine Copyright, 2006 by JOSE VITUG

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1

BOOK IV OBLIGATIONS AND CONTRACTS TITLE I. OBLIGATIONS Chapter 1 General Provisions Article 1156. An obligation is a juridical necessity to give, to do or not to do. (n) Art. 1157. Obligations arise from: (1) (2) (3) (4) (5)

Law; Contracts; Quasi-contracts; Acts or omissions punished by law; and Quasi-delicts. (1089a)

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. (1090) Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a) Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book. (n) Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject 1

2

CIVIL LAW

Arts. 1156-1162

to the provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages. (1092a) Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws. (1093a)

Concept and Birth of Obligations An obligation, a “juridical necessity to give, to do or not to do,” is constituted upon the concurrence of the essential elements thereof, viz.: (a) the vinculum juris or juridical tie which is the efficient cause established by the various sources of obligations (law, contracts, quasicontracts, delicts, and quasi-delicts); (b) the object which is the prestation or conduct required to be observed (to give, to do, or not to do); and (c) the subject-persons who, viewed from the demandability of the obligations, are the active (obligee) and the passive (obligor) subjects. The juridical tie binding the active and the passive subjects together is created by any of the sources of obligations expressed in Article 1157 of the Code (Leung vs. O’Brien, 38 Phil. 182), to wit: (1) Law — Obligations ex lege or those derived from law are not presumed. Only those expressly stated by the Code or by special laws are demandable. They shall be regulated by the precepts of the law which establishes them, and as to what has been foreseen, by the provisions of the Code on Obligations and Contracts (see Art. 1158, Civil Code; Bautista vs. F.O. Borromeo, Inc., 30 SCRA 119). (2) Contracts — A contract is a meeting of the minds between two persons whereby one binds himself to the other to give something or to render some service (Art. 1305, Civil Code). Obligations arising from contracts have the force of law

Arts. 1156-1162

OBLIGATIONS AND CONTRACTS Title I. Obligations

3

between the contracting parties and should be complied with in good faith (Art. 1159; see Art. 1308, Civil Code; see also Maritime Company of the Philippines vs. Reparations Commission, 40 SCRA 170). (3) Quasi-contracts — Quasi-contracts are certain lawful, voluntary and unilateral acts which give rise to a juridical relation to the end that no person may unjustly enrich himself at the expense of another (Art. 2142, Civil Code). Obligations derived from quasi-contracts based on the presumed will of the parties are demandable (see Title XVII, infra.; Cf. Art. 1160, Civil Code). (4) Acts or omissions punished by law — Civil obligations arising from criminal offenses are governed by the penal laws, subject to the provisions of Article 2177 and other pertinent provisions of the Civil Code (see Preliminary Title on Human Relations, supra., and Title XVII, infra.; Tejuco vs. Squibb & Sons, 103 Phil. 594; Art. 1161, Civil Code). (5) Quasi-delicts — Quasi-delicts are extra-contractual relations resulting from certain acts or omissions causing damage to another, there being fault or negligence on the part of the person responsible therefor (see Art. 2176, Civil Code). Obligations may be derived from such quasi-delicts (see Title XVII, infra.; Barredo vs. Garcia, 73 Phil. 607; Art. 1162, Civil Code). These sources of patrimonial obligations, as distinguished from those that are correlatively due or arising from purely personal and intransmissible rights, are said to be exclusive (see Sagrado Orden de Predicadores vs. NACOCO, 91 Phil. 503) and so of the essence that those sources, independently, can justifiably be called the fourth element of obligations.

4

CIVIL LAW

Arts. 1163-1169

Chapter 2 Nature and Effect of Obligations Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. (1094a) Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. (1095) Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for fortuitous event until he has effected the delivery. (1096) Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. (1097a) Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. (1098) Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. (1099a) Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially

Arts. 1170-1173

OBLIGATIONS AND CONTRACTS Title I. Obligations

or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declares; or (2) When from the nature and circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a) Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) Art. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103) Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply.

5

6

CIVIL LAW

Arts. 1163-1178

If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which, could not be foreseen, or which, though foreseen, were inevitable. (1105a) Art. 1175. Usurious transactions shall be governed by special laws. (n) Art. 1176. The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. (1110a) Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112)

Compliance with Obligations Basically, the standard norm in the observance of an obligation by both the active and passive subjects may be said to be that which Article 19 of the Code prescribes, viz.: “Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.”

Arts. 1163-1178

OBLIGATIONS AND CONTRACTS Title I. Obligations

7

(1) In Obligations to Give Every person obliged to give a determinate thing must deliver, and the obligee may compel the delivery of, that itself which was promised, and the obligor cannot substitute it unless the obligee agrees (Art. 1244, in relation to Art. 1165, Civil Code) or the right is reserved such as in alternative obligations (see infra.). The obligor is also obliged to take care of the things with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care (see Art. 1163, Civil Code; E. Razon, Inc. vs. Court of Appeals, 161 SCRA 356). The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned (Art. 1166, Civil Code). The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. He shall, however, acquire no real right (including ownership or title) over it until the same has been delivered to him (Art. 1164, Civil Code; Cruzado vs. Bustos, 34 Phil. 17; see Art. 1187, infra., as regards conditional obligations). If the thing to be delivered is generic, the obligor must deliver a thing of the quality specified; if none is fixed, he must deliver one of average quality, nor can the obligee demand one of superior quality. The creditor may ask that the obligation be complied with at the expense of the debtor (see Art. 1246 and 1165, Civil Code). (2) In Obligations to Do If a person is obliged to do something, it must be done as so promised, and it cannot be substituted by another act or forbearance against the obligee’s will (see Art. 1244, Civil Code). If the obligor fails to do it, the same shall be executed at his cost (see Chavez vs. Gonzales, 32 SCRA 547) albeit he may not be compelled to do so personally or by himself. This same rule shall be observed if he does it in contravention of the tenor of the obligation.

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Furthermore, it may be decreed that what has been poorly done be undone (see Art. 1167, Civil Code). (3) In Obligations Not to Do When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall be undone at his expense (see Art. 1168, Civil Code; Cui vs. Chan, 41 Phil. 523). Breach of Obligations Subject to such exceptions or qualifications as the law or the parties themselves may provide, obligations must be complied with precisely (“identity of obligations”) and completely (“integrity of obligations”) as promised or required. The receipt, however, of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt, without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid (Art. 1176, Civil Code; for further discussions on Payment or Performance, see infra.). Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages without the need for a contractual stipulation or prior agreement thereon (see Art. 1170, Civil Code; Boysaw vs. Interphil Promotions, Inc., 148 SCRA 635; Arrieta vs. NARIC, 10 SCRA 79; CMS Investments and Management Corp. vs. Intermediate Appellate Court, 139 SCRA 75; Magat vs. Medialdea, 121 SCRA 418). Fraud Responsibility arising from fraud (malice) is demandable in all obligations. Any waiver of an action for future fraud is void (Art. 1171, Civil Code).

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Fraud, in the context of its use as a mode of breaching an obligation, is bad faith in the performance of an obligation, oftentimes referred to as malice (see Flores vs. Miranda, 105 Phil. 266), as distinguished from fraud in the celebration of contracts, also commonly known as deceit (dolo) which may constitute a ground for annulment of the contract if substantial (dolo causante) or which may merely call for a reparation for damages if incidental (dolo incidente), such as when, although fraud is absent or not exercised, the other party would have nonetheless entered into the agreement on significantly the same terms. Negligence Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances of each case (Art. 1172, Civil Code; E. Razon, Inc. vs. Court of Appeals, supra.). The fault or negligence (culpa) of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time, and of the place. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required (Art. 1173, Civil Code). Gross or reckless imprudence could amount to or be indicative of bad faith that can call for the application of the provisions of Article 1171 on Fraud and Article 2201, 2nd paragraph, on Damages. Negligence in the performance of obligations, in general, although akin in many respects to, is not exactly the same as, culpa contractual. The source of liability in culpa contractual being contracts exclusively, the rule on the privity or relativity of contracts applicable to liability in culpa contractual may not accurately be pertinent to

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culpa in the performance of obligations derived from other sources such as law. Neither is negligence in the performance of an obligation and culpa contractual, on the one hand, to be likened to culpa aquiliana, on the other, which is the negligence referred to as a quasi-delict (Art. 2176, Civil Code) as a source of an obligation (Art. 1157, Civil Code). The distinctions between culpa contractual and culpa aquiliana (see Cangco vs. Manila Railroad Co., 38 Phil. 769; Rakes vs. AG & P, 7 Phil. 359) may be exemplified in the following illustrative application: Facts Two taxicabs, one owned and operated by “X & Co.” and the other by “Y & Co.,” have figured in a collision. Both drivers of the taxicabs are negligent. As a result of the incident, “A,” a passenger of the taxicab owned and operated by “X & Co.,” suffers injuries. He institutes an action for damages against “X & Co.,” “Y & Co.,” and the two drivers. Basic differences in the Liabilities of the Several Defendants (1) The primary (principal) cause of action by “A” against “X & Co.” is culpa contractual and the source of liability against all others is culpa aquiliana (also culpa criminal in the case of the drivers). (2) “X & Co.” may not raise the defense of due diligence in the selection (culpa in eligiendo) and supervision (culpa in vigilando) of its employees, although “Y & Co.” may do so (De Guia vs. Manila Electric Co., 40 Phil. 706). (3) In case direct evidence is bereft of the existence or non-existence of negligence, “X & Co.” can still be held liable, since fault or negligence is presumed in culpa contractual; in culpa aquiliana, fault or negligence must, as a rule, be established.

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(4) In culpa contractual, the privity of contracts would bar non-successors from claiming from “X & Co.” (in case “A” dies); in culpa aquiliana, relatives and dependents (although non-heirs) may claim damages. Discussions (1) Although the cause of action against “X & Co.” is basically one of breach of contract (culpa contractual), the factual circumstances, however, would also point to the existence of tort as a mode of breach. Where, without a pre-existing contract between two parties, an act or omission could have nevertheless constituted an actionable tort between them, the mere existence then of a contract between such parties will not militate against the application of the rules on tort liability or even the predominance of tort in the resolution of the case (see Singson vs. BPI, 23 SCRA 1117; Air France vs. Carrascoso, 18 SCRA 155). Accordingly, “X & Co.” could become a joint tortfeasor with the other defendants, rendering themselves solidarily liable (Art. 2194, Civil Code). Likewise, the possibility of “Y & Co.” being liable for moral damages for the injury of “A” because of quasi-delict under Article 2219 of the Civil Code may not altogether be discounted in appropriate cases. (2) While “X & Co.” may not raise the defense of due diligence in the selection and supervision of its employees as against its passenger “A” (the latter’s cause of action still being basically one of culpa contractual), the proof of such diligence, however, is not all that immaterial or inconsequential. Once established, such due diligence will work to operate an extenuation of any possible tort liability, and “X & Co.” could no longer be considered a joint tortfeasor. In

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this case, neither liability under Article 2194 of the Civil Code nor liability for moral damages to “A” under Article 2219 of the same Code (in the absence of gross negligence amounting to bad faith) would be applicable. “X & Co.,” however, would still be liable but purely on the basis of culpa contractual. (3) If the drivers of the colliding vehicles were convicted in a criminal case for their negligence, “X & Co.” and “Y & Co.,” being both engaged in an industry, can be held liable subsidiarily for their respective drivers’ civil liability (Arts. 100-103, Revised Penal Code). In FGU Insurance Corporation vs. G.P. Sarmiento Trucking Corp., G.R. No. 141910, 06 August 2002, the Supreme Court said: “In culpa contractual, upon which the action of petitioner rests as being the subrogee of Concepcion Industries, Inc., the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promisee that may include his “expectation interest,” which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, or his “reliance interest,” which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made; or his “restitution interest,” which is

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his interest in having restored to him any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or for society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to make recompense to the one who has been injured by the failure of another to observe his contractual obligation unless he can show extenuating circumstances, like proof of his exercise of due diligence (normally that of the diligence of a good father of a family or, exceptionally by stipulation or by law such as in the case of common carriers, that of extraordinary diligence) or of the attendance of fortuitous event, to excuse him from his ensuing liability. “Respondent trucking corporation recognizes the existence of a contract of carriage between it and petitioner’s assured, and admits that the cargoes it has assumed to deliver have been lost or damaged while in its custody. In such a situation, a default on, or failure of compliance with, the obligation – in this case, the delivery of the goods in its custody to the place of destination — gives rise to a presumption of lack of care and corresponding liability on the part of the contractual obligor the burden being on him to establish otherwise. GPS has failed to do so. “Respondent driver, on the other hand, without concrete proof of his negligence or fault, may not himself be ordered to pay petitioner. The driver, not being a party to the contract of carriage between petitioner’s principal and defendant, may not be held liable under the agreement. A contract can only bind the parties who have entered into it or their successors who have assumed their personality or their juridical position. Consonantly with the axiom res inter alios acta aliis neque nocet prodest, such contract can neither favor nor prejudice a third person. Petitioner’s civil action against the driver can only

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be based on culpa aquiliana, which, unlike culpa contractual, would require the claimant for damages to prove negligence or fault on the part of the defendant. “A word in passing. Res ipsa loquitur, a doctrine being invoked by petitioner, holds a defendant liable where the thing which caused the injury complained of is shown to be under the latter’s management and the accident is such that, in the ordinary course of things, cannot be expected to happen if those who have its management or control use proper care. It affords reasonable evidence, in the absence of explanation by the defendant, that the accident arose from want of care. It is not a rule of substantive law and, as such, it does not create an independent ground of liability. Instead, it is regarded as a mode of proof, or a mere procedural convenience since it furnishes a substitute for, and relieves the plaintiff of, the burden of producing specific proof of negligence. The maxim simply places on the defendant the burden of going forward with the proof. Resort to the doctrine, however, may be allowed only when (a) the event is of a kind which does not ordinarily occur in the absence of negligence; (b) other responsible causes, including the conduct of the plaintiff and third persons, are sufficiently eliminated by the evidence; and (c) the indicated negligence is within the scope of the defendant’s duty to the plaintiff. Thus, it is not applicable when an unexplained accident may be attributable to one of several causes, for some of which the defendant could not be responsible. “Res ipsa loquitur generally finds relevance whether or not a contractual relationship exists between the plaintiff and the defendant, for the inference of negligence arises from the circumstances and nature of the occurrence and not from the nature of the relation of the parties. Nevertheless, the requirement that responsible causes other than those due

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to defendant’s conduct must first be eliminated, for the doctrine to apply, should be understood as being confined only to cases of pure (non-contractual) tort since obviously the presumption of negligence in culpa contractual, as previously so pointed out, immediately attaches by a failure of the covenant or its tenor. In the case of the truck driver, whose liability in a civil action is predicated on culpa acquiliana, while he admittedly can be said to have been in control and management of the vehicle which figured in the accident, it is not equally shown, however, that the accident could have been exclusively due to his negligence, a matter that can allow, forthwith, res ipsa loquitur to work against him.’’ Fortuitous Event No person shall be responsible for those events which could not be foreseen (accident) or which, though foreseen, are inevitable (force majeure), collectively referred to simply as “fortuitous event” (see Art. 1174, Civil Code). In order that a fortuitous event can be the basis of exemption from liability, a number of circumstances must be shown. The Supreme Court, in Lasam vs. Smith (45 Phil. 657; reiterated in Austria vs. Court of Appeals, 39 SCRA 527; Servando vs. Phil. Steam Navigation, 117 SCRA 832), has held: “In discussing and analyzing the term “caso fortuito the Encyclopedia Juridica Española says: ‘In a legal sense and, consequently, also in relation to contract, a caso fortuito presents the following essential characteristics: (1) The cause of the unforeseen and unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will; (2) It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; (3) The occurrence must be such as to render it im-

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possible for the debtor to fulfill his obligation in a normal manner; and (4) The obligor (debtor) must be free from any participation in the aggravation of the injury resulting to the creditor (Encyclopedia Juridica Española, 309).” There is no caso fortuito where a ship captain proceeded en route despite a typhoon advice close to the area where the vessel will pass. In Pedro Vasquez vs. Court of Appeals (138 SCRA 553), it appeared that when a ship, owned and operated by private respondent, had left Manila for Cebu, its officers were aware that a typhoon was building up in Mindanao. Good weather prevailed until the vessel reached Romblon. Upon passing Tanguingui Island, however, the weather suddenly changed. Although the officers knew that the island was within the typhoon zone, they still decided to proceed on course. Visibility dropped to zero. The ship struck a reef and sank. The petitioners herein, relatives of some of the passengers, sued the respondent for damages. The respondent pleaded force majeure. The Supreme Court has ruled: “To constitute a caso fortuito that would exempt a person from responsibility, it is necessary that (1) the event must be independent of the human will; (2) the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and that (3) the obligor must be free of participation in, or aggravation of, the injury to the creditor.” x x x “Under the circumstances, while, indeed, the typhoon was an inevitable occurrence, yet, having been kept posted on the course of the typhoon by weather bulletin at intervals of six hours, the captain and crew were well aware of the risk they were taking as they hopped from island to island from Romblon up to Tanguingui. They held frequent conferences, and oblivious of the utmost diligence required of very cautious persons, they decided to take a calculated risk. In so doing, they failed to observe that extra-

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ordinary diligence required of them explicitly by law for the safety of the passengers transported by them with due regard for all circumstances and unnecessarily exposed the vessel and passengers to the tragic mishap. They failed to overcome that presumption of fault or negligence that arises in cases of death or injuries to passengers.” (see also Nakpil & Sons vs. Court of Appeals, 144 SCRA 596). A decision that has received critical attention is the case of Overseas Bank vs. Court of Appeals (105 SCRA 49, 113 SCRA 778), the Supreme Court there holding that a bank should not be made liable to pay interest on deposits during the period that its operations are ordered suspended by the Monetary Board of the Central Bank. The criticism lies mainly on the thesis that (a) the ruling appears to have misapplied fortuitous event which, in this context, can merely be a causative factor to loss as a mode of extinguishing an obligation to deliver a specific thing but never as the mode itself and (b) the fact that an obligation to pay money (a “genus”) is incapable of being “lost.” In any event, the Supreme Court has felt that it would be “utterly unfair to require such a bank to pay the stipulated interest for what enables a bank to do so is its ability to generate funds from its authorized operations.” If the situation cannot, strictly speaking, be legally termed as force majeure, it should be held, as a matter of simple equity, that it be treated as such, and that “conventional wisdom dictates this inexorable and just conclusion.” (But see Central Bank of the Philippines vs. Court of Appeals, 139 SCRA 46). Mechanical defects of carriers have been held not to constitute fortuitous event (Sweet Lines vs. Court of Appeals, 121 SCRA 769; Sons vs. Cebu Autobus, 94 Phil, 892; Landingin vs. Pangasinan Transp. Co., 22 SCRA 284; Necessito vs. Paras, 104 SCRA Phil. 75). A tire blowout, that causes a public utility jeep to jump into a ditch, has been ruled to be insufficient to overcome the presumption of negligence. The fact alone that the tire

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may have still been good because its grooves are still visible does not make the explosion a fortuitous event. If there is no evidence that the driver has taken due precautions to compensate for any condition liable to cause accidents, such as the road condition, a tire blow-out could not unlikely be caused, for instance, by too much air pressure, overloading or speeding at the time of the accident (Juntilla vs. Fontanar, L-45637, 31 May 1985). The existence of a fortuitous event negates the liability that might otherwise arise in the breach of obligations. In Victorias Planters Assn., Inc. vs. Victorias Milling Co., Inc. (97 Phil. 318), the Supreme Court has elaborated, thusly: “Fortuitous event relieves the obligor from fulfilling a contractual obligation (Art. 1105, old Civil Code; Art. 1174, new Civil Code). The stipulation in the contract that in the event of force majeure the contract shall be deemed suspended during said period does not mean that the happening of any of those events stops the running of the period agreed upon. It only relieves the parties from the fulfillment of their delivering sugar cane and the respondent central from milling it. In order that the respondent central may be entitled to demand from the petitioners the fulfillment of their part in the contracts, the latter must have been able to perform it but failed or refused to do so and not when they were prevented by force majeure such as war. To require the petitioners to deliver the sugar cane which they failed to deliver during the six years is to demand from them the fulfillment of an obligation which was impossible of performance at the time it became due. Nemo tenetur ad impossibilia. The respondent central not being entitled to demand from the petitioners the performance of the latter’s part of the contracts under those circumstances cannot later on demand its fulfillment. The performance of what the law has written of cannot be demanded and required. The

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prayer that the petitioners be compelled to deliver sugar cane for six years to make up for what they failed to deliver, the fulfillment of which was impossible, if granted, would in effect be an extension of the terms of the contracts entered into by and between the parties.” Fortuitous events will not extenuate liability (a) in cases expressly specified by law, such as when the obligor is in default or has promised to deliver the same thing to two or more persons who do not have the same interest (see Art. 1165, Civil Code); (b) when it is otherwise declared by stipulation (see Insular Government vs. Punzalan, 7 Phil. 546); or (c) when the nature of the obligation requires the assumption of risk, such as in the aleatory contract of insurance (see Art. 1174, Civil Code). Delay Those obliged to deliver or to do something but fail incur delay (“mora”) from the time the obligee judicially or extrajudicially demands from them the fulfillment of their matured obligation (see Art. 1169, Civil Code). Without such demand, the mere non-performance of the obligation on the time fixed therefor does not necessarily put the obligor in default (see Rose Packing Company, Inc. vs. Court of Appeals, 167 SCRA 309; Adiarte vs. Court of Appeals, 92 Phil. 758). A demand before the maturity of the obligation is ineffective. Demand, however, by the creditor shall not be necessary in order that delay may exist when — a.

the obligation or the law expressly so declares (see Siulong & Co. vs. Ylagan, 43 Phil. 393); or

b.

from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract (see Hanlon vs. Hausserman, 40 Phil. 796); or

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the demand would be useless, as when the obligor has rendered it beyond his power to perform (see Art. 1169, Civil Code; CETUS Dev., Inc. vs. Court of Appeals, 176 SCRA 72).

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 (see Art. 1169, Civil Code; Cf. Alano vs. Cortes, 110 Phil. 74; Central Bank of the Philippines vs. Court of Appeals, 139 SCRA 46; Limjuco vs. Court of Appeals, 37 SCRA 663). Delay or mora has generally been categorized into — (1) Mora solvendi (delay of the debtor) a.

Mora solvendi ex persona (when demand is necessary)

b.

Mora solvendi ex re (when demand is unnecessary)

(2) Mora accipiendi (delay of the creditor; see Villaruel vs. Manila Motor Co., 104 Phil. 926). (3) Compensatio morae (mutual delay of parties that would cancel the effects of delay by said parties). Delay has the effect of rendering liable the guilty party for damages that the other might suffer (PNCC vs. NLRC, 172 SCRA 887), as well as of being responsible even for a fortuitous event, inclusive of the assumption of any risk of loss (see Arts. 1165 and 1170, Civil Code). Contravention of Tenor of Obligations The faithful observance of an obligation according to its tenor is mandated by law; an unexcused failure thereof renders the obligor liable for losses and damages that are caused thereby (see Art. 1170, Civil Code; Arrieta vs. NARIC, 10 SCRA 79).

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Remedies for Breach of Obligations Appropriate legal remedies are available in order to allow redress upon the breach of obligations. The leniency or laxity of the party entitled to enforce the obligation does not diminish his rights thereunder (National Power Corporation vs. EIN Chem. Corporation, 145 SCRA 529). The judicial remedies, in general, would include: (a) The principal remedies (i) of specific performance in obligations to give specific things (Articles 1165 and 1167 of the Civil Code), substitute performance in an obligation to do or to deliver generic things (Article 1165 of the Civil Code) and equivalent performance for damages (Articles 1168 and 1170 of the Civil Code); and (ii) of rescission or resolution of reciprocal obligations; and (b) the subsidiary remedies that may be availed of when the principal remedies are unavailable or ineffective such as (i) accion subrogatoria or subrogatory action (Article 1177 of the Civil Code; see also Articles 1729 and 1893 of the Civil Code); and (ii) accion pauliana or rescissory action (Articles 1177 and 1381 of the Civil Code). And, in order to secure the integrity of final judgments, such ancillary remedies as attachments, replevin, garnishments, receivership, examination of the debtor, and similar remedies, are additionally provided for in procedural law. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them (Art. 1177, Civil Code; Gold Star Mining Co., Inc. vs. Lim-Jimena, 25 SCRA 597; Pascual vs. Secretary of Public Works, 110 Phil. 331). Subject to applicable laws, all rights acquired by virtue of an obligation, are transmissible if there has been no stipulation to the contrary (Art. 1178, Civil Code; see Bastida vs. Dy Buncio & Co., Inc., 93 Phil. 195).

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The principal remedies open to an obligee, upon the breach of an obligation, are generally judicial in nature and must be independently sought in litigation, i.e., an action for performance (specific, substitute or equivalent) or rescission (resolution) of a reciprocal obligation. The right to rescind (resolve) is recognized in reciprocal obligations; it is implicit, however, in third paragraph of Article 1191 of the Civil Code that the rescission there contemplated can only be invoked judicially. Hence, the mere failure of a party to comply with what is incumbent upon him does not ipso jure produce the rescission (resolution) of the obligation. Exceptionally, under the law and, to a limited degree, by agreement of the parties, extrajudicial remedies may become available such as, in the latter case, an option to rescind or terminate a contract upon the violation of a resolutory facultative condition. In the case of lease agreements, despite the absence of an explicit stipulation, that option has been reserved by law in favor of a lessee under Article 1673 of the Civil Code by providing that the lessor may judicially eject the lessee for, among other grounds, a violation of any of the conditions agreed upon in the contract. The provision, read in conjunction with Section 2, Rule 70, of the 1997 Rules of Civil Procedure, would , absent a contrary stipulation, merely require a written demand on the lessee to pay or to comply with the conditions of the lease and to vacate the premises prior to the institution of an action for ejectment. The above provisions, in effect, authorizes the lessor to terminate extrajudicially the lease (with the same effect as rescission) by simply serving due notice to the lessee. Extrajudicial Remedies Extrajudicial remedies (remedies that may be exercised without need of resorting to court action) may be available or resorted to — (1) When the law expressly grants such remedies such as in the case of the rights of an unpaid

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seller of personal property (Arts. 1526, et seq. and 1593, Civil Code, where a reservation to rescind by mere notice, although preferable, is not indispensable); or (2) When the right is reserved by a party in an agreement (see De Motors Corp. vs. Sanson, G.R. No. 55655, 8 February 1989; but see BacolodMurcia Co. vs. Court of Appeals, 182 SCRA 24) such as in the sale of real property (see Art. 1592, Civil Code) and, in general, in an option to terminate or rescind a contract upon the violation of a resolutory facultative condition (Consing vs. Jamandre, 64 SCRA 1; De la Rama Steamship Co. vs. Tan, 99 Phil. 1034; Angeles vs. Calasanz, 135 SCRA 323; Ponce Enrile vs. Court of Tax Appeals, 29 SCRA 504). Notice of resolution, however, must be given to the other party when the right is exercised (Banez vs. Court of Appeals, 59 SCRA 15; Palay, Inc. vs. Clave, 124 SCRA 638). But whether the extrajudicial remedy is granted by law or by agreement, its exercise may be subject to judicial scrutiny at the instance of the other party (see Consolidated Plywood Industries vs. IFC Leasing, 149 SCRA 448; University of the Philippines vs. De los Angeles, 35 SCRA 102). Similarly, resort to courts may be necessary when the right involves the retaking of property which is not voluntarily surrendered by the other party, this rule being predicated on the thesis that no one should take the law into his own hands (see Zulueta vs. Mariano, 111 SCRA 206). Judicial Remedies The judicial remedies may be grouped into — (1) Principal Remedies a.

Action for specific performance in obligations to give specific things (Arts. 1165 and 1167, Civil Code), substitute performance in an obligation

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to do (since the obligor cannot be compelled to himself perform the undertaking) or to deliver generic things (Art. 1165, Civil Code), or equivalent performance for damages (Arts. 1168 and 1170, Civil Code); or b.

Rescission (resolution) of a reciprocal obligation (Boysaw vs. Interphil Promotions, supra.) unless there is a just cause to fix a period (see Universal Corporation vs. Court of Appeals, 33 SCRA 1). In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other and until one has done or is ready to do his part the other incurs no default (Central Bank vs. Court of Appeals, 139 SCRA 46).

These remedies are not cumulative but alternative (Osario vs. Bennet, 41 Phil. 301; see Rose Packing Company, Inc. vs. Court of Appeals, supra.; Bacordo vs. Alcantara, 14 SCRA 730). If, however, fulfillment becomes impossible, the injured party may still seek rescission even after he has chosen specific performance (AysonSimon vs. Adamos, 131 SCRA 439). The court shall decree rescission where fulfillment is prohibited by lawful authority (see Central Bank vs. Court of Appeals, supra). The right to rescind is not absolute; rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement (Ocampo vs. Co, 52 SCAD 610, 233 SCRA 551; Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643). The court may instead grant a period (Gaboya vs. Cui, 38 SCRA 85; Angeles vs. Calasanz, 135 SCRA 323). Without a just cause, however, there would be no reason to fix a period (Roman vs. Court of Appeals, 137 SCRA 563; see Article 1191, Civil Code). Until the obligation is resolved, the parties are obligated to perform under the old terms of their reciprocal obligations (Delta Motors Corporation vs. Genuino, 170 SCRA 29).

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Article 1191 of the Civil Code contemplates judicial action, and a court decree is the only operative act that can result in the resolution of the obligation (Ocejo vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan de Dios, 84 Phil. 820; Tan vs. Court of Appeals, 175 SCRA 656). Thus, a seller cannot unilaterally and extrajudicially rescind a contract of sale where there is no express stipulation to that effect (Laforteza vs. Machuca, 333 SCRA 643; Co vs. Court of Appeals, 312 SCRA 528). In a contract containing a resolutory facultative condition to rescind in the event of breach, judicial recourse would be unnecessary although the act of cancellation, which must be known to the other party, could later be subject to judicial scrutiny and review (see Angeles vs. Calasanz, supra.; Cruz vs. Intermediate Appellate Court, 180 SCRA 703; see also discussion on Extrajudicial Remedies, supra.). The object of judicial review in contracts providing for automatic revocation in case of violation of the terms thereof is not to obtain a court declaration rescinding a contract which is already deemed rescinded by virtue of an agreement, but to determine whether or not the rescission has been proper. Where such propriety is sustained, the court decision will be merely declaratory of revocation and is not itself to be deemed the revocatory act (Spouses Pangilinan vs. Court of Appeals, 87 SCAD 468, 279 SCRA 590). An interesting ruling case was that of Central Bank of the Philippines vs. Court of Appeals (supra.). In April of 1965, Island Savings Bank had approved the loan application of P80,000 of Sulpicio M. Tolentino who correspondingly executed a real estate mortgage over his 100-hectare land. In May of 1965, the bank released only P17,000 payable within three years at semi-annual installments. The bank failed to make further releases until the Central Bank prohibited it from making new loans and investments and ultimately prohibited it from doing business. The acting superintendent of banks was put in charge of the bank. In 1968, the bank, in view of the nonpayment of the P17,000 released amount, filed an appli-

26

CIVIL LAW

Arts. 1163-1178

cation for the extrajudicial foreclosure of the mortgage. Tolentino filed a petition for injunction, specific performance or rescission and damages. The case reached the Supreme Court, which held: “Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either cases. But since Island Savings Bank is now prohibited from doing business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M. Tolentino. Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000 balance of the P80,000 loan, because the bank is in default only insofar as such amount is concerned , as there is no doubt that the bank failed to give P63,000. x x x” The general provisions of Article 1191 are inapplicable if what might be thought to be reciprocal obligations are really separate and distinct obligations (see Songcuan vs. Intermediate Appellate Court, 191 SCRA 28) or where specific remedies are provided for in certain juridical relations such as Article 1786 and Article 1788 on partnerships (Sancho vs. Lizarrage, 55 Phil. 601). The remedies on a secured debt have been held to be either an action to collect or to foreclose (Caltex vs. Intermediate Appellate Court, 176 SCRA 741). In the Margarita Suria case (Suria vs. Intermediate Appellate Court, 151 SCRA 661), the Supreme Court, denying the resolution of an obligation secured by a mortgage, has ruled that foreclosure should be the proper remedy. It might be submitted, however, that the remedies for the breach of an obligation are not necessarily lost by the availability of accessory undertakings which are not themselves constitutive nor in the nature of alternative obligations.

Art. 1179

OBLIGATIONS AND CONTRACTS Title I. Obligations

27

(2) Subsidiary Remedies (where the principal remedies are unavailable or ineffective) a.

Accion subrogatoria (subrogatory action) — an action against the debtor’s debtor (see Art. 1177, Civil Code, supra.), although, exceptionally, the law permits a direct action against the latter such as in actions by workers against the owner in contracts for a piece of work (Art. 1729, Civil Code), and by the principal against the subagent (Art. 1893, Civil Code).

b.

Accion pauliana (rescissory action) — an action to rescind contracts entered into by the debtor in fraud of creditors (Arts. 1177 and 1381, Civil Code).

(3) Ancillary Remedies Remedial law or procedural rules provide certain remedies, such as attachments, replevin, garnishment, receivership, examination of the debtor and similar other remedies, in order to secure the integrity of final judgments. Chapter 3 Different Kinds of Obligations

The Civil Code classifies obligations primarily into (a) pure and conditional (Arts. 1179-1192), (b) with a period (Arts. 1193-1198), (c) alternative (Arts. 1199-1206), (d) joint and solidary (Arts. 1207-1222), (e) divisible and indivisible (Arts. 1223-1225), and (f) with a penal clause (Arts. 1226-1230). Section 1 — Pure and Conditional Obligations Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once.

28

CIVIL LAW

Arts. 1180-1185

Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event. (1113) Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of Article 1197. (n) Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (1114) Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. (1115) Art. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a) Art. 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (1117) Art. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. (1118)

Arts. 1186-1189

OBLIGATIONS AND CONTRACTS Title I. Obligations

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119) Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. (1120) Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition. (1121a) Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: (1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;

29

30

CIVIL LAW

Arts. 1190-1191

(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (1122) Art. 1190. When the conditions have for their purpose, the extinguishment of an obligation to give, the parties upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return. As for obligations to do and not to do, the provisions of the second paragraph of Article 1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123) Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)

Arts. 1179-1192

OBLIGATIONS AND CONTRACTS Title I. Obligations

31

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n)

A pure obligation is one whose performance does not depend upon a condition or a period. A condition is a future and uncertain event, or a past event unknown to the parties (the condition being the parties’ later becoming aware or coming to know of the past event). A period or a term is a day certain — that which must necessarily come — although it may not be known when (see Arts. 1173 and 1193, Civil Code). When an obligation is subject neither to a condition nor to a period, it is demandable at once (see Art. 1179, Civil Code; Schenker vs. Gemperle, 5 SCRA 1042). An obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event (Art. 1179, Civil Code). In conditional obligations, the acquisition of rights (suspensive), or the extinguishments or loss of those already acquired (resolutory), shall depend upon the happening of the event which constitutes the condition (Art. 1181, Civil Code). But when the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of Article 1197 (Art. 1180, Civil Code), revoking the rule under the regime of the old Civil Code (Berg vs. Magdalena Estates, Inc., 92 Phil. 1101). The condition is suspensive when the acquisition of rights or demandability of the obligation must await the occurrence of the condition (People vs. Capule, 65 Phil. 582); it is resolutory when the obligation is at once due and demandable (Art. 1179, Civil Code; Villanueva vs. Girged, 110 Phil. 478) but the right is extinguished or lost upon the fulfillment of the condition (see Art. 1181,

32

CIVIL LAW

Arts. 1179-1192

Civil Code). The non-payment of the purchase price in a sale is a resolutory condition, for which the remedy could either be specific performance or rescission under Article 1191 (Central Bank of the Philippines vs. Bichara, 123 SCAD 697, 328 SCRA 807). The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place (Art. 1184, Civil Code; see Luzon Brokerage Co., Inc. vs. Maritime Shipping Co., Inc., 46 SCRA 381). The condition that some event will not happen at a determinate time shall render the obligation effective the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation (Art. 1185, Civil Code). The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment (Art. 1186, Civil Code; Recto vs. Harden, 100 Phil. 427; Philippine Long Distance Telephone Co. vs. Jeturan, 97 Phil. 981). Potestative, Casual, and Mixed Conditions A condition is potestative when its fulfillment depends upon the will of the parties; it is casual when its occurrence depends upon chance or the will of a third person or stranger; and it is mixed when it is partly potestative and partly casual. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, or partly upon chance or will of a third person and partly upon the will of the parties, the obligation shall take effect (see Art. 1182, Civil Code; Smith Bell & Co. vs. Motti, 44 Phil. 874; Hermosa vs. Longra, 93 Phil. 971; Romero vs. Court of Appeals, G.R. 107207, 23

Arts. 1179-1192

OBLIGATIONS AND CONTRACTS Title I. Obligations

33

November 1995). In a suspensive potestative condition dependent upon the sole will of the debtor, the whole obligation becomes void (Trillana vs. Quezon College, Inc., 93 Phil. 393), but not when such condition is resolutory (Art. 1113, Civil Code; Taylor vs. Uy, 43 Phil. 873). In Liebenow vs. Philippine Vegetable Oil Co. (39 Phil. 60), on the legal effect of a stipulation in an employment contract that the employee would be entitled to such amount, in addition to his fixed salary, by way of bonus as the Board of Directors might see fit to grant, the Supreme Court held: “We see no reason to doubt that a promise of this character creates a legal obligation binding upon the promissor, although in its actual results it may not infrequently prove to be illusory. Such a promise is not, in our opinion, nugatory, under Article 1115 of the Civil Code, as embodying a condition precedent exclusively upon the will of the obligor. Nor can it be held invalid under Article 1256 of the same Code, which declares that the validity and performance of a contract cannot be left to the will of one of the contracting parties. The uncertainty of the amount to be paid by way of bonus is also no obstacle to the validity of the contract (Art. 1273, Civil Code), since the contract itself specifies the manner in which the amount payable is to be determined, namely, by the exercise of the judgment and discretion of the employer.” Where the potestative condition is imposed, not on the birth of the obligation but on its fulfillment, only the condition must be deemed avoided, leaving unaffected the obligation itself (see Osmeña vs. Rama, 14 Phil. 99). Thus, the condition to pay a previously contracted indebtedness when the debtor decides to sell his house, although itself void as being potestative and exclusively dependent on his will, does not invalidate the pre-existing obligation itself (see Trillana vs. Quezon College, Inc., 93 Phil. 383). In Tible vs. Aquino (65 SCRA 207), the con-

34

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Arts. 1179-1192

dition that payment of a promissory note shall depend on whether or not the obligor “will operate concession” was similarly declared void as being solely dependent on the will of the debtor but not the obligation under the promissory note itself. When such obligation relates to the payment, not the constitution, of an obligation, it would seem preferrable to apply Article 1180, in relation to Article 1197, instead of Article 1182, of the Code and to construe the condition as a period, authorizing thereby the courts to fix it if the parties themselves fail to do so. In Patente vs. Omega (93 Phil. 218), the Supreme Court has ruled: “Article 1115 (now Art. 1180) of the Civil Code provides: ‘When the fulfillment of a condition depends upon the exclusive will of the debtor, the conditional obligation shall be void.’ It should be void and of no effect because if the will of the debtor be complied with, the collection would be impossible, and the right of the creditor illusory. The condition being declared void, should the obligation be likewise declared pure and unconditional? We believe not. If, by inadvertence or ignorance, the parties agree on a condition of payment contrary to law, why, upon the annulment of the condition, should the principal obligation be converted to pure, immediately demandable, when the original intention was to grant the debtor time for payment? To declare the obligation pure is to impose a judgment completely distinct from that agreed upon; another term should be determined compatible with the law and the will of the parties, and it is evident that a new condition should not depend solely on the creditor; it is likewise unjust to leave it to the exclusive will of the debtor, as to leave it to the sole discretion of the creditor. The Court should determine the period taking into consideration the circumstances under which the loan was granted (Art. 1128 now Art. 1197). Therefore, we conclude that when the period of payment in an obli-

Arts. 1179-1192

OBLIGATIONS AND CONTRACTS Title I. Obligations

35

gation is left to the exclusive will of the debtor, said condition should be annulled; but its annulment does not convert the obligation into simple or unconditional; and the remedy of the creditor in such case is to ask the Court to fix the period of payment. As the plaintiff claims payment of an obligation without first having obtained from the Court an order to fix the period of payment, the filing of the complaint is premature.” Impossible Conditions Impossible conditions, those contrary to good customs or public policy, and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon (Art. 1183, Civil Code; Litton vs. Luzon Surety Co., Inc., 90 Phil. 783). In the law on donations, and so in testamentary succession as well, such conditions are simply disregarded and considered not imposed (Arts. 727 and 873, Civil Code). Effects of Conditions The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation but not as to such fruits and interests meanwhile accruing. The fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated when the obligation imposes reciprocal prestations upon the parties. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different (see Art. 1187, Civil Code). In obligations to do and not to do, the courts shall determine

36

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Arts. 1179-1192

in each case the retroactive effect of the condition that has been complied with (Art. 1187, Civil Code; see PLDT vs. Jeturian, 97 Phil. 981). The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. The debtor may recover that which during the same time he had paid by mistake in case of a suspensive condition (Art. 1188, Civil Code). When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: (1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary (Art. 1189, Civil Code; see Laureta vs. Mata, 44 Phil. 668).

Arts. 1179-1192

OBLIGATIONS AND CONTRACTS Title I. Obligations

37

When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in Article 1189 (supra.), shall be applied to the party who is bound to return. As for obligations to do and not to do, the provisions of the second paragraph of Article 1187 (supra.) shall be observed as regards the effect of the extinguishments of the obligation (Art. 1190, Civil Code). In reciprocal obligations, the power to rescind is implied in case one of the obligors should not comply with what is incumbent upon him and the other is ready, the two parties being obligors and obligees of each other. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. These remedies are alternative, not cumulative (Ramirez vs. Court of Appeals, 98 Phil. 225), but rescission may still be sought even after fulfillment is chosen if, and within four years after, the latter should become impossible (Matute vs. Cheong, 37 Phil. 372; AysonSimon vs. Adamos, 131 SCRA 439). The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period such as when the breach is not “so substantial and fundamental as to defeat the object of the parties in making the agreement” (Banahaw, Inc. vs. Dejarme, 55 Phil. 338, cited in Gaboya vs. Cui, 38 SCRA 85; see also Angeles vs. Calasanz, supra.). In any case, these remedies are without prejudice to the rights of third persons (see Art. 1191, Civil Code). The breach contemplated in Article 1191 of the Civil Code is the obligor’s failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation (Padilla vs. Court of Appeals, 328 SCRA 434; Ong vs. Court of Appeals, 310 SCRA 1; Odyssey Park vs. Court of Appeals, 87 SCAD 735, 280 SCRA

38

CIVIL LAW

Art. 1193

253). In a contract to sell real property on installments, the full payment of the purchase price is a positive suspensive condition, the failure of which is not considered a breach, casual or serious, but simply an event which prevents the obligation of the vendor to convey title from acquiring any obligatory force. It is an oftrepeated rule that there can be no rescission of an obligation that is still non-existent, such as when the suspensive condition has yet to happen (Rillo vs. Court of Appeals, 83 SCAD 905, 274 SCRA 461). The liability of the first infractor shall be equitably tempered by the courts in case both parties have committed a breach of the obligation. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages (Art. 1192, Civil Code; see Camus vs. Price, Inc., 5 SCRA 581). While damages may be assessed in favor of the prejudiced party, only those kinds of damages consistent with the remedy of rescission may be granted, keeping in mind that had the parties opted for specific performance, other kinds of damages would have been called for which are absolutely distinct from those kinds of damages accruing by reason of rescission (Asuncion vs. Evangelista, 114 SCAD 384, 316 SCRA 848). Section 2 — Obligations with a Period Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is deemed conditional, and

Arts. 1194-1198

OBLIGATIONS AND CONTRACTS Title I. Obligations

it shall be regulated by the rules of the preceding Section. (1125a) Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Article 1189 shall be observed. (n) Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and interests. (1126a) Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other. (1127) Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (1128a) Art. 1198. The debtor shall lose every right to make use of the period: (1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; (2) When he does not furnish to the creditor the guaranties or securities which he has promised; (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;

39

40

CIVIL LAW

Arts. 1193-1198

(4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; (5)

When the debtor attempts to abscond. (1129a)

Obligations subject to a suspensive period or for whose fulfillment a day certain has been fixed shall be demandable only when that day comes (ex die). Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain (in diem). A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is considered conditional and shall be regulated by the rules on conditional obligations (see Art. 1193, Civil Code; Cf. Caldero vs. Carrion, 107 Phil. 549; Berg vs. Magdalena Estates, Inc., 92 Phil. 110). In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Article 1189 (supra.) shall be observed (Art. 1194, Civil Code). Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and interest (Art. 1195, Civil Code). Dr. A. Tolentino and Dr. A. Padilla have expressed the view that the premature payment could be governed by the rules on solutio indebiti (see Arts. 21592160, Civil Code, infra.). Justice E. Caguio has taken the position that since the obligation is, in fact, owing, although not yet demandable, solutio indebiti would be inapplicable. Under Article 1164, the “creditor has a right to the fruits of the thing from the time the obligation to deliver it arises.” In a conditional obligation, the rights of the parties over the fruits is rather explicit (see Art. 1187, Civil Code, supra.); the matter, unfortunately, is not that defined in an obligation with a term. It would seem, however, that the obligation to deliver (to give) meant by

Arts. 1193-1198

OBLIGATIONS AND CONTRACTS Title I. Obligations

41

Article 1164 is really when it is constituted, rather than when the delivery can be demanded. Justices JBL Reyes and R. Puno would appear to have this view. When Courts May Fix Period If the obligation does not fix a period, but from its nature and circumstances it can be inferred that a period has been intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. The courts shall determine in every case such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them (see Art. 1197, Civil Code; Gregorio Araneta, Inc. vs. Phil. Sugar Est. Dev., 20 SCRA 330; Gonzales vs. Jose, 66 Phil. 369; Concepcion vs. People, 74 Phil. 63; Patente vs. Omega, 93 Phil. 218; Cf. Arts. 1180, 1191 [supra.], 1682, 1687, Civil Code), unless by a new or novatory agreement (see Salvante vs. Cruz, 88 Phil. 236). In the foregoing cases, no cause of action to demand performance exists until after the period is fixed, since before that, the obligation is technically not yet due and demandable (Calero vs. Carrion, L-13246, 30 March 1960). In Borromeo vs. Court of Appeals (47 SCRA 65), the Supreme Court has implicitly held that the courts may fix such period not necessarily in a separate action but concurrently in the judicial demand for performance itself upon the justification that technicalities should not subordinate practical and substantial justice (see also Gregorio Araneta, Inc. vs. Philippine Sugar Development Co., Ltd., 20 SCRA 330; Chavez vs. Gonzales, 32 SCRA 547). In Buccat vs. Dispo (160 SCRA 240), the Court has ruled that when a lease is for an indefinite period (i.e., “as long as the land will serve the purpose for which it is intended as a school site x x x”), the right of action for the fixing of the period (Art. 1197, Civil Code), where the validity of the lease is questioned in court, should be reckoned not when the parties entered into the contract

42

CIVIL LAW

Arts. 1193-1198

but when the decision of the court upholding the validity of the contract is promulgated. Benefit or Use of the Period Whenever in an obligation a period is designed, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other (Art. 1196, Civil Code; see Pastor vs. Gaspar, 2 Phil. 392; Sarmiento vs. Villasenor, 43 Phil. 880; Abesamis vs. Woodcraft, Ltd., 30 SCRA 372). Thus, neither may the creditor demand nor the debtor tender the performance of the obligation before the arrival of the period, unless the contrary intention appears such as when the payment is to be made “on or before” a certain period which would indicate its being for the debtor’s benefit. Fortuitous event has been held to relieve the obligor from fulfilling his obligation during the time that the event prevents due compliance; the duration thereof, however, does not correspondingly extend the term or period of the obligation (see Victoria Planters vs. Victorias Milling, 97 Phil. 318). The debtor shall lose every right to make use of the period: (1) when he becomes insolvent after the obligation has been contracted, unless he gives a guaranty or security for the debt; (2) when he does not furnish to the creditor the guaranties or securities which he has promised; (3) when by his own acts he has impaired said guaranties or securities after their establishment, and when through fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; (4) when the debtor violates any undertaking, in consideration of which the creditor agreed to the period; and (5) when the debtor attempts to abscond (Art. 1198, Civil Code; see Visayan Distributors, Inc. vs. Flores, 92 Phil. 145; Daguhoy Ent. vs. Ponce, 96 Phil. 15; Song Fo & Co., vs. Oria, 33 Phil. 3; Recto vs. Harden, 100 Phil. 427).

Arts. 1199-1200

OBLIGATIONS AND CONTRACTS Title I. Obligations

43

Grace Period A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. The grace period must not be likened to an obligation the non-payment of which, under Article 1169 of the Civil Code, would generally still require judicial or extrajudicial demand before “default’’ can be said to arise. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. The demand by the creditor, however, shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declares; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins (Bricktown Development Corp. [its new corporate name Multinational Realty Development Corporation] and Mariano Z. Veralde vs. Amor Tierra Development Corp. and the Court of Appeals, G.R. No. 112182, 12 December 1994, 239 SCRA 126). Section 3 — Alternative Obligations Art. 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131) Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor.

44

CIVIL LAW

Arts. 1201-1205

The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. (1132) Art. 1201. The choice shall produce no effect except from the time it has been communicated. (1133) Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. (1134) Art. 1203. If through the creditor’s acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. (n) Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible. Damages other than the value of the last thing or service may also be awarded. (1135a) Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. Until then the responsibility of the debtor shall be governed by the following rules: (1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists; (2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages;

Arts. 1199-1206

OBLIGATIONS AND CONTRACTS Title I. Obligations

45

(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages. The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should become impossible. (1136a) Art. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. (n)

There may be one or several objects or prestations in an obligation; where there are two or more, the prestations may be conjunctive, in which case both or all must be complied with; alternative, in which case the obligor shall completely perform one of the alternatives (Art. 1199, Civil Code); and facultative, in which case one prestation is due but the obligor may render another in substitution (Art. 1206, Civil Code). Alternative Prestations at Debtor’s Choice In alternative obligations, the right of choice belongs to the debtor, unless it has been expressly granted to the creditor (Art. 1200, Civil Code). The creditor may not be compelled to receive part of one and part of the other undertaking (Art. 1199, Civil Code). When the debtor has the right of choice, he cannot choose those prestations which are impossible, unlawful or which could not have been the object of the obligation (see Art. 1200, Civil Code). The choice shall produce no effect except from the time it has been communicated (Art. 1201, Civil Code), and it is binding once made (Reyes vs. Martinez, 55 Phil.

46

CIVIL LAW

Arts. 1199-1206

492). The debtor shall lose the right of choice when among the prestations, whereby he is immediately bound, only one is practicable (Art. 1202, Civil Code). If through the creditor’s acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages (Art. 1203, Civil Code). The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed, taking as a basis the value of the last thing which disappeared or that of the service which last becomes impossible. Damages other than the value of the last thing or service may also be awarded (Art. 1204, Civil Code). It is logical that the law points to the last thing or the service which last became impossible since until the choice is made by the debtor, the risks and benefits on the different objects of the obligation, except the one that is finally and properly chosen (the effect of which choice retroacts to the date of the constitution of the obligation) or last to disappear or to become impossible, as the case may be, would solely be for the debtor’s account. Alternative Obligations at Creditor’s Choice When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. Until then, the responsibility of the debtor shall be governed by the following rules: (1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists; (2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim

Arts. 1199-1206

OBLIGATIONS AND CONTRACTS Title I. Obligations

47

any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages; (3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages; (4) If all the things are lost through a fortuitous event, the obligation is extinguished subject to the exceptional cases when the obligor renders himself liable even for a fortuitous event. The same rules shall be applied to obligations to do or not to do in case one, some, or all of the prestations should become impossible (Art. 1205, Civil Code). In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the chosen alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the difference between alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case, the choice generally becomes conclusive only upon the exercise of the remedy. For instance, in one of the remedies expressed in Article 1484 of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted to escape from a deficiency liability. Thus, if the case is one for specific performance, even when this action is selected after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may still be levied on execution and an alias writ may be issued if the proceeds thereof are insufficient to satisfy the judgment credit. So, also, a mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the repossession

48

CIVIL LAW

Arts. 1207-1208

thereof by the vendor-mortgagee would have the effect of foreclosure (Daniel L. Borbon II and Francisco L. Borbon vs. Servicewide Specialists, Inc. and Hon. Court of Appeals, G.R. No. 106418, 11 July 1996, 258 SCRA 634). Facultative Obligations When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud (Art. 1205, Civil Code; Quizana vs. Redugerio, 94 Phil. 218). Unless and until the debtor (with whom the option always lies) makes the substitution by communicating that decision to the creditor, there is but one prestation (the principal), in legal contemplation, and the loss, deterioration or improvement of the substitute would have no bearing on the rights and obligations of the parties. Conversely, once substitution is made, anything that may thenceforth affect the principal (original) prestation would be of no legal consequence to the obligation. Section 4 — Joint and Solidary Obligations Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each of the latter is bound to render, entire compliance with the prestations. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a) Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many

Arts. 1209-1216

OBLIGATIONS AND CONTRACTS Title I. Obligations

equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a) Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139) Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140) Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a) Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n) Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (1142a) Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143) Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subse-

49

50

CIVIL LAW

Arts. 1217-1221

quently be directed against the others, so long as the debt has not been fully collected. (1144a) Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his codebtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a) Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (n) Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a) Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n) Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible after one of

Arts. 1207-1222

OBLIGATIONS AND CONTRACTS Title I. Obligations

51

the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a) Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a)

The plurality of subjects, whether it exists among the active (creditors) or the passive (debtors) subjects or both, may result in joint or solidary obligations. A solidary obligation (mancomunidad solidaria, in solidum, or “joint and several”) arises when each of the creditors has a right to demand, or that each of the debtors is bound to render, entire compliance with the prestation (see Art. 1207, Civil Code). In a joint obligation (mancomunidad simple, or pro rata), however, the credit or debt is deemed divided into as many equal shares as there are creditors or debtors to each other, each resulting credit or debt being considered distinct from one another (see Art. 1208, Civil Code). Solidarity is not presumed (World Wide Insurance & Surety vs. Jose, 96 Phil. 45); solidary obligations exist only if (a) expressed by law, such as the liability of joint tort-feasors under Article 1294, the civil liability of coperpetrators of felonies under Article 112 of the Revised Penal Code and the liability of two or more promissors in negotiable instruments who use “I” instead of “We” in expressing their “promise” under Section 17 of the Negotiable Instruments Law (see also Arts. 1824, 1911, 1915, 1945, 1946 and 2157, Civil Code); (b) stipulated by the parties, such as by using “solidary,” “individually and collectively,” “joint and several,” “individual and joint” or equivalent terms or statements that would denote any

52

CIVIL LAW

Arts. 1207-1222

one of the obligor’s liability to perform the whole obligation (see Ronquillo vs. Court of Appeals, 132 SCRA 274); or (c) when the nature of the obligation calls for solidarity by its very essence (Art. 1208, Civil Code). The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does not solidarity of itself imply indivisibility (Art. 1210, Civil Code). But solidarity may exist among creditors (active solidarity) and/or among debtors (passive solidarity). Illustrative Application A, B, and C owe P9,000 to X, Y and Z. Who can demand up to how much and against whom the payment of the obligation? (1) If A, B, and C are joint debtors and X, Y, and Z are likewise joint creditors, X, Y, and Z may each demand P1,000 only from each debtor; hence, X may demand P1,000 from A, P1,000 from B and P1,000 from C; Y may demand P1,000 from A, P1,000 from B and P1,000 from C; and Z may demand P1,000 from A, P1,000 from B, and P1,000 from C (Romulo vs. Desalla, 108 Phil. 346). If the obligation is indivisible, like an obligation to deliver a horse, then the demand can be made, and the compliance shall be met, only by their collective acts; hence, X, Y, and Z, acting collectively, may demand the delivery of the horse from A, B, and C, collectively (see Art. 1209). The inability or failure of a debtor to comply with the obligation converts the indivisible prestation to one of indemnity for damages; the debtors who may have been ready to fulfill the prestation are liable only to the extent of their corresponding portion of the price of the thing or value of the service in which the obligation consists (see Art. 1224, Civil Code). (2) If A, B, and C are solidary debtors and X, Y, and Z are solidary creditors, any one, any two or all of the

Arts. 1207-1222

OBLIGATIONS AND CONTRACTS Title I. Obligations

53

creditors X, Y, and Z may demand the entire sum of P9,000 from any one, any two, or all of the debtors A, B, and C (see Art. 1216, Civil Code; see also Imperial Insurance Inc. vs. David, 133 SCRA 317 and PNB vs. Independent Planters Assn., 122 SCRA 113). Payment to one of the solidary creditors made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor to whom the offers are made may choose which offer to accept (see Article 1217, Civil Code; Camus vs. Court of Appeals, 107 Phil. 4). While the debtor may pay any one of the solidary creditors, if any demand, judicial or extrajudicial, has been made by one of them, however, payment should be made to him (see Art. 1214, Civil Code). The same rules apply if the obligation is indivisible, e.g., to deliver a horse; in this case, the default of one of the solidary debtors renders all of them liable as far as the creditors are concerned, although among the debtors themselves, the non-defaulting debtors may proceed against the defaulting debtor. (3) If A, B, and C are joint debtors and X, Y, and Z are solidary creditors, any one, any two or all of the creditors may demand P3,000 only from each of the joint debtors, i.e., P3,000 from A, P3,000 from B, and P3,000 from C. If the prestation is indivisible, the demand by any, some or all of the creditors must be made against A, B, and C, collectively. Art. 1224 would be applicable where one or some but not all are not ready to fulfill the obligation. (4) If A, B, and C are solidary debtors and X, Y, and Z are joint creditors, each of the creditors may only demand P3,000 each from any one, any two or all of the debtors; hence, X may demand P3,000 from any one, any two or all three of the debtors A, B, and C; Y and Z may

54

CIVIL LAW

Arts. 1207-1222

proceed on their respective shares of P3,000 against any one, any two or all three of the debtors. Additional Rules on Solidary Obligations A solidary creditor cannot assign his rights without the consent of the other solidary creditors (Art. 1123, Civil Code). Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter (Art. 1212, Civil Code). This provision is intended primarily for the solidary creditors among themselves and not as far as such actions might affect the debtors. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors on grounds not personal to the latter (see Universal Motors Corporation vs. Court of Appeals, 205 SCRA 448), shall extinguish the obligation, without prejudice to the provisions of Article 1219 (infra.). The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them (Art. 1215, Civil Code). The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected (Art. 1219, Civil Code). The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors (Art. 1220, Civil Code). He who makes the payment may claim from his codebtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such

Art. 1223

OBLIGATIONS AND CONTRACTS Title I. Obligations

55

share shall be borne by all his co-debtors, in proportion to the debt of each (Art. 1217, Civil Code). Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal (Art. 1218, Civil Code). If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor for the price and payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply (Art. 1221, Civil Code). The rule applies only to the debtors among themselves. Insofar as the creditors are concerned, the default of one solidary debtor is default by the other solidary debtors. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible (Art. 1222, Civil Code; see Chinese Chamber of Commerce vs. Pua, 16 Phil. 406; Inchausti vs. Yulo, 34 Phil. 978; Luzon Surety Co. vs. Marbella, 109 Phil. 734). Section 5 — Divisible and Indivisible Obligations Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter

56

CIVIL LAW

Arts. 1223-1225

or modify the provisions of Chapter 2 of this Title. (1149) Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists. (1150) Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a)

An obligation may be divisible or indivisible. It is indivisible when the object or service which is the subject matter of the prestation is not susceptible of partial compliance either because of its nature (physical) or because it is provided by law (legal) or it is intended by the parties (contractual). Generally, obligations are indivisible since the integrity of obligations requires their payment or performance completely (see Arts. 1233 and 1248, Civil Code). Obligations to give definite things and those which are not susceptible of partial performance are deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work, the

Arts. 1226-1227

OBLIGATIONS AND CONTRACTS Title I. Obligations

57

accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. Even when the object or service may be physically divisible, an obligation is indivisible if it is so provided by law or so intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case (see Art. 1225, Civil Code). The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the governing rules on the nature and effect of obligations (see Chapter 2, supra.; Art. 1223, Civil Code). A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the things or of the value of the service in which the obligation consists (Art. 1224, Civil Code). In a solidary indivisible obligation, the indemnity for damages is demandable against the other solidary debtors but the latter cannot seek indemnification against the defaulting solidary debtor. Section 6 — Obligations with a Penal Clause Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the pen-

58

CIVIL LAW

Arts. 1226-1230

alty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a) Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n) Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) Art. 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause. (1155)

An obligation with a penal clause is one that contains an accessory undertaking, primarily intended to induce faithful performance of the principal prestation that becomes due and demandable under the terms thereof, as and when there arises a breach of the obligation. A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligation and to provide, in effect, for what could be the liquidated damages resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. Although a court may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that

Arts. 1226-1230

OBLIGATIONS AND CONTRACTS Title I. Obligations

59

contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with (Ligutan vs. Court of Appeals, G.R. No. 138677, 12 February 2002, 376 SCRA 560). Effects Under Article 1226, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interest in case of non-compliance, except: (1) when the contrary is stipulated; (2) when the debtor refuses to pay the penalty in the obligation in which case the creditor is entitled to interest on the amount of the penalty in accordance with Article 2209; and (3) when the obligor is guilty of fraud in the fulfillment of the obligation (Country Bankers, Ins. vs. Court of Appeals, 201 SCRA 458; Pamintuan vs. Court of Appeals, 94 SCRA 556; Cabarroguis vs. Vicente, 107 Phil. 340). The penalty may be enforced only when it is demandable in accordance with the provisions of the Code (Art. 1226, Civil Code; Araneta vs. Paterno, 91 Phil. 686). The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him (Vitug-Dimatulac vs. Coronel, 40 Phil. 686). Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted to him. If, however, after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced (see Art. 1227, Civil Code). Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Art. 1228, Civil Code; Palacios vs. Cavite, 12 Phil. 140).

60

CIVIL LAW

Arts. 1226-1230

The court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the court if it is iniquitous or unconscionable (Art. 1229, Civil Code; see Makati Dev. Corporation vs. Empire Ins. Co. Inc., 20 SCRA 557). The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals, just an example, the Court has tempered the penalty charges after taking into account the debtor’s pitiful situation and its offer to settle the entire obligation with the creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular performance is made by the debtor. The stipulated penalty might even be deleted such as when there has been substantial performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it. (Ligutan vs. Court of Appeals, G.R. 138677, 12 February 2002). The power of the courts to reduce penalties is inapplicable to final and executory judgments (Comm. Credit Corp. vs. Court of Appeals, 169 SCRA 1). These provisions hardly make any real difference between penalty and liquidated damages (governed by Arts. 22262228, Civil Code) as far as their legal consequences are concerned (Lambert vs. Fox, 26 Phil. 288) although the Civil Code deals primarily with these two matters separately (Joe’s Radio vs. Alto Electronics, 104 Phil. 333). The nullity of the penal clause does not carry with it the nullity of the principal obligation, but the nullity of the principal obligation carries with it that of the penal

Art. 1231

OBLIGATIONS AND CONTRACTS Title I. Obligations

61

clause (see Art. 1230, Civil Code). Where the penalty is a nullity, Article 1229 of the Civil Code would obviously be inapplicable. Chapter 4 Extinguishment of Obligations General Provisions Art. 1231. Obligations are extinguished: (1)

By payment or performance;

(2)

By the loss of the thing due;

(3)

By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor; (5)

By compensation;

(6)

By novation.

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

Modes of Extinguishing Obligations Obligations are extinguished: (1) by payment or performance; (2) by the loss of the thing due; (3) by the condonation or remission of the debt; (4) by the confusion or merger of the rights of creditor and debtor; (5) by compensation; and (6) by novation. Other causes of extinguishments of obligations include annulment, rescission, fulfillment of a resolutory condition, and prescription (see Art. 1231, Civil Code). The enumeration under Article 1231 is not exclusive (see Tejuco vs. E.R. Squib & Sons, 103 Phil. 594); death and fortuitous event, among other causes, as well as discharge in insolvency and discharge of a negotiable instrument under special laws, may also be cited. Mutual desistance,

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said the Supreme Court in Saura Import & Export Co. vs. DBP (44 SCRA 445), is likewise a mode of extinguishing obligation. Section 1 — Payment or Performance Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157) Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n) Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. (n) Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a) Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor’s

Arts. 1239-1244

OBLIGATIONS AND CONTRACTS Title I. Obligations

consent. But the payment is in any case valid as to the creditor who has accepted it. (n) Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on “Natural Obligations.” (1160a) Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a) Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor’s rights; (2) person;

If the creditor ratifies the payment to the third

(3) If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a) Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164) Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due.

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In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will. (1166a) Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales. (n) Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (1167a) Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a) Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a) Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. (1170)

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Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n) Art. 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a)

Payment means not only the delivery of money but also the performance, in any other manner, of an obligation (Art. 1232, Civil Code). Payment or performance, if properly made, puts an end to obligations. At times, however, it may itself also create or give rise to a new juridical relation, such as in legal subrogation or in payment to a third person in possession of the credit, in which cases payment may also be considered as a juridical act and not a mere event or fact by which normally it is characterized. Integrity of Payment A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be (Art. 1233, Civil Code). The creditor cannot be compelled to receive the prestation partially, and neither may the debtor be required to make partial payments (see Art. 1248, Civil Code). The burden of proof of

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payment lies with the debtor (Pinon vs. De Osorio, 30 Phil. 365; however, see presumption of payment of interest and installments under Art. 1176, supra.). Some exceptions from strict integrity of payment are provided for by law: The first is when the obligation has been substantially performed in good faith, in which case the obligor may recover as though there has been a strict and complete fulfillment, less damages suffered by the obligee (see Art. 1234, Civil Code; JM Tuason & Co. vs. Javier, 31 SCRA 829); the second is when the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, in which case the obligation is deemed fully complied with (Art. 1235, Civil Code; see Joe’s Radio vs. Alto Electronics, 104 Phil. 333), but a mere receipt of payment is not necessarily acceptance (see Esguerra vs. Villanueva, 21 SCRA 1314); the third is when there is an express stipulation; and the fourth is when the debt is in part liquidated and in part unliquidated (Art. 1248, Civil Code). The Payor and the Payee Normally, payment is made by the debtor and to the creditor or by and to their respective agents or successors-in-interest; such, however, is not always the case. In these cases, generally, the rules may be said to be as follows: (1) In the case of payors (a) If payment is made by the debtor, his agent or successor-in-interest, the obligation is simply extinguished, and the payment does not give rise to a new juridical relation, subject to certain exceptions such as in dation in payment where implied warranties may become operative (see Art. 1245, Civil Code). (b) If payment is made by a third person interested in the fulfillment of an obligation (such as by a

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guarantor or surety or by a creditor paying a preferred creditor), the obligation is extinguished. In turn, he can be subrogated to the rights of the creditor (see Art. 1237, also Art. 1302, Civil Code; BPI vs. McCoy, 52 Phil. 831). (c)

If payment is tendered or made by a third person not interested in the fulfillment of an obligation — (i)

The creditor is not bound to accept payment, unless there is a stipulation to the contrary (see Art. 1236, Civil Code);

(ii) If accepted, the payor may demand what he has paid (reimbursement), except that if he paid without the knowledge or against the will of the debtor, in which case he can recover only insofar as the payment has been beneficial to the debtor (see Art. 1236, Civil Code) at the time payment is made (RFC vs. Court of Appeals, 94 Phil. 985), and he cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty (Art. 1237, Civil Code). Legal subrogation is presumed when payment is made with the express or tacit approval of the debtor (Art. 1302, Civil Code). These rules are inapplicable to the exercise of the right of repurchase which is not a debt but a right (Gonzaga vs. Garcia, 27 Phil. 7). (iii) Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor’s consent; the payment, however, is in any case valid as to the creditor who has accepted it (Art. 1238, Civil Code). In obligations to give, payment must be made by one who has the free disposal of the thing due and capacity to

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alienate; otherwise, it shall not be valid, without prejudice to the provisions of Article 147 (infra.) under the Title on “Natural Obligations” (see Art. 1239, Civil Code). (2) In the case of payees (a) Payment should be made to the person in whose favor the obligation has been constituted, or his successor-in-interest, or any person authorized to receive it (see Art. 1240, Civil Code; see Banco de Oro vs. Equitable Bank, 157 SCRA 188; Aranas vs. Tutaan, 127 SCRA 838; Tuason vs. Zamora & Sons, 2 Phil. 305). 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 (see Art. 1241, Civil Code). Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid (Art. 1243, Civil Code). (b) Payment to a third person shall be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved (a) if after the payment, the third person acquires the creditor’s rights; (b) if the creditor ratifies the payment to a third person; or (c) if by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment (Art. 1241, Civil Code). (c)

Payment made in good faith to any person in possession of the credit shall release the debtor (Art. 1242, Civil Code). The term “credit” does not necessarily mean the document evidencing the right. A “person in possession of the credit” refers to a person who is not the creditor but who, on the face of the instrument, appears to be the rightful holder thereof. In negotiable instruments, that person would be the possessor

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of a bearer instrument who is neither the lawful holder (creditor) thereof nor the latter’s agent. Exceptionally, it might likewise refer to a person in possession of an instrument payable to the order of another person where both their names are completely identical. Identity of Payment The identity of payment requires that the very thing, service or forbearance, as the object of the prestation, must be performed or observed. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than, that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will (Art. 1244, Civil Code; see Florentino vs. PNB, 98 Phil. 99). The parties may agree on dation in payment whereby property is alienated to the creditor in satisfaction of a debt in money; in this case, the payment shall be governed by the law on sales (see Art. 1245, Civil Code). To constitute dation in payment, however, the true intention of the parties, express or implied, must be clear (Filinvest vs. Philippine Acetylene Co., 111 SCRA 421; see also Lopez vs. Court of Appeals, 114 SCRA 671). Dacion en pago requires a transfer of ownership of the thing (PNB vs. Pineda, 197 SCRA 1). When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration in resolving the matter (Art. 1246, Civil Code). Unless it is otherwise provided, the extrajudicial expenses required by the payment shall be for the account

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of the debtor. With regard to judicial costs, the Rules of Court shall govern (Art. 1247, Civil Code). Uniform Currency Act and Art. 1249 In money obligations, the Civil Code provides: Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is the legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed or when through the fault of the creditor they may have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. The first part of the above article was modified by Republic Act No. 529 (approved on June 16, 1950), as amended by Republic Act No. 4100. The amendatory law was itself repealed by Republic Act No. 8183 (“An Act Repealing Republic Act Numbered Five Hundred TwentyNine, As Amended, entitled An Act to Assure the Uniform Value of Philippine Coin and Currency”), approved on June 11, 1996. The then R.A. No. 529 declared null and void any provision in an obligation contracted in the Philippines that would require payment (a) in gold or in foreign currency, or (b) in Philippine currency measured in gold or in foreign exchange. The obligation itself was valid, and it was to be discharged by payment in legal tender. Any other domestic obligation incurred was to be discharged in Philippine legal tender. Under R.A. No. 8183, obligations contracted in the Philippines can be denominated and valued at any convertible currency acceptable to the Bangko Sentral ng Pilipinas. Its essence is to allow parties to agree on what

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currency they wish to utilize in their business transactions. The former doctrine under R.A. No. 529 was that the legal tender should be measured in the prevailing rate of exchange at the time the obligation was incurred (Arrieta vs. NARIC, 10 SCRA 74). It was subsequently held, however, that if the obligation was incurred after the enactment of R.A. No. 529, the rate of exchange should be that prevailing at the time of payment since the law itself did not provide for the rate of exchange for the payment of such obligation (Kalalo vs. Luz, 34 SCRA 337). In Ponce vs. Court of Appeals (90 SCRA 533), the Supreme Court reiterated the rule by holding that when the obligation was incurred in, or based on, foreign exchange, the legal tender to be paid would be at the rate of exchange prevailing at the time of payment. In General Insurance & Surety Corp. vs. Union Insurance Society of Canton, Ltd. (179 SCRA 530, elaborated in Republic Resources Dev. Corp. vs. Court of Appeals, 203 SCRA 164, and San Buenaventura vs. Court of Appeals, 181 SCRA 197), the Court held: (a) If the obligation was incurred prior to the enactment of R.A. No. 569 and required payment in a particular kind of coin or currency other than the Philippine currency, the same shall be discharged in Philippine currency at the prevailing rate of exchange at the time the obligation was incurred, except in case of a loan made in a foreign currency in which event the rate of exchange prevailing at the stipulated date of payment shall prevail. (b) If, however, the obligation was incurred after the enactment of R.A. No. 529, the provision of the law which requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied. R.A. No. 529 does not provide for the payment of obligation after

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the enactment of the said Act. Logically, therefore, the rate of exchange shall be that prevailing at the time of payment rather than on the date of incurrence. R.A. No. 529, concededly, left some gaps on its proper application. While it did fail to provide for the payment of obligations incurred after its effectivity, it indeed seemed logical to conclude that the law meant to apply the rate of exchange prevailing at the time of payment but only to obligations incurred in, or based on, foreign currency. This view was also just and fair in that it maintains and preserves the real value of the foreign exchange-incurred obligation to the date of its payment. When, however, the obligation was incurred in Philippine currency, there should be no need for the law to still make any reference to any rate of exchange or to a measure of value in foreign currency in its payment. The obligation should instead be then understood to be payable in the same amount of Philippine currency conformably with Article 1250 of the Civil Code. An adjustment in value, under this provision, could only be made in the event of extraordinary inflation or deflation and only if the parties did not stipulate against such adjustment. To assume otherwise would be to defeat the clear intendment of the law for not only did Republic Act No. 529 prohibit a stipulation requiring payment in foreign currency or in gold but likewise a stipulation providing for payment in Philippine currency measured in its value in gold or in foreign currency. To exemplify the measure of payment of obligations incurred after the effectivity of the law then in force under this view — (1) If incurred in Philippine currency, no adjustment was to be made (hence, if P10,000 was borrowed, payable in a foreign currency, the same amount of P10,000 would be due upon payment irrespective of any change in the rates of exchange prevailing at the time the obliga-

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tion was constituted and the time it is paid) except to the extent that Article 1250 of the Civil Code on extraordinary inflation or deflation could apply; (2) If incurred in foreign currency or in Philippine currency but based on foreign exchange values, the payment would be made in the Philippine currency measured at the rate of exchange prevailing at the time of payment (hence, a $1 obligation incurred at a time when the rate of exchange was $1:P10 and when payable the rate becomes $1:P20, would be paid in Philippine currency at P20). The excepted transactions under R.A. No. 529 included: (a) transactions involving identifiable funds of foreign governments and international financial institutions; (b) transactions affecting high priority economic projects financed by or through foreign funds; (c) forward exchange transactions between banks or between banks and other persons; and (d) import-export and other international banking, financial investment and industrial transactions (see Zagala vs. Jimenez, 152 SCRA 147). The second part of Article 1249 relates to payments in mercantile documents. A negotiable instrument, like some other mercantile documents, may be a medium of exchange but is not quite legal tender for the payment of money obligations (Belisario vs. Natividad, 60 Phil. 156). The established jurisprudence is that a creditor may not be compelled to accept payment in mercantile documents (see Soco vs. Militante, 123 SCRA 160; Villanueva vs. Santos, 67 Phil. 648); an acceptance thereof, however, by the creditor may produce the effect of payment under the circumstances declared by Article 1249 of the Civil Code, that is, upon the mercantile documents being cashed or by its impairment due to the creditor’s fault. In New Pacific Timber vs. Seneris (101 SCRA 684), the Supreme Court considered it unjustified for a cash-

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ier’s check to be rejected by a judgment creditor as payment of the redemption price by the debtor of the property levied on execution by the sheriff. Citing Section 63 of the Central Bank Act (to the effect that a check which would have been cleared and credited to the account of the creditor should be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to the latter’s account), the tribunal ruled that the act of the holder who would procure that check to be certified operates as an assignment of funds to the creditor. It would seem, however, that the cited provision of the Central Bank Act might be pertinent, if at all, only when the creditor has an account with the same bank. Under Section 189 of the Negotiable Instruments Law, the certification by the bank merely operates as an assignment of funds to the credit of the drawer, not the payee. Perhaps, Article 19 of the Code should have enough justification for the Court’s conclusion. But whatever misimpression one might gather from the language of the above case, subsequent decisions of the Court make it crystal clear that a check, whether a manager’s check or an ordinary check, is not legal tender and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the creditor (Roman Catholic Church vs. Court of Appeals, G.R. No. 72110, 16 November 1990). When accepted, however, it can become effective as a means of payment subject to the conditions expressed in Article 1249 of the Civil Code (see Fortunado vs. Court of Appeals, 196 SCRA 269). The rules do not necessarily apply in the exercise of a right. Thus, in Leticia Co vs. PNB (114 SCRA 842), the Court has ruled that the use by a mortgagor of a bank manager’s check is a valid means to exercise the redemption right. In NAMARCO vs. FUND (49 SCRA 238), the Supreme Court has said that Article 1249 of the Civil Code,

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providing that the delivery of notes, bills or other mercantile documents shall produce the effect of payment when impaired by the creditor’s fault, does not apply to a check issued by the debtor himself, since no prejudice to him can result thereby. This is to say that an issuer of a negotiable instrument, to the extent that he is not prejudiced, may be required to re-issue a replacement of the impaired or lost instrument. Extraordinary Inflation or Deflation The term “extraordinary” inflation or deflation is explained in Filipino Pipe and Foundry Corp. vs. MWSS (161 SCRA 32) thusly: Extraordinary inflation (or deflation) exists when “there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.” An example of extraordinary inflation, the Court has observed, is the situation that has happened to the Deutchmark: “More recently, in the 1920’s Germany experienced a case of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S. Dollar. By May of the same year, it had stumbled to 62 to the U.S. Dollar. And as prices went by rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. Dollar” (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]). In Huibonhoa vs. Court of Appeals (117 SCAD 281, 320 SCRA 625), the Court has expressed that there is inflation when there appears to be an increase in the volume of money and credit relative to available goods, resulting in a substantial and continuing rise in the general price level. The decline in the purchasing power of the Philippine currency is of judicial notice and cannot be

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considered unforeseeable, for this is simply a universal trend that has not spared our country. The party alleging the supervening event of extraordinary inflation must lay down the factual basis for the application of Article 1250 because the same is never assumed (Singson vs. Caltex, 134 SCAD 219, 342 SCRA 91). Article 1250 of the Civil Code needs an official declaration of inflation or deflation, as the case may be, by competent government authorities for the law to apply (Mobile Oil Philippines vs. Court of Appeals, 180 SCRA 651; Hahn vs. Court of Appeals, G.R. No. 55372, 31 March 1989). Article 1250 does not apply in non-contractual obligations. Accordingly, no adjustment would be authorized in obligations arising from tort (Velasco vs. Meralco, 42 SCRA 556), in expropriation proceedings (Commissioner of Public Highways vs. Burgos, 96 SCRA 831), and in the subrogatory rights of an insurer against the person whose negligence or fault has caused the insurer’s liability (St. Paul Insurance vs. Macondray & Co., 70 SCRA 122), these obligations not being contractual in nature. In Commissioner of Public Highways vs. Francisco Burgos (96 SCRA 831), the Court has ruled that Article 1250 of the Civil Code seems to be the only provision in our statutes which provides for payment of an obligation in an amount different from what has been agreed upon by the parties because of the supervening of extraordinary inflation or deflation. It is clear that the provisions of the said article applies only to cases where a contract or agreement is involved. It does not apply where the obligation to pay arises from law, independent of contract. The taking of private property by the government in the exercise of its power of eminent domain does not give rise to a contractual obligation. Moreover, the law clearly provides that the value of the currency at the time of the establishment of the obligation shall be the basis of payment which, in cases of expropriation, would be the value of the peso at the time of the taking of property when the obligation of the government to pay arises.

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In fine, Article 1250 would apply in order to warrant a revaluation or devaluation of the obligation (adjusted according to present values) when the following conditions concur — (1) existence of extraordinary inflation or deflation of the currency stipulated; (2) an obligation to pay a sum certain in money; (3) the obligation is contractual in nature; and (4) there exists no stipulation to the contrary. When the above conditions concur, an adjustment shall be made so that “the value of the currency at the time of the establishment of the obligation shall be the basis of payment.” Hence, if P1 were required to purchase a specific thing at the time a contractual obligation is constituted and at the time of payment as a result of extraordinary inflation one would need P10 to buy the same thing, then the amount to be paid thereupon, unless otherwise stipulated, shall be P10 less whatever may be considered the ordinary inflation between the time of incurrence and the time of payment. By extraordinary inflation or deflation of currency is meant one that is uncommon and abrupt or sudden; where the inflation, for instance, would simply be the equivalent of, or would merely approximate, the normal cost of money or standard rates of interest in loan obligations, the inflation can only be considered as ordinary. The payment of legal interest, said the Court in Republic vs. Juan (92 SCRA 26), should be considered sufficient compensation for any inflation that may have arisen. The parties, however, may stipulate to allow an adjustment of the obligation even in cases of ordinary inflation or deflation. Place of Payment Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the

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payment shall be made wherever the thing might be at the moment the obligation was constituted (see Warner, Barnes & Co. vs. Inza, 43 Phil. 505). In any other case, the place of payment shall be the domicile of the debtor (Gomez vs. Ng, 76 Phil. 555). If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These rules, however, are without prejudice to venue under procedural laws (see Art. 1251, Civil Code). Special Forms of Payment a.

Application of Payments

Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a) Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173) Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a)

The rules on application of payments under Articles 1252 and 1253 apply only when: (a) there are several

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debts; and (b) the several debts are owing from one debtor to a single creditor. Hence, where a P500 debt, secured by a guarantor up to P200, is payable in installments all of which have matured without being paid, the rules on application of payments would not apply since there is but one obligation. Accordingly, a partial payment can be rejected by the creditor; if accepted by the latter, neither is the debtor entitled nor can the guarantor claim that the part payment shall be deemed to be that portion guaranteed as being more onerous (see Reparations Commission vs. Universal Deep-Sea Fishing and Manila Surety Co., 83 SCRA 764). The rules apply to a person owing several debts of the same kind to a single creditor. Thus, a payment made by the surety or guarantor entitles the latter, not the debtor, to have payment applied exclusively to the guaranteed liability (see Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967; Socony-Vacuum Corp. vs. Miraflores, 67 Phil. 304). In cases where the provisions on application of payments apply, the following rules govern: (1) The debtor may declare at the time of making the payment to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due (see Art. 2252, Civil Code). If the debt produces interest, payment of the principal shall not be deemed to have been made until the interest has been covered (Art. 1253, Civil Code). (2) If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless

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Art. 1255

there is a cause for invalidating the contract (see Art. 1252, Civil Code). (3) When the payment cannot be applied in accordance with the preceding rules, or if the application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionally (Art. 1254, Civil Code), an exception from the rule of integrity of payments. The first choice in the application of payment lies with the debtor (U.P. Recreation Club, Inc. vs. Alto Surety & Insurance Co., 104 Phil. 534); once made, the application is final (Bachrach Garage and Taxicab Co. vs. Galingco, 39 Phil. 912). The debtor, however, may only make his application to debts that have become due, unless he has the benefit of the period, and in interest-bearing debts, the debtor’s payment must first be applied to the interest and then only to the principal (see Guanzon vs. Llantada, 94 Phil. 234). No choice having been made at the moment of payment, the creditor may state in the receipt of the debt to which the payment is to be applied which becomes operative if the debtor accepts it without objections (see Sanz vs. Lavin Brothers, 6 Phil. 299). If neither the debtor nor the creditor has made the application, the payment shall be by operation of law, i.e., the payment shall apply to the debt most onerous to the debtor. A secured debt is more onerous than an unsecured obligation (Ligget & Myers Tobacco Corp. vs. Associated Insurance & Surety Co., 109 Phil. 1093), and a sole debt is more onerous than a solidary indebtedness (Commonwealth vs. Far Eastern Surety & Ins. Co., 83 Phil. 305). b.

Payment by Cession

Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This ces-

Art. 1256

OBLIGATIONS AND CONTRACTS Title I. Obligations

81

sion, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. (1175a)

The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is a stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements, which on the effect of the cession are made between the debtor and his creditors, shall be governed by special laws, e.g., laws on insolvency (see Art. 1255, Civil Code; Act No. 1956, as amended; see Ignacio vs. Martinez, 33 Phil. 576). There can be no payment by cession under Article 1255 where there is only one creditor; the article contemplates the existence of two or more creditors and involves the assignment of all the debtor’s property (DBP vs. Court of Appeals, 284 SCAD 14). c.

Tender of Payment and Consignation

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect;

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CIVIL LAW

(5) (1176a)

Arts. 1256-1261

When the title of the obligation has been lost.

Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. (1178) Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1179) Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180) Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a)

If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the judicial consignation of the thing or sum due (see Art. 1256, Civil Code).

Arts. 1256-1261

OBLIGATIONS AND CONTRACTS Title I. Obligations

83

In order that tender of payment and consignation may be valid and effective against a creditor, the following requisites should concur: (1) The debt sought to be paid must be due; (2) There must be a valid and unconditional tender of payment; consignation alone or tender of payment may be dispensed with in the following cases: (a) When the creditor is absent or unknown, or does not appear at the place of payment; (b) When he is incapacitated to receive the payment at the time it is due; (c)

When, without just causes, he refuses to give a receipt;

(d) When two or more persons claim the same right to collect; and (e)

When the title of the obligation has been lost (Art. 1256, Civil Code; Rural Bank of Parañaque vs. Court of Appeals, 104 SCRA 151).

A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the creditor. Thus, in one case, where a buyer had offered a certified personal check for the payment of the last installment of the purchase price of land, said check being neither legal tender nor the currency stipulated in the contract, there was, the Court ruled, no valid tender of payment, and it would be error to conclude that there was tender payment by a buyer simply because said buyer had sufficient available funds on or before the grace period for paying the purchase price expired. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the former’s obli-

84

CIVIL LAW

Arts. 1256-1261

gation and demanding that the latter accept the same (Roman Catholic vs. Court of Appeals, G.R. No. 72110, 16 November 1990). However, an offer in writing to pay a specific sum of money, if rejected on some other grounds, is equivalent to the actual production and tender of the money (see Sec. 24, Rule 123, Rules of Court; see also McLaughlin vs. Court of Appeals, 144 SCRA 693); (3) The consignation of the thing due must first be announced to the persons interested in the fulfillment of the obligation; (4) Consignation shall be made by depositing the things due at the disposal of judicial authority (Ercillo vs. Court of Appeals, 192 SCRA 163), before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases; and (5) The consignation having been made, the interested parties shall also be notified thereof (Art. 1258, Civil Code; see Valdellon vs. Tengco, 141 SCRA 321; Soco vs. Millante, 123 SCRA 160; Ponce de Leon vs. Syjuco, 90 Phil. 311; Philippine National Bank vs. Relativo, 92 Phil. 203). Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force (Art. 1260, Civil Code). If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released (Art. 1261, Civil Code). A tender of payment, without valid consignation, does not discharge the obligation (Capalungan vs. Medrano, 108 Phil. 22), and the debtor continues to be

Arts. 1262-1265

OBLIGATIONS AND CONTRACTS Title I. Obligations

85

liable for interest payments due thereon (Llamas vs. Abaya, 60 Phil. 502). Mora accipiendi does not excuse consignation (Manuel vs. Court of Appeals, 199 SCRA 603). In one case, the Supreme Court excused the payment of interest despite what is considered a defective consignation (due to a tender of payment in checks but where the creditor’s rejection of the offer was based on an entirely different reason) on the grounds of equity and justice (Gregorio Araneta, Inc. vs. Tuason de Paterno, 91 Phil. 786, reiterated in Francisco vs. Gorgonio, 115 SCRA 345). The rules on tender of payment and consignation have been held inapplicable to options or rights of redemption which are not in the nature of debts (see Immaculata vs. Navarro, 160 SCRA 197; Quirino vs. Palanca, 29 SCRA 1; Asturias Sugar Central vs. Pure Cane Molasses Co., 60 Phil. 255). Section 2 — Loss of the Thing Due Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a) Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n) Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n) Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss

86

CIVIL LAW

Arts. 1262-1269

was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of Article 1165. This presumption does not apply in case of earthquake, flood, storm or other natural calamity. (1183a) Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (1184a) Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n) Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third person by reason of the loss. (1186)

A thing is lost “when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or (even if known) it cannot be recovered” (see Art. 1189, Civil Code). In obligations to do, the equivalent term of loss is “impossibility.” Broadly in law, the risk of loss lies with the owner under the res perit domino rule; in the law on obligations and contracts, however, the generally applicable principle is the res perit creditori that places upon the creditor the burden of loss (see Reyes vs. Caltex, 47 O.G. 1293; Villaruel vs. Manila Motors, 104 Phil. 926; see also Arts. 1255 and 1262, Civil Code). In effect, therefore, the debtor is relieved from his obligation, leaving to the creditor all the rights of action

Arts. 1262-1269

OBLIGATIONS AND CONTRACTS Title I. Obligations

87

which the debtor may have against third persons by reason of the loss (see Art. 1269, Civil Code). In reciprocal obligations, the debtor whose obligation has thus been extinguished by the loss of the thing can still require the other party to comply with his own undertaking to the former, except as otherwise expressly provided by law, such as in the sale of goods (Art. 1504, Civil Code), lease of things (Art. 1655, Civil Code), and contract for a piece of work (Art. 1717, Civil Code), where res perit domino appears to be the rule. In the following cases, however, the debtor is not discharged from liability nor entitled, in a reciprocal obligation, to claim from the other party the latter’s performance of his undertaking: (1) When the loss occurs after the debtor has incurred in delay or the loss is not without his fault (see Art. 1262, Civil Code). 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 (without prejudice to the provisions of Art. 1165, supra.), but this presumption does not apply in case of loss occurring during the occasion of an earthquake, flood, storm or other natural calamity (see Art. 1265, Civil Code). (2) When despite the loss of the thing because of a fortuitous event (loss without the debtor’s fault) — (a) The law places the burden of loss on the debtor such as in obligations to deliver generic things under the maxim genus nunquam perit (Art. 1263, Civil Code), which would include money (see Central Bank of the Philippines vs. Court of Appeals, 139 SCRA 46, where the debtor’s insolvency was held not to discharge a contractual obligation but as a breach thereof)

88

CIVIL LAW

Arts. 1262-1269

and similar obligations (see Ramirez vs. Court of Appeals, 98 Phil. 225; Republic vs. Grijaldo, 15 SCRA 681; De Leon vs. Soriano, 87 Phil. 551); when the debt proceeds from a criminal offense, unless the thing having been offered to the person who should receive it, the latter refuses without justification to accept it (Art. 1268, Civil Code); and when the obligor promises the same thing to two or more persons having different interests (Art. 1165, Civil Code); or (b) The debtor has agreed by stipulation to assume the risk of loss (see Lawyers’ Cooperative Publishing Co. vs. Tabora, 13 SCRA 762). (3) When the nature of obligation requires the assumption of risk on the part of the debtor such as that of an insurer in a contract of insurance. In Co vs. Court of Appeals (95 SCAD 34, 291 SCRA 111), the Supreme Court has said that carnapping per se could not be considered a fortuitous event. A fortuitous event should be understood as being an act of God or act done solely by third parties and that neither the claimant nor the person alleged to be negligent has had any participation therein. Under Article 1174 and Article 1262 of the Civil Code, liability would still attach even if the loss were due to a fortuitous event if the nature of the obligation requires the assumption of risk. Carnapping, observed the Court, is a normal business risk for those engaged in the repair of motor vehicles, and for just as the owner is exposed to that risk so also is the repair shop to which the car has been entrusted. Partial Loss; Theory of Imprevisibility Loss or impossibility must be of a nature that would render the obligation incapable from being complied with in a normal manner (see PNCC vs. NLRC, 193 SCRA

Art. 1270

OBLIGATIONS AND CONTRACTS Title I. Obligations

89

401; General Enterprises, Inc. vs. Lianga Bay Logging Co., 11 SCRA 733; Labayen vs. Talisay-Silay, 52 Phil. 440). In a partial loss of the object of the obligation, the courts may determine whether, under given circumstances, such loss is so important as to extinguish the obligation (Art. 1264, Civil Code). In obligations to do, the debtor shall be released when the prestation becomes legally or physically impossible without his fault (Art. 1266, Civil Code). 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 (Art. 1267, Civil Code). Neither partial loss of the thing in an obligation to deliver nor extreme difficulty in an obligation to do (also referred to as the Theory of Imprevisibility or Frustration of Enterprise in Contracts) authorizes the courts to remake or revise a contract; if at all, these circumstances may only serve to release the debtor from his obligation in whole or in part (see Occena vs. Jabson, 73 SCRA 637; in respect to lease of agricultural lands, see Art. 1680, Civil Code). In contracts, where the impossibility of things and services occur prior to perfection, no obligation is deemed constituted (see Art. 1348, Civil Code) and the loss prevents the contract from acquiring an obligatory force (see Art. 1409, Civil Code). Section 3 — Condonation or Remission of the Debt Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187)

90

CIVIL LAW

Arts. 1270-1274

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189) Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190) Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a)

Condonation is the forgiveness of a debt or the waiver of its enforcement (see Babez vs. Young, 92 Phil. 1067); the remission is essentially gratuitous and requires the acceptance by the obligor. It may be made expressly or impliedly. Express condonation shall comply with the forms of donation (Art. 1270, Civil Code). The delivery of a private document evidencing a credit, voluntarily made by the creditor to the debtor, implies the renunciation of the action which the former had against the latter (see Art. 1271, Civil Code). Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved (Art. 1272, Civil Code). Conversely, the possession of the instrument of credit by the creditor is prima facie proof of non-payment (Torbio vs. Foz, 34 Phil. 913). These presumptions may certainly be overcome by evidence (see Lopez Liso vs. Tambunting, 33 Phil. 226; Prising vs. Springer, 13 Phil.

Arts. 1275-1277

OBLIGATIONS AND CONTRACTS Title I. Obligations

91

223). An express condonation, upon the other hand, does not give rise to a mere presumption; precisely, the law requires it to comply with the forms of donation in order to set it free from further dispute or doubt. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force (Art. 1273, Civil Code). It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing (Art. 1274, Civil Code). Condonation is subject to the rules which govern inofficious donations (see Art. 1270, Civil Code). If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt (see Art. 1271, Civil Code). Section 4 — Confusion or Merger of Rights Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a) Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193) Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194)

The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person (Art. 1275, Civil Code; see Yek Tong vs. Yusingco, 64 Phil. 1062). Merger as one of the means of extinguishing an obligation has the following elements: (1) the

92

CIVIL LAW

Arts. 1278-1280

merger of the characters of the creditor and debtor must be in the same person; (2) it must take place in the person of either the principal creditor or the principal debtor; and (3) it must be complete and definite (Valmonte vs. Court of Appeals, 103 SCAD 509, 303 SCRA 278). Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation (Art. 1276, Civil Code). Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur (Art. 1277, Civil Code). Section 5 — Compensation Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195) Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3)

That the two debts be due;

(4)

That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196) Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197)

Arts. 1281-1287

OBLIGATIONS AND CONTRACTS Title I. Obligations

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n) Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n) Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (n) Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n) Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (1198a) Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a) Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous

93

94

CIVIL LAW

Arts. 1278-1290

title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a) Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n) Art. 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. (1201) Art. 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (1202a)

Compensation takes place when two persons, in their own right, are creditors and debtors of each other (Art. 1278, Civil Code; see Ong vs. Court of Appeals, 177 SCRA 402; Sycip vs. Court of Appeals, 134 SCRA 317; De Borja vs. Gella, 8 SCRA 602). Compensation may be total (when the two debts are of the same amount) or partial (when the two debts vary in amounts, in which case compensation shall only be to the extent of the concurrent amount). Compensation may also be legal (by operation of law), conventional (by agreement), or judicial (by judgment). Legal Compensation In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, that they be of the same kind and also of the same quality if the latter has been stated;

Arts. 1278-1290

OBLIGATIONS AND CONTRACTS Title I. Obligations

95

(3) That the two debts be due; (4) That they be liquidated and demandable; thus, compensation cannot take place if one’s claim against the other is still the subject of litigation (see Solinap vs. del Rosario, 123 SCRA 640); (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor (Art. 1279, Civil Code; Solinap vs. Judge del Rosario, 123 SCRA 640; Sycip vs. Court of Appeals, 134 SCRA 317). These provisions notwithstanding, the guarantor may set up compensation as regards what the creditor may owe the principal debtor (see Art. 1280, Civil Code; see Basilio vs. Natividad, 80 Phil. 52). When all requisites for legal compensation occur, compensation takes effect by operation of law (Mindanao Portland Cement vs. Court of Appeals, 120 SCRA 930) and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation and even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment (Art. 1290, in relation to Art. 1286, Civil Code). If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation (Art. 1289, Civil Code). When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided (Art. 1284, Civil Code). The debtor who has consented to the assignment of rights made by a creditor in favor of a third person cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor, at the time he gave

96

CIVIL LAW

Arts. 1278-1290

his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment (Art. 1285, Civil Code). Compensation shall not be proper when one of the debts: (a) arises from a depositum or from the obligation of a depositary; (b) arises from the obligation of a bailee in commodatum; (c) is a claim for support due by gratuitous title, except those in arrears (see Art. 301, Civil Code); and (d) consists in civil liability arising from a penal clause (Arts. 1287 and 1288, Civil Code). In Republic vs. Mambulao Lumber Co. (6 SCRA 622), the Supreme Court has enunciated the rule that taxes are not subject to set-off or legal compensation. In the subsequent case of Domingo vs. Garlito (8 SCRA 443), the tribunal has reversed itself by holding that where the taxes and the taxpayer’s claim are fully liquidated, due and demandable, legal compensation (Art. 1279, Civil Code) can take place by operation of law, and both debts are extinguished to the concurrent amount. The decision in the Mambulao Lumber case, supra, which has adopted the prevailing rule in common law, appears to be the better view for, among other things, the following reasons: (1) taxes are of a distinct kind, essence and nature, and these impositions cannot be so classed in merely the same category as ordinary obligations; (2) the applicable laws and principles governing each are peculiar, not necessarily common, to each; and (3) public policy is better subserved if the integrity and independence of taxes be maintained. Where, however, the two claims are pleaded and proved before the same court which has jurisdiction over both said claims, conventional wisdom would dictate the practicability of set-off. The Mambulao Lumber case

Arts. 1291-1294

OBLIGATIONS AND CONTRACTS Title I. Obligations

97

has been subsequently restored in Francia vs. Intermediate Appellate Court (162 SCRA 753). Conventional Compensation Conventional compensation is the mutual set-off of obligations by the will or agreement of the parties. The parties may agree upon the compensation of debts which are not yet due (see Art. 1282, Civil Code). Judicial Compensation If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof (Art. 1283, Civil Code). The set-off must be pleaded by the claimant and adjudged by the court (Yap vs. Chua, 14 Phil. 602). Section 6 — Novation Art. 1291. Obligations may be modified by: (1)

changing their object or principal conditions;

(2)

substituting the person of the debtor;

(3) subrogating a third person in the rights of the creditor. (1203) Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204) Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a) Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor’s

98

CIVIL LAW

Arts. 1295-1302

insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. (n) Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt. (1206a) Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (1207) Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (n) Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor, or when ratification validates acts which are voidable. (1208a) Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (n) Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. (1209a) Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n) Art. 1302. It is presumed that there is a legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

Arts. 1291-1304

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(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. (1210a) Art. 1303. Subrogation transfers to the person subrogated the credits with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. (1213)

Novation, in its broad concept, may either be extinctive or modificatory. Obligations may be altered by changing their object or principal conditions, substituting the person of the debtor, or subrogating a third person in the rights of the creditor (Art. 1291, Civil Code; Lopez vs. Court of Appeals, 114 SCRA 671); or by making any change in any of the elements of an obligation. It is extinctive when the old obligation is extinguished by the creation of a new one that takes the place of the former; or modificatory when the old obligation subsists, as amended, to the extent it remains compatible with the novatory agreement. No novation of a contract occurs when the new agreement entered into between the parties is intended “to give life” to the old one (Huibonhoa vs. Court of Appeals, 117 SCAD 281, 320 SCRA 625). a.

Extinctive Novation

An extinctive novation results either by changing the object or principal conditions either by changing the object or principal conditions (objective or real), or by

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substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions — one to extinguish an existing obligation, the other to substitute a new one in its place — requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. The animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. The term “expressly’’ means that the contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations. There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes that bread incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential ele-

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ments of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation (Leonida C. Quinto vs. People of the Philippines, G.R. No. 126712, 14 April 1999, 305 SCRA 708). Extinctive novation requires: first, a previous valid obligation; second, the agreement of all the parties to the new contract; third, the extinguishments of the old obligation; and fourth, the validity of the new one (Tiu vs. Habana, 45 Phil. 707). Novation is never presumed; in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be (express) so declared in unequivocal terms, or (implied) that the old and the new obligations be on every point incompatible with each other. It does not necessarily mean, however, that the new agreement is complete in itself; certain terms and conditions may be carried, expressly or impliedly, over to the new obligation (see Art. 1292, Civil Code; Ligutan vs. Court of Appeals, G.R. No. 138677, 12 February 2002; Goni vs. Court of Appeals, 144 SCRA 222; Osmena vs. Court of Appeals, 120 SCRA 395; Lopez vs. Court of Appeals, 114 SCRA 671; Sandico vs. Piguing, 42 SCRA 322; Joe’s Radio vs. Alto Electronics, 104 Phil. 333; Guerrero vs. Court of Appeals, 29 SCRA 791; Pacific Mills vs. Court of Appeals, 206 SCRA 317). When not expressed, incompatibility is required so as to ensure that the parties did really intend such novation despite their failure to express it in categorical terms. The incompatibility, to be sure, should take place in any of the essential elements of the obligation, viz.: (1) The juridical relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage to antichresis (see Jagunap vs. Mirasol [CA], 48 O.G. 3911), or from a sale to one of loan (Soncuya vs. Azarraga, 65 Phil. 635);

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(2) The object or principal conditions, such as a change of the nature of the prestation; or (3) The subjects, such as the substitution of a debtor (Azarraga vs. Rodriguez, 9 Phil. 637) or the subrogation of the creditor. Extinctive novation does not necessarily imply that the new agreement should be complete by itself; certain terms and conditions, even some of the essential elements of the old obligations, expressly or by implication, may be carried over to the new obligation. What may, instead, be significant is that the old obligation is extinguished so as to affect the accessory undertakings thereto (see Art. 1296, infra.). A novation may, however, be conditional the nonfulfillment of which condition may render it legally ineffective (see Integrated Construction Services vs. Relova, 146 SCRA 360). The rule on consensuality of contracts requires the consent of all parties to the new agreement but not necessarily of the parties to the old obligation since that consensuality does not apply to the extinguishments thereof. Neither does the consensuality rule apply to legal subrogation which arises by operation of law rather than by contract. In conventional subrogation, however, the law expressly requires the consent of the original parties and of the third person (Art. 1301, Civil Code). Substitution of Debtors Novation, which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. It is necessary that the old debtor be released from the old obligation; otherwise, the third person merely becomes a joint or solidary co-debtor as the circumstances warrant (see Mercantile Insurance vs. Court of Appeals, 196 SCRA 197; La Campana Food Products, Inc. vs. PCIB, 142 SCRA 394). Where there is a unilateral substitution of the obligor,

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the aggrieved creditor is not bound to deal with the substitute (Boysaw vs. Interphil Promotions, Inc., 148 SCRA 635; see also Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80; GSIS vs. Court of Appeals, 169 SCRA 244). Payment by the new debtor gives him the rights mentioned in Article 1236 and Article 1237 (supra.; Art. 1293, Civil Code; see Lopez vs. Court of Appeals, 114 SCRA 671; Rodriguez vs. Reyes, 37 SCRA 196). If the substitution is without the knowledge or against the will of the debtor (expromission), the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor (Art. 1294, Civil Code). The insolvency of the new debtor, who has been proposed by the original debtor (delegacion) and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt (Art. 1295, Civil Code). Subrogation Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in the Code; the latter must be clearly established in order that it may take effect (Art. 1300, Civil Code). Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation (Art. 1303, Civil Code). Conventional subrogation of a third person, unlike in a simple assignment of credit (see Arts. 1624-1628, Civil Code), requires the consent of the original parties and of the third person. It is presumed that there is legal subrogation: (a) when a creditor pays another creditor who is preferred,

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even without the debtor’s knowledge; (b) when a third person, not interested in the obligation, pays with express or tacit approval of the debtor; or (c) 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 (Art. 1302, Civil Code). A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit (Art. 1304, Civil Code). Effects When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent (Art. 1296, Civil Code). 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 (Art. 1297, Civil Code; see Ong vs. Court of Appeals, 124 SCRA 578). The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable (Art. 1298, Civil Code). If the original obligation is subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated (Art. 1299, Civil Code). b.

Modificatory Novations

A change in the incidental elements of, or an addition of such elements to, an obligation, unless otherwise expressed by the parties, will not result in its extinguishment (Young vs. Court of Appeals, 196 SCRA 795). Altera-

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tions of the terms and conditions of the obligation would generally result only in modificatory novation (Tiu vs. Habana, 45 Phil. 707) unless such terms and conditions are considered to be the essence (and thereby become an essential part of the object) of the obligation itself (see Young vs. Court of Appeals, 196 SCRA 795). Thus, a change on the rate of interest (BPI vs. Abaladejo, 53 Phil. 14), on the compounding of such interest (see Garcia vs. Court of Appeals, G.R. No. 80201, 20 November 1990), on the manner or method of payment (Ramos vs. Gibbon, 67 Phil. 371; Zapanta vs. De Rotaeche, 21 Phil. 154), or on the place of delivery (North Negros Sugar vs. Compania General de Tobacco, 100 Phil. 1103), will merely be modificatory and will not affect accessory undertakings (Garcia vs. Court of Appeals, G.R. No. 80201, 20 November 1990). An increase or reduction does not change the nature of the object of the obligation to pay a sum of money and should merely be modificatory. Accordingly, a guarantor would still be liable, albeit never beyond his original undertaking. In Macondray & Co., Inc. vs. Ruiz (66 Phil. 562), however, the change has been held to be extinctive; although in Millar vs. Court of Appeals (38 SCRA 642), the Court has said that a mere reduction of the amount due would only result in a modificatory novation. A mere extension of time to pay, said the Court in Inchausti & Co. vs. Yulo (34 Phil. 978), is modificatory but a reduction of that period results in incompatibility (Kabankalan Sugar Co. vs. Pacheco, 55 Phil. 555). Ultimately, in the absence of an express statement made by the parties, the question would largely rest on the appreciation of the court on the circumstances of each particular case, the intention of the parties on the matter being always crucial. It seems that, as a rule of thumb, changes that are substantially more onerous to the debtor than before would be treated as being of the essence of the obligation, thereby resulting in incompatibility and extinctive novation.

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TITLE II. CONTRACTS Chapter 1 General Provisions Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a) Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. (1255a) Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. (n) Art. 1308. The contracts must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a) Art. 1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. (n) Art. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. (n) Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are 106

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not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a) Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration laws. (n) Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n) Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258) Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. (n) Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law or right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. (1259a)

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Concept A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305, Civil Code; see Lao Sok vs. Sabaysabay, 138 SCRA 134). Contracts may either be nominate (the Special Contracts regulated by Book IV of the Civil Code), such as those which the law designates by name (e.g., sales), or innominate (contractual relations recognized by law with no special designation) which are broadly grouped into do ut des (I give and you give), do ut facias (I give and you do), facio ut des (I do and you give), facio ut facias (I do and you do) primarily based on unjust enrichment (Corpus vs. Court of Appeals, 98 SCRA 424). Innominate contracts are regulated by the stipulations of the parties, by the provisions of Titles I and II of Book IV of the Code, by the rules governing the most analogous contracts, and by the customs of the place (Art. 1307, Civil Code), in that order. Principles or Tenets of Contracts 1.

Autonomy of Contracts

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem desirable or convenient, provided they are not contrary to law, morals, good customs, public order, or public policy (Art. 1306, Civil Code; Castro vs. Court of Appeals, 99 SCRA 722). A contract is the law between the parties and, absent any showing that its provisions are wholly or in part contrary to law, morals, good customs, public order or public policy, it shall be enforced to the letter by the courts (Metropolitan Bank & Trust Co. vs. Wong, G.R. No. 120859, 26 June 2001, 150 SCAD 178; Salvatiera vs. Court of Appeals, 73 SCAD 586, 261 SCRA 45). Courts cannot make for the parties better or equitable agreements than they themselves have been satisfied to make, or rewrite contracts because they operate harshly or unjustly

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to one of the parties, or alter them for the benefit of one party and to the detriment of the other, or by construction, relieve one of the parties from terms which he voluntarily consented to or impose on him those which he did not (Angel Bautista vs. Court of Appeals, G.R. No. 123655, 19 January 2000, 118 SCAD 327). The fact that the contractual stipulations may thus turn out to be financially disadvantageous will not relieve parties thereto of their obligations; contracts bind the parties not only to what has been expressly stipulated, but also to all necessary consequences thereof which, according to their nature, may be in keeping with good faith, usage and law (Torres vs. Court of Appeals, 117 SCAD 94, 320 SCRA 428). A contract may happen to be a foolish or unwise investment, but the law will not relieve a party from its effects once the contract has been executed with all the required formalities and with full awareness of his actions (Heirs of Joaquin Teves vs. Court of Appeals, 114 SCAD 181, 316 SCRA 632). In Banco Filipino Savings and Mortgage Bank vs. Hon. Navarro and Valle (152 SCRA 346, reiterated in Insular Bank of Asia and America vs. Salazar, 159 SCRA 133; Macasaet vs. Commission on Audit, G.R. No. 83748, 12 May 1989) the validity of “escalation” or “escalator” clauses in contracts has been upheld, the Court saying — “Some contracts contain what is known as an ‘escalator clause’ which is defined as one of which the contract fixes a base price but contain a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price provision, the contracts, was too definite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that contract lacked mutuality. In most instances, however, these attacks

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have been unsuccessful. (17 Am. Jur. 2d, pp. 786787) “The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable.” Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid standards (see PNB vs. Intermediate Appellate Court, 183 SCRA 133; PNB vs. Court of Appeals, 196 SCRA 536). The freedom of contract has been said to be both a constitutional and statutory right (Gabriel vs. Monte de Piedad, 71 Phil. 497), and an essence of our contractual system (Republic vs. PLDT, 26 SCRA 629; see also People vs. Pomar, 46 Phil. 440). The right, however, is not without limitations; hence, contracts or stipulations may not contravene the law, morals, good customs, public order or public policy (Art. 1206, Civil Code; see Lita Enterprises, Inc. vs. Intermediate Appellate Court, 129 SCRA 79; Baluyot vs. Venegas, 22 SCRA 412). The law, meant in this context, refers to mandatory or prohibitory laws (normally expressed in the Law on Obligations and Contracts, such as by the phrase “any stipulation to the contrary shall be void” or words of similar import) and not to those provisions which are merely intended to be suppletory to the agreement of the parties. Morals and good customs, being both based on a norm of conduct or standard of fairness and justice, practically overlap each other except that the good customs are more localized than the other (see Report of the Code Commission; De los Reyes vs. Alojado, 16 Phil. 499) and, therefore, must be proved (see Art. 12, in relation to Art. 11, Civil Code). Public order relates to the public weal, peace, safety and health of the community (Report of the Code Commission) which is permanent and essential in any institution (Ollendorf vs. Abrahamson, 38 Phil. 585). Public policy is determined by the circumstances of time, place and events; it gener-

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ally connotes the public good and welfare, the interest of society, and the security of individuals and the preservation of their rights (see Gabriel vs. Monte de Piedad, 71 Phil. 497). In order to be against public policy, “actual injury need not be shown; it is enough if the potentialities for harm are present” (Sy Suan vs. Regala, L-9506, 30 June 1959). By way of illustration, the following agreements have been held to contravene the above limitations: a sale of land covered by a homestead patent within the 5-year prohibitory period, as being contrary to law (Castro vs. Opiano, 90 Phil. 491; see also Gacayan vs. Leano, 121 SCRA 260); a promise of marriage where carnal relation is the consideration of the promise, as being contrary to morals (Batarra vs. Marcos, 7 Phil. 156); an employment contract providing that within five years from its termination, the employee shall not enter into any new employment except by the written permission of the employer, as being an unreasonable restraint and contrary to public policy (Ferrazzini vs. Gsell, 34 Phil. 957); and a waiver to transfer to another school in a scholarship grant, as being contrary to public order and public policy (Qui vs. Arellano University, 2 SCRA 205). Police power has been held to subordinate the nonimpairment clause of the Constitution (Ortigas & Co., Limited Partnership vs. Feati Bank and Trust Co., 94 SCRA 533), which yields to the interest of public health, safety and morals and, in general, to public regulations intended for the general welfare of the community (AngloFil Trading Corp. vs. Lazaro, 124 SCRA 495). Restrictive covenants on land ownership have been sustained. In the case of Fajardo, Jr. vs. Freedom To Build, Inc., G.R. No. 134692, 01 August 2000, the Supreme Court has held: “Restrictive covenants are not, strictly speaking, synonymous with easements. While it may be correct to state that restrictive covenants on the use

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of land or the location or character of buildings or other structures thereon may broadly be said to create easements or rights, it can also be contended that such covenants, being limitations on the manner in which one may use his own property, do not result in true easements, but a case of servitudes (burden), sometimes characterized to be negative easements or reciprocal negative easements. Negative easement is the most common easement created by covenant or agreement whose effect is to preclude the owner of the land from doing an act, which, if no easement existed, he would be entitled to do. “Courts which generally view restrictive covenants with disfavor for being a restriction on the use of one’s property, have, nevertheless, sustained them where the covenants are reasonable, not contrary to public policy, or to law, and not in restraint of trade. Subject to these limitations, courts enforce restrictions to the same extent that will lend judicial sanction to any other valid contractual relationship. In general, frontline restrictions on constructions have been held to be valid stipulations. The provisions in a restrictive covenant prescribing the type of the building to be erected are crafted not solely for the purpose of creating easements, generally of light and view, nor as a restriction as to the type of construction, but may also be aimed as a check on the subsequent uses of the building conformably with what the developer originally might have intended the stipulations to be. x x x There appears to be no cogent reasons for not upholding restrictive covenants aimed to promote aesthetics, health, and privacy or to prevent overcrowding. xxx “This Court is not unaware of its ruling in Ayala Corporation vs. Ray Burton Development Corpora-

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tion, which has merely adjudged the payment of damages in lieu of demolition. In the aforementioned case, however, the elaborate mathematical formula for the determination of compensatory damages which takes into account the current construction cost index during the immediately preceding 5 years based on the weighted average of wholesale price and wage indices of the National Census and Statistics Office and the Bureau of Labor Statistics is explicitly provided for in the Deed of Restrictions entered into by the parties. This unique and peculiar circumstance, among other strong justifications therein mentioned, is not extant in the case at bar.’’ In Alcuaz vs. PSBA (161 SCRA 7), the Supreme Court has held that a student once admitted by the school would be considered enrolled for one semester; thus, after the close of the first semester, the school would no longer have any existing contract either with the teachers or with the intervening teachers. The Court, in the subsequent Non vs. Dames (185 SCRA 523), has refused to apply the “termination of contract” theory that would consider the contract between the school and the student as expiring after each semester for collegiate courses, holding that the said contract is not to be considered as an ordinary contract but as one being imbued with public interest. Impositions by a school of sanctions on students require procedural due process, among them being the right to a hearing and of representation by counsel. Academic deficiencies can be proper grounds but not the student’s exercise of his constitutional rights of free speech and assembly (see also Capitol Medical Center vs. Court of Appeals, 178 SCRA 493). The ruling in Non vs. Dames, however, should not be given a retroactive effect to cases that have arisen before its promulgation on May 20, 1990. A contrary view would result in oppression to the schools relying on the decision in Alcuaz case promulgated only on May 2, 1988 (Unciano Paramedical College, Inc. vs. Court of Appeals, 221 SCRA 285).

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The decision in Isabelo, Jr. vs. Perpetual Help College of Rizal, Inc., G.R. No. 103142, 08 November 1993, is noteworthy. There — “The petitioner claims that the real reason why PHCR has voided his enrollment as a senior graduating student had been because of his active participation in opposing PHCR’s application for tuition fee increase with the DECS. “The private respondent, on the other hand, invokes “academic freedom’’ in dropping the petitioner from its roll of students. It argues that the petitioner has only been allowed to enroll “conditionally’’ during the first semester of school year 1991-92 pending the completion of his remedial classes in CMT, in which he has failed.’’ The Supreme Court said: “The rule in this jurisdiction since Garcia vs. Loyola School of Theology, reiterated in Tangonan vs. Paño, has been to uphold the rule that admission to an institution of higher learning is discretionary upon the school and that such an admission is a mere privilege, rather than a right, on the part of the student. In Ateneo de Manila University vs. Capulong this Court cited with approval the formulation made by Justice Felix Frankfurter of the essential freedoms subsumed in the term “academic freedom’’ encompassing not only “the freedom to determine . . . on academic grounds who may teach, what may be taught (and) how it shall be taught,’’ but likewise “who may be admitted to study.’’ We have thus sanctioned its valid invocation by a school in rejecting students who are academically delinquent, or a laywoman seeking admission to a seminary, or students violating “School Rules on Discipline.’’ “Like any other right, however, academic freedom has never been meant to be an unabridged

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license. It is a privilege that assumes a correlative duty to exercise it responsibly. An equally telling precept is a long recognized mandate, so well expressed in Article 19 of the Civil Code, that every “person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.’’ “Another observation. In Non vs. Dames II, we have already abandoned our earlier ruling in Alcuaz vs. PSBA (that enrollment of a student is a semester-to-semester contract, and that the school may not be compelled to renew the contract) by recognizing instead the right of a student to be enrolled for the entire period required in order to complete his course. We have also stressed that the contract between the school and the student, imbued, as it is, with public interest, is not an ordinary contract.’’ 2.

Consensuality of Contracts

It is indispensable in any contract that the parties thereto give their consent (Arts. 1305, 1306 and 1315, Civil Code). Thus, although the landowner has an option under Article 448 of the Code to compel the builder or planter to buy the land and the sower to pay the rent, an action for specific performance is not available since such action would presuppose a contract of sale or lease, as the case may be, which, without mutual consent, cannot exist (see discussions on Art. 448, supra.). No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, before it is revoked by the other contracting party (Art. 1317, in relation to Art. 1403 and Art. 1898, Civil Code), meanwhile rendering it, in effect, a continuing offer.

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3.

Arts. 1305-1317

Mutuality of Contracts

The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them (Art. 1308, Civil Code). A contract containing a condition whose efficacy or fulfillment is dependent solely on the uncontrolled will of one party is void (Garcia vs. Rita Legarda, 21 SCRA 555; PNB vs. Court of Appeals, 196 SCRA 536). The determination, however, of the performance under the contract may be left to a third person whose decision shall not be binding until it has been made known to both contracting parties (see Art. 1309, Civil Code), but this determination shall not be obligatory if it is evidently inequitable. In this latter case, the courts shall decide what is equitable under the circumstances (see Art. 1310, Civil Code). It has been held that a lease which provides that the lessee can continue in the premises so long as the rentals are paid is violative of mutuality (Encarnacion vs. Baldomar, 77 Phil. 470; Lao Lim vs. Court of Appeals, 191 SCRA 150). It may be preferable, however, to hold such contract as instead providing for a period and as having been contemplated by the parties or as being left to the will of the debtor, under Article 1197 of the Code, and which would permit the courts to fix the period of the contract if the parties are unable or unwilling to fix it themselves. The termination of the contract does not necessarily require mutuality, and it can even be validly left to one party (see Taylor vs. Uy Tieng Piao, 43 Phil. 873) by agreement or under a resolutory facultative condition. In the Baldomar case (supra.), the Supreme Court, in effect, had given to the lessor, and withheld from the lessee, the decision to terminate the lease. Furthermore, by considering the lease to be violative of mutuality, the contract itself must inescapably be deemed to have suffered from a fatal infirmity which the Court did not seem to have conceded.

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Obligatoriness of Contracts

The contract, once perfected, has the force of law between the parties, with which they are bound to comply in good faith, and neither one may, without the consent of the other, renege therefrom (see Art. 1159, Civil Code; LTB vs. Manubat, 58 SCRA 650; Phoenix Assn. Co., Ltd. vs. United States Lines, 22 SCRA 674; National Marketing Corp. vs. Atlas Development Corp., 21 SCRA 359). The autonomy of contracts allows the parties to establish such stipulations, clauses, terms and conditions as they may deem appropriate provided only that they are not contrary to law, morals, good customs, public order or public policy. The standard norm in the performance of their respective covenants in the contract, as well as in the exercise of their rights thereunder, is expressed in the cardinal principle that the parties in that juridical relation must act with justice, honesty and good faith (Bricktown Development Corp. [its new corporate name Multinational Realty Development Corporation] and Mariano Z. Veralde vs. Amor Tierra Development Corp. and the Court of Appeals, G.R. No. 112182, 12 December 1994, 239 SCRA 126). 5.

Relativity of Contracts

Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. An heir, however, is not liable beyond the value of the property he received from the decedent (see Baranda vs. Baranda, 150 SCRA 59; Art. 1311, Civil Code). In consonance with the axiom res inter alios acta aliis neque nocet prodest, a contract can only obligate the parties who had entered into it, or their successors who assumed their personalities or juridical positions, and that, concomitantly, a contract can neither favor nor prejudice third persons. As a consequence of the rule that a

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contract takes effect only between the contracting parties and that third persons cannot be obligated thereunder, a person who is not a party to a contract has no legal standing to challenge its validity or to prosecute an action for its rescission, except only to the extent that the contract may be prejudicial to him. Verily, in some ways, third persons may be affected in varying degrees. In contracts creating real rights, third persons who come into possession of the object of the contract may be bound thereby under the provisions of mortgage laws and land registration laws (Art. 1312, Civil Code). Creditors are protected in cases of contracts intended to defraud them (Art. 1313, Civil Code). Accion directa is allowed by law in certain cases (see Art. 1729, Civil Code). Any third person who induces another to violate his contract can be made liable for damages to the other contracting party (Art. 1314, Civil Code; National Union of Bank Employees vs. Lazaro, 157 SCRA 123). Exceptionally, contracts may confer benefits to a third person or what are otherwise known as stipulation pour autrui. Stipulation Pour Autrui If a contract should contain a stipulation in favor of a third person, he may demand its fulfillment, provided he has communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. It is essential that the contracting parties have clearly and deliberately conferred a favor upon the third person (Art. 1311, Civil Code). In fine, in order that the third person benefited by a stipulation pour autrui may demand its fulfillment, the following requisites must be shown: (1) There is a clear and deliberate conferment of benefit upon a third person, that is not conditioned or compensated for by any kind of obligation, and for whom neither of the contracting parties bears legal representation or authorization;

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(2) The stipulation is communicated to the third person intended to be benefited by the parties; (3) The third person accepts the benefit and communicates such acceptance to the obligor before its revocation (see Young vs. Court of Appeals, G.R. No. 79518, 13 January 1989). The acceptance may either be express or implied; such as by the enjoyment of benefits of the contract with the knowledge of the obligor (Florentino vs. Encarnacion, L-27696, 30 September 1977). The stipulation must merely be an incidental, not the main element of purpose, of the contract; otherwise, the contract itself would either amount to a donation or place the beneficiary as a real party thereto and would accordingly be governed elsewhere as such. Once the requisites of the stipulation pour autrui have concurred, the same is enforceable (see Coquia vs. Fieldman’s Insurance, Co., 26 SCRA 178), and no longer can it be revoked. The stipulation may be revoked before its acceptance; but to be effective, both contracting parties should exercise the revocation. A revocation by only one party would be violative of the obligatoriness and mutuality of contracts (see Kauffman vs. National Bank, 41 Phil. 182). It has been held that where an agent is not the beneficiary of a stipulation pour autrui, the fact that he did not obtain his commission or recoup his advances because of the non-performance of the contract does not entitle him to file an action against the buyer (Uy vs. Court of Appeals, 112 SCAD 63, 314 SCRA 69). Chapter 2 Essential Requisites of Contracts General Provisions Art. 1318. There is no contract unless the following requisites concur: (1)

Consent of the contracting parties;

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(2) Object certain which is the subject matter of the contract; (3) (1261)

Cause of the obligation which is established.

Stages and Elements of Contracts The three stages of a contract include its negotiation or preparation, its birth or perfection, and its fulfillment or consummation. Negotiation covers the period from the time the contracting parties indicate interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the concurrence of its essential elements. Contracts which are consensual as to perfection are established upon the meeting of the minds (concurrence of offer and of acceptance) on the object and the cause of the contract. Real contracts require, in addition, the delivery of the object of the contract; solemn contracts require certain formalities to be observed in order to make said agreements valid, the prescribed form becoming an essential element thereof. The stage of consummation begins when the parties perform their respective commitments under the contract culminating in the death or extinguishment of the contract. Negotiation Negotiation is formally initiated by an offer. An imperfect promise (policitation) is merely an offer. Public advertisements or solicitations and the like are generally construed as mere invitations to make offers or proposals. These circumstances, unless and until a contract is perfected, are not considered as binding commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of

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the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules can be said to govern: (1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the offer (before its acceptance) by communicating such withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, wherein it has been held that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249), that is, before the offeror’s coming to know of the acceptance (see Art. 1319, Civil Code; Rural Bank of Parañaque vs. Court of Appeals, 135 SCRA 408; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Code which ordains that “every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.” An action for specific performance would be voidable. (2) If the period has a separate consideration, a contract of “option” is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is to be distinguished from the main contract which is yet to be concluded. If, in fact, the optioner withdraws the offer before its acceptance by the optionee, the latter may not sue for specific performance, but merely for damages, since the main contract has failed from being perfected. The optioner-offeror renders himself liable for the breach of option. In these

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cases, care should be taken of the real nature of the consideration given, for if, in fact, it is intended as part consideration for the main contract with a right of withdrawal on the part of the optionee, the main contract could be deemed perfected; a similar instance would be an “earnest money” in contract of sale that may evidence its perfection (Art. 1482, Civil Code). (3) If the contract is perfected, i.e., the offer is accepted before the offer is withdrawn, neither party is permitted to renege therefrom. Perfection A consensual contract is perfected (birth of contract) at the moment there is a meeting of minds upon the object and the cause thereof, i.e., when its essential elements concur. Its essential elements include: (1) the consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established (Art. 1318, Civil Code; see Ramon Magsaysay Award Foundation vs. Court of Appeals, 134 SCRA 136; National Grains Authority vs. Intermediate Appellate Court, 171 SCRA 131; Salonga vs. Farrales, 105 SCRA 359). In real and solemn contract, delivery and due observance of prescribed formalities, respectively, are additional essential elements to perfect the contract (see Royal Lines, Inc. vs. Court of Appeals, 143 SCRA 608). In contracts by correspondence, the Code of Commerce expresses the “manifestation theory” (Art. 54), perfecting the contract at the moment when acceptance is declared or made by the offeree. This rule may be considered as having been superseded by the “cognition theory” adopted by Article 1319 of the Civil Code that considers the acceptance to effectively bind the offeror only “from the time it came to his knowledge.” The view has been expressed, however, that Article 54 of the Code of Commerce would still apply to commercial contracts premised upon the rule that implied repeals are not

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favored and that, accordingly, not having been expressly repealed, the Code of Commerce is still the governing law in commercial transaction, at least in those contracts that are still specifically governed by the latter Code, such as bottomry and respondentia. 1.

Consent

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) Art. 1320. An acceptance may be express or implied. (n) Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (n) Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n) Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n) Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n) Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n)

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Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n) Art. 1327. The following cannot give consent to a contract: (1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a) Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (n) Art. 1329. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualification established in the laws. (1264) Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a) Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its correction. (1266a) Art. 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. (n) Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (n)

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Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (n) Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed. There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent. (1267a) Art. 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (1268) Art. 1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. (n) Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (1269) Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n) Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n)

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Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s special knowledge. (n) Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (n) Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. (1270) Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n) Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. (n)

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. (see Art. 1319, Civil Code; Yuviengco vs. Dacuycuy, 104 SCRA 668). A contract being basically consensual in nature, it can only be perfected upon a concurrence of the offer and the acceptance. The offer must be certain and the acceptance must be absolute, unconditional and without variance of any sort from the proposal. A qualified acceptance constitutes a counter-offer. Such a qualified acceptance cannot be the equivalent of consent, and it will, in fact, have the effect of a rejection or an annulment of the original offer (Cesar P. Uy, Beatriz F. Uy and Anita Papa vs. Hon. Victorino P.

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Evangelista, Presiding Judge, Regional Trial Court, Quezon City, Branch 223, et al., G.R. No. 140365, 11 July 2001, 361 SCRA 95). Verily, consent could be given not only by the party himself but by anyone duly authorized and acting for and in his behalf. A contract entered into in the name of another by one who ostensibly might have but who, in reality, had no authority or legal representation, or who, having such authority, acted beyond his powers, would be unenforceable, however, it is susceptible to ratification but that ratification should be made before its revocation by the other contracting party (Regal Films, Inc. vs. Gabriel Concepcion, G.R. No. 139532, 09 August 2001, 362 SCRA 504). The Offer The offer must be certain (Art. 1319, Civil Code; see Rosentock vs. Burk, 46 Phil. 217). It may fix the time, place, and manner of acceptance, all of which must be complied with (Art. 1321, Civil Code; Matias vs. Court of Appeals, 141 SCRA 217; Leoquinco vs. Postal Savings, 47 Phil. 772). It may be made personally or through an agent (Art. 1322, Civil Code). Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer (Art. 1325, Civil Code). Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears (Art. 1326, Civil Code; Leoquinco vs. Postal Savings Bank, 47 Phil. 772). When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised (Art. 1324, Civil Code; see discussion on Negotiation, supra.). An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before

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acceptance is conveyed (Art. 1323, Civil Code), i.e., no contract is deemed perfected if those circumstances should arise before the offeror learns of the acceptance. In contracts by correspondence, the withdrawal of an offer is effective upon its manifestation or when it is sent so long as the offeror has not yet learned of the acceptance by the offeree. The Acceptance The acceptance must be absolute (Art. 1319, Civil Code; Yuviengco vs. Dacuycuy, 104 SCRA 668; Valencia vs. RFC, 103 Phil. 444), and may be express or implied (Art. 1320, Civil Code). A qualified acceptance constitutes a counter-offer (Art. 1319, Civil Code; Batungan vs. Cojuangco, 78 Phil. 481) and has the effect of rejecting the offer (see Logan vs. Phil. Acetylene, 32 Phil. 177). An acceptance made by letter or telegram does not bind the offeror except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into the place where the offer is made (Art. 1319, Civil Code; Japan Overseas Commercial Co. vs. Baquer & Co., 3 C.A. Reports 961). If the offer fixes the time, place and manner of acceptance, all such conditions must be complied with (Art. 1321; Montinola vs. Victorias Milling Co., 54 Phil. 782). An offer made through an agent is accepted from the time acceptance is communicated and made known to him (Art. 1322, Civil Code). The Parties The contracting parties must have juridical capacity and capacity to act (see discussion on Law on Persons, supra.) and, in proper cases, authority and must not be otherwise disqualified (see Arts. 1327-1329). Effects of Want of Capacity or Authority and Disqualification In general, incapacity of a party would result in a voidable contract (Art. 1390, Civil Code); where both par-

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ties are incapacitated to give consent, the contract becomes unenforceable (Art. 1403, Civil Code). Where the issue is one of authority such as in a contract entered into by an agent, want of authority renders the contract unenforceable (Art. 1403, Civil Code; Frias vs. Esquivel, 67 SCRA 487), except where the party with whom the agent acts is aware of such lack of authority in which case it is considered void unless the principal ratifies the act entered into by the agent without or in excess of his authority (Art. 1898, Civil Code; National Power Corp. vs. National Merchandising Corp., 120 SCRA 628). A conveyance of conjugal real property by the wife, who is not the administratrix, without the husband’s consent, is void (see Arts. 96 and 124, Family Code), but until revoked, it shall be considered a continuing offer. A contract entered into by one who by law is disqualified, being prohibitory in nature, is void (Art. 5, Civil Code; Rubias vs. Batiller, 51 SCRA 120; examples of disqualification are contained in Arts. 133, 1490 and 1491, Civil Code; see also the effect of a void contract under Arts. 1409 to 1419, infra.). Vices of Consent Consent must be free and voluntary. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is merely voidable (see Art. 1330, Civil Code; Pangadil vs. Court of First Instance, 116 SCRA 347; Rio Grande Rubber Est. Co. vs. Board of Liquidator, 104 SCRA 863) and may, therefore, be ratified (see Art. 1390, Civil Code). Violence, intimidation and undue influence affect volition, while mistake and fraud, as well as incapacity, affect cognition. Mistake In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the

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contract. Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or disqualification has been the principal cause of the contract. A simple mistake of account shall give rise to its correction (Art. 1331, Civil Code; Dumasug vs. Modelo, 34 Phil. 252). Mutual error as to the legal effect of an agreement normally would not render the contract voidable (Luna vs. Linatoc, 74 Phil. 15) but when the real purpose of the parties is frustrated, it may be held to vitiate consent (see Art. 1334, Civil Code). There is no mistake if the parties alleging it knew the doubt, contingency or risk affecting the object of the contract (Art. 1333, Civil Code). When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former (Art. 1332, Civil Code; see Bunyi vs. Reyes, 39 SCRA 504; Tang vs. Court of Appeals, 90 SCRA 236). Article 1332 of the Civil Code is intended for the protection of a party to a contract who might be at a disadvantage due to his illiteracy, ignorance, mental weakness or other handicap and contemplates a situation wherein a contract has been entered into, but the consent of one of the parties is vitiated by mistake or fraud committed by the other contracting party (Hemides vs. Court of Appeals, 316 SCRA 347). Violence and Intimidation There is violence when in order to wrest consent, serious or irresistible force is employed. There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or upon the person or property of his spouse, descendants or ascendants, to give his consent. In determining the degree of the intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one’s claim through

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competent authority, if the claim is just or legal, does not vitiate consent (Art. 1335, Civil Code; see Vales vs. Villa, 35 Phil. 769; Papa vs. Montenegro, 54 Phil. 231). Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract (Art. 1336, Civil Code). Undue Influence There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual, and other relations between the parties, or the fact that the person alleged to have unduly influenced is suffering from mental weakness or is ignorant or in financial distress (Art. 1337, Civil Code; Martinez vs. Hongkong and Shanghai Banking Corp., 15 Phil. 252). For undue influence to justify the cancellation of an instrument, three elements must be present: first, a person who can be influenced; second, the fact that improper influence is exerted; and third, submission to the overwhelming effect of such unlawful conduct. A confidential or fiduciary relationship may include any relationship between persons, allowing one to dominate the other with the opportunity to use that superiority to the other’s disadvantage. Included are those of attorney and client, physician and patient, nurse and invalid, parent and child, guardian and ward, member of a church or sect and spiritual adviser, a person and his confidential adviser, or whenever a confidential relationship exists as being a fact. Undue influence is not to be inferred alone from age, sickness, or debility of body if sufficient intelligence remains (Loyola vs. Court of Appeals, 326 SCRA 285). Fraud There is fraud (deceit or dolo) when, through insidious words or machinations of one of the contracting par-

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ties, the other is induced to enter into a contract which, without them, he would not have agreed to (Art. 1338, Civil Code). Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud (Art. 1339, Civil Code; Strong vs. Repide, 41 Phil. 947). In order that fraud may make a contract voidable, it should be serious (dolo causante) and should not have been employed by both contracting parties (see Valdez vs. Sibal, 46 Phil. 930). Incidental fraud (dolo incidente) only obliges the person employing it to pay damages (Art. 1344, Civil Code; see Woodhouse vs. Halili, 93 Phil. 526). The usual exaggerations in trade are not in themselves fraudulent when the other party has had an opportunity to know the facts (Art. 1340, Civil Code; Song-co vs. Sellmer, 37 Phil. 254). A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s special knowledge (Art. 1341, Civil Code). Misrepresentation (unlike violence or intimidation) by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual (Art. 1342, Civil Code; Co vs. Court of Appeals, 193 SCRA 198; Rural Bank of Caloocan vs. Court of Appeals, 104 SCRA 151; Hill vs. Veloso, 31 Phil. 160). Misrepresentation made in good faith is not fraudulent but may constitute error (Art. 1343, Civil Code; see Asian vs. Jalandoni, 45 Phil. 296). Simulation of Contracts Simulation of contracts may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement (Art. 1345, Civil Code). An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy, binds the parties to their real agreement (Art. 1346; see also Arts. 1359-1369

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and 1409, Civil Code, infra.; Gardner vs. Court of Appeals, 131 SCRA 585; Lagang vs. Court of Appeals, 131 SCRA 361). 2.

Object of Contracts

Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts. No contracts may be entered into upon future inheritance except in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public order, or public policy may likewise be the object of a contract. (1271a) Art. 1348. Impossible things or services cannot be the object of contracts. (1272) Art. 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. (1273)

All things which are not outside the commerce of man, including future things, all rights which are not intransmissible and all services which are not contrary to law, morals, good customs, public order or public policy may be the object of a contract (see Arts. 1347, 1178 and 1461, Civil Code). The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties (Art. 1349, Civil Code; see Yu Tek & Co. vs. Gonzalez, 29 Phil. 384). The following may not be the object of contract: (1) Things which are outside the commerce of man (Art. 1347, Civil Code), such as communal prop-

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erty for public use (Mun. of Cavite vs. Rojas, 30 Phil. 602); (2) Intransmissible rights (Art. 1347, Civil Code), such as purely personal and political rights (Saura vs. Sandico, L-13403, 23 March 1960); (3) Future inheritance except in cases expressly provided by law (Art. 1347, Civil Code; see also Art. 1080, Civil Code; Chavez vs. Intermediate Appellate Court, G.R. No. 68282, 8 November 1990, where a partition inter vivos in the form of deeds of sale was not deemed to be a contract with respect to future inheritance; Tordilla vs. Tordilla, 60 Phil. 162); (4) Impossible things and services (Art. 1348, Civil Code); and (5) Services which are contrary to law, morals, good customs, public order or public policy (Art. 1347, Civil Code). 3.

Cause of Contracts

Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274) Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n) Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a) Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276)

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Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277) Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (n)

In onerous contracts, the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor (Art. 1350, Civil Code; Rodriguez vs. Rodriguez, 20 SCRA 908). To illustrate, if a contract mainly would require “A” to deliver his horse to “B,” and “B” to deliver his cow to “A,” the horse and the cow would be the objects of the contract; the cause, however, is viewed from each party’s proximate reason for concluding the contract which may not thus be common to both parties — hence, the cause as to “A” would be the delivery of the cow and as to “B” the delivery of the horse (see General Enterprises, Inc. vs. Lianga Bay Logging Co., 11 SCRA 733). The parties may have their own reasons, personal to each of them, why they desire the exchange — properly termed their motives. In contracts where money is used as the medium of exchange, such as in sales or leases, the law considers money as the cause or consideration thereof, and it makes the object and the cause as being viewed from the standpoint of the contract itself and thus common to both parties. Contracts without cause, or with unlawful cause, produce no effect whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy (Art. 1352, Civil Code). The absence or illegality of the cause renders the contract not merely voidable but void (see Batarra vs. Marcos, 7 Phil. 156). The particular motives of the parties in entering into a contract are different from the cause thereof (Art. 1351,

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Civil Code; see Basic Books, Inc. vs. Lopez, 16 SCRA 291; Gonzalez vs. Trinidad, 67 Phil. 682). Motive is that which induces a party, personal to him, into concluding a contract specifically over which the other party has no legal concern nor has made any direct covenant. True, at times, the line that separates the motive and the cause of contracts may be so thin as to make them interlink. In Liguez vs. Lopez (102 Phil. 577), a married man donated a conjugal parcel of land to a 16-year old girl so that he might live maritally with her. The latter’s parents would not allow her to live with him without the donation. The Supreme Court ruled the donation to be tainted by an immoral cause and, therefore, void and of no effect (see discussion on Donations). The Court said: “x x x It is argued that under Article 1274 of the Civil Code of 1889 (which was the governing law in 1943 when the donation was executed), in contracts of pure beneficence the consideration is the liberality of the donor, and that liberality per se can never be illegal, since it is neither against the law nor morals or public policy. The flaw in this argument lies in ignoring that under Article 1274, liberality of the donor is deemed causa only in those contracts that are pure beneficence; that is to say, contracts designed solely and exclusively to procure the welfare of the beneficiary, without any intent of producing any satisfaction for the donor; contracts, in other words, in which the idea of self-interest is totally absent on the part of the transferor. For this very reason, the same Article 1274 provides that in remuneratory contracts, the consideration is the service or benefit for which the remuneration is given; causa is not liberality in these cases because the contract or conveyance is not made out of pure beneficence, but “solvendi animo.” The existence and legality of the cause of the contract are presumed, although the same may not be therein

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stated, unless the debtor proves the contrary (Art. 1354, Civil Code; Ong vs. Ong, 139 SCRA 133). In one case, the Supreme Court has said that in deeds of conveyance adhering to the Anglo-Saxon practice, it is not unusual to state that the consideration given is P1.00 although the actual consideration may be more. A one-peso consideration on a sale may be suspicious; but this alone does not justify one to infer that the buyers are not buyers in good faith and for value. Neither does such inference warrant one to conclude that the sale is void ab initio. Bad faith and inadequacy of monetary consideration do not render a conveyance inexistent. The assignor’s liberality could also be sufficient cause for a valid contract (Ong vs. Ong, supra.; see Art. 1350, Civil Code). Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence (Art. 1355, Civil Code; see Rosal vs. Gan, 55 Phil. 527). A natural obligation may be a sufficient cause (Villaruel vs. Estrada, 71 Phil. 14) but not a mere or purely moral obligation (Fisher vs. Robb, 69 Phil. 101). Statement of a false cause in contracts shall render them void (see Mapalo vs. Mapalo, 17 SCRA 114), unless it be proved that they are founded upon another true and lawful cause (Art. 1353, Civil Code). Chapter 3 Form of Contracts Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a) Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated

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in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. (1279a) Art. 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds Five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles 1403, No. 2 and 1405. (1280a)

Generally, contracts are obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. When, however, the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable (see Art. 1356, Civil Code). Thus, Section 127 of the Land Registration Act (Act 496, now Sec. 112 of P.D. No. 1524), requiring deeds of conveyance to be acknowledged, does not allow the registration of a private document of sale (Gellardo vs. Intermediate Appellate Court, 155 SCRA 248).

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A certain form may be prescribed by law for any of the following purposes: for validity, for enforceability or for greater efficacy of the contract. When the solemnity requirement is for validity, its non-observance renders the contract void and of no effect. The non-compliance of a form prescribed for enforceability will not permit the contract, upon the objection of a party and although otherwise valid, to be proved or enforced by action. Formalities intended for greater efficacy or convenience or to bind third persons, if not done, would not adversely affect the binding effect, validity or enforceability of the contract between the contracting parties themselves (DaudenHernaez vs. De Los Angeles, 27 SCRA 1276); in this case, the parties may compel each other to observe the form, once the contract has been perfected, and this right may be exercised simultaneously with an action upon the contract (see Art. 1357, Civil Code). Illustrative cases — (1) In the following cases, the prescribed formalities by law are for the validity of the contract or agreement: In writing (a) Donations of personal property where its value exceeds P5,000 (Art. 748, Civil Code); (b) Stipulations reducing the common carrier’s extraordinary diligence and limiting its liability (Arts. 1744-1750, Civil Code); (c)

Agent’s authority in the sale of land or any interest therein (Art. 1874, Civil Code);

(d) Stipulations to pay interest on loans (Art. 1956, Civil Code); and (e) Antichresis (Art. 2134, Civil Code). In a Public Document (a) Donations of real property (Art. 749, Civil Code); and

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(b) Partnerships where real property is contributed (Arts. 1771 and 1773, Civil Code). Transfer of Certificate of Registration Sales of large cattle (Art. 1581, Civil Code; Sec. 22, Act No. 1147). Substantial Compliance with Form Prescribed by Law Chattel morgages (Art. 2140, Civil Code; Act No. 1508). (2) In the following cases, the contract must be in writing in order that it may be enforceable: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c)

An agreement made in consideration of marriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accepts and receives part of such goods and chattels, or the evidences, or some of them, of such things in action, or pays at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, name of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e)

An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; and

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(f)

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A representation as to the credit of a third person (see Art. 1403, Civil Code).

In the foregoing transactions, the agreement shall be unenforceable by action, unless the same or some note or memorandum thereof be in writing and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing or a secondary evidence of its contents (Art. 1403, Civil Code). The term “statute of frauds” is descriptive of statutes which require certain classes of contracts to be in writing. The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged (Rosencor Development Corporation vs. Paterno Inquing, 145 SCAD 484, 354 SCRA 119). The Statute of Frauds cannot apply to transactions not therein enumerated (ibid.). When a verbal contract has already been either fully consummated or partially executed, its enforceability will not be barred by the Statute of Frauds, and oral evidence may thus be admitted to prove the agreement (Cordial vs. Miranda, 140 SCAD 271, 348 SCRA 158). Verily, the application of the Statute of Frauds presupposes the existence of a perfected contract (Villanueva vs. Court of Appeals, 78 SCAD 484, 267 SCRA 89). Not all agreements “affecting land” must be put into writing to attain enforceability. Setting up of boundaries, the oral partition of real property, or an agreement creating a right of way are not covered by the provisions of the statute of fraud (Rosencor Development Corporation vs. Paterno Inquing, supra.). (3) In the following cases, the requisite form is merely for greater efficacy or convenience and the failure to comply therewith does not affect the validity and binding effect of the act between the parties (Philip-

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pine National Railways vs. Intermediate Appellate Court, G.R. No. 66715, 18 September 1990). In a Public Document (a)

Acts and contracts which have for their object the creation, transmission, modification or extinguishments of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2 and 1405;

(b) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal property of gains; (c) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; and (d) The cession of actions or rights proceedings from an act appearing in a public document (Art. 1358, Civil Code; Manotok Realty vs. Court of Appeals, L-35367, 9 August 1987). Article 1358 does not require the accomplishment of an act or contract in a public document in order to validate the act or contract, but only for its greater efficacy, convenience of the parties, and to bind third persons. The private conveyance of a real property is therefore valid, and the vendee has the right to compel the vendor or his heirs to execute the necessary document to properly convey the property (Cenido vs. Apacionado, 115 SCAD 798, 318 SCRA 688). In Writing All contracts where the amount involved exceeds five hundred pesos except in sales of goods, chattels or things in action which are governed by the Statute of Frauds (Arts. 1403, No. 2, and 1405, supra., in relation to Art. 1358, Civil Code).

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Registration All acts or transactions affecting real property (see Arts. 708-709; Art. 2125, Civil Code; Act No. 496). The fact alone that the two deeds are registered five years after the date of their execution would not adversely affect their validity nor would such circumstance alone be indicative of fraud. The registration of the documents is a ministerial act and merely creates a constructive notice of the contents against all third persons. Among the parties, the instrument would remain completely valid and binding (Rebecca Viado Non vs. Court of Appeals, 121 SCAD 166, 325 SCRA 652). Chapter 4 Reformation of Instruments (n) Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract. Art. 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code. Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument.

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Art. 1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. 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.

Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns. Art. 1369. The procedure for the reformation of instruments shall be governed by rules of court to be promulgated by the Supreme Court.

The purpose of reformation is to set aright and clear up whatever may have been an error, imperfection or ambiguity in the instrument and to make it truly reflective of the real intention of the parties but not to remake the contract or to create a new one (see Cosio vs. Palileo,

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14 SCRA 170; City of Cabanatuan vs. Lazaro, 39 SCRA 653; Jardenil vs. Salas, 73 Phil. 626). The right of reformation is necessarily an invasion or limitation of the parol evidence rule since, when a writing is reformed, the result would be that an oral agreement is by court degree made legally effective. Consequently, the courts, as the agencies so authorized by law to exercise the power to reform an instrument, must necessarily exercise that power sparingly, with great caution and zealous care. The remedy, being an extraordinary one, must be subject to such limitations as may be provided by law. A suit for reformation of an instrument must be brought within the period prescribed by law, otherwise, it will be barred by lapse of time (Rosello-Bentir vs. Leanda, 125 SCAD 322, 330 SCRA 591). Reformation would, for instance, be proper in the following cases: (a) When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement (see Art. 1361, Civil Code); (b) If one party is mistaken and the other has acted fraudulently or inequitably in such a way that the instrument does not show their true intention (see Art. 1362, Civil Code); (c)

When one party is mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former (see Art. 1362, Civil Code);

(d) When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties (see Art. 1364, Civil Code); (e)

If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or

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Art. 1370

with a right of repurchase (see Arts. 1365, 1602, Civil Code); or (f)

When there is relative simulation that does not prejudice a third person and is not unlawful (Art. 1346, Civil Code).

Reformation may be ordered at the instance of either party or his successors in interest if the mistake is mutual; otherwise, upon petition of the injured party or his heirs and assigns (Art. 1368, Civil Code). Reformation may not be asked in: (a) simple donations inter vivos wherein no condition is imposed; (b) wills and testaments; (c) when the real agreement is void (Art. 1366, Civil Code); or (d) when one of the parties has brought an action to enforce the instrument and subsequently seeks its reformation (Art. 1367, Civil Code). The principles of the general law on interpretation of instruments are applicable in the reformation of instruments to the extent that they are not in conflict with the provisions of the Code (see Art. 1360, Civil Code). The procedure for the reformation are governed by the Rules of Court (see Art. 1369, Civil Code). Under the Rules of Court, an action for reformation of an instrument is instituted as a special civil action for declaratory relief, the purpose of which is to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof or compliance therewith; hence, it must be instituted before the breach of the obligation (Rosello-Bentir vs. Leanda, supra.). Chapter 5 Interpretation of Contracts Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

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If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281) Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (1282) Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. (1283) Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (1284) Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. (1285) Art. 1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. (1286) Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. (1287) Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. (1288) Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known

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what may have been the intention or will of the parties, the contract shall be null and void. (1289) Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. (n)

The intention of the parties is primordial (Kasilag vs. Rodriguez, 69 Phil. 217). If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control (GSIS vs. Court of Appeals, 145 SCRA 311; Visayan Surety & Ins. Co., vs. Tabares, 67 Phil. 743). If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former (Art. 1370, Civil Code; Sy vs. Court of Appeals, 131 SCRA 116). Resort to extrinsic aids and other extraneous sources are not necessary in order to ascertain the intent of the parties when there is no ambiguity in the terms of the agreement (Baylon vs. Court of Appeals, 312 SCRA 502). In case of doubt, the following rules shall govern: (a) In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Art. 1371, Civil Code; GSIS vs. Court of Appeals, supra.; Serrano vs. Court of Appeals, L-46357, 9 October 1985; Nielsen & Co. vs. Lepanto Consolidated Mining Co., 18 SCRA 1040). (b) The terms of a contract, however general, shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree (Art. 1372, Civil Code; Buiser vs. Cabrera, 81 Phil. 669). (c)

If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual (Art. 1373, Civil Code; Luna

Arts. 1370-1379

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vs. Linatoc, 74 Phil. 15). Termed as the “principle of effectiveness,” the rule is to the effect that when two interpretations of a contract are possible, that which will render the contract operative, rather than that which will make it meaningless, will be preferred (PNB vs. Utility Assurance, G.R. No. 39215, 1 September 1989). (d) The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly (Art. 1374, Civil Code; NAPOCOR vs. Court of Appeals, G.R. No. 43706, 14 November 1986; People’s Trust & Trust Co. vs. Odom, 64 Phil. 126). (e)

Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract (Art. 1375, Civil Code; Cerman & Co. vs. Donaldson, Sim & Co., 1 Phil. 63).

(f)

The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract and shall fill the omission of stipulations which are ordinarily established (Art. 1376, Civil Code; Andreas vs. Bank of P.I., 47 Phil. 795).

(g) The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity (Art. 1377, Civil Code; Equitable Bank vs. Intermediate Appellate Court, G.R. No. 74451, 25 May 1988; Bayview Hotel vs. Ker & Co., 116 SCRA 327). (h) A contract of adhesion is construed and interpreted against the party who drafted it (Angeles vs. Casalanz, supra.). When it is absolutely impossible to settle doubts by the rules established above —

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(1) If the doubts refer to incidental circumstances, the doubt in the case of a gratuitous contract shall be resolved in favor of the least transmission of rights and interest, and in onerous contracts, the doubt shall be settled in favor of the greatest reciprocity of interests. (2) If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void (see Art. 1378, Civil Code; see Labasan vs. Lacuesta, 86 SCRA 16). The principles of interpretation and construction under the Rules of Court shall likewise be observed in the interpretation and construction of contracts (see Art. 1379, Civil Code; Rule 123, Rules of Court). Defective Contracts Civil law, in its usual sophistication, classifies defective contracts into: first, the rescissible contracts (Arts. 1381-1382, Civil Code), which are the least infirm; second, the voidable contracts (Art. 1390, Civil Code); third, the unenforceable contracts (Art. 1403, Civil Code); and finally, the void contracts (Art. 1409, Civil Code). Chapter 6 Rescissible Contracts Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;

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(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; (4) Those which refer to things under litigation if they have been entered into by the defendants without the knowledge and approval of the litigants or of competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission. (1291a) Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292) Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (1294) Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n) Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interests; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. (1295) Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts. (1296a)

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Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. (1297a) Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a) Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known. (1299)

In terms of their efficaciousness, rescissible contracts are regarded, among the four, as being the closest to perfectly executed contracts. A rescissible contract contains all the requisites of a valid contract and are considered legally binding, but by reason of injury or damage to either of the contracting parties or to third persons, such as creditors, it is susceptible to rescission at the instance of the party who may be prejudiced thereby. A rescissible contract is valid, binding and effective until it is rescinded.

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The proper way by which it can be assailed is by an action for rescission based on any of the causes specified by law (Borja vs. Addison, 44 Phil. 895). Rescissible contracts are validly agreed upon but, by reason of lesion or economic prejudice, may be rescinded in the cases established by law (see Art. 1380, Civil Code; Cf. Ibanez vs. Hongkong & Shanghai Bank, 22 Phil. 572). The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer lesion by more than one-fourth of the value of the things which are the object thereof; (3) Those undertaken in fraud of creditor when the latter cannot in any other manner collect the claims due them; (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission (Art. 1381; see also Arts. 1177 and 1098, Civil Code). Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected are likewise rescissible (Art. 1382, Civil Code; Asia Banking vs. Nable, 51 Phil. 763). Under the Insolvency Law, transfers declared to be fraudulent are not merely rescissible but void (De la Paz vs. Garcia, 18 SCRA 779; Act 1956). Rescission referred to in Nos. 1 and 2, Article 1381 (supra.), however, shall not take place with respect to contracts approved by the court (see Art. 1386, Civil Code).

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Arts. 1380-1389

Rescission creates the obligation to return the things which have been the object of the contract, together with their fruits and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss (Art. 1385, Civil Code; see Cordovero vs. Villaruz, 46 Phil. 473). In respect to the third type of rescissible contracts, all contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence (Art. 1387, Civil Code; see Provincial Sheriff vs. Court of Appeals, 22 SCRA 798; Gatchalian vs. Manalo, 68 Phil. 708; Oria vs. Mcmicking, 21 Phil. 243). Accion pauliana requires that: (1) the party asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; and (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud (Siguan vs. Lim, 318 SCRA 725). An action to rescind must be of last resort, availed of only after all the

Arts. 1380-1389

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legal remedies have been exhausted and proven futile (Khe Hong Cheng vs. Court of Appeals, 355 SCRA 701). Article 1381 of the Civil Code would allow the rescission of contract in fraud of creditors only when the latter cannot in any manner collect the claims due them (Adorable vs. Court of Appeals, 319 SCRA 200). Thus, an action for rescission cannot be instituted when the party suffering damage has other legal means to obtain reparation for the same (Art. 1383, Civil Code; Goquiolay vs. Sycip, 108 Phil. 947). The rescission sought shall be only to the extent necessary to cover the damages sustained (Article 1384, Civil Code). Consequently, only the creditor who brought the action for rescission can benefit therefrom; those who are strangers to the action cannot benefit from its effects (see Siguan vs. Lim, supra.). Rescission under Article 1191 termed “resolution” by the old Civil Code, unlike rescission under Article 1383, is a principal action based on a breach of a party. Rescission under Article 1383, upon the other hand, is a subsidiary action limited to cases of lesion thereunder specified (Ong vs. Court of Appeals, 310 SCRA 1). Elaborating on the distinctions between the rescission of rescissible contracts and resolution set forth in Article 1191, Justice J.B.L. Reyes, in his concurring opinion in UFC vs. Court of Appeals (33 SCRA 1) said: “x x x The rescission on account of breach of stipulation is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder subordinated to anything other than the culpable breach of his obligation by the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: ‘Non servanti

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ifdem, non est fides servanda.’ Hence, the reparation of damages for the breach is purely secondary.” Under Article 1389 of the Civil Code, the action to claim rescission must be commenced within four years. It is the legal possibility of bringing the action which determines the starting point for the computation of the four-year prescriptive period provided for in Article 1389 of the Civil Code (see Khe Hong Cheng vs. Court of Appeals, supra.). However, the period of four years shall not begin until the termination of the incapacity of the person under guardianship, or until the domicile of the absentee is known (Art. 1389, Civil Code). Re Right of First Refusal A right of first refusal is not a perfected contract. Neither does it qualify as an option under the second paragraph of Article 1479, which itself must be supported by a consideration separate and distinct from the price itself, nor an offer which Article 1319 of the Code requires to be definitive and certain both as to object and cause of the contemplated agreement. Even while the object in a “right of first refusal’’ might be determinate, the exercise of the right, nevertheless, would still be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation but also on terms, including the price, that obviously are yet to be fixed. It would be absurd to suggest that a right of first refusal can be the proper subject of an action for specific performance but, of course, neither would it be correct to say that a breach of such right would be totally inconsequential. A grantor who unjustly discards his own affirmation violates the basic dogma in human relations so well expressed as in Article 19 of the Civil Code to the effect that every person is expected to act with justice, give another is due and observe honesty and good faith. When ignored, the legal feasibility of an action for damages not an action for rescission under Article 1381 of the Code which is

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subsidiary and merely to obtain reparation is a matter now long settled. Unfortunately, it would seem, Article 1381 (paragraph 3) of the Civil Code has been invoked to be the statutory authority for the rescission of the contract of sale between Carmelo & Bauermann, Inc., and Equatorial Realty Development, Inc., in the case of Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc. (G.R. No. 106063, 21 November 1996). The action for rescission under that provision of the law, unlike in the resolution of reciprocal obligations under Article 1191 of the Code, is merely subsidiary and relates to the specific instance when a debtor, in an attempt to defraud his creditor, enters into a contract with another that deprives the creditor to recover his just claim and leaves him with no other legal means, than by rescission, to obtain reparation. Thus, the rescission is only to the extent necessary to cover the damages caused (Article 1384, Civil Code) and, consistent with its subsidiary nature, would require the debtor to be an indispensable party in the action (see Gigante vs. Republic Savings Bank, 135 Phil. 359). The concept of a right of first refusal as a simple juridical relation, and so governed (basically) by the Civil Code’s title on “Human Relations,’’ is not altered by the fact alone that it might be among the stipulated items in a separate document or even in another contract. A “breach’’ of the right of first refusal can only give rise to an action for damages primarily under Article 19 of the Civil Code, as well as its related provisions, but not to an action for specific performance set out under Book IV of the Code on “Obligations and Contracts.’’ That right, standing by itself, is far distant from being the obligation referred to in Article 1159 of the Code which would have the force of law sufficient to compel compliance per se or to establish a creditor-debtor or obligee-obligor relation between the parties. If, as it is rightly so, a right of first refusal cannot even be properly classed as an offer or as an option, certainly, and with much greater reason,

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Arts. 1390-1392

it cannot be the equivalent of, nor be given the same legal effect as, a duly perfected contract. It is not possible to cross out, such as what has been said in Ang Yu Asuncion vs. Court of Appeals (238 SCRA 602), the indispensable element of consensuality in the perfection of contracts. It is basic that without mutual consent on the object and on the cause, a contract cannot exist (Art. 1305, Civil Code); corollary to it, no one can be forced, least of all perhaps by a court, into a contract against his will or compelled to perform thereunder. Chapter 7 Voidable Contracts Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence, or fraud; These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n) Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a) Art. 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)

Arts. 1393-1400

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Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a) Art. 1394. Ratification may be effected by the guardian of the incapacitated person. (n) Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (1312) Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313) Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a) Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. (1303a) Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304) Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at

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Arts. 1390-1402

the time of the loss, with interest from the same date. (1307a) Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a) Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308)

The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; and (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled in a proper action in court. Deceit by a third person without connivance with a party does not render the contract voidable unless it results in mutual error (Art. 1342, Civil Code; Co vs. Court of Appeals, 193 SCRA 198). Voidable contracts are susceptible of ratification (see Arts. 1390 and 1327, Civil Code, supra.; Gonzales vs. Lopez, 160 SCRA 346; Vda. de Buncio vs. Estate of De Leon, 156 SCRA 352; Tumalad vs. Vicencio, 41 SCRA 143). The action for annulment shall be brought within four years which shall begin, in cases of intimidation, violence or undue influence, from the time the defect of the consent ceases, and in case of mistake or fraud, from

Arts. 1390-1402

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161

the time of the discovery of the same. When the action refers to contracts entered into by minors or other incapacitated persons, the period starts from the time the guardianship ceases (Art. 1391, Civil Code; see Reyes vs. Ferrer, 156 SCRA 314; Bael vs. Intermediate Appellate Court, 169 SCRA 617; Armentia vs. Patriarca, 18 SCRA 1253; Braganza vs. De Villar Abrille, 105 Phil. 456). The discovery of fraud or mistake is deemed to have taken place from the execution of the contract or its registration if there is an allegation that it did not express the true intention of the parties. (Bael vs. Intermediate Appellate Court, supra.). Ratification extinguishes the action to annul a voidable contract (Art. 1392, Civil Code). Ratification may be effected either expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right (Art. 1393, Civil Code). Implied ratification may take the form of accepting and retaining the benefits of a contract (Julian Francisco vs. Pastor Herrera, G.R. No. 139982, 21 November 2002). Ratification may be effected by the guardian of the incapacitated person (Art. 1394, Civil Code). Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment (Art. 1395, Civil Code). Ratification cleanses the contract from all its defects from the moment it is constituted (Art. 1396, Civil Code; see Tang vs. Gonzales, 52 Phil. 180). The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily, or although not being parties, may be prejudiced by such contracts. Persons, however, who are capable cannot allege the incapacity of those with whom they are contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the con-

162

CIVIL LAW

Arts. 1390-1402

tract (see Art. 1397, Civil Code; see Singson vs. Isabela Sawmill, 88 SCRA 623; City Council of Cebu City vs. Cuizon, 47 SCRA 325; De Santos vs. City of Manila, 45 SCRA 409; Wolfson vs. Estate of Martinez, 20 Phil. 340). Effects of Annulment An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages (Art. 1398, Civil Code; Cadwallader & Co. vs. Smith Bell & Co., 7 Phil. 461). When the defect of the contract consists in the incapacity of one of the parties, the incapacitated persons is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him (Art. 1399, Civil Code; Braganza vs. De Villa Abrille, 105 Phil. 456). Effect of Loss of Thing The rules may be stated thusly — (1) If the thing is lost after the decree of annulment (a) If the thing is lost because of the fault of the obligor (who may either be the plaintiff or the defendant bound by the judgment to make restitution), he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date (Art. 1400, Civil Code). (b) If the thing is lost due to fortuitous event — (i)

If the vice of consent is attributable to the obligor, the latter is liable as in (1) above;

(ii) If the vice of consent is not attributable to the obligor, the general rule of res perit creditori applies; where, however, the obli-

Art. 1403

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163

gation annulled is analogous to, is the equivalent of, or approximates a sale of goods, lease of things or contract for a piece of work, the res perit domino rule should apply. (Thus, in Dumasag vs. Modelo [34 Phil. 252], where the defendant was required to return the carabao sold after annulment of the sale, the loss of the carabao because of fortuitous event did not excuse the defendant [as its owner at the time of lost] from paying its value to the plaintiff). (2) Where the thing is lost before the action to annul is brought — (a) If the thing is lost due to the fault of the party entitled to bring the action, the right to bring such action is extinguished (Art. 1401, Civil Code). (b) If the thing is lost because of fortuitous event, should the a contrario rule apply? It is believed that the res perit domino rule should instead apply since at this point in time no obligation to return has as yet arisen; accordingly, if at the time of loss the party who has the right to bring the action was the owner thereof, the action should likewise fail. Article 1402 of the Civil Code appears to sanction this rule indirectly by providing that if in virtue of a decree (once given) one fails to restore what he is bound to return, the other is not compelled to comply with what is incumbent upon him. Chapter 8 Unenforceable Contracts (n) Art. 1403. The following contracts are unenforceable, unless they are ratified:

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Art. 1403

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than Five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract.

Arts. 1403-1408

OBLIGATIONS AND CONTRACTS Title II. Contracts

165

Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2, of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them. Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357. Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception. Art. 1408. Unenforceable contracts cannot be assailed by third persons.

Unenforceable contracts are those that cannot be enforced by court action, upon the timely objection of a party. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has not been given authority or legal representation, or who has acted beyond his powers (Frias vs. Esquivel, 66 SCRA 29), except that, if the other party is aware of the agent’s want of authority, the contract is rendered void (see Art. 1898, Civil Code, infra.; National Power Corp. vs. National Merchandising Corp., 117 SCRA 789);

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Arts. 1403-1408

(2) Those that do not comply with the Statute of Frauds which requires certain agreements or some kind of note or memorandum thereof to be in writing, and subscribed by the other party charged, or by his agent; otherwise, the same shall be unenforceable and evidence of the agreement cannot be received without the writing, or a secondary evidence of its contents. These are — (a) An agreement that by its terms is not to be performed within a year from the making thereof (see Arroyo vs. Azur, 76 Phil. 493); (b) A special promise to answer for the debt, default, or miscarriage of another (see Colbert vs. Bachrach, 12 Phil. 83 [but not a direct or primary liability]); (c)

An agreement made in consideration of marriage, other than a mutual promise to marry (see Atienza vs. Castillo, 72 Phil. 589);

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accepts and receives part of such goods and chattels, or the evidences, or some of them, of such things in action, or pays at the time some part of the purchase money; but when a sale is made by auction and entry is made by auctioneer in his sales book, at the time of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e)

An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein (Santos vs. Ganayo, 116 SCRA 431; Ipapo vs. Intermediate Appellate Court, G.R. No. 72740,

Arts. 1403-1408

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167

27 January 1987; Montilla vs. Court of Appeals, 161 SCRA 167; see also Art. 1443 on express trust) but not all dealings involving real property are covered (Cruz vs. Tuason & Co., 76 Phil. 543), such as an agreement settling a boundary dispute (Hernandez vs. Court of Appeals, 160 SCRA 821) or a partition of co-owned property (Espina vs. Ayala, 196 SCRA 312); (f)

A representation as to the credit of a third person (see Surety Co. vs. Teodoro, 101 Phil. 684);

(3) Those where both parties are incapable of giving consent to a contract (see Art. 1403, Civil Code). Unauthorized contracts are additionally governed by Article 1317 and the principles of agency in Title X of Book IV of the Code (see Art. 1404, Civil Code). Contracts infringing the Statute of Frauds referred to in No. 2 of Article 1403 (supra.) are ratified by the failure to object to the presentation of oral evidence to prove the same (see Conlu vs. Araneta, 15 Phil. 587, requiring the objection to be made at the first opportunity; and Abenica vs. Gonda, 34 Phil. 739, wherein it was held that cross-examination on the contract was deemed a waiver of the defense of the Statute of Frauds), or by the acceptance of benefits thereunder (Art. 1405, Civil Code). The Statute of Frauds is applicable only to executory contracts, not to those that are totally or partially performed (Victoriano vs. Court of Appeals, 194 SCRA 19; Clarin vs. Ralona, 127 SCRA 512; Facturan vs. Sabanal, 81 Phil. 512; Diana vs. Macalibo, 75 Phil. 71; Carbonell vs. Poncio, L-11231, 12 May 1958; Inigo vs. Estate of Manolo, 21 SCRA 246). The full compliance by one party to the contract renders said contract enforceable (see PNB vs. Phil. Vegetable Oil Co., 49 Phil. 857; Shoetime vs. La Tondeña, 68 Phil. 24). The same rule applies when par-

168

CIVIL LAW

Art. 1409

tial compliance is made by such party (Valenzuela vs. Court of Appeals, 181 SCRA 524). When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357 (Art. 1406, Civil Code), i.e., to compel each other to observe the requisite form to permit such registration. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. The contract shall be deemed validated from its inception if the ratification is made by the parents or guardians, as the case may be, of both contracting parties (Art. 1407, Civil Code). Unenforceable contracts cannot be assailed by third persons (Art. 1408, Civil Code). One case has held a consummated verbal sale to be valid between the parties but when a third person disputes the ownership of the buyer, the latter could be precluded, said the Court, from offering proof, unless the writing is shown (Claudel vs. Court of Appeals, 199 SCRA 113). Chapter 9 Void or Inexistent Contracts 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) titious;

Those which are absolutely simulated or fic-

(3) Those whose cause or object did not exist at the time of the transaction; (4) of men;

Those whose object is outside the commerce

Arts. 1410-1413

(5)

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169

Those which contemplate an impossible serv-

ice; (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) by law.

Those expressly prohibited or declared void

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305) Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise. (1306) Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the

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Arts. 1414-1420

debtor, with interest thereon from the date of the payment. Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property. Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands, allow recovery of money or property delivered by the incapacitated person. Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess. Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit. Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

Arts. 1409-1422

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171

Art. 1421. The defense of illegality of contracts is not available to third persons whose interests are not directly affected. Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

Article 1409 of the Civil Code of the Philippines has grouped together contracts which have theretofore been jurisprudentially considered void ab initio under the old code. The nullity of these contracts is rather definitive in nature and cannot thereby be cured by ratification. There are, however, other judicial relations which are specifically declared to be void by law under separate provisions of the code like the sale of a piece of land or any interest therein made through an agent whose authority is not reduced in writing or when the agent exceeds the scope of his authority. In these special instances, it would be important and prudent to take a minute longer to look at the law for, at times, the rationale for their being can justify a divergence from the standard rules governing void contracts in general. Thus, although by statute and jurisprudence denominated void, Article 1874 sales, are, in fact, susceptible to ratification. This intent of the law can be gleaned from some provisions of the code. The susceptibility to ratification could prompt one to say that the contract should, in essence, be deemed merely unenforceable. That, too, may not be totally accurate for outside that feature, other principles of a void contract could, nevertheless, be apt and relevant. To exemplify, the rule in evidence to the effect that the unenforceable character of a contract is lost by a failure to object at the first opportunity to the presentation of oral evidence to prove the questioned transaction would not necessarily be applicable to contracts specially declared void under Article 1874 of the Code which sanctions ratification only if done by an act of affirmation by the principal (Claudio De Los Reyes and Lydia De Los Reyes vs. Court

172

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Arts. 1409-1422

of Appeals and Aluyong Gabriel, G.R. No. 129103, 03 September 1999, 313 SCRA 632, Concurring Opinion). Void contracts cannot be ratified (Manotok Realty vs. Court of Appeals, 149 SCRA 372). Neither can the right to set up the defense of illegality be waived (Art. 1409, Civil Code; see Martin vs. Adil, 130 SCRA 406; Arsenal vs. Court of Appeals, 143 SCRA 40; see also discussions on Autonomy and Elements of Contracts, supra.; also Arts. 5, 17, 1306, 1345-1358, Civil Code, supra.). A contract which is the direct result of a previous illegal contract is itself null and void (Art. 1422, Civil Code; E. Razon, Inc. vs. Philippine Ports Authority, 151 SCRA 233). The action or defense for the declaration of the inexistence of a contract does not prescribe (Art. 1410, Civil Code; see Cabral vs. Court of Appeals, 130 SCRA 498; Trigal vs. Tobias, 25 SCRA 1154). Mere lapse of time cannot give efficacy to a void contract (Vda. de Catindig vs. Heirs of Roque, 74 SCRA 83). A promise to convey a homestead after the 5-year prohibitory period is itself void and neither prescription or laches nor implied trust can be invoked (see Homena vs. Casa, 157 SCRA 188). The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests are not directly affected thereby (Chavez vs. PCGG, 307 SCRA 394). Effects 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. Furthermore, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given and shall not be bound to comply with his promise (Art. 1411, Civil Code; Iribar vs. Millat, 5 Phil. 362).

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If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules are observed: (1) When the fault is on the part of both contracting parties, neither may recover what he had given by virtue of the contract, or demand the performance of the other’s undertaking; and (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise (Art. 1312, Civil Code; see Yuchengco vs. Velayo, 115 SCRA 307; see also Umali vs. Court of Appeals, 189 SCRA 529; Bough vs. Contiveros, 40 Phil. 209). When the agreement is not illegal per se but is merely prohibited and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered (Art. 1416, Civil Code; see Guiang vs. Kintanar, 106 SCRA 49). Thus, recovery has been allowed in the sale of land acquired under the Public Land Act within the prohibited period (see Ras vs. Sua, 25 SCRA 153). In the sale of land to aliens, the seller’s right of recovery (Phil. Banking Corp. vs. Lui, 21 SCRA 52), however, is lost if meanwhile the land is conveyed to a qualified national (Yap vs. Rico, 121 SCRA 244) or if the buyer himself becomes a naturalized citizen (Republic vs. Intermediate Appellate Court, 175 SCRA 398; De Castro vs. Tan, 129 SCRA 85). Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment (Art. 1413, Civil Code; see discussion on Contracts of Loan, infra.; see Angel Warehousing Co. vs. Chelda Ent., 23 SCRA 119, allowing recovery of the whole interest; see also Briones

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vs. Camnayo, 41 SCRA 404). Central Bank Circular No. 905, issued conformably with Presidential Decree No. 116, as amended, has done away with the interest ceilings prescribed by the Usury Law (Act No. 2655, as amended). Summary on the Civil Effects of a Void Contract 1.

Neither party may seek to enforce a void contract, irrespective of the reason that makes it void (Bough vs. Contiveros, 40 Phil. 209). From this rule, there is no exception and neither prescription or laches nor the doctrine of implied trust may be invoked that would lend the court itself to its enforcement which the parties may not do (see Homena vs. Casa, 157 SCRA 188).

2.

Neither party may seek the aid of the law or the courts, and both parties shall be deemed in pari delicto. Hence, the expressions ex dolo malo non eritor getio or in pari delicto potior est conditio dependentis. From this rule there are exceptions so as to permit the return of that which may have been given under a void contract, such as by — (a) The innocent party (Arts. 1411-1412, Civil Code); (b) The debtor who pays usurious interest (Art. 1413 Civil Code); (c)

The party repudiating the void contract before the illegal purpose is accomplished or before damage is caused to a third person and if public interest is subserved by allowing recovery (Art. 1414, Civil Code);

(d) The incapacitated party if the interest of justice so demands (Art. 1515, Civil Code); (e)

The party for whose protection the prohibition by law is intended if the agreement is

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not illegal per se but merely prohibited and if public policy would be enhanced by permitting recovery (Art. 1416, Civil Code); and (f)

The party for whose benefit the law has been intended such as in price ceiling laws (Art. 1417, Civil Code) and labor laws (Arts. 1418-1419, Civil Code).

Resumé on Distinctive Features of Defective Contracts As to 1. Causes

Rescissible Lesion/fraud against creditors

Voidable

Unenforceable

Void

Vice of Consent Failure of form, Lack of essenwant of author- tial elements or ity, or incapacity illegality of both parties

2. Prescription Prescriptible

Prescriptible

Imprescriptible Imprescriptible

3. Ratification Need not be ratified

Can be ratified

Can be ratified

4. Binding efficacy

Binding until Not enforceable Not binding annulled unless totally or partially performed or the objection is waived

Binding unless rescinded

5. Assailability Parties or third persons who are defrauded

Parties or third Parties only persons who are prejudiced

Cannot be ratified

Parties and third persons whose interests are directly affected

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TITLE III. NATURAL OBLIGATIONS Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered. Art. 1425. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid. Art. 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact that he has not been benefited thereby, there is no right to demand the thing or price thus returned. Art. 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no 176

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right to recover the same from the obligee who has spent or consumed it in good faith. (1160a) Art. 1428. When, after an action to enforce a civil obligation has failed, the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered. Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer. Art. 1430. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable.

Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not warrant a right of action to enforce their performance but, after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof (see Art. 1423, Civil Code; Ansay vs. NDC, 107 Phil. 997). Moral obligations, unlike natural obligations, have no legal consequence. Natural obligations may be distinguished from moral obligations in that the former must have initially been or be founded upon civil obligations that, for some reasons, cannot be enforced or are no longer enforceable by court action. The codal provisions are merely illustrative, i.e., not exclusive, of natural obligations. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has

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delivered or the value of the service he has rendered (Art. 1424, Civil Code). In Development Bank of the Philippines (DBP) vs. Adil (161 SCRA 307), a second promissory note that was executed covering a sum in a previous promissory note which had theretofore prescribed was held to be enforceable. The new note, the Court said, amounted to renunciation and waiver of the right of prescription of action, adding that the consideration of the new promissory note was the obligation under the old promissory note, and the statute of limitation merely barred the remedy but did not discharge the debt. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid (Art. 1425, Civil Code). When such payment by a third person is with the knowledge or consent of the debtor, the former may demand, unless he intended it to be a donation, from the debtor what he has paid but he cannot compel the creditor to subrogate him in his rights (see Arts. 1236, 1237 and 1238, Civil Code). Republic Act No. 6809, lowering the age of majority to 18 years from twenty-one, renders obsolete the provisions of Article 1426 and Article 1427 of the Civil Code. A person, at least eighteen years of age, is now qualified for all acts of civil life except as may be specifically so provided otherwise. When, after an action to enforce a civil obligation has failed, the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered (Art. 1428, Civil Code). But payment made after the defendant has been judicially ordered to retain the debt shall not be valid (Art. 1243, Civil Code). An heir is not obligated to pay a debt owing from the deceased, but when the heir voluntarily pays a debt of

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the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer (Art. 1429, Civil Code). When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable (Art. 1430, Civil Code). The term “legacy” must be understood in a generic sense as also including any testamentary disposition in favor of an heir, legatee or devisee.

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TITLE IV. ESTOPPEL (n) Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with the provisions of this Code, the Code of Commerce, the Rules of Court and special laws. Art. 1433. Estoppel may be in pais or by deed. Art. 1434. When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee. Art. 1435. If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee. Art. 1436. A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor. Art. 1437. When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present: (1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped; 180

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181

(2) The party precluded must intend that the other should act upon the facts as misrepresented; (3) The party misled must have been unaware of the true facts; and (4) The party defrauded must have acted in accordance with the misrepresentation. Art. 1438. One who has allowed another to assume apparent ownership of personal property for the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for value. Art. 1439. Estoppel is effective only as between the parties thereto or their successors in interest.

Through estoppel an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved against the person relying thereon (Art. 1431, Civil Code; Laurel V vs. Civil Service Commission, 203 SCRA 195; Servicewide Specialists vs. Intermediate Appellate Court, 174 SCRA 80). Estoppel, however, cannot give validity to an act that is prohibited by law or against public policy (Development Bank of the Philippines vs. Court of Appeals, 90 SCAD 12, 284 SCRA 14). The principles of estoppel have been adopted by the Civil Code insofar as they are not in conflict with its provisions, the Code of Commerce, the Rules of Court and special laws (see Art. 1432, Civil Code; Cf. Lazo vs. Republic Surety & Ins. Co., 31 SCRA 329). Article 1433 of the Code classifies estoppel into estoppel in pais or by deed. It may also be promissory in character (Philippine National Bank vs. Intermediate Appellate Court, 189 SCRA 680). Estoppel is in pais when the admission or representation arises from the conduct of the party in estoppel such as by his act or declaration, omission or silence. Since estoppel is based on equity and justice, it is essential that before a person can be barred

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from asserting a fact contrary to his admission or representation, it must be shown that such admission or representation has been intended and would unjustly cause harm to those who are misled if the principle were not applied against him. Generally, it has been said that the following elements must be shown so as to put a party in estoppel by his conduct: (1) Insofar as the party in estoppel is concerned, it should appear that — (a) His conduct amounts to a false representation or concealment of material facts or at least is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (b) There is an intent or at least expectation that his conduct shall be acted upon by, or at least influence, the other party; and (c)

He has knowledge, actual or constructive, of the real facts.

(2) Insofar as the party invoking estoppel is concerned, it must be shown that — (a) He has lack of knowledge and of the means of knowledge of the truth as to the material facts; (b) He has relied in good faith upon the conduct or statements of the party to be estopped; and (c)

His reliance thereon is of such character as to change his position or status to his injury, detriment or prejudice (Kalalo vs. Luz, 34 SCRA 347).

Estoppel by laches and estoppel by silence may be considered as forms of estoppel in pais. Estoppel by laches, in a general sense, is the failure or neglect for an unreasonable or unexplained length of time to do that which, by exercising due diligence, could or should have

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been done earlier warranting a presumption that he has abandoned his right or has declined to assert it (Madeja vs. Patcho, 132 SCRA 540). Mere lapse of time cannot give efficacy to a void contract (Catindig vs. Roque, 74 SCRA 83), but estoppel may bar a party who makes no categorical objection to (Northern Cement vs. Intermediate Appellate Court, 158 SCRA 408), or who fails to promptly repudiate, an invalid contract (Cadano vs. Cadano, 49 SCRA 33; De Castro vs. Tan, 129 SCRA 85). The law aids the vigilant, not those who slumber on their rights –– vigilantibus sed non dormientibus jura subveniunt. The doctrine of “laches” is a creation of equity applied only to bring about equitable results, and it is largely addressed to the sound discretion of the court (Central Azucarera del Danao vs. Court of Appeals, 137 SCRA 295). The elements of laches are — (1) conduct of the defendant which gives rise to a cause of action for which the plaintiff can seek a remedy; (2) delay in asserting the right, complainant being aware of defendant’s conduct and having the opportunity to institute a suit; (3) lack of knowledge on the part of defendant that complainant would assert the right on which he bases his suit; and (4) injury or prejudice to defendant in the event relief is accorded to the complainant, or the suit is not barred (Chacon Enterprise vs. Court of Appeals, 124 SCRA 784; Cimafranca vs. Intermediate Appellate Court, 147 SCRA 611; Alba vs. Santander, 160 SCRA 8; BailonCasilao vs. Court of Appeals, 160 SCRA 738). The equitable principle of laches has been distinguished from prescription, viz.: (1) Prescription is concerned with the fact of delay; laches relates to the effects of delay. (2) Prescription is statutory; laches is a creation of equity; and

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(3) Prescription is a matter of time; laches is a matter of injustice (see Heirs of Lacamen vs. Heirs of Laruan, 65 SCRA 605). Estoppel by silence or inaction assumes that there must be an obligation or duty, not merely a right and opportunity, to speak (see 19 Am. Jur. 663). Mere innocent silence will not create estoppel. There must also be some element of turpitude or negligence connected with the silence by which another is misled to his injury based on moral and natural justice; its applicability to any particular case to a large extent depends upon the special circumstances of the case (Beronilla vs. GSIS, 36 SCRA 44, citing Mirasol vs. Mun. of Tabaco, 43 Phil. 610; see also Santiago Syjuco, Inc. vs. Castro, 175 SCRA 171). Estoppel by deed refers to admissions or representations in an instrument or deed. Thus, a privy to a contract would be precluded from asserting against the other party any right in derogation of the deed or from denying the truth of any material fact found therein (see 31 C.J.S. 195; Banco de Oro vs. Equitable Bank, 157 SCRA 188). The code enumerates instances of estoppel, albeit non-exclusive in nature; hence — (a) When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee (Art. 1434, Civil Code). If the thing sold is yet undelivered when title passes to the seller, the latter shall be bound to deliver it to the buyer. (b) If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee (Art. 1435, Civil Code). A sale by a non-owner can be perfected, and it obligates the seller to acquire title to the thing and deliver it to the buyer.

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OBLIGATIONS AND CONTRACTS Title IV. Estoppel

185

(c) A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor (Art. 1436, Civil Code). The possession of the thing by the lessee or bailee, not being adverse to the lessor or bailor, may not ripen into ownership by acquisitive prescription. (d) When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present: (1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped; (2) The party precluded must intend that the other should so act upon the facts as misrepresented; (3) The party misled must have been unaware of the true facts; and (4) The party defrauded must have acted in accordance with the misrepresentation (Art. 1437, Civil Code). (e) One who has allowed another to assume apparent ownership of personal property for the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for value (Art. 1438, Civil Code). Persons Bound by Estoppel Estoppel is effective only as between the parties thereto or their successors in interest (Art. 1439, Civil Code). In Mapa vs. Guanzon (77 SCRA 837), it has been ruled that while no title in derogation to that of a registered owner may be acquired by prescription or adverse

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possession, this legal guarantee may in appropriate cases yield to the right of third persons under the equitable principle of laches (see also Caragay-Layno vs. Court of Appeals, 133 SCRA 718). Neglect or omissions of public officers as to their duties will not work as estoppel against the State, and the government is never estopped by the mistakes or errors of its agent (Manila Lodge vs. Court of Appeals, 73 SCRA 116; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Bachrach Motors vs. Unson, 50 Phil. 981). Certain affirmative acts of public officials may, however, give rise to estoppel (see Bachrach Motors vs. Unson, 50 Phil. 981; Pineda vs. CFI, 52 Phil. 803; Boada vs. Posadas, 58 Phil. 184). The Central Bank may be guilty of promissory estoppel (Central Bank vs. Court of Appeals, 106 SCRA 143; see also Central Bank vs. Intermediate Appellate Court, 179 SCRA 752). In Republic vs. Alagad (169 SCRA 455), the Republic assailed the decision insofar as it had sustained the lower court in dismissing the petition for failure of the Republic to appear for pre-trial. In holding that the Court of Appeals was guilty of grave abuse of discretion, the Supreme Court said: “It is well-established that the State cannot be bound by, or estopped from, the mistakes or negligent acts of its officials or agents, much more, non-suited as result thereof. “This is so because: “x x x [T]he state as a person in law is the judicial entity, which is the source of any asserted right to ownership in land under the basic doctrine embodied in the 1935 Constitution as well as the present charter. It is charged moreover with the conservation of such patrimony. There is need therefore of the most rigorous scrutiny before private claims to portions thereof are judicially accorded recognition, especially so where the matter is sought to be raised up anew after almost fifty years. Such primordial considera-

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tion, not the apparent carelessness, much less the acquiescence of public officials, is the controlling norm ... “The cases of Ramos vs. Central Bank of the Philippines and Nilo vs. Romero, cited by the Court of Appeals in support of its decision, are not applicable. In Ramos, we applied estoppel upon finding of bad faith on the part of the State (the Central Bank) in deliberately reneging on its promises. In Nilo, we denied efforts to impugn the jurisdiction of the court on the ground that the defendant had been ‘erroneously’ represented in the complaint by the City Attorney when it should have been the City Mayor, on the holding that the City Attorney, in any event, could have ably defended the City (Davao City). In both cases, it is seen that the acts that gave rise to estoppel were voluntary and intentional in character, in which cases, it could not be said that the Government had been prejudiced by some negligent act or omission.” On the matter of court jurisdiction, the ruling in People vs. Casiano (111 Phil. 72; see also People vs. Munar, 53 SCRA 278; Nieva vs. Manila Banking Corp., 124 SCRA 453) is instructive. “The operation of the principle of estoppel on the question of jurisdiction seemingly depends upon whether the lower court actually had jurisdiction or not. If it had no jurisdiction, but the case was tried and decided upon the theory that it had jurisdiction, the parties are not barred, on appeal, from assailing such jurisdiction, for the same ‘must exist as a matter of law, and may not be conferred by consent of the parties or by estoppel (5 C.J.S. 861-863). However, if the lower court had jurisdiction, and the case was heard and decided upon a given theory, such, for instance, as that the court had no jurisdiction, the party who induced it to adopt such theory will not be

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permitted, on appeal, to assume an inconsistent position — that the lower court had jurisdiction. Here, the principle of estoppel applies. The rule that jurisdiction is conferred by law, and does not depend upon the will of the parties, has no bearing thereon.” When a court which lacks jurisdiction over a case but subsequently acquires it by an invocation of an affirmative defense by the defendant, the latter is barred by estoppel against a claim of lack of jurisdiction. A party may not reject that jurisdiction with respect to the part of the decision unfavorable to him and accept it as regards the portion that favors him (Balais vs. Balais, 159 SCRA 47). Also, a person, who is not an original party to an action but who fully participates, voluntarily appeared and seen the proceedings before the appellate court, cannot be permitted to run about and repudiate later the said appellate court’s jurisdiction (Limpin, Jr. vs. Intermediate Appellate Court, 147 SCRA 516). On estoppel by judgment, the case of Peñalosa vs. Tuason (22 Phil. 303; see also Manila Electric Co. vs. Court of Appeals, 114 SCRA 173) can be well in point: “The two main rules based on the doctrine of res judicata or estoppel by judgment as known to AngloAmerican jurisprudence are as follows: (a) That judgment rendered by a court of competent jurisdiction on the merits is a bar to any future suit between the same parties or their privies upon the same cause of action, so long as it remains unreversed; (b) A point which was actually and directly in issue in a former suit, and was there judicially passed upon and determined by a domestic court of competent jurisdiction, cannot be again drawn in question in any future action between the same parties or their privies, even when the causes of action in the two suits are wholly different.

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189

The difference between the effect of a judgment as a bar or estoppel against the prosecution of a second action upon the same claim or demand, and its effect as an estoppel in another action between the same parties upon a different claim or cause of action, is that in the former case the judgment, if rendered upon the merits, constitutes an absolute bar to a subsequent action, and is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose. While in the latter case the judgment in the prior action operates as an estoppel only as to those matters in issue or points controverted upon the determination of which the finding or judgment was rendered.” The first which renders the judgment conclusive between the parties on the matters directly adjudged is what we might term as res judicata, and the second which precludes the parties from raising any question that might have been put in issue by them is commonly referred to as estoppel by judgment.

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CIVIL LAW

Arts. 1440-1442

TITLE V. TRUSTS Chapter 1 General Provisions Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary. Art. 1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law. Art. 1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted.

A trust is a juridical relationship that exists between one person having the equitable title or beneficial enjoyment of property, real or personal, and another having the legal title thereto (see Deluao vs. Casteel, 29 SCRA 368). The person who establishes the trust is the trustor (or grantor); one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee (fiduciary), and the person for whose benefit the trust has been created is referred to as the beneficiary (cestui que trust). The Code has adopted the principles of the general law of trusts, insofar as they are not in conflict with its provisions, the Code of Commerce, the Rules of Court and special laws (see Arts. 1440 and 1442, Civil Code). 190

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191

Trust is either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by implication of law (Art. 1441, Civil Code). Implied trusts, in turn, may either be: (a) resulting trusts which are presumed to have been contemplated by the parties, the intention as to which is to be found in the nature of their transaction but not expressed in the deed itself (see 89 C.J.S. 275), such as those contained in Articles 1448 to 1455 of the Code, and (b) constructive trusts which are created, not by any word evincing a direct intention to create a trust, but by operation of law based on equity in order to satisfy the demands of justice, such as Article 1456 (infra.) of the Code (Eschay vs. Court of Appeals, 61 SCRA 369; Ramos vs. Ramos, 61 SCRA 284; Magallon vs. Montejo, 146 SCRA 282; Salao vs. Salao, 70 SCRA 65). One basic distinction between an implied trust and an express trust is that while the former may be established by parol evidence, the latter cannot. Even then, in order to establish an implied trust in real property by parol evidence, the proof should be as fully convincing as if the acts giving rise to the trust obligation are proven by an authentic document. An implied trust, in fine, cannot be established upon vague and inconclusive proof (Heirs of Lorenzo Yap, namely Sally Sun Yap, Margaret Yap-Uy and Manuel Yap vs. The Honorable Court of Appeals, Ramon Yap and Benjamin Yap, G.R. No. 133047, 17 August 1999, 312 SCRA 603). Neither laches nor prescription is a bar to enforce an express trust (see Government vs. Abadilla, 46 Phil. 642; Fabian vs. Fabian, 22 SCRA 231). In Valdez vs. Olorga (51 SCRA 71), the Supreme Court has ruled: “From the standpoint of acquisitive prescription, or prescription of ownership, this court has held numerous decisions involving fiduciary relations such as those occupied by a trustee with respect to the cestui que trust that, as a general rule, the former’s possession is not adverse and therefore cannot ripen

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CIVIL LAW

Arts. 1443-1446

into a title by prescription. Adverse possession in such case requires the concurrence of the following circumstances: (a) that the trustee has performed unequivocal acts of repudiation amounting to ouster of the cestui que trust; (b) that such positive acts of repudiation have been made known to the cestui que trust; and (c) that the evidence thereon should be clear and conclusive.” Either laches or prescription, however, may constitute a bar to enforce an implied trust (see Fabian vs. Fabian, 22 SCRA 231; Sinaon vs. Soroñgon, 136 SCRA 407). Thus, an action to recover an immovable under a constructive trust prescribes in 10 years (Gicano vs. Gegato, 157 SCRA 140; De Portugal vs. Intermediate Appellate Court, 159 SCRA 178) counted from the date the Transfer Certificate of Title is issued in the name of the repudiating possessor (Villagonzalo vs. Intermediate Appellate Court, 167 SCRA 535; Bergado vs. Court of Appeals, 173 SCRA 497). Chapter 2 Express Trusts Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence. Art. 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended. Art. 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary.

Arts. 1447-1448

OBLIGATIONS AND CONTRACTS Title V. Trusts

193

Express trusts are those which are created by the direct and positive acts of the parties, by some writing or deed, or by will, or by words evincing an intention to establish a trust. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended (Art. 1444, Civil Code). No express trusts concerning an immovable or any interest therein may be proved by parole evidence (Art. 1443, Civil Code; Ferrer-Lopez vs. Court of Appeals, 150 SCRA 393; Asuncion vs. Pineda, 175 SCRA 719; Cuaycong vs. Cuaycong, 21 SCRA 1193). No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust (Art. 1445, Civil Code). Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed unless there is proof to the contrary (Art. 1446, Civil Code). This acceptance by the beneficiary is not subject to the law on donation (see Cristobal vs. Gomez, 50 Phil. 810).

Chapter 3 Implied Trusts Art. 1447. The enumeration of the following cases of implied trust does not exclude others established by the general law of trust, but the limitation laid down in Article 1442 shall be applicable. Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child.

194

CIVIL LAW

Arts. 1449-1455

Art. 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof. Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him. Art. 1451. When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner. Art. 1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each. Art. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated. Art. 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. Art. 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong.

Arts. 1447-1457

OBLIGATIONS AND CONTRACTS Title V. Trusts

195

Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. Art. 1457. An implied trust may be proved by oral evidence.

Implied trusts are those which, without being express, are deducible from the nature of the transaction as matters of intent or, independently of the particular intention of the parties, as being super-induced on the transaction by operation of law basically by reason of equity. These species of implied trust are ordinarily subdivided into resulting and constructive trusts. A resulting trust is one that arises by implication of law and presumed always to have been contemplated by the parties, the intention as to which can be found in the nature of their transaction although not expressed in a deed or instrument of conveyance. Resulting trusts are based on the equitable doctrine that it is the more valuable consideration than the legal title that determines the equitable interest in property. Upon the other hand, a constructive trust is a trust not created by any word or phrase, either expressly or impliedly, evincing a direct intention to create a trust, but one that arises in order to satisfy the demands of justice. It does not come about by agreement or intention but in main by operation of law construed against one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. Although, ordinarily, a certificate of title becomes incontrovertible one year after it is issued pursuant to a public grant, the rule does not apply when such issuance is null and void. An action to declare the nullity of that void title does not prescribe; in fact, it is susceptible to direct, as well as to collateral, attack. The ten-year prescriptive period is applicable to an action for reconveyance if it is based on an implied or constructive trust predicated on Article 1456 of the Civil Code.

196

CIVIL LAW

Arts. 1447-1457

The enumeration of the cases of implied trust by the law does not exclude possible other instances established by the principles of the general law of trusts (see Art. 1442, in relation to Art. 1447, Civil Code). (a) An implied trust is created when property is sold and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. If the person to whom the title has been conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child (Art. 1448, Civil Code). (b) An implied trust arises when a donation is made to a person but it appears that, although the legal estate is transmitted to the donee, he is nevertheless either to have no beneficial interest or to only have a part thereof (Art. 1449, Civil Code). The remaining part, in the latter case, is covered by the implied trust. (c) If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid, allowing the latter to redeem the property and compel a conveyance thereof to him (Art. 1450, Civil Code). (d) When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the trust owner (Art. 1451, Civil Code). (e) If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each (Art. 1452, Civil Code). If the agreement is explicit on the trust relationship, the trust may be considered express rather than implied.

Arts. 1447-1457

OBLIGATIONS AND CONTRACTS Title V. Trusts

197

(f) When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or to the grantor, there is an implied trust in favor of the person whose benefit is contemplated (Art. 1453, Civil Code; Valera vs. Inserto, 149 SCRA 533). (g) If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him (Art. 1454, Civil Code). Related to this illustrative implied trust are the provisions of the Civil Code on a contract presumed to be an equitable mortgage under Article 1602 of the Civil Code. (h) When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong (Art. 1455, Civil Code; Valera vs. Inserto, 149 SCRA 533). (i) If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes (Art. 1456, Civil Code; Adille vs. Court of Appeals, 157 SCRA 455; Caro vs. Court of Appeals, 180 SCRA 401; Tale vs. Court of Appeals, 208 SCRA 266). When a property is transferred to the paramour, which property has been acquired by the husband during his marriage, a constructive trust is deemed to have been created by operation of law under the provisions of Article 1456 of the Civil Code (Belcodero vs. Court of Appeals, 45 SCAD 400, 227 SCRA 303). An action for reconveyance of a parcel of land based on an implied or constructive trust prescribes in ten years, the point of reference being the date of registration of the deed or the date of

198

CIVIL LAW

Arts. 1447-1457

the issuance of the certificate of title over the property. This rule finds applicability only when the plaintiff is not in possession of the property, since if a person claiming to be the owner thereof is in actual possession of the property, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not prescribe (Heirs of Olviga vs. Court of Appeals, 45 SCAD 427, 227 SCRA 234). An implied trust, unlike an express trust involving real property or an interest therein, may be proved by oral evidence (Art. 1457, in relation to Article 1443, Civil Code).

199

SPECIAL CONTRACTS TITLE VI. SALES Chapter 1 Nature and Form of the Contract Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a) Art. 1459. The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered. (n) Art. 1460. A thing is determinate when it is particularly designated or physically segregated from all others of the same class. The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties. (n) Art. 1461. Things having a potential existence may be the object of the contract of sale. The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence. The sale of a vain hope or expectancy is void. (n) 199

200

CIVIL LAW

Arts. 1462-1467

Art. 1462. The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale, in this Title called “future goods.” There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen. (n) Art. 1463. The sole owner of a thing may sell an undivided interest therein. (n) Art. 1464. In the case of fungible goods, there may be a sale of an undivided share of a specific mass, though the seller purports to sell and the buyer to buy a definite number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in common of such a share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent appears. (n) Art. 1465. Things subject to a resolutory condition may be the object of the contract of sale. (n) Art. 1466. In construing a contract containing provisions characteristic of both the contract of sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. (n) Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. (n)

Arts. 1468-1473

OBLIGATIONS AND CONTRACTS Title VI. Sales

201

Art. 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale. (1446a) Art. 1469. In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a specified person or persons. Should such person or persons be unable or unwilling to fix it, the contract shall be inefficacious, unless the parties subsequently agree upon the price. If the third person or persons acted in bad faith or by mistake, the courts may fix the price. Where such third person or persons are prevented from fixing the price or terms by fault of the seller or the buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be. (1447a) Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (n) Art. 1471. If the price is simulated, the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract. (n) Art. 1472. The price of securities, grain, liquids, and other things shall also be considered certain, when the price fixed is that which the thing sold would have on a definite day, or in a particular exchange or market, or when an amount is fixed above or below the price on such day, or in such exchange or market, provided said amount be certain. (1448) Art. 1473. The fixing of the price can never be left to the discretion of one of the contracting parties. How-

202

CIVIL LAW

Arts. 1474-1476

ever, if the price fixed by one of the parties is accepted by the other, the sale is perfected. (1449a) Art. 1474. Where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inefficacious. However, if the thing or any part thereof has been delivered to and appropriated by the buyer, he must pay a reasonable price therefor. What is a reasonable price is a question of fact dependent on the circumstances of each particular case. (n) Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a) Art. 1476. In the case of a sale by auction: (1) Where goods are put up for sale by auction in lots, each lot is the subject of a separate contract of sale. (2) A sale by auction is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other customary manner. Until such announcement is made, any bidder may retract his bid; and the auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve. (3) A right to bid may be reserved expressly by or on behalf of the seller, unless otherwise provided by law or by stipulation. (4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf or for the auctioneer, to employ or induce any person to bid at such sale on behalf of the seller or knowingly to take any bid from the seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer. (n)

Arts. 1477-1482

OBLIGATIONS AND CONTRACTS Title VI. Sales

203

Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. (n) Art. 1478. The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price. (n) Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a) Art. 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. (1452a) Art. 1481. In the contract of sale of goods by description or by sample, the contract may be rescinded if the bulk of the goods delivered do not correspond with the description or the sample, and if the contract be by sample as well as by description, it is not sufficient that the bulk of goods correspond with the sample if they do not also correspond with the description. The buyer shall have a reasonable opportunity of comparing the bulk with the description or the sample. (n) Art. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the

204

CIVIL LAW

Arts. 1483-1488

price and as proof of the perfection of the contract. (1454a) Art. 1483. Subject to the provisions of the Statute of Frauds and of any other applicable statute, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word of mouth, or may be inferred from the conduct of the parties. (n) Art. 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. (1454-Aa) Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-A-a) Art. 1486. In the cases referred to in the two preceding articles, 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. (n) Art. 1487. The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary. (1455a) Art. 1488. The expropriation of property for public use is governed by special laws. (1456)

Arts. 1489-1491

OBLIGATIONS AND CONTRACTS Title VI. Sales

205

Chapter 2 Capacity to Buy or Sell Art. 1489. All persons who are authorized in this Code to obligate themselves, may enter into a contract of sale, saving the modifications contained in the following articles. Where necessaries are sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in Article 290. (1457a) Art. 1490. The husband and the wife cannot sell property to each other, except: (1) When a separation of property was agreed upon in the marriage settlements; or (2) When there has been a judicial separation of property under Article 191. (1458a) Art. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another: (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 intrusted to them, unless the consent of the principal has been given; (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 intrusted 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

206

CIVIL LAW

Arts. 1458-1492

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) (1459a)

Any others specially disqualified by law.

Art. 1492. The prohibitions in the two preceding articles are applicable to sales in legal redemption, compromises and renunciations. (n)

1.

Concept

A sale is a contract whereby a person, called the seller, obligates himself to deliver and to transfer ownership of a thing or right to another, called the buyer, for a price certain. A contract of sale may be absolute or conditional (Art. 1458, Civil Code). Where the sale is conditional, such as in “Contracts to Sell” when ownership is retained until the fulfillment of a positive suspensive condition, e.g., full payment of the purchase price, the breach of the condition will prevent the obligation to convey title from acquiring an obligatory force (Roque vs. Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186 SCRA 375; see also Spouses Gimenez vs. Court of Appeals, 195 SCRA 205). Where the condition is imposed upon the perfection of the contract itself, the failure of the condition would prevent such perfection (Romero vs. Court of Appeals, G.R. No. 107207, 03 November 1995, 250 SCRA 223; People’s Homesite & Housing Corp. vs. Court of Appeals, 133 SCRA 777). If the condition is imposed on the obligation of a party which is not fulfilled, the other party may either refuse to proceed or waive said condition (Art. 1545, Civil Code; Delta Motor vs. Genuino, 170 SCRA 29; see discussions, infra., on “right of first refusal” stipulations on lease agreements and contracts in general).

Arts. 1458-1492

OBLIGATIONS AND CONTRACTS Title VI. Sales

207

In Dignos vs. Court of Appeals (158 SCRA 375), it was held that a sale, although denominated as a “Deed of Conditional Sale,” is absolute where the contract is devoid of any proviso that the title is reserved or the right to unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the buyer upon actual or constructive delivery (i.e., by a public document) of the property sold. The sale being absolute is governed by the provisions of Article 1592 of the Civil Code, allowing rescission the exercise of which would require, said the Court, a public document conformably with Article 1358 of the Civil Code. Observe, however, that Article 1358 of the Civil Code requires a public instrument merely for greater efficacy; Article 1592 specifies a notarial rescission instead. In Delpher Trades Corporation vs. Intermediate Appellate Court (157 SCRA 349), a lease contract provided that should the lessor decide to sell the property leased, the lessee would have the priority to buy the same. The lessor later exchanged the property for no par value shares in a corporation (Sec. 135, now Sec. 134, National Internal Revenue Code), a business conduit of the lessor which was part of the family’s “estate planning” for tax avoidance purposes. The Supreme Court held the exchange as not amounting to a sale since there was no real transfer of ownership or interest to a third party but that the family’s ownership was merely changed from one form to another. The stipulation that the “payment of the full consideration based on a survey shall be due and payable in five (5) years from the execution of a formal deed of sale” is not a condition which affects the efficacy of the contract of sale. It merely provides the manner by which the full consideration is to be computed and the time within which the same is to be paid (Heirs of Juan San Andres vs. Rodriguez, 127 SCAD 178, 332 SCRA 769). Transfer of rights may either be by assignment or by negotiation, such as when the evidence of credit is a nego-

208

CIVIL LAW

Arts. 1458-1492

tiable document (see discussions, infra., on Documents of Title and Assignment of Credits). Distinguished from a Piece of Work Contract A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work (Art. 1467, Civil Code). The mere fact alone that certain articles are made upon previous orders of customers will not argue against the imposition of the sales tax if such articles are ordinarily manufactured by the taxpayer for sale to the public (Celestino Co. vs. Collector, 99 Phil. 841). The distinction between a contract of sale and one for work, labor and materials is tested, said the Supreme Court in Commissioner vs. Engineering Equipment and Supply Company (64 SCRA 590), by the inquiry whether the thing transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have existed and had been the subject of sale of some other person even if the order had not been given. If the article ordered by the purchaser is exactly such as the manufacturer makes and keeps on hand for sale to anyone, and no change or modification of it is made at the other’s request, it is a contract of sale even though it may be entirely made after, and in consequence of, the latter’s order of it. Distinguished from Barter If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as a part of

Arts. 1458-1492

OBLIGATIONS AND CONTRACTS Title VI. Sales

209

the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale (Art. 1468, Civil Code). Expropriation The expropriation of property for public use is governed by special laws (Art. 1488, Civil Code). 2.

Elements (Perfection) a.

Consent

The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price (delivery of the thing sold is not required to perfect the contract). From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts (Art. 1475, Civil Code; see Clarin vs. Rulona, 127 SCRA 512). Non-payment of the purchase price constitutes a very good reason to rescind a sale, for it violates the very essence of the contract of sale (Central Bank of the Philippines vs. Bichara, 123 SCAD 697, 328 SCRA 807). Where the parties have yet to agree on how and when the down payment and the installment payments are to be paid, the sale cannot as yet be deemed to be a perfected contract (see Velasco vs. Court of Appeals, 51 SCRA 439). In Maharlika Publishing Corporation vs. Tagle (142 SCRA 553), it was shown that in 1963, the GSIS entered into a conditional contract to sell a parcel of land to petitioner Maharlika Publishing Corporation. One of the conditions of the contract was that said petitioner should pay the GSIS in monthly installments and that failure to pay any installment within 90 days from the due date would render the contract automatically cancelled. The petitioner failed to pay several installments. After warning the petitioner, GSIS cancelled the contract and published an invitation to bid the property on 12 February 1971. On 11 February 1971, the petitioner, represented

210

CIVIL LAW

Arts. 1458-1492

by its president, Adolfo Calica, addressed to the GSIS a letter-proposal for the payment of the arrearages. Calica discussed the proposal with GSIS Vice Chairman Leonilo Ocampo, who sent a note to GSIS General Manager Roman Cruz, Jr., which read: “It sounds fair and reasonable subject to your wise judgment, as usual.” The letter-proposal and Ocampo’s note were taken to Cruz who wrote on the face of Ocampo’s note a note to one Mr. Ibañez which read: “Hold bidding. Discuss with me.” The letterproposal together with two checks amounting to P11,000 were submitted to the office of Cruz and were received by his secretary. Nevertheless, the public bidding was held and Calica participated but his bid was rejected as imperfect. In the court proceedings that followed, the question was whether petitioner had repurchased the property. The Supreme Court ruled: “In Article 1475 of the Civil Code, we find that the contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the law governing the form of contracts. x x x “We note that the petitioners are not complete strangers entering into a contract with respondent GSIS for the first time. There was an earlier contract to sell the same properties to the petitioners. That contract was perfected and there had been partial compliance with its terms. The transaction now under question in this case merely referred to the curing of certain defects which led to the cancellation of the earlier contract by GSIS. Under the peculiar circumstances of this case, therefore, the acceptance of the petitioners’ letter-proposal by Mr. Roman Cruz, Jr., the person with authority to do so, and his order to his subordinates to stop the bidding so that they could first discuss the matter with him,

Arts. 1458-1492

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created an agreement of binding nature with the petitioners.” In the case of a sale by auction: (1) Where goods are put up for sale by auction in lots, each lot is the subject of a separate contract of sale. (2) A sale by auction is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other customary manner. Until such announcement is made, any bidder may retract his bids; and the auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve. (3) A right to bid may be reserved expressly by or on behalf of the seller, unless otherwise provided by law or by stipulation. (4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf or for the auctioneer, to employ or induce any person to bid at such sale on behalf of the seller or knowingly to take any bid from the seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer (Art. 1476, Civil Code). A promise to buy and sell a determinate thing for a price certain is reciprocally demandable (Art. 1479, Civil Code). An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable consideration apart from the price, is what may be so properly termed as the perfected contract of option. This contract is legally binding and conforms with the 2nd paragraph of Article 1479 of the Civil Code (Ang Yu Asuncion vs. Court of Appeals, 238 SCRA 602; Co vs. Court of Appeals, 312 SCRA 528). Without such consideration, the option is not binding (Natino vs. Intermediate Appellate Court, 197 SCRA 332). An option contract is separate and distinct from that which the

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parties may enter into upon the consummation of the option (Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643; Co vs. Court of Appeals, 57 SCAD 163, SCAD 312 SCRA 528). An option, as used in the law of sales, is a continuing offer or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a time certain, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or demand a sale. It is also sometimes called an “unaccepted offer.” An option is not of itself a purchase, but merely secures the privilege to buy. It is not a sale of property but a sale of the right to purchase. It is simply a contract by which the owner of property agrees with another person that he shall have the right to buy his property at a fixed price within a certain time. He does not sell his land, nor does he agree to sell it; but he does sell something, i.e., the right or privilege to buy at the election or option of the other party. Its distinguishing characteristic is that it imposes no binding obligation on the person holding the option, aside from the consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a contract by which the owner of the property gives the optionee the right or privilege of accepting the offer and buying the property on certain terms. To elucidate. An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted. An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract of option. This contract is legally binding, Observe, however, that the option is not the contract of sale itself. The

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optionee has the right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal. Where a period is given to the offeree within which to accept the offer, the following rules generally govern: (1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror’s coming to know of such fact, by communicating that withdrawal to the offeree. The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains that “every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.’’ (2) If the period has a separate consideration, a contract of “option’’ is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself, and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offerer withdraws the offer before its acceptance

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(exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on the proposed contract (“object’’ of the option) since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of the option. In these cases, care should be taken of the real nature of the consideration given, for if, in fact, it has been intended to be part of the consideration for the main contract with a right of withdrawal on the part of the optionee, the main contract could be deemed perfected; a similar instance would an “earnest money’’ in a contract of sale that can evidence its perfection (Ang Yu Asuncion vs. Court of Appeals and Buen Realty Development Corp., G.R. No. 109125, 02 December 1994, 238 SCRA 602). In Atkins Kroll vs. Co. vs. Cua (102 Phil. 948; reiterated in Sanchez vs. Rigos, 45 SCRA 368; and Rural Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409), the Supreme Court has said that there is no distinction between Article 1324 on an offer and Article 1479 on a mere unilateral promise to sell (modifying the ruling in Southern Sugar and Molasses Co. vs. Atlantic Gulf & Pacific, 97 Phil. 249; see discussion on Art. 1324, supra.). The contract of sale is perfected upon acceptance of the option to buy, although it is not accompanied by an actual payment of the price (Nietes vs. Court of Appeals, 46 SCRA 654). A mutual promise to buy and sell, however, is reciprocally demandable (Mas vs. Lanuza, 5 Phil. 457). Whenever earnest money is given in a contract of sale, it is considered as part of the price and as proof of the perfection of the contract (Art. 1482, Civil Code; SalasRodriguez vs. Leuterio, 47 Phil. 818). Earnest money is something of value to show the buyer being really in earnest and is given to bind the bargain (Topacio vs. Court of Appeals, 211 SCRA 291). An earnest money must be distinguished from an option money, thusly: (a) earnest money is part of the purchase price, while option money is the money given as distinct consideration for an

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option contract; (b) earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and (c) the buyer is bound to pay the balance whenever earnest money is given, while when the would be buyer gives option money, he is not required to buy but may even forfeit it depending on the terms of the option (Limson vs. Court of Appeals, G.R. No. 135929, 20 April 2001). Right of First Refusal In the law on sales, the so-called “right of first refusal’’ is relatively an innovative juridical relation. Needless to point out, it cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first refusal, understood in its normal concept, per se be brought within the purview of an option under the second paragraph of Article 1479 or possibly of an offer under Article 1319 of the same Code. An option or an offer would require, among other things, a clear certainty on both the object and the cause or consideration of the envisioned contract. In a right of first refusal, while the object might be made determinate, the exercise of the right, however, would be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws of general application, the pertinent scattered provisions of the Civil Code on human conduct. (But see Equatorial vs. Carmelo, G.R. No. 106063, 21 November 1996). Even on the premise that such right of first refusal has been decreed under a final judgment, its breach cannot justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its exist-

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ence, nor would it sanction an action for specific performance without thereby negating the indispensable element of consensuality in the perfection of contracts. It is not to say, however, that the right of first refusal would be inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the circumstances expressed in Article 19 of the Civil Code, can warrant a recovery for damages (Ang Yu Asuncion vs. Court of Appeals and Buen Realty Development Corp., G.R. No. 109125, 02 December 1994, 238 SCRA 602). Capacity to Buy or Sell Generally, all persons who are capable of acting with civil effects or authorized to obligate themselves may enter into a contract of sale; where, however, necessaries are sold and delivered to a minor (unemancipated) or other person without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in Article 290 of the Civil Code (now Art. 194, Family Code) such as items indispensable for sustenance, dwelling, clothing and medical attendance (see Art. 1489, Civil Code). In other cases, a contract of sale entered into by a minor or an incapacitated person would be voidable (see Art. 1390, Civil Code). Disqualifications The husband and the wife cannot sell property to each other, except: (1) when a separation of property was agreed upon in the marriage settlements; or (2) when there has been a judicial separation of property between the spouses (Art. 1490, Civil Code). The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another — (1) The guardian, the property of the person or persons who may be under his guardianship;

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(2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given: (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 on 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 right 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 (Art. 1491, Civil Code). The foregoing prohibitions (under Arts. 1490-1491) are applicable to sales in legal redemption, compromises and renunciations (see Art. 1492, Civil Code). But the disqualification of an agent does not include the special power to foreclose real estate mortgages (Fiestan vs. Court of Appeals, 185 SCRA 751). A contract of sale entered into by persons who are disqualified under the provisions of Article 1490 and Article 1491 is void (Uy Sui Pin vs. Cantollas, 70 Phil. 55; Maharlika Publishing Corporation vs. Tagle, 142 SCRA 553; Rubias vs. Batiller, 51 SCRA 120). In general, the law considers as voidable an act or contract of an incapacitated person (Art. 1390, Civil Code)

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or one (act or contract) requiring an approval thereof by another which is not given (Bautista vs. Montilla, L-6569, 3 April 1956; see Art. 173, Art. 399, Civil Code) and as void that of a person suffering from disqualification (Art. 5 and Art. 1409, Civil Code). Where a person instead suffers from want of authority, the resulting act or contract becomes generally unenforceable (Art. 1403, Civil Code). At times, however, the law expresses a different rule; thus, a will and testament executed by an incapacitated person renders the will void (Art. 801, in relation to Art. 839, Civil Code); and a sale of a piece of land by agent whose authority is not in writing (Art. 1874, Civil Code), or a contract entered into by an agent in excess of authority with another who is aware of the limits of the powers granted by the principal in the absence of ratification, is considered void (Art. 1998, Civil Code). There have been deviations, too, not by strict positive law but by judicial decisions. For instance, in Felipe vs. Aldon (120 SCRA 628), the sale of a conjugal parcel of land sold by the wife, who was not the administratrix of the conjugal partnership, was held to be voidable (Art. 124, Family Code, now expresses such sale to be void). In Yuchengco vs. Velayo (115 SCRA 307), Presidential Decree No. 189 and Presidential Decree No. 289, authorizing rules and regulations to be promulgated by the Ministry of Tourism and to give them the force and effect of law, were held to prohibit the transfer of shares of stock of the corporation engaged in tourism without the approval of the Tourism Ministry. A conveyance without such approval, the Court ruled, resulted in a void contract and entitled the buyers in good faith to recover the price paid therefor. Justice Aquino, concurring, considered the contract merely rescissible under Article 1547 of the Civil Code, thus permitting the purchaser to recover the price paid under Article 1594. Perhaps, the rule by the majority of the Justices in the Yuchengco case can be justified in that the prerequisite approval is governmental, the absence of which renders the contract contrary to

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law and, therefore, void under the provisions of Article 1409. Under Article 1491 of the Civil Code, a sale between a lawyer and his client involving property and rights in litigation is expressly prohibited. In a settlement of estate proceedings, the property is still considered under litigation after the project of partition is approved but before the estate is declared closed and terminated (Fornilda vs. Br. 164, RTC IVth Judicial Region, Pasig, 166 SCRA 281). In Director of Lands vs. Ababa (88 SCRA 513), the Supreme Court sanctioned a contingent fee arrangement, whereby the lawyer was to get a share of the property under litigation, on the ground that the transfer of the thing (under said arrangement) would take effect only after the finality of a favorable judgment (see also Fabillo vs. Intermediate Appellate Court, 195 SCRA 28). But if, as the Supreme Court held in Rubias vs. Batiller (51 SCRA 120), a violation of Article 1491 renders the contract void, then convalidation would be improper since a contract is adjudged either as valid or as void not on circumstances subsequent but on those contemporary with the contract itself. It would have, of course, been preferable had the Court simply ruled in Abada that since the contract was one of lease of service, the disqualification under Article 1491 did not apply. b. Object — Present and Future (vendor need not be the owner at perfection but only upon delivery) The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered (Art. 1459, Civil Code); he need not be its owner, however, when the contract is perfected (Martin vs. Reyes, 91 Phil. 666). The thing must also be determinate; it is determinate when it is particularly designated or physically segregated from all others of the same class, or if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties (see Art. 1460,

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Civil Code; Melliza vs. City of Iloilo, 23 SCRA 477). A sale of up to a certain quantity of palay produced is valid (National Grains Authority vs. Intermediate Appellate Court, 171 SCRA 131). Emptio Rei Speratae Things having a potential existence may be the object of the contract of sale (Art. 1461, Civil Code; Pichel vs. Alonzo, 111 SCRA 341; Sibal vs. Valdez, 50 Phil. 512). The goods which form the subject of a contract of sale may either be existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale (called “future goods”). There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen (Art. 1462, Civil Code; Martin vs. Reyes, 91 Phil. 666). Things subject to a resolutory condition may meanwhile be the object of the contract of sale (Art. 1465, Civil Code; Rodriguez vs. Francisco, 2 SCRA 649). Emptio Spei The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence. The sale of a vain hope or expectancy is void (Art. 1461, Civil Code). The term “vain” does not connote impossibility but if the hope or expectancy does occur, its character as being vain might well be assailed. Sale of Interest A co-owner of a thing may sell his undivided interest therein (Art. 439, Civil Code), but not a definite part thereof (Clarin vs. Rulona, 127 SCRA 512). A sole owner may also sell an undivided interest in the thing, rendering the buyer a co-owner with the seller (Art. 1463, Civil Code). In the case of fungible goods, there may be a sale of an undivided share of a specific mass, though the seller purports to sell and the buyer to buy a definite number,

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weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in common of such a share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent appears (Art. 1464, Civil Code). Sale of Animals The sale of animals suffering from contagious diseases or that are unfit for the use or service stated in the contract is void (see Art. 1575, Civil Code); otherwise, the contract is treated just like any sale of goods subject to the provisions of Act No. 1147 on the sale of large cattle. Sale of Credit When a credit or incorporeal right is transferred, the contract is commonly referred to as an “assignment” (Art. 1624, Civil Code) or as “negotiation” in the case of credits or rights which are evidenced by negotiable documents or instruments (see infra.). c.

Cause — Money or its Equivalent

The price must be certain in money or its equivalent (see Art. 1458, Civil Code; Republic vs. Phil. Resources Dev. Corp., 102 Phil. 960). In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a specified person or persons. Should such person or persons be unable or unwilling to fix it, the contract shall be inefficacious, unless the parties subsequently agree upon the price. If the third person or persons acted in bad faith or

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by mistake, the courts may fix the price. Where such third persons are prevented from fixing the price or terms by fault of the seller or the buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be (Art. 1469, Civil Code). The fixing of the price can never be left to the discretion of one of the contracting parties. If, however, the price fixed by one of the parties is accepted by the other, the sale is perfected (Art. 1473, Civil Code). The price of securities, grain, liquids, and other things shall also be considered certain when the price fixed is that which the thing sold would have on a definite day, or in a particular exchange or market, or when an amount is fixed above or below the price on such day, or in such exchange or market, provided said amount be certain (Art. 1472, Civil Code). Where the price cannot be determined in any other manner, the contract is rendered inefficacious. If, however, the thing or any part thereof has been delivered to and appropriated by the buyer, he must pay a reasonable price therefor. What could be a reasonable price is a question of fact dependent on the circumstances of each particular case (Art. 1474, Civil Code). Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent or as it may mean that the parties may have really intended a donation or some other act or contract (Art. 1470, Civil Code; see Goquiolay vs. Sycip, 108 Phil. 947). If the price were simulated, the sale is void (Borromeo vs. Borromeo, 98 Phil. 432; Jocson vs. Court of Appeals, 170 SCRA 333; de Portugal vs. Intermediate Appellate Court, 159 SCRA 179; Ladanga vs. Court of Appeals, 131 SCRA 361), but again the act may be shown to have been in reality a donation, or some other act or contract (Art. 1471, Civil Code). The Supreme Court, in Ladanga vs. Court of Appeals (131 SCRA 361), ruled that a contract of sale is void and without effect “where the price, which appears therein as paid, has in fact never been paid by the purchaser to the vendor” (citing the previous cases of Catindig vs. Heirs of Roque, 74 SCRA 83 and Mapalo vs. Mapalo, 123 Phil.

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979). Such a sale, the Supreme Court said, is “inexistent and cannot be considered consummated” (citing Borromeo vs. Borromeo, 96 Phil. 431). Although the law would consider the sale perfected from the moment the parties agree on the thing to be sold and the price to be paid therefor (see Art. 1458 in relation to Art. 1319, Civil Code), it is at perfection, not consummation, when a contract is to be adjudged as being either valid or void. The circumstance of consummation, however, is a strong factor to consider in determining whether there is absolute simulation that can, indeed, render an agreement void (see also Art. 1409, par. 2, Civil Code; Cf. Gardner vs. Court of Appeals, 131 SCRA 585; De Portugal vs. Intermediate Appellate Court, 159 SCRA 179). A sale of property for “P1.00 and other valuable consideration” (a common law documentation practice) would be legally feasible as a sale contract so long as it can withstand a possibility that, in reality, a different contract is intended by the parties or that, in fact, the same is merely a simulated arrangement. In one case, a sale for P1.00, plus an unspecified and unquantified services, of a valuable piece of real estate was held to be fictitious and void (Bagnas vs. Court of Appeals, 176 SCRA 159). Form of Contract Subject to the provisions of the Statute of Frauds and of any other applicable statute, a contract of sale may be made in writing or verbally, or partly in writing and partly by word of mouth, or may be inferred from the conduct of the parties (Art. 1483, Civil Code). In the sale of large cattle, a transfer of the Certificate of Registration is required (Sec. 22, Act No. 1147). The sale of goods worth not less than P500, as well as a sale of real property, is covered by the Statute of Frauds and must thus be in writing to be enforceable (see Art. 1403, Civil Code). The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary (Art. 1487, Civil Code).

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Chapter 3 Effects of the Contract When the Thing Sold Has Been Lost Art. 1493. If at the time the contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the contract shall be without any effect. But if the thing should have been lost in part only, the vendee may choose between withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon. (1460a) Art. 1494. Where the parties purport a sale of specific goods, and the goods without the knowledge of the seller have perished in part or have wholly or in a material part so deteriorated in quality as to be substantially changed in character, the buyer may at his option treat the sale: (1)

As avoided; or

(2) As valid in all of the existing goods or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in which the ownership will pass, if the sale was divisible. (n) Chapter 4 Obligations of the Vendor Section 1 — General Provisions Art. 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is the object of the sale. (1461a) Art. 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. (n)

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Section 2 — Delivery of the Thing Sold Art. 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee. (1462a) Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred. With regard to movable property, its delivery may also be made by the delivery of the keys of the place or depository where it is stored or kept. (1463a) Art. 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a) Art. 1500. There may also be tradition constitutum possessorium. (n) Art. 1501. With respect to incorporeal property, the provisions of the first paragraph of Article 1498 shall govern. In any other case wherein said provisions are not applicable, the placing of the titles of ownership in the possession of the vendee or the use by the vendee of his rights, with the vendor’s consent, shall be understood as a delivery. (1464) Art. 1502. When goods are delivered to the buyer “on sale or return” to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time. (n) When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar terms, the ownership therein passes to the buyer: (1)

When he signifies his approval or acceptance

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to the seller or does any other act adopting the transaction; (2) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact. (n) Art. 1503. Where there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer. Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But, if except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the seller’s property in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract. Where goods are shipped, and by the bill of lading the goods are deliverable to order of the buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby reserves a right to the possession of the goods as against the buyer. Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading together to the buyer to secure acceptance or payment of the bill of exchange, the buyer is bound to return the bill of lading if he does not honor the bill of exchange, and if he wrongfully retains the bill of lading he acquires no added right thereby. If, however, the bill of lading provides that the goods are deliverable to the

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buyer or to the order of the buyer, or is indorsed in blank, or to the buyer by the consignee named therein, one who purchases in good faith, for value, the bill of lading, or goods from the buyer will obtain the ownership in the goods, although the bill of exchange has not been honored, provided that such purchaser has received delivery of the bill of lading indorsed by the consignee named therein, or of the goods, without notice of the facts making the transfer wrongful. (n) Art. 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 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. (n) Art. 1505. Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by its conduct precluded from denying the seller’s authority to sell. Nothing in this Title, however, shall affect: (1) The provisions of any factors’ acts, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction;

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(3) Purchases made in a merchant’s store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. (n) Art. 1506. Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller’s defect of title. (n)

Obligations of Seller, In General — The vendor is bound to transfer the ownership of and deliver, as well as warrant, the thing which is the object of the sale (Art. 1495, Civil Code). Delivery The vendor is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfection of the contract. All fruits shall pertain to the vendee from the day on which the contract was perfected (Art. 1537, Civil Code). The ownership of the thing sold is acquired by the vendee upon the actual or constructive delivery thereof (see Art. 1477, Civil Code) or from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501 of the Code (infra.), or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee (see Art. 1496, Civil Code; Sapto vs. Fabiana, 103 Phil. 683) even when the price is yet unpaid (Ledesma vs. Court of Appeals, 213 SCRA 195). The rule notwithstanding, the parties may stipulate that ownership shall not pass to the purchaser until he has fully paid the price (see Art. 1478, Civil Code; Edca Publishing vs. Santos, 184 SCRA 614; Bean vs. Cadwallader, 10 Phil. 606), or the seller may reserve the right of possession or ownership in the goods until certain conditions are fulfilled (see Art. 1503, Civil Code). Delivery may be actual, constructive (which may be sym-

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bolic, by tradicio longa manu, by tradicio brevi manu, or by constitutum possessorium), quasi-tradition and by operation of law (see discussions on Tradition as a Mode of Acquiring Ownership, supra.). Illustrative Acts Constituting Delivery The thing sold shall be understood as delivered when it is placed in the control and possession of the vendee (Art. 1497, Civil Code; La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217; Chrysler Philippines Corp. vs. Court of Appeals, 133 SCRA 567; Alliance Tobacco Corporation, Inc. vs. Philippine Virginia Tobacco Administration, 179 SCRA 336). When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract if from the deed the contrary does not appear or cannot clearly be inferred (Viacrusis vs. Court of Appeals, 44 SCRA 176). With regard to movable property, its delivery may also be made by the delivery of the keys of the place or depository where it is stored or kept (Art. 1498, Civil Code). The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason (Art. 1499, Civil Code; Board of Liquidators vs. Floro, 110 Phil. 482). There may also be tradition constitutum possessorium (Art. 1500, Civil Code) such as when the seller continues to be in possession as the lessee of the buyer (Amigo vs. Teves, 96 Phil. 252). With respect to incorporeal property, the sale made through a public instrument is equivalent to delivery if the contrary does not appear or cannot be clearly inferred (see also Art. 1625, Civil Code). In any other case, the

230

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Arts. 1507-1508

placing of the titles of ownership in the possession of the vendee or the use by the vendee of his rights, with the vendor’s consent, shall be understood as a delivery (Art. 1501, in relation to Art. 1498, Civil Code). Delivery on “Sale or Return” or on “Trial on Satisfaction” When goods are delivered to the buyer “on sale or return” to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time. When goods are delivered to the buyer “on approval or trial or on satisfaction,” or other similar terms, the ownership therein passes to the buyer: (1) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction; (2) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact (Art. 1502, Civil Code). Transfers of Goods Covered by Documents of Title Art. 1507. A document of title in which it is stated that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document is a negotiable document of title. (n) Art. 1508. A negotiable document of title may be negotiated by delivery: (1) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the bearer; or

Arts. 1509-1511

OBLIGATIONS AND CONTRACTS Title VI. Sales

231

(2) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the document has indorsed it in blank or to the bearer. Where by the terms of a negotiable document of title the goods are deliverable to bearer or where a negotiable document of title has been indorsed in blank or to bearer, any holder may indorse the same to himself or to any specified person, and in such case the document shall thereafter be negotiated only by the indorsement of such indorsee. Art. 1509. A negotiable document of title may be negotiated by the indorsement of the person to whose order the goods are by the terms of the document deliverable. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiations may be made in like manner. (n) Art. 1510. If a document of title which contains an undertaking by a carrier, warehouseman or other bailee to deliver the goods to bearer, to a specified person or order of a specified person or which contains words of like import, has placed upon it the words “not negotiable,” “non-negotiable” or the like, such document may nevertheless be negotiated by the holder and is a negotiable document of title within the meaning of this Title. But nothing in this Title contained shall be construed as limiting or defining the effect upon the obligations of the carrier, warehouseman, or other bailee issuing a document of title or placing thereon the words “not negotiable,” “non-negotiable,” or the like. (n) Art. 1511. A document of title which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee. A non-negotiable document cannot be negotiated and the indorsement of such a document gives the transferee no additional right. (n)

232

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Arts. 1512-1514

Art. 1512. A negotiable document of title may be negotiated: (1)

By the owner thereof; or

(2) By any person to whom the possession or custody of the document has been entrusted by the owner, if, by the terms of the document the bailee issuing the document undertakes to deliver the goods to the order of the person to whom the possession or custody of the document has been entrusted, or if at the time of such entrusting the document is in such form that it may be negotiated by delivery. (n) Art. 1513. A person to whom a negotiable document of title has been duly negotiated acquires thereby: (1) Such title to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser in good faith for value; and (2) The direct obligation of the bailee issuing the document to hold possession of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him. (n) Art. 1514. A person to whom a document of title has been transferred, but not negotiated, acquires thereby, as against the transferor, the title to the goods, subject to the terms of any agreement with the transferor. If the document is non-negotiable, such person also acquires the right to notify the bailee who issued the document of the transfer thereof, and thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document. Prior to the notification to such bailee by the transferor or transferee of a non-negotiable document of title, the title of the transferee to the goods and the right to acquire the obligation of such bailee may be

Arts. 1515-1518

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defeated by the levy of an attachment of execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor. (n) Art. 1515. Where a negotiable document of title is transferred for value by delivery, and the indorsement of the transferor is essential for negotiation, the transferee acquires a right against the transferor to compel him to indorse the document unless a contrary intention appears. The negotiation shall take effect as of the time when the indorsement is actually made. (n) Art. 1516. A person who for value negotiates or transfers a document of title by indorsement or delivery, including one who assigns for value a claim secured by a document of title unless a contrary intention appears, warrants: (1) (2) fer it;

That the document is genuine; That he has a legal right to negotiate or trans-

(3) That he has knowledge of no fact which would impair the validity or worth of the document; and (4) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby. (n) Art. 1517. The indorsement of a document of title shall not make the indorser liable for any failure on the part of the bailee who issued the document or previous indorsers thereof to fulfill their respective obligations. (n) Art. 1518. The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the pos-

234

CIVIL LAW

Arts. 1507-1520

session of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefore in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistake, duress or conversion. (n) Art. 1519. If goods are delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner and a negotiable document of title is issued for them they cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution unless the document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court. (n) Art. 1520. A creditor whose debtor is the owner of a negotiable document of title shall be entitled to such aid from courts of appropriate jurisdiction by injunction and otherwise in attaching such document or in satisfying the claim by means thereof as is allowed at law or in equity in regard to property which cannot readily be attached or levied upon by ordinary legal process. (n)

The term “document of title to goods” includes any bill of lading, dock warrant, “quedan,” or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by indorsement or by delivery, goods represented by such document (see Art. 1636, Civil Code). The document may either be negotiable or non-negotiable. A document of title in which it is stated that the goods referred to therein will be delivered to the bearer

Arts. 1507-1520

OBLIGATIONS AND CONTRACTS Title VI. Sales

235

of, or to the order of any person named in, such document is a negotiable document of title (Art. 1507, Civil Code; Roman vs. Asia Banking Corp., 46 Phil. 705). The Code also provides: “Art. 1510. If a document of title which contains an undertaking by a carrier, warehouseman or other bailee to deliver the goods to bearer, to a specified person or order (or to the order) of a specified person or which contains words of like import, has placed upon it the words ‘not negotiable,’ ‘non-negotiable’ or the like, such document may nevertheless be negotiated by the holder and is a negotiable document of title within the meaning of this title. But nothing in this Title contained shall be construed as limiting or defining the effect upon the obligations of the carrier, warehouseman, or other bailee issuing a document of title or placing thereon the words ‘not negotiable,’ ‘non-negotiable,’ or the like” (Words in parenthesis added). A non-negotiable document of title is one in which it is expressed that the goods covered thereby are to be delivered to a specified person named therein. Manner of Transfer A negotiable document of title is transferred by negotiation (delivery or indorsement, as the case may be; see infra.) or by assignment; a non-negotiable document may only be transferred by assignment. In either case, i.e., negotiation or assignment, the transferee does not acquire title more than what the transferor had or had ability to convey. Negotiation A negotiable document of title may be negotiated by delivery: (1) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the bearer; or

236

CIVIL LAW

Arts. 1507-1520

(2) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the order of a specified person and such person or a subsequent indorsee of the document has indorsed it in blank or to the bearer. Where by the terms of a negotiable document of title the goods are deliverable to bearer or where a negotiable document of title has been indorsed in blank or to bearer, any holder may indorse the same to himself or to any specified person, and in such case the document shall thereafter be negotiated only by the indorsement of such indorsee (Art. 1508, Civil Code). A negotiable document of title may be negotiated by the indorsement of the person to whose order the goods are by the terms of the document deliverable. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiations may be made in like manner (Art. 1509, Civil Code). Where a negotiable document of title is transferred for value by delivery, and the indorsement of the transferor is essential for negotiation, the transferee acquires a right against the transferor to compel him to indorse the document unless a contrary intention appears. The negotiation shall take effect as of the time when the indorsement is actually made (Art. 1515, Civil Code). A negotiable document of title may be negotiated: (1) by the owner thereof; or (2) by any person to whom the possession or custody of the document has been entrusted by the owner if, by the terms of the document, the bailee issuing the document undertakes to deliver the goods to the order of the person to whom the possession or custody of the document has been entrusted, or if at the time of such entrusting the document is in such form that it may be negotiated by delivery (Art. 1512, Civil Code).

Arts. 1507-1520

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237

Effects of Negotiation A person to whom a negotiable document of title has been duly negotiated acquires thereby: (1) such title to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser in good faith for value; and (2) the direct obligation of the bailee issuing the document to hold possession of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him (Art. 1513, Civil Code). The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith without notice of the breach of duty or loss, theft, fraud, accident, mistake, duress or conversion (Art. 1518, Civil Code; see National Bank vs. Producers Warehouse Assn., 42 Phil. 608). If goods are delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner and a negotiable document of title is issued for them, they cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution unless the document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court (Art. 1519, Civil Code).

238

CIVIL LAW

Arts. 1507-1520

A creditor whose debtor is the owner of a negotiable document of title shall be entitled to such aid from courts of appropriate jurisdiction by injunction and otherwise in attaching such document or in satisfying the claim by means thereof as is allowed at law or in equity in regard to property which cannot readily be attached or levied upon by ordinary legal process (Art. 1520, Civil Code). Assignment and its Effects A document of title, which is not in such form that it can be negotiated by delivery, may be transferred by the holder by delivery to a purchaser or donee. A non-negotiable document cannot be negotiated and the indorsement of such a document gives the transferee no additional right (Art. 1511, Civil Code). A person to whom a document of title (whether negotiable or non-negotiable) has been transferred, but not negotiated, acquires thereby, as against the transferor the title to the goods, subject to the terms of any agreement with the transferor. If the document is non-negotiable, such person also acquires the right to notify the bailee who issued the document of the transfer thereof, and thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document. Prior to the notification to such bailee by the transferor or transferee of a non-negotiable document of title, the title of the transferee to the goods and the right to acquire the obligation of such bailee may be defeated by the levy of an attachment of execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor (Art. 1514, Civil Code). Liability of Transferor A person who for value negotiates or transfers a document of title by indorsement or delivery, including one

Arts. 1507-1520

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239

who assigns for value a claim secured by a document of title, unless a contrary intention appears, warrants: (1) That the document is genuine; (2) That he has a legal right to negotiate or transfer it; (3) That he has knowledge of no fact which would impair the validity or worth of the document; and (4) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby (Art. 1516, Civil Code). The indorsement of a document of title shall not make the indorser liable for any failure on the part of the bailee who issued the document or previous indorsers thereof to fulfill their respective obligations (Art. 1517, Civil Code). Double Sales “Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property. “Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. “Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith.”

240

CIVIL LAW

Arts. 1507-1520

The above provisions of the Civil Code apply, by express provision of the law, to double donations (Art. 744, Civil Code). In agency, when the agent and the principal contract with regard to the same thing, the law favors that of the prior date but in case of double sales, Article 1544 is made to apply (see Art. 1916, Civil Code). It may also be well to note that under Article 1165 (see also Art. 1917 in Agency) of the Code, if an obligor has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. In sales, Article 1544, providing for the rules to resolve the conflicting rights of two or more buyers, is appropriate since the law does not prohibit but, in fact, sanctions the perfection of a sale by a non-owner, such as the sale of future things or a short sale, for it is only at the consummation stage of the sale, i.e., delivery of the thing sold, that ownership would be deemed transmitted to the buyer. In the meanwhile, a subsequent sale to another of the same thing by the same seller can still be a legal possibility. This rule on double sales finds hardly any relevance in an ordinary donation where the law requires the donor to have ownership of the thing or the real right he donates at the time of its perfection (see Article 750, Civil Code) since a donation constitutes a mode, not just a title, in an acquisition and transmission of ownership. A conditional sale or contract to sell could only have the effect of preventing the obligation to convey title from acquiring an obligatory force if the condition is yet unfulfilled (see Roque vs. Lapuz, 96 SCRA 741). In a contract of sale, title, too, is not conveyed until, of course, when and after delivery is made. Clearly, Article 1544 also covers sales where ownership is not yet transmitted to the buyer; indeed, it equates some of its rules of preference, such as priority in possession or registration, to cover precisely the transfer of ownership (see Alterado vs.

Arts. 1507-1520

OBLIGATIONS AND CONTRACTS Title VI. Sales

241

Jimenez [CA], 57 O.G. 9213; see also Land Authority vs. De Leon, 120 SCRA 128). The rule on double sales has been held to apply where the same property was sold to different buyers, first by its owner and later by the heirs, the latter being deemed the juridical continuation of the personality of the decedent (Nuguid vs. Court of Appeals, 171 SCRA 213). (1) In the double sales of movables, the vendee who in good faith takes possession has the better right to its ownership (Tomassi vs. Villa-Abrille, 104 Phil. 310); otherwise, the preference, all things being equal, should be given to the first buyer (prius tempore, potior jure). (2) In the double sales of immovables, ownership is transferred (in the order hereunder stated) to — (a)

the first registrant in good faith;

(b)

the first in possession in good faith; and

(c) the buyer who presents the oldest title in good faith. The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge by the first buyer of the second sale cannot defeat the first buyer’s rights except when the second buyer first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33). Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register, since such knowledge taints his registration with bad faith (see also Astorga vs. Court of Appeals, 133 SCRA 748). In Cruz vs. Cabaña (129 SCRA 656), it was held that it is essential, to merit the protection of Article 1544, second paragraph, that the second realty buyer must act in good faith in registering his deed of sale (citing Carbonell vs. Court of Appeals, 69 SCRA 99; Abarquez vs. Court of Appeals, 213 SCRA 414). The knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register the second sale, since such knowledge taints his prior registration with

242

CIVIL LAW

Arts. 1507-1520

bad faith. Thus, before the second buyer can obtain priority over the first, he must show that he has acted in good faith throughout — from the time of acquisition until title is transferred to him by registration or failing registration, by delivery of possession (Uraca vs. Court of Appeals, 278 SCRA 702, cited in Angel Bautista vs. Court of Appeals, 118 SCAD 327, 322 SCRA 365). In cases of double sales of immovables, what finds relevance and materiality is not whether or not the second buyer is a buyer in good faith but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in the title of the property sold (Bayoca vs. Nogales, 133 SCAD 564, 340 SCRA 154). Article 1544 does not apply where the first registrants did not act in good faith, such as where they had notice of the prior sale of the land to another (Tan vs. Court of Appeals, G.R. No. 135038, 16 November 2001). The registration contemplated under Article 1544 has been held to refer to registration under Act 496 Land Registration Act (now PD 1529) which considers the act of registration as the operative act that binds the land (see Mediante vs. Rosabal, 1 O.G. [12] 900; Garcia vs. Rosabal, 73 Phil. 694). On lands covered by the Torrens System, the purchaser acquires such rights and interest as they appear in the certificate of title, unaffected by any prior lien or encumbrance not noted therein. The purchaser is not required to explore farther than what the Torrens title, upon its face, indicates. The only exception is where the purchaser has actual knowledge of a flaw or defect in the title of the seller or of such liens or encumbrances which, as to him, is equivalent to registration (see Sec. 39, Act 496; Bornales vs. Intermediate Appellate Court, 166 SCRA 519; Hernandez vs. Sales, 69 Phil. 744; Tajonera vs. Court of Appeals, 103 SCRA 467). Registration of the second buyer under Act 3344, providing for the registration of all instruments on land neither covered by the Spanish Mortgage Law nor the Torrens System (Act 496), cannot improve his standing

Arts. 1507-1520

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243

since Act 3344 itself expresses that registration thereunder would not prejudice prior rights in good faith (see Carumba vs. Court of Appeals, 31 SCRA 558). Registration, however, by the first buyer under Act 3344 can have the effect of constructive notice to the second buyer that can defeat his right as such buyer in good faith (see Arts. 708-709, Civil Code; see also Revilla vs. Galindez, 107 Phil. 480; Taguba vs. Peralta, 132 SCRA 700). Article 1544 has been held to be inapplicable to execution sales of unregistered land, since the purchaser merely steps into the shoes of the debtor and acquires the latter’s interest as of the time the property is sold (Carumba vs. Court of Appeals, 31 SCRA 558; see also Fabian vs. Smith, Bell & Co., 8 Phil. 496) or when there is only one sale (Remalante vs. Tibe, 158 SCRA 138). In case the first rule, in respect of immovables under Article 1544, is inapplicable, the ownership goes to the first in possession, by actual or constructive delivery to him, in good faith (see Sanchez vs. Ramos, 40 Phil. 614). The execution of a public instrument evidencing the sale has been held to transfer the possession of the property sold to the buyer (Navera vs. Court of Appeals, 184 SCRA 584). In default thereof, the preference belongs to the buyer who presents the oldest title in good faith who would generally be the first buyer since the character of his title is determined as of the time of the sale and not because of events subsequent thereto. In Caram vs. Laureta (103 SCRA 7), the Court has ratiocinated that in order to give full effect to Article 1544, the status of the two contracts must be declared so that one contract must be declared void to cut off rights which may arise from said contract; otherwise, Article 1544 would be rendered meaningless. The provision, however, appears to be self-operating, and it can vest ownership without going into the validity or nullity of the other sale. If, as the Supreme Court has ruled, the other sale becomes void, how then could the remedies against the breach of implied warranty against eviction under Arti-

244

CIVIL LAW

Art. 1521

cle 1553 to Article 1556 become operative. Then, too, a contract of sale can be an executory contract and the conveyance of title can be made, as in fact it usually does occur, after such perfection. The seller, it may be noted, need not be the owner at the time of the perfection of the contract of sale, and the law dictates the passing of title only upon delivery. If, in a double sale, the seller later reacquires ownership, he must be obligated, as he is obligated, to convey title to the other buyer (see Art. 1434, Civil Code). Place and Time of Delivery Art. 1521. Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. Apart from any such contract, express or implied, or usage of trade to the contrary, the place of delivery is the seller’s place of business if he has one, and if not his residence; but in case of a contract of sale of specific goods, which to the knowledge of the parties when the contract or the sale was made were in some other place, then that place is the place of delivery. Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. Where the goods at the time of sale are in the possession of a third person, the seller has not fulfilled his obligation to deliver to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on the buyer’s behalf. Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a reasonable hour is a question of fact. Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller. (n)

Arts. 1522-1523

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245

Art. 1522. Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods so delivered, knowing that the seller is not going to perform the contract in full, he must pay for them at the contract rate. If, however, the buyer has used or disposed of the goods delivered before he knows that the seller is not going to perform his contract in full, the buyer shall not be liable for more than the fair value to him of the goods so received. Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept the goods included in the contract and reject the rest. If the buyer accepts the whole of the goods so delivered he must pay for them at the contract rate. Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest. In the preceding two paragraphs, if the subject matter is indivisible, the buyer may reject the whole of the goods. The provisions of this article are subject to any usage of trade, special agreement, or course of dealing between the parties. (n) Art. 1523. Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the cases provided for in Article 1503, first, second and third paragraphs, or unless a contrary intent appears. Unless otherwise authorized by the buyer, the seller must make such contract with the carrier on behalf of the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of the case. If the seller omit so to do, and the goods

246

CIVIL LAW

Arts. 1524-1526

are lost or damaged in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself, or may hold the seller responsible in damages. Unless otherwise agreed, where goods are sent by the seller to the buyer under circumstances in which the seller knows or ought to know that it is usual to insure, the seller must give such notice to the buyer as may enable him to insure them during their transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during such transit. (n) Art. 1524. The vendor shall not be bound to deliver the thing sold, if the vendee has not paid him the price, or if no period for the payment has been fixed in the contract. (1466) Art. 1525. The seller of goods is deemed to be an unpaid seller within the meaning of this Title: (1) When the whole of the price has not been paid or tendered; (2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise. In Articles 1525 to 1535 the term “seller” includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. (n) Art. 1526. Subject to the provisions of this Title, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has: (1) A lien on the goods or right to retain them for the price while he is in possession of them; (2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them;

Arts. 1527-1529

(3)

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A right of resale as limited by this Title;

(4) A right to rescind the sale as likewise limited by this Title. Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transitu where the ownership has passed to the buyer. (n) Art. 1527. Subject to the provisions of this Title, the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases, namely: (1) Where the goods have been sold without any stipulation as to credit; (2) Where the goods have been sold on credit, but the term of credit has expired; (3)

Where the buyer becomes insolvent.

The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer. (n) Art. 1528. Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of retention. (n) Art. 1529. The unpaid seller of goods loses his lien thereon: (1) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the ownership in the goods or the right to the possession thereof; (2) When the buyer or his agent lawfully obtains possession of the goods; (3)

By waiver thereof.

The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has ob-

248

CIVIL LAW

Arts. 1530-1531

tained judgment or decree for the price of the goods. (n) Art. 1530. Subject to the provisions of this Title, when the buyer of goods is or becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit, and he will then become entitled to the same rights in regard to the goods as he would have had if he had never parted with the possession. (n) Art. 1531. Goods are in transit within the meaning of the preceding article: (1) From the time when they are delivered to a carrier by land, water, or air, or other bailee for the purpose of transmission to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee; (2) If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back. Goods are no longer in transit within the meaning of the preceding article: (1) If the buyer, or his agent in that behalf, obtains delivery of the goods before their arrival at the appointed destination; (2) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent; and it is immaterial that further destination for the goods may have been indicated by the buyer; (3) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf. If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer, it is a ques-

Arts. 1532-1533

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249

tion depending on the circumstances of the particular case, whether they are in the possession of the carrier as such or as agent of the buyer. If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be stopped in transitu, unless such part delivery has been under such circumstances as to show an agreement with the buyer to give up possession of the whole of the goods. (n) Art. 1532. The unpaid seller may exercise his right of stoppage in transitu either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer. When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller. If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee, he shall not be obliged to deliver or justified in delivering the goods to the seller unless such document is first surrendered for cancellation. (n) Art. 1533. Where the goods are of perishable nature, or where the seller expressly reserves the right of resale in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time, an unpaid seller having a right of lien or having stopped the goods in transitu may resell the goods. He shall not thereafter be liable to the original buyer upon the contract of sale or for any profit made by such resale, but may recover from the buyer damages for any loss occasioned by the breach of the contract of sale.

250

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Art. 1534

Where a resale is made, as authorized in this article, the buyer acquires a good title as against the original buyer. It is not essential to the validity of a resale that notice of an intention to resell the goods be given by the seller to the original buyer. But where the right to resell is not based on the perishable nature of the goods or upon an express provision of the contract of sale, the giving or failure to give such notice shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the resale was made. It is not essential to the validity of a resale that notice of the time and place of such resale should be given by the seller to the original buyer. The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement may make a resale either by public or private sale. He cannot, however, directly or indirectly buy the goods. (n) Art. 1534. An unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods, where he expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time. The seller shall not thereafter be liable to the buyer upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract. The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other overt act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the right of rescission was asserted. (n)

Arts. 1535-1539

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Art. 1535. Subject to the provisions of this Title, the unpaid seller’s right of lien or stoppage in transitu is not affected by any sale, or other disposition of the goods which the buyer may have made, unless the seller has assented thereto. If, however, a negotiable document of title has been issued for goods, no seller’s lien or right of stoppage in transitu shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether such negotiation be prior or subsequent to the notification to the carrier, or other bailee who issued such document, of the seller’s claim to a lien or right of stoppage in transitu. (n) Art. 1536. The vendor is not bound to deliver the thing sold in case the vendee should lose the right to make use of the term as provided in Article 1198. (1467a) Art. 1537. The vendor is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfection of the contract. All the fruits shall pertain to the vendee from the day on which the contract was perfected. (1468a) Art. 1538. In case of loss, deterioration or improvement of the thing before its delivery, the rules in Article 1189 shall be observed, the vendor being considered the debtor. (n) Art. 1539. The obligation to deliver the thing sold includes that of placing in the control of the vendee all that is mentioned in the contract, in conformity with the following rules: If the sale of real estate should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the vendor shall be obliged to deliver to the vendee, if the latter should demand it, all that may have been stated in the contract; but, should this be not possible, the vendee may choose between a proportional reduction of the price and the rescission of the contract, provided that, in the latter

252

CIVIL LAW

Arts. 1540-1543

case, the lack in the area be not less than one-tenth of that stated. The same shall be done, even when the area is the same, if any part of the immovable is not of the quality specified in the contract. The rescission, in this case, shall only take place at the will of the vendee, when the inferior value of the thing sold exceeds one-tenth of the price agreed upon. Nevertheless, if the vendee would not have bought the immovable had he known of its smaller area or inferior quality, he may rescind the sale. (1469a) Art. 1540. If, in the case of the preceding article, there is a greater area or number in the immovable than that stated in the contract, the vendee may accept the area included in the contract and reject the rest. If he accepts the whole area, he must pay for the same at the contract rate. (1470a) Art. 1541. The provisions of the two preceding articles shall apply to judicial sales. (n) Art. 1542. In the sale of real estate, made for a lump sum and not at the rate of a certain sum for a unit of measure or number, there shall be no increase or decrease of the price, although there be a greater or less area or number than that stated in the contract. The same rule shall be applied when two or more immovables are sold for a single price; but if, besides mentioning the boundaries, which is indispensable in every conveyance of real estate, its area or number should be designated in the contract, the vendor shall be bound to deliver all that is included within said boundaries, even when it exceeds the area or number specified in the contract; and, should he not be able to do so, he shall suffer a reduction in the price, in proportion to what is lacking in the area or number, unless the contract is rescinded because the vendee does not accede to the failure to deliver what has been stipulated. (1471) Art. 1543. The actions arising from Articles 1539

Arts. 1521-1544

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253

and 1542 shall prescribe in six months, counted from the day of delivery. (1472a) Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property. Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. (1473)

Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. Apart from any such contract, express or implied, or usage of trade to the contrary, the place of delivery is the seller’s place of business if he has one, and if not, his residence; but in case of a contract of sale of specific goods, which to the knowledge of the parties when the contract or the sale was made were in some other place, then that place is the place of delivery. Where the goods at the time of sale are in the possession of a third person, the seller has not fulfilled his obligation to deliver to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on the buyer’s behalf. Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a reasonable hour is a question of fact. Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller

254

CIVIL LAW

Arts. 1521-1544

(Art. 1521, Civil Code). The vendor shall not be bound to deliver the thing sold if the vendee has not paid him the price, or if no period for the payment has been fixed in the contract (Art. 1524, Civil Code; Florendo vs. Fox, 20 Phil. 388). Delivery to Carrier Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the cases provided for in Article 1503, first, second and third paragraphs (infra.) or unless a contrary intent appears. Unless otherwise authorized by the buyer, the seller must make such contract with the carrier on behalf of the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of the case. If the seller omits to do so and the goods are lost or damaged in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself, or may hold the seller responsible in damages. Unless otherwise agreed, where goods are sent by the seller to the buyer under circumstances in which the seller knows or ought to know that it is usual to insure, the seller must give such notice to the buyer as may enable him to insure them during their transit, and if the seller fails to do so, the goods shall be deemed to be at his risk during such transit (Art. 1523, Civil Code). In Behn, Meyer & Co. vs. Yengco (38 Phil. 602), the Supreme Court defined commonly used terms in the delivery of goods to the carrier, thus: “The letters ‘c.i.f.’ found in British contracts stand for costs, insurance, and freight. They signify that the price fixed covers not only the cost of the goods, but the expense of freight and insurance to be paid by the seller (Ireland vs. Livingston, L.R., 5 H.L., 395). Our instant contract, in addition to the

Arts. 1521-1544

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255

letters ‘c.i.f.,’ has the word following, ‘Manila.’ Under such a contract, an Australian case is authority for the proposition that no inference is permissible that a seller was bound to deliver at the point of destination (Bowden vs. Little, 4 Comm. [Australia], 1364). With all due deference to the decision of the High Court of Australia, we believe that the word ‘Manila’ in conjunction with the letters ‘c.i.f.’ must mean that the contract price, covering costs, insurance and freight, signifies that delivery was to be made at Manila. x x x “In mercantile contracts of American origin, the letters ‘F.O.B.’ standing for the words ‘Free on Board,’ are frequently used. The meaning is that the seller shall bear all expenses until the goods are delivered where they are to be ‘F.O.B.’ According as to whether the goods are to be delivered ‘F.O.B.’ at the point of shipment or at the point of destination determines the time when property passes. x x x “Both of the terms ‘C.I.F.’ and ‘F.O.B.’ merely make rules of presumption which yield to proof of contrary intention. As Benjamin, in his work on Sales, well says: The question, at last, is one of intent, to be ascertained by a consideration of all the circumstances. (Benjamin on Sales, par. 329). For instance, in a case of Philippine origin, appealed to the United States Supreme Court, it was held that the sale was complete on shipment, though the contract was for goods ‘F.O.B. Manila,’ the place of destination, the other terms of the contract showing the intention to transfer the property (United States vs. R.P. Andrews & Co. [1907], 207 U.S. 229). x x x “A specification in a contract relative to the payment of freight can be taken to indicate the intention of the parties in regard to the place of delivery. If the buyer is to pay the freight, it is reasonable to suppose that he does so because the goods become

256

CIVIL LAW

Arts. 1521-1544

his at the point of shipment. On the other hand, if the seller is to pay the freight, the inference is equally strong that the duty of the seller is to have the goods transported to their ultimate destination and that title to property does not pass until the goods have reached their destination (see Williston on Sales, pp. 406-408).” Absent any fault on the part of the seller, the latter is not liable for mis-delivery by the carrier (Smith Bell & Co. vs. Gutierrez, 8 SCRA 408). Where there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer (see Art. 1503, Civil Code). Where goods are shipped and, by the bill of lading, the goods are deliverable to the seller or his agent or to the order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But, if except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the seller’s property in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract. Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby reserves a right to the possession of the goods as against the buyer. Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading together to the buyer to secure acceptance or payment of the bill of exchange, the buyer is bound to return the bill

Arts. 1521-1544

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257

of lading if he does not honor the bill of exchange, and if he wrongfully retains the bill of lading he acquires no added right thereby. If, however, the bill of lading provides that the goods are deliverable to the buyer or to the order of the buyer, or is indorsed in blank or to the buyer by the consignee named therein, one who purchases in good faith for value, the bill of lading, or goods from the buyer will obtain the ownership in the goods, although the bill of exchange has not been honored, provided that such purchaser has received delivery of the bill of lading indorsed by the consignee named therein, or of the goods, without notice of the facts making the transfer wrongful (Art. 1503, Civil Code). Risk of Loss Different rules govern the effects of the loss of the object of sale, viz.: (1) If the thing (personal or real) is lost before the sale could be perfected, the lack of object as an essential element of the contract would prevent the sale from being perfected (see Art. 1318, in relation to Art. 1409, Civil Code). If it is lost in part, the parties may decide on whether to proceed with their contract or not on the remainder; if the loss is unknown to them and they proceed with the contract, their mistake can vitiate consent. (2) If the thing is lost at the time the sale is perfected, Article 1493, Civil Code, shall govern, viz.: “Art. 1493. If at the time the contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the contract shall be without any effect. “But if the thing should have been lost in part only, the vendee may choose between withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon.”

258

CIVIL LAW

Arts. 1521-1544

(3) If the thing is lost after the sale is perfected but before it is delivered to the buyer, three provisions of the Code on Sales, providing for different rules, are expressed, viz.: “Art. 1480. Any injury to or benefit from the thing sold, after the contract has been perfected, from the moment of the perfection 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.” “Art. 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 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.” “Art. 1538. In case of loss, deterioration or improvement of the thing before its delivery, the rules

Arts. 1521-1544

OBLIGATIONS AND CONTRACTS Title VI. Sales

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in Article 1189 shall be observed, the vendor being considered the debtor.” Undoubtedly, if the loss is due to the fault of one party or when he is in default, such loss shall be for his account. If the loss is due to a fortuitous event, Articles 1480 and 1538 express the general rule in the Law on Obligations and Contracts “res perit creditori” that places the burden of loss on the creditor (in this case the buyer) to whom the obligation to deliver is due (see Art. 1262, Civil Code, in prestations to give and Art. 1255, in prestation to do; see also Villaruel vs. Manila Motors, 104 Phil. 926; Reyes vs. Caltex, 47 O.G. 1293). The seller, whose obligation is extinguished by a fortuitous event, may thus retain the price, if paid, or demand payment, if still owing. In the sale of goods (corporeal movable), however, Article 1504, adopting the “res perit domino” rule by way of exception, controls (see Norkis Distributors, Inc. vs. Court of Appeals, 193 SCRA 700; Chrysler Philippines Corp. vs. Court of Appeals, 133 SCRA 567) such that until delivery is effected the risk of loss lies with the seller (being still the owner). The third paragraph of Article 1480 regarding the sale of fungibles conforms with Article 1504 and applies the res perit domino rule that would put the burden of loss on the seller until after such fungibles are delivered to the vendee. In case of partial loss or deterioration in quality of specific goods sold, the following provision governs: “Art. 1494. Where the parties purport a sale of specific goods, and the goods without the knowledge of the seller have perished in part or have wholly or in a material part so deteriorated in quality as to be substantially changed in character, the buyer may at his option treat the sale: “(1)

As avoided; or

“(2) As valid in all of the existing goods or in so much thereof as have not deteriorated, and as

260

CIVIL LAW

Arts. 1521-1544

binding the buyer to pay the agreed price for the goods in which the ownership will pass, if the sale was divisible.” The term “goods” referred to in the foregoing rules “includes all chattels or personal property” (but not things in action or money of legal tender in the Philippines), as well as “growing fruits or crops.” The term “specific goods” embraces “goods identified and agreed upon at the time a contract of sale is made” (see Art. 1636, Civil Code). (4) If the thing is lost after its delivery, the buyer, subject to contrary stipulations (e.g., delivery on “trial or satisfaction”) as well as express and implied warranties, bears the risk of loss (see Art. 1504, Civil Code; see also discussion on Risk of Loss in Loss as a mode of extinguishing obligations, supra.). Delivery of Articles with Incorrect Quality In the contract of sale of goods by description or by sample, the contract may be rescinded if the bulk of the goods delivered does not correspond with the description or the sample, and if the contract be by sample as well as by description, it is not sufficient that the bulk of goods corresponds with the sample if it does not also correspond with the description. The buyer shall have a reasonable opportunity of comparing the bulk with the description or the sample (Art. 1481, Civil Code). Delivery of Incorrect Quantity Where the seller delivers to the buyer a quantity of goods less than what he contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods so delivered, knowing that the seller is not going to perform the contract in full, he must pay for them at the contract rate. If, however, the buyer has used or disposed of the goods delivered before he knows that the seller is not going to perform his contract in full, the buyer shall

Arts. 1521-1544

OBLIGATIONS AND CONTRACTS Title VI. Sales

261

not be liable for more than the fair value to him of the goods so received. Where the seller delivers to the buyer a quantity of goods larger than what he contracted to sell, the buyer may accept the goods included in the contract and reject the rest. The buyer must pay at the contract rate if he accepts the whole of the goods so delivered. Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest. In the preceding two paragraphs, if the subject matter is indivisible, the buyer may reject the whole of the goods. These rules are subject to any usage of trade, special agreement, or course of dealing between the parties (Art. 1522, Civil Code). The obligation to deliver the thing sold includes that of placing in the control of the vendee all that is mentioned in the contract. In the case of real estate — (a) If the sale should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the vendor shall be obliged to deliver to the vendee, if the latter should demand it, all that may have been stated in the contract; but should this be not possible, the vendee may choose between a proportional reduction of the price and the rescission of the contract, provided that, in the latter case, the lack in the area be not less than one-tenth of that sale. The same shall be done, even when the area is the same, if any part of the immovable is not of the quality specified in the contract. The rescission, in this case, shall only take place at the will of the vendee, when the inferior value of the thing sold exceeds one-tenth of the price agreed upon. If, nevertheless, the vendee would not have bought the immovable had he known of its smaller area or inferior quality,

262

CIVIL LAW

Arts. 1521-1544

he may rescind the sale (see Art. 1539, Civil Code). In case, however, there is a greater area or number in the immovable than that stated in the contract, the vendee may accept the area included in the contract and reject the rest. If he accepts the whole area, he must pay for the same at the contract rate (see Art. 1540, Civil Code). These provisions are applicable to judicial sales (see Art. 1541, Civil Code). (b) In the sale of real estate, made for a lump sum and not at the rate of a certain sum for a unit of measure or number, there shall be no increase or decrease of the price, although there be a greater or lesser area or number than that stated in the contract. The same rule shall be applied when two or more immovables are sold for a single price; but if, besides mentioning the boundaries which is indispensable in every conveyance of real estate, its area or number should be designated in the contract, the vendor shall be bound to deliver all that is included within said boundaries, even when it exceeds the area or number specified in the contract; and, should he not be able to do so, he shall suffer a reduction in the price, in proportion to what is lacking in the area or number, unless the contract is rescinded because the vendee does not accede to the failure to deliver what has been stipulated (Art. 1542, Civil Code). In a sale pursuant to Article 1542 of the Civil Code, the vendor’s obligation is to deliver everything within the boundaries, for it is the entirety thereof that distinguishes the determinate object. A vendee of land, when sold in gross or when its area is described by “more or less,” does not, however, take all risk of quantity in the land. “More or less” or words of similar import covers only a reasonable excess or deficiency (Veronica Robles vs. Dominador Arbasa, G.R. No. 130707, 31 July 2001, 152 SCAD 115). The actions arising from Articles 1539 and 1542 prescribe in six months, counted from the day of delivery (see Art. 1543, Civil Code).

Arts. 1521-1544

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263

Sale by Non-Owner of Goods Where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than what the seller had (thus, the maxim “caveat emptor” or “buyer beware”), unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell. The rule, however, does not affect: (1) The provisions of any factors’ act, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction; (3) Purchases made in a merchant’s store, or in fairs, or markets, in accordance with the Code of Commerce and special laws (see Art. 1505, Civil Code; see Hidalgo vs. La Tondeña, 16 SCRA 619; Gutierrez Hermanos vs. Orense, 28 Phil. 571; Mallorca vs. De Ocampo, 32 SCRA 48; Luna vs. Valle, 48 SCRA 361; Chua Hai vs. Kapunan, 104 Phil. 110). Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller’s defect of title (Art. 1506, Civil Code; see Aznar vs. Yapdiangco, 13 SCRA 486; Chua Hai vs. Kapunan, supra.). It may not be amiss to correlate some rules on the sale of property by a non-owner, thus — a.

Where goods are sold by one who is neither the owner nor the representative of the owner, the buyer acquires no title to the goods, subject, however, to the provisions of Article 1505 (supra.) and of Article 559 in case the goods (mov-

264

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Arts. 1545-1546

able property) are placed in the possession of the buyer who had acted in good faith (see discussions on Art. 559, supra.). b.

When said person, who is not the owner of thing (movable or immovable) sold, sells and delivers it, and he later acquires title thereto, such title passes by operation of law to the buyer pursuant to Article 1434 of the Civil Code.

c.

When a person contracts the sale in a representative capacity but he acts without or in excess of authority, the sale is unenforceable under the general provisions of Article 1403 of the Code but if the other party is aware of the agent’s lack or excess of authority, unless ratified by the principal, the contract is considered void by Article 1898. In case the sale involves a piece of land, or any interest therein, the authority of the agent must be in writing; otherwise, the sale is void under Article 1874 of the Civil Code.

Conditions and Warranties Art. 1545. 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. If the other party has promised that the condition should happen or be performed, such first mentioned party may also treat the nonperformance of the condition as a breach of warranty. Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the seller of his obligation to deliver the same as described and as warranted expressly or by implication in the contract of sale as a condition of the obligation of the buyer to perform his promise to accept and pay for the thing. (n) Art. 1546. 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

Arts. 1547-1549

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promise is to induce the buyer to purchase the same, and if the buyer purchases the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller’s opinion only, shall be construed as a warranty, unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer. (n) Art. 1547. In a contract of sale, unless a contrary intention appears, there is: (1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing; (2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. This article shall not, however, be held to 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. (n) Subsection 1 — Warranty in Case of Eviction Art. 1548. Eviction shall take place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of the thing purchased. The vendor shall answer for the eviction even though nothing has been said in the contract on the subject. The contracting parties, however, may increase, diminish, or suppress this legal obligation of the vendor. (1475a) Art. 1549. The vendee need not appeal from the decision in order that the vendor may become liable for eviction. (n)

266

CIVIL LAW

Arts. 1550-1555

Art. 1550. When adverse possession had been commenced before the sale but the prescriptive period is completed after the transfer, the vendor shall not be liable for eviction. (n) Art. 1551. If the property is sold for nonpayment of taxes due and not made known to the vendee before the sale, the vendor is liable for eviction. (n) Art. 1552. The judgment debtor is also responsible for eviction in judicial sales, unless it is otherwise decreed in the judgment. (n) Art. 1553. Any stipulation exempting the vendor from the obligation to answer for eviction shall be void, if he acted in bad faith. (1476) Art. 1554. If the vendee has renounced the right to warranty in case of eviction, and eviction should take place, the vendor shall only pay the value which the thing sold had at the time of the eviction. Should the vendee have made the waiver with knowledge of the risks of eviction and assumed its consequences, the vendor shall not be liable. (1477) 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. (1478)

Arts. 1556-1560

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Art. 1556. Should the vendee lose, by reason of the eviction, a part of the thing sold of such importance, in relation to the whole, that he would not have bought it without said part, he may demand the rescission of the contract; but with the obligation to return the thing without other encumbrances than those which it had when he acquired it. He may exercise this right of action, instead of enforcing the vendor’s liability for eviction. The same rule shall be observed when two or more things have been jointly sold for a lump sum, or for a separate price for each of them, if it should clearly appear that the vendee would not have purchased one without the other. (1479a) Art. 1557. The warranty cannot be enforced until a final judgment has been rendered, whereby the vendee loses the thing acquired or part thereof. (1480) Art. 1558. The vendor shall not be obliged to make good the proper warranty, unless he is summoned in the suit for eviction at the instance of the vendee. (1481a) Art. 1559. The defendant vendee shall ask, within the time fixed in the Rules of Court for answering the complaint, that the vendor be made a co-defendant. (1482) Art. 1560. 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 presume 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 indemnity. Neither right can be exercised if the non-apparent burden or servitude is recorded in the Registry of Property, unless there is an express warranty that the thing is free from all burdens and encumbrances. Within one year, to be computed from the execution of the deed, the vendee may bring the action for rescission, or sue for damages.

268

CIVIL LAW

Arts. 1561-1564

One year having elapsed, he may only bring an action for damages within an equal period, to be counted from the date on which he discovered the burden or servitude. (1483a) Subsection 2 — Warranty Against Hidden Defects of or Encumbrances Upon the Thing Sold Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them. (1484a) Art. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows: (1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the seller’s skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose; (2) Where the goods are bought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality. (n) Art. 1563. In the case of contract of sale of a specified article under its patent or other trade name, there is no warranty as to its fitness for any particular purpose, unless there is a stipulation to the contrary. (n) Art. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade. (n)

Arts. 1565-1571

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Art. 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. (n) Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof. This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold. (1485) Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case. (1486a) Art. 1568. If the thing sold should be lost in consequence of the hidden faults, and the vendor was aware of them, he shall bear the loss, and shall be obliged to return the price and refund the expenses of the contract, with damages. If he was not aware of them, he shall only return the price and interest thereon, and reimburse the expenses of the contract which the vendee might have paid. (1487a) Art. 1569. If the thing sold had any hidden fault at the time of the sale, and should thereafter be lost by a fortuitous event or through the fault of the vendee, the latter may demand of the vendor the price which he paid, less the value which the thing had when it was lost. If the vendor acted in bad faith, he shall pay damages to the vendee. (1488a) Art. 1570. The preceding articles of this Subsection shall be applicable to judicial sales, except that the judgment debtor shall not be liable for damages. (1489a) Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months, from the delivery of the thing sold. (1490)

270

CIVIL LAW

Arts. 1572-1577

Art. 1572. If two or more animals are sold together, whether for a lump sum or for a separate price for each of them, the redhibitory defect of one shall only give rise to its redhibition, and not that of the others; unless it should appear that the vendee would not have purchased the sound animal or animals without the defective one. The latter case shall be presumed when a team, yoke, pair, or set is bought, even if a separate price has been fixed for each one of the animals composing the same. (1491) Art. 1573. The provisions of the preceding article with respect to the sale of animals shall in like manner be applicable to the sale of other things. (1492) Art. 1574. There is no warranty against hidden defects of animals sold at fairs or at public auctions, or of livestock sold as condemned. (1493a) Art. 1575. The sale of animals suffering from contagious diseases shall be void. A contract of sale of animals shall also be void if the use or service for which they are acquired has been stated in the contract, and they are found to be unfit therefor. (1494a) Art. 1576. If the hidden defect of animals, even in case a professional inspection has been made, should be of such a nature that expert knowledge is not sufficient to discover it, the defect shall be considered as redhibitory. But if the veterinarian, through ignorance or bad faith should fail to discover or disclose it, he shall be liable for damages. (1495) Art. 1577. The redhibitory action, based on the faults or defects of animals, must be brought within forty days from the date of their delivery to the vendee. This action can only be exercised with respect to faults and defects which are determined by law or by local customs. (1496a)

Arts. 1545-1581

OBLIGATIONS AND CONTRACTS Title VI. Sales

271

Art. 1578. If the animal should die within three days after its purchase, the vendor shall be liable if the disease which caused the death existed at the time of the contract. (1497a) Art. 1579. If the sale be rescinded, the animal shall be returned in the condition in which it was sold and delivered, the vendee being answerable for any injury due to his negligence, and not arising from the redhibitory fault or defect. (1498) Art. 1580. In the sale of animals with redhibitory defects, the vendee shall also enjoy the right mentioned in Article 1567; but he must make use thereof within the same period which has been fixed for the exercise of the redhibitory action. (1499) Art. 1581. The form of sale of large cattle shall be governed by special laws. (n)

A contract of sale may be subject to conditions, as well as warranties, express or implied, otherwise, the caveat emptor (“buyer beware”) rule may also find application (see Filinvest Credit Corporation vs. Court of Appeals, 178 SCRA 188). 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 (Delta Motor vs. Genuino, 170 SCRA 29). If the other party has promised that the condition should happen or be performed, such first mentioned party may also treat the non-performance of the condition as a breach of warranty (Delta Motor vs. Genuino, 170 SCRA 29; see Art. 1545, Civil Code). Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the seller of his obligation to deliver the same as described and as warranted expressly, or by implication in the contract of sale as a condition of the obligation of the buyer to perform his promise to accept and pay for the thing (see Art. 1545, Civil Code).

272

CIVIL LAW

Arts. 1545-1581

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 the buyer purchases the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller’s opinion only, shall be construed as a warranty, unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer (Art. 1546, Civil Code; see Azarraga vs. Gay, 52 Phil. 599; see also Art. 1599, infra., on the buyer’s remedies in breach of warranty). Implied Warranties In a contract of sale, unless a contrary intention appears, there is: (1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing; and (2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. These warranties shall not, however, be held to 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 (Art. 1547, Civil Code; see Sta. Romana vs. Imperio, 15 SCRA 625; Chang vs. Santos, 13 Phil. 52; Lim vs. Lang, 51 Phil. 930). Implied Warranty Against Eviction Eviction shall take place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or

Arts. 1545-1581

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of a part of the thing purchased. The vendee need not appeal from the decision in order that the vendor may become liable for eviction. The vendor shall not be obliged to make good the proper warranty, unless he is summoned in the suit for eviction at the instance of the vendee. The defendant vendee shall ask, within the time fixed in the Rules of Court for answering the complaint, that the vendor be made a co-defendant. The warranty cannot be enforced until a final judgment has been rendered, whereby the vendee loses the thing acquired or a part thereof (Arts. 1548-1549, 1557-1559, Civil Code; Bautista vs. Lasam, 72 Phil. 605; Republic vs. Alto Surety, 103 Phil. 717). The vendor shall answer for the eviction although the contract is silent on the subject. The contracting parties, however, may increase, diminish or suppress this legal obligation of the vendor (see Art. 1548, Civil Code). In fine, the vendor’s liability may be enforced only if the following requisites concur: (a) there is a final judgment; (b) the purchaser is deprived of the whole or part of the thing sold; (c) the deprivation is by virtue of a right prior to the sale in question; and (d) the vendor has been summoned and made a co-defendant in the suit for eviction at the instance of the vendee (Escaler vs. Court of Appeals, 138 SCRA 1). If the property is sold for non-payment of taxes due and not made known to the vendee before the sale, the vendor is liable for eviction (Art. 1551, Civil Code). The judgment debtor is also responsible for eviction in judicial sales, unless it is otherwise decreed in the judgment (Art. 1552, Civil Code). However, when adverse possession had been commenced before the sale but the prescriptive period is completed after the transfer, the vendor shall not be liable for eviction (Art. 1550, Civil Code). Waiver If the vendee has renounced the right to warranty in case of eviction (consciente), and eviction should take place,

274

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Arts. 1545-1581

the vendor shall only pay the value which the thing sold had at the time of the eviction. Should the vendee have made the waiver with knowledge of the risks of eviction and assumed its consequences (intencionada), the vendor shall not be liable (Art. 1554, Civil Code; PNB vs. Silo, 72 Phil. 141; Andaya vs. Manansala, 107 Phil. 1151). Any such waiver or stipulation exempting the vendor from the obligation to answer for eviction shall be void if he acted in bad faith (Art. 1553, Civil Code; Angelo vs. Pacheco, 56 Phil. 70). Effects of Eviction 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 interest, and ornamental expenses, if the sale was made in bad faith (Art. 1555, Civil Code). Should the vendee lose, by reason of the eviction, a part of the thing sold of such importance, in relation to the whole, that he would not have bought it without said part, he may demand the rescission of the contract; but with the obligation to return the thing without other encumbrances than those which it had when he acquired it. He may exercise this right of action, instead of enforc-

Arts. 1545-1581

OBLIGATIONS AND CONTRACTS Title VI. Sales

275

ing the vendor’s liability for eviction. The same rule shall be observed when two or more things have been jointly sold for a lump sum, or for a separate price for each of them, if it should clearly appear that the vendee would not have purchased one without the other (Art. 1556, Civil Code). If the immovable sold should be encumbered with any non-apparent burden or servitude, not mentioned in the agreement, of such 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 indemnity. Neither right can be exercised if the non-apparent burden or servitude is recorded in the Registry of Property, unless there is an express warranty that the thing is free from all burdens and encumbrances. Within one year, to be computed from the execution of the deed, the vendee may bring the action for rescission or sue for damages. One year having elapsed, he may only bring an action for damages within an equal period, to be counted from the date on which he discovered the burden or servitude (Art. 1560, Civil Code). Implied Warranty Against Hidden Defects of or Encumbrances Upon the Thing Sold The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended or should they diminish its fitness for the same such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it. The vendor is responsible for any such hidden faults or defects even though he was not aware thereof. This warranty shall not, however, apply if the contrary has been stipulated and the vendor was not aware of the hidden faults or defects in the thing sold. The said vendor shall not also be answerable for patent defects or those which may be visible, or for those which are not visible but the

276

CIVIL LAW

Arts. 1545-1581

vendee is an expert who, by reason of his trade or profession, should have known them (see Arts. 1561 and 1566, Civil Code; Gochengco vs. Dean, 47 Phil. 687). In the case of contract of sale of a specified article under its patent or other trade name, there is no warranty as to its fitness for any particular purpose, unless there is a stipulation to the contrary (Art. 1563, Civil Code). In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows: (1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the seller’s skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose; (2) Where the goods are bought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality (Art. 1562, Civil Code; McCullough vs. Aenlle & Co., 3 Phil. 285). An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade (Art. 1564, Civil Code). 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 (Art. 1565, Civil Code; McCullough vs. Aenlle & Co., 3 Phil. 285). Effects of Hidden Defects or Encumbrances The remedy against violations of the warranty against hidden defects is either to withdraw from the

Arts. 1545-1581

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contract (redhibitory action) or to demand a proportionate reduction of the price (accion quanti minoris) with damages in either case (Engineering & Machinery Corporation vs. Court of Appeals, 67 SCAD 113, 252 SCRA 156; see Consolidated Plywood Industries, Inc. vs. IFC Leasing and Acceptance Corporation, 149 SCRA 448). If the thing sold should be lost in consequence of the hidden faults and the vendor was aware of them, he shall bear the loss and shall be obliged to return the price and refund the expenses of the contract, with damages. If he was not aware of them, he shall only return the price and interest thereon and reimburse the expenses of the contract which the vendee might have paid (Art. 1568, Civil Code). If the thing sold had any hidden fault at the time of the sale and should thereafter be lost by a fortuitous event or through the fault of the vendee, the latter may demand of the vendor the price which he paid, less the value which the thing had when it was lost. If the vendor acted in bad faith, he shall pay damages to the vendee (Art. 1569, Civil Code). The foregoing rules shall be applicable to judicial sales, except that the judgment debtor shall not be liable for damages (see Art. 1570, Civil Code). Actions arising from the above responsibilities of the vendor for hidden defects or encumbrances shall be barred after six months from the delivery of the thing sold (see Art. 1571, Civil Code; La Fuerza vs. Court of Appeals, 23 SCRA 1217). In G.A. Machineries, Inc. vs. Yaptinchay (126 SCRA 78), Yaptinchay agreed to purchase from GAMI a brand-new diesel engine. Pursuant to the contract, GAMI delivered an engine to Yaptinchay. A few days after delivery, the engine malfunctioned and continued to malfunction after repeated repairs. Yaptinchay, became convinced that the engine delivered to him was not brandnew. Eventually he filed a suit for damages. The trial court ruled in his favor. The decision was affirmed by the

278

CIVIL LAW

Arts. 1545-1581

Court of Appeals. GAMI went to the Supreme Court, contending that Yaptinchay’s cause of action had prescribed. GAMI said the respondent’s cause of action was for breach of warranty against hidden defects as provided under Article 1561 and Article 1565 of the Civil Code, and Article 1571 provides for a six-month prescriptive period from the delivery of the thing sold to the filing of an action for breach of warranty against hidden defects. GAMI said that when respondent filed the case more than six months had already elapsed. It contended that Yaptinchay’s cause of action was premised on the delivery of a defective engine and that the allegations in the complaint that the engine was not brand-new were mere specifications of the precise nature of the hidden defects. The Supreme Court ruled: “A cursory reading of the complaint shows that the petitioner’s arguments are not well-taken. “The main thrust of the complaint is the contention that the Fordson diesel engine delivered by the petitioner to the respondent was not brand-new contrary to the representations of the former and the expectations of the latter. The complaint was couched in a manner which shows that instead of the brand-new Fordson diesel engine which was bought by the respondent from the petitioner, another engine which was not brand-new was delivered resulting in the damages sought to be recovered. It is evident, therefore, that the complaint was for a breach of contract of sale rather than a breach of warranty against hidden defects.” There is no implied warranty as to the condition, adaptation, fitness, suitability or quality of a thing sold as and for a “secondhand article,” said the Court in Moles vs. Intermediate Appellate Court (169 SCRA 777), unless, as provided in Article 1562 of the Civil Code, when “the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are

Arts. 1545-1581

OBLIGATIONS AND CONTRACTS Title VI. Sales

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acquired, and it appears that the buyer relies on the seller’s skill on judgment” in which case “there is an implied warranty that the goods shall be reasonably fit for such purpose.” A redhibitory defect contemplated in Article 1561, referring to an imperfection or defect of such nature as to engender a certain degree of importance, which prescribes in six months under Article 1571, refers to an implied warranty. Where the case involves an express warranty, such as a certification by the seller that the articles sold are “in A-1 condition,” the general rule on rescission of contracts within four years instead applies. In Schmid & Oberly, Inc. vs. RJL Martinez Fishing Corp. (166 SCRA 493), an indentor, the Court noted, is one who, for compensation, acts as a middleman in bringing about a purchase and sale of goods between a foreign supplier and a local purchaser. Not being the vendor, an indentor cannot be held liable for the implied warranty for hidden defects under Article 1561 of the Civil Code. An indentor, however, is not prevented from voluntarily warranting the thing sold. To some extent, the indentor is an agent of both the vendor and the vendee, and he may expressly obligate himself to undertake the obligations of the principal. A mere expression of opinion however, e.g., the equipment is “very good,” cannot be construed as such express warranty. Redhibitory Defects of Animals If two or more animals are sold together, whether for a lump sum or for a separate price for each of them, the redhibitory defect of one shall only give rise to its redhibition, and not that of the others; unless it should appear that the vendee would not have purchased the sound animal or animals without the defective one. The latter case shall be presumed when a team, yoke, pair, or set is bought, even if a separate price has been fixed for each one of the animals composing the same (Art. 1572, Civil Code; this particular provision has been made to likewise apply, under Art. 1573, to the sale of other things).

280

CIVIL LAW

Arts. 1545-1581

If the hidden defect of animals, even in case a professional inspection has been made, should be of such a nature that expert knowledge is not sufficient to discover it, the defect shall be considered as redhibitory. But if the veterinarian, through ignorance or bad faith should fail to discover or disclose it, he shall be liable for damages (Art. 1576, Civil Code). There is no warranty against hidden defects of animals sold at fairs or at public auction, or of livestock sold as condemned (Art. 1574, Civil Code). Redhibitory Action The redhibitory action, based on the faults or defects of animals, must be brought within forty days from the date of their delivery to the vendee. This action can only be exercised with respect to faults and defects which are determined by law or by local customs (Art. 1577, Civil Code). If the animal should die within three days after its purchase, the vendor shall be liable if the disease which caused the death existed at the time of the contract (Art. 1578, Civil Code). If the sale be rescinded, the animal shall be returned in the condition in which it was sold and delivered, the vendee being answerable for any injury due to his negligence, and not arising from the redhibitory fault or defect (Art. 1579, Civil Code). In the sale of animals with redhibitory defects, the vendee may also elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case, but he must make use thereof within the same period which has been fixed for the exercise of the redhibitory action (Art. 1580, in relation to Art. 1567, Civil Code). The form of sale of large cattle is governed by special laws (Art. 1581, Civil Code; see Sec. 22, Act No. 1147, requiring a Certificate of Registration).

Arts. 1582-1584

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281

Chapter 5 Obligations of the Vendee Art. 1582. The vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the contract. If the time and place should not have been stipulated, the payment must be made at the time and place of the delivery of the thing sold. (1500a) Art. 1583. Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by installments. Where there is a contract of sale of goods to be delivered by stated installments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses without just cause to take delivery of or pay for one or more installments, it depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is so material as to justify the injured party in refusing to proceed further and suing for damages for beach of the entire contract, or whether the breach is severable, giving rise to a claim for compensation but not to a right to treat the whole contract as broken. (n) Art. 1584. Where goods are delivered to the buyer, which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract if there is no stipulation to the contrary. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. Where goods are delivered to a carrier by the seller, in accordance with an order from or agreement with the buyer, upon the terms that the goods shall not

282

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be delivered by the carrier to the buyer until he has paid the price, whether such terms are indicated by marking the goods with the words “collect on delivery,” or otherwise, the buyer is not entitled to examine the goods before the payment of the price, in the absence of agreement or usage of trade permitting such examination. (n) Art. 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. (n) 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. (n) 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. (n) Art. 1588. If there is no stipulation as specified in the first paragraph of Article 1523, when the buyer’s refusal to accept the goods is without just cause, the title thereto passes to him from the moment they are placed at his disposal. (n) 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:

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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. (1501a)

The vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the contract. If the time and place should not have been stipulated, the payment must be made at the time and place of the delivery of the thing sold (Art. 1582, Civil Code). The goods are deemed to be in a “deliverable state” when they are in such condition that the buyer would, under the contract, be bound to take delivery of them (see Art. 1636, Civil Code). Acceptance of Delivery The buyer may reject the seller’s delivery of a quantity of goods less than that contracted (Art. 1522, Civil Code; Chrysler Philippines Corp. vs. Court of Appeals, 133 SCRA 567). Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by installments. Where there is a contract of sale of goods to be delivered by stated installments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses without just cause to take delivery of or pay for one or more installments, it depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is so material as to justify the injured party in refusing to proceed further and suing for damages for breach of the entire contract, or whether the breach is severable, giving rise to a claim for compensation but not to a right to treat the whole contract as broken (Art. 1583, Civil Code). Where the goods are delivered to the buyer, which he has not previously examined, he is not deemed to have

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accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract, if there is no stipulation to the contrary. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. Where goods are delivered to a carrier by the seller, in accordance with an order from or agreement with the buyer, upon the terms that the goods shall not be delivered by the carrier to the buyer until he has paid the price, whether such terms are indicated by marking the goods with the words “collect on delivery,” or otherwise, the buyer is not entitled to examine the goods before the payment of the price, in the absence of agreement or usage of trade permitting such examination (Art. 1584, Civil Code). 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. 1585, Civil Code). Effects of Acceptance or Rejection 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 should fail 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. 1586, Civil Code; this provision did not exist under the old Civil

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Code during which regime the case of Ker & Co. vs. De La Rama, 11 Phil. 456, was decided). 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 depository thereof, he shall be liable as such (Art. 1587, Civil Code). The title to the goods passes to the buyer from the moment they are placed at his disposal when his refusal to accept them is without just cause (see Art. 1588, Civil Code). Payment of Price 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 (Art. 1589, Civil Code). 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 (Art. 1590, Civil Code; Bareng vs. Court of Appeals, 107 Phil. 641).

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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 (Art. 1591, Civil Code). Where there is a flaw or defect in a contract of sale, the remedy is rescission or annulment but not refusal to pay the balance of the purchase price and at the same time retaining the goods purchased by the buyer (see Embee Transportation Corporation vs. Camacho, 80 SCRA 477). 3.

Remedies in Sales

Generally, the remedies of an aggrieved party in contracts are judicial in nature predicated upon a basic legal principle that no one should be permitted to take the law into his own hands, although it is, too, recognized that in a reciprocal obligation a party thereto may refuse to perform his part of the undertaking if the other does not himself comply or is not ready to comply with what is incumbent upon him (see Art. 1169, Civil Code), in turn, premised on the maxim “exceptio non adimpleti contractus.” The law on sales, mainly perhaps because of the highly reciprocal nature of the contract, grants or recognizes rather extravagant remedies, judicial as well as extrajudicial, more than perhaps in any other agreement. a.

Extrajudicial Remedies in Sales

Art. 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

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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. (1502a) Art. 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) Art. 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 act. After the demand, the court may not grant him a new term. (1504a) Art. 1593. With respect to movable property, the rescission of the sale shall of right take place in the interest of the vendor, if the vendee, upon the expiration of the period fixed for the delivery of the thing, should not have appeared to receive it, or having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated for its payment. (1505)

(1) Of the Buyer (a) The buyer need not pay unless there is delivery (see Art. 1582, Civil Code; Barretto vs. Compañia Maritima, 62 SCRA 147). (b) The buyer may reject improper deliveries (see Arts. 1522, 1540, 1583 and 1587, Civil Code); and (c) The buyer may, if he is disturbed in the possession or ownership of the thing, or should he have reasonable grounds to fear such disturbance

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(but not because of mere act of trespass), suspend payment of the price (Art. 1590, Civil Code). (2) Of the Seller (a) The vendor is not bound to deliver the thing sold if the vendee has not paid the price, or if no period for the payment has been fixed in the contract, or in case the vendee loses the right to make use of the term (see Arts. 1524 and 1536, in relation to Art. 1198, Civil Code; Cf. Katigbak vs. Court of Appeals, 4 SCRA 243). (b) Additional or Special Remedies (i) In Conditional Contracts of Sale or to Sell (where seller reserves title or to retake possession if conditions do not occur): In the case of movable property, the non-fulfillment of the condition (e.g., non-payment of the price) prevents the obligation to convey title from acquiring an obligatory force. To retake possession, however, judicial action is required. Rescission is unnecessary once the period of the fulfillment of the condition (or non-payment of the price) expires without such condition having occurred; where no period is stipulated, Article 1191 (resolution) may be sought, although Article 1593 could be applicable (by analogy at least) that may permit an extrajudicial rescission (by mere notice). In the case of immovable property, substantially the same results would follow, hence, if the buyer fails to pay in accordance with the terms of the agreement, the seller is entitled to rescind. Article 1592, which permits the vendee to pay even after the expiration of the period as long as no demand for rescission is made upon him either judicially or by notarial act, does not apply to contracts to sell or deeds of conditional sale (see Alfonso vs. Court of Appeals, 186 SCRA 400; Joseph & Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663). Where no time for the fulfillment of the condition (e.g., payment of the price)

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is fixed, Article 1191 (not Article 1592 [see Roque vs. Lapuz, 96 SCRA 741; Caridad Est. vs. Sautno, 71 Phil. 114]), unless the parties have agreed otherwise (see Torralba vs. De los Angeles, 96 SCRA 69), would be applicable, i.e., the seller need not meanwhile deliver, and he may choose between fulfillment or resolution. Until resolved by the courts, the contractual obligation remains indefinite although subject to other legal principles, such as laches, prescription, and so forth. (ii) In Installment Sales: Of Personal Property “Art. 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.” “Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.” “Art. 1486. In the cases referred to in the two preceding articles, 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.”

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The remedies under Article 1484 of the Civil Code, where a sale of personal property on installments is secured by a chattel mortgage on the thing sold, are alternative and exclusive, not cumulative, remedies (see Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80). The rule applies to lease-purchase contracts of personal property (see Filinvest Credit Corp. vs. Court of Appeals, 178 SCRA 188). “The meaning of [Article 1484 of the Civil Code] has been repeatedly enunciated in a long line of cases. Thus: ‘Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any of these three remedies — either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one has been constituted. These remedies have been recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the other.’’ (Nonato vs. Intermediate Appellate Court, 140 SCRA 255.) When the seller assigns his credit to another person, the latter would be bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the deficiency, the assignee having acquired no rights better than those of the assignor (Zeyas vs. Luneta Motors, 117 SCRA 726); and when the property is foreclosed, the seller-mortgagee is deemed to have renounced all other rights; hence, a foreclosure of additional property would be a nullity (Ridad vs. Filipinas Investment and Finance Corp., 120 SCRA 246). In the event the seller-mortgagee seeks, instead, the enforcement of the additional mortgages, guarantees or other security arrangements, he must then be deemed to have lost by waiver or non-choice his lien on the chattel

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mortgage of the personal property sold by and mortgaged to him, although, similar to an action for specific performance, he may still levy on it on execution. In ordinary alternative obligations, a mere choice categorically or unequivocally made and communicated by the person entitled to exercise it concludes the parties. He may not thereafter exercise any other option, unless the opted alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the meaning of alternative obligations in substantive law as distinguished from alternative remedies in procedural law where the choice generally becomes conclusive upon the exercise of the remedy. Under Article 1484 of the Civil Code, it is only when there has actually been a foreclosure of the chattel mortgage that the vendee-mortgagor is not liable for deficiency. If the case is one for specific performance, even when this action is chosen after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may be levied on execution and an alias writ may be issued if the proceeds thereof are insufficient to satisfy the judgment credit (Industrial Finance Corp. vs. Ramirez, 77 SCRA 152). A mere demand to surrender the object which is not heeded by the mortgagor because the property is in the possession of a repair shop will not amount to a foreclosure (see Industrial Finance Corporation vs. Tobias, 78 SCRA 28). In Filinvest vs. Philippine Acetylene Company (111 SCRA 421), the Court held that a mere return of the mortgaged vehicle, which had unpaid taxes, upon demand by the seller-mortgagee that the mortgagor-buyer either pay the unpaid price or return the vehicle, amounted to neither a foreclosure or cancellation nor a dacion en pago. (To be considered as the equivalent of dation in payment, there must, the Court ruled, be an express or implied but clear intention of both parties that the delivery was an accepted equivalent of performance of the obligation.)

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Of Real Property Covered by Republic Act No. 6552 (Realty Installment Buyer Protection Act) Republic Act 6552 is a special law on the sale on installments of certain real property, the full text of which provides: Section 1. This Act shall be known as the ‘Realty Installment Buyer Protection Act.’ Sec. 2. It is hereby declared a public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Sec. 3. In all transactions or contracts involving the sale or financing of real estate on installment payments, including residential condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred fortyfour as amended by Republic Act Numbered Sixtythree hundred eighty-nine, where the buyer has paid at least two years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments: (a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him, which is hereby fixed at the rate of one month grace period for every one year of installment payments made: Provided, That this right shall be exercised by the buyer only once in every five years of the life of the contract and its extensions, if any. (b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty per cent of the total payments made and, after five years of installments, an additional five per cent every year but not to exceed ninety per cent of total payments made: Provided, That the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by

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a notarial act and upon full payment of the cash surrender value to the buyer. Down payments, deposits or options on the contract shall be included in the computation of the total number of installments made. Sec. 4. In cases where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installments became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. Sec. 5. Under Sections 3 and 4, the buyer shall have the right to sell his rights or assign the same to another person or to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract. The deed of sale or assignment shall be done by notarial act. Sec. 6. The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase price any time without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property. Sec. 7. Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6 shall be null and void. Sec. 8. If any provision of this Act is held invalid or unconstitutional, no other provision shall be affected thereby. Sec. 9. This Act shall take effect upon its approval.

(Note: See Presidential Decree No. 1344, Executive Order No. 648, 7 February 1981, and Executive Order No. 90, 17 December 1986; see also C.T. Torres Enterprises, Inc. vs. Hibionada, 191 SCRA 268). Where the

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development work in a housing subdivision is delayed or incomplete, the buyer has the option to demand reimbursement of installments thus far paid or wait for its completion; in the meantime, the seller may not rescind the sale (Relucio vs. Brillante-Garfin, 187 SCRA 405). While Republic Act No. 6552 recognizes the right of the vendor to cancel the contract upon breach and nonpayment of stipulated installments by the vendee, it likewise grants the latter the right to receive the cash surrender value of the payments already made in case he defaults in the payments of succeeding installments (Rillo vs. Court of Appeals, 274 SCRA 461; see also Carmelita Leaño vs. Court of Appeals, G.R. No. 129018, 15 November 2001). In Vda. de Roxas vs. Court of Appeals (143 SCRA 77), it was ruled that there would be no legal basis for notarial cancellation where the vendor’s decision is not so much because the vendee was not paying due installments on time as the vendor’s desire to be paid an amount higher than what was being paid and accepted regularly. (iii) In Contracts of Sale: Of Personal Property Rights under Article 1593, Civil Code “Art. 1593. With respect to movable property, the rescission of the sale shall of right take place in the interest of the vendor, if the vendee, upon the expiration of the period fixed for the delivery of the thing, should not have appeared to receive it, or, having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated for its payment.” Rescission “shall of right take place” if the vendee, on the date fixed for delivery of the thing, does not appear or pay, unless a longer period has been stipulated for payment (Guevarra vs. Pascual, 12 Phil. 311). A notice of

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rescission appears to be required in other cases of breach of the contract (see Art. 1597, Civil Code, infra.). A stipulation reserving the right of rescission is preferable but not required. These rules are inapplicable if the vendor has already effected delivery (but in this case, Article 1526 might still be applicable; see infra.). Rights under Article 1526, Civil Code “Art. 1526. Subject to the provisions of this Title, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has: “(1) A lien on the goods or right to retain them for the price while he is in possession of them; “(2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them; “(3) A right of resale as limited by this Title; “(4) A right to rescind the sale as likewise limited by this Title. “Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transitu where the ownership has passed to the buyer.” The seller of goods is deemed to be an unpaid seller: (1) When the whole of the price has not been paid or tendered; (2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise. The term “seller” (for

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purposes of Arts. 1525-1535, Civil Code) includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller (Art. 1525, Civil Code). The unpaid seller of goods who is in possession thereof is entitled to retain possession of them until payment or tender of the price in the following cases, namely: (1) Where the goods have been sold without any stipulation as to credit; (2) Where the goods have been sold on credit, but the term of credit has expired; (3) Where the buyer becomes insolvent. The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer (Art. 1527, Civil Code). Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of retention (Art. 1528, Civil Code; Katigbak vs. Court of Appeals, 4 SCRA 243). The unpaid seller of goods loses his lien thereon: (1) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the ownership in the goods or the right to the possession thereof (see Cebu United Enterprises vs. Gallofin, 106 Phil. 491); (2) when the buyer or his agent lawfully obtains possession of the goods; or (3) by waiver thereof. The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or decree for the price of the goods (Art. 1529, Civil Code). When the buyer of goods is or becomes insolvent, the unpaid seller who has parted with the possession of the

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goods has the right of stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit, and he will then become entitled to the same rights in regard to the goods as he would have had if he had never parted with the possession (Art. 1530, Civil Code). Goods are in transit: (1) From the time when they are delivered to a carrier by land, water, or air, or other bailee for the purpose of transmission to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee; (2) If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back. Goods are no longer in transit: (1) If the buyer, or his agent in that behalf, obtains delivery of the goods before their arrival at the appointed destination; (2) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent; and it is immaterial that further destination for the goods may have been indicated by the buyer; (3) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf. If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in the possession of the carrier as such or as agent of the buyer. If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be stopped in transitu, unless such part delivery has been under such circumstances as to show an agreement with the buyer to give up possession of the whole of the goods (Art. 1531, Civil Code).

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The unpaid seller may exercise his right of stoppage in transitu either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer. When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller. If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee, he shall not be obliged to deliver or justified in delivering the goods to the seller unless such document is first surrendered for cancellation (Art. 1532, Civil Code). Where the goods are of perishable nature, or where the seller expressly reserves the right of resale in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time, an unpaid seller having a right of lien or having stopped the goods in transitu may resell the goods. He shall not thereafter be liable to the original buyer upon the contract of sale or for any profit made by such resale, but may recover from the buyer damages for any loss occasioned by the breach of the contract of sale. Where a resale is made, conformably with the foregoing, the buyer acquires a good title as against the original buyer. It is not essential to the validity of a resale that notice of the time and place of such resale should be given by the seller to the original buyer. The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement, may make a resale either by public or private sale. He cannot, however, directly or indirectly buy the goods (Art. 1533, Civil Code).

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An unpaid seller, having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods where he expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time. The seller shall not thereafter be liable to the buyer upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract. The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other overt act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the right of rescission was arrested (Art. 1534, Civil Code). The unpaid seller’s right of lien or stoppage in transitu is not affected by any sale, or other disposition of the goods which the buyer may have made, unless the seller has assented thereto. If, however, a negotiable document of title has been issued for goods, no seller’s lien or right of stoppage in transitu shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether such negotiation be prior or subsequent to the notification to the carrier, or other bailee who issued such document of the seller’s claim to a lien or right of stoppage in transitu (Art. 1535, Civil Code; see Roman vs. Asia Banking Corp., 46 Phil. 705). While the goods remain in his possession, the vendor has the preferential right to the purchase price (Unson vs. Urquijo, etc., 51 Phil. 329) and no action is essential to rescind the sale (Hanlon vs. Hausserman, 40 Phil. 796, see also Art. 1593, Civil Code). If the goods, however, are already in the buyer’s possession, judicial action (specific performance or resolution) can be taken. A right to re-

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scind without judicial action, however, may be reserved by the seller. In this case, notice to the buyer of rescission would be required; to retake possession of the goods not voluntarily surrendered, judicial action is necessary to obtain the return of the property. Of Real Property “Art. 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 a demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term” (Civil Code). This provision which permits the vendee to 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 notarial act, does not apply to a contract to sell or deed of conditional sale where the seller reserves title until full payment of the price (Alfonso vs. Court of Appeals, 186 SCRA 400); the latter is entitled to rescind without regard to Article 1592 (see Joseph & Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663). In one case, the Court ruled that a contract to sell conditioned on the payment of the price acquires no obligatory force if the price is unpaid (Agustin vs. Court of Appeals, 186 SCRA 373). In the case of Palay, Inc. vs. Clave (124 SCRA 638), the Court said that judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked or cancelled for violation of any of its terms and conditions, but as held in previous jurisprudence, there must be at least a written notice sent to the defaulter informing him of the rescission.

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Where the sale is absolute in nature, the applicable provision is Article 1592 of the Code (Taguba vs. Vda. de De Leon, 132 SCRA 722; Dignos vs. Court of Appeals, 158 SCRA 375). In contracts of sale, judicial resolution (Art. 1191, Civil Code) is necessary unless extrajudicial rescission is reserved; in the latter case, a rescission by notarial act is essential short of judicial action. To retake possession, if the buyer is unwilling to surrender it, judicial processes must be sought. A stipulation, entitling one party to take possession of the land sold if the other party violates the contract does not ex proprio vigore confer upon the former the right to take possession thereof, if objected to by the latter, without judicial intervention and determination (Zulueta vs. Mariano, 111 SCRA 206). Unlike the resolution of the contract contemplated in Article 1191 of the Code, the rescission prescribed under Article 1592 does not authorize the court to grant a new period for compliance (Bucoy vs. Paulino, 23 SCRA 248). In the interest of justice and equity, however, such as when there has been a substantial performance in good faith, it has been held that a court may grant a new term upon the authority of Article 1234 (supra.) of the Code (Angeles vs. Calasanz, 135 SCRA 323, citing J.M. Tuason & Co., Inc. vs. Javier, 31 SCRA 829). Effect of Mortgage In Suria vs. Intermediate Appellate Court (151 SCRA 661), the Supreme Court held: “By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a determinate thing to the buyer, who in turn, is obligated to pay a price certain in money or its equivalent (Art. 1458, Civil Code). From the respondent’s own arguments, we note that they have fully complied with their part of the reciprocal obligation. As a matter of fact, they have already parted with the

302

CIVIL LAW

Arts. 1590-1593

title as evidenced by the transfer certificate of title in the petitioner’s name as of June 27, 1875. “The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The payments on an installment basis secured by the execution of a mortgage took the place of a cash payment. In other words, the relationship between the parties is no longer one of buyer and seller because the contract of sale has been perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration of the petitioner’s promise to pay on installment basis the sum they owe the respondents, the latter have accepted the mortgage as security for the obligation. “The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of obligations is not with respect to the perfected contract of sale but in the obligations created by the mortgage contract. The remedy of rescission is not a principal action retaliatory in character but becomes a subsidiary one which by law is available only in the absence of any other legal remedy (Art. 1384, Civil Code). “Foreclosure here is not a remedy accorded by law but as earlier stated, is a specific provision found in the contract between the parties. “The petitioners are correct in citing this Court’s ruling in Villaruel vs. Tan King (43 Phil. 251) when we stated: “At the outset it must be said that since the subject matter of the sale in question is real property, it does not come strictly within the provisions of Article 1124 of the Civil Code, but is rather subjected to the stipulations agreed upon by the contracting parties and to the provisions of Article 1504 of the Civil Code.

Arts. 1590-1593

OBLIGATIONS AND CONTRACTS Title VI. Sales

303

“The pacto commisorio or ley comisoria is nothing more than a condition subsequent of the contract of purchase and sale. Considered carefully, it is the very condition subsequent that is always attached to all bilateral obligations according to Article 1124; except that when applied to real property it is subordinate to the stipulations made by the contracting parties and to the provisions of the article on which we are now commenting (Article 1504). (Manresa, Civil Code, volume 10, page 286, second edition). “Now, in the contract of purchase and sale before us, the parties stipulated that the payment of the balance of one thousand pesos (P1,000) was guaranteed by the mortgage of the house that was sold. This agreement has the two-fold effect of acknowledging indisputably that the sale had been consummated, so much so that the vendee was disposing of it by mortgaging it to the vendor, and of waiving the pacto commisorio, that is the resolution of the sale in the event of failure to pay the one thousand pesos (P1,000) such waiver being proved by the execution of the mortgage to guarantee the payment, and in accord therewith the vendor’s adequate remedy, in case of nonpayment, is the foreclosure of such mortgage. (At pp. 255-256) “x x x

xxx

xxx

“There is, therefore, no cause for the resolution of the sale as prayed for by the plaintiff. His action, at all events, should have been one for the foreclosure of the mortgage, which is not the action brought in this case. “Article 1124 of the Civil Code, as we have seen, is not applicable to this case. Neither is the doctrine enunciated in the case of Ocejo, Perez & Co. vs. International Banking Corporation (37 Phil. 631), which plaintiff alleges to be applicable, because that principle has reference to the sale of personal property.”

304

CIVIL LAW

Arts. 1590-1593

Upon the breach of an obligation, the aggrieved party, as reiterated in Consolidated Plywood Industries, Inc. vs. IFC Leasing and Acceptance Corporation (149 SCRA 448), may opt for specific performance or resolution of the obligation under Article 1191 of the Civil Code. The remedies are not cumulative but alternative (Osorio and Tirona vs. Bennet and Prov. Board of Cavite, 41 Phil. 301; Siy vs. Court of Appeals, 138 SCRA 536). Obviously, the choice is with the aggrieved party. Thus, where the remedy of specific performance is chosen, the resolution of the obligation can no longer be sought unless, of course, the fulfillment of the obligation is impossible or becomes unlawful (see Ayson-Simon vs. Adamos, 131 SCRA 439). Thus, it is submitted, if the obligation is secured, such as by a mortgage, the foreclosure thereof would amount to, in effect, a pursuit of specific performance, and resolution would no longer be available. The existence of accessory contracts to secure the principal obligations does not militate nor warrant against the alternative remedy of resolution. It is not only when there are specific remedies provided for in certain juridical relations, such as those found in Articles 1786 and 1788 in partnership, that Article 1191 would be inapplicable (see Sancho vs. Lizariaga, 55 Phil. 601). The passing of title of the property sold is no ground for withholding from the seller the right of resolution where the buyer breaches his obligation under his contract. Neither can the execution of the mortgage to secure the unpaid price be tantamount to the payment of the price nor the substitute thereof. The essence of the mortgage is still to the payment compliance in the contract of sale. Could the vendor demand the rescission of a contract for the sale of a parcel of land for a cause traceable to his own failure to have the squatters on the subject property evicted within the contractually-stipulated period? The question was posed in Virgilio R. Romero vs. Hon. Court of Appeals and Enriqueta Chua Vda. De Ongsiong, G.R. No. 107207, 23 November 1995. The Supreme Court ruled:

Arts. 1590-1593

OBLIGATIONS AND CONTRACTS Title VI. Sales

305

“The term “condition’’ in the context of a perfected contract of sale pertains, in reality, to the compliance by one party of an undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal prestation of the other party. The reciprocal obligations referred to would normally be, in the case of vendee, the payment of the agreed purchase price and, in the case of the vendor, the fulfillment of certain express warranties (which, in the case at bench is the timely eviction of the squatters on the property). xxx “From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the operative act of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of the purchase price. Private respondent’s failure to “remove the squatters from the property’’ within the stipulated period gives petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the Civil Code. This option clearly belongs to petitioner and not to private respondent. “We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a “potestative condition dependent solely on his will’’ that might, otherwise, be void in accordance with Article 1182 of the Civil Code but a “mixed’’ condition “dependent not on the will of the vendor alone but also of third persons like the squatters and government agencies and personnel concerned.’’ We must hasten to add, however, that where

306

CIVIL LAW

Art. 1594

the so-called “potestative condition’’ is imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected obligation itself. “In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose between proceeding with the agreement or waiving the performance of the condition. It is this provision which is the pertinent rule in the case at bench. Here, evidently, petitioner has waived the performance of the condition imposed on private respondent to free the property from squatters. “In any case, private respondent’s action for rescission is not warranted. She is not the injured party. The right of resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party that violates the reciprocity between them. It is private respondent who has failed in her obligation under the contract. Petitioner did not breach the agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the ejectment case and to make arrangements with the sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has tendered payment and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to the demand for rescission, assuming for the sake of argument that such a demand is proper under Article 1592 of the Civil Code, would likewise suffice to defeat private respondent’s prerogative to rescind thereunder.’’ Chapter 6 Actions for Breach of Contract of Sale of Goods Art. 1594. Actions for breach of the contract of sale of goods shall be governed particularly by the provisions of this Chapter, and as to matters not spe-

Arts. 1595-1596

OBLIGATIONS AND CONTRACTS Title VI. Sales

307

cifically provided for herein, by other applicable provisions of this Title. (n) Art. 1595. Where, under a contract of sale, the ownership of the goods has passed to the buyer, and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against him for the price of the goods. Where, under a contract of sale, the price is payable on a certain day, irrespective of delivery or of transfer of title, and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price although the ownership in the goods has not passed. But it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested an inability to perform the contract of sale on his part or an intention not to perform it. Although the ownership in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the provisions of Article 1596, fourth paragraph, are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer. Thereafter the seller may treat the goods as the buyer’s and may maintain an action for the price. (n) Art. 1596. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance. The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer’s breach of contract. Where there is an available market for the goods in question, the measure of damages is, in the absence of special circumstances showing proximate damage of a different amount, the difference between the contract price and the market or current price at the time or times when the goods ought to have been

308

CIVIL LAW

Arts. 1597-1599

accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept. If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer’s repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages. (n) Art. 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated the contract of sale, or has manifested his inability to perform his obligations thereunder, or has committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer. (n) Art. 1598. Where the seller has broken a contract to deliver specific or ascertained goods, a court may, on the application of the buyer, direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise, as the court may deem just. (n) Art. 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;

Art. 1599

OBLIGATIONS AND CONTRACTS Title VI. Sales

309

(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 1191. When 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 of 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

310

CIVIL LAW

Arts. 1594-1599

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. (n)

Where, under a contract of sale, the ownership of the goods has passed to the buyer, and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against him for the price of the goods. Where the price is payable on a certain day, irrespective of delivery or of transfer of title, and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price although the ownership in the goods has not passed. But it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested an inability to perform the contract of sale on his part or an intention not to perform it. Although the ownership in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the provisions of Article 1596, fourth paragraph (infra.), are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer. Thereafter, the seller may treat the goods as the buyer’s and may maintain an action for the price (see Art. 1595, Civil Code; see also Matute vs. Cheong Boo, 37 Phil. 372). “Art. 1596. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance. “The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer’s breach of contract. “Where there is an available market for the goods in question, the measure of damages is, in the absence of special circumstances showing proximate

Arts. 1594-1599

OBLIGATIONS AND CONTRACTS Title VI. Sales

311

damage of a different amount, the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept. “If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer’s repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages (Civil Code).” In case the goods have not been delivered to the buyer and the buyer has repudiated the contract of sale, or has manifested his ability to perform his obligations thereunder, or has committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer (Art. 1597, Civil Code). Where the seller has broken a contract to deliver specific or ascertained goods, a court may, on the application of the buyer, direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise, as the court may deem just (Art. 1598, Civil Code). In the event of 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;

312

CIVIL LAW

Arts. 1594-1599

(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 any of these ways, no other remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191 (supra.). 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 of 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

Arts. 1600-1602

OBLIGATIONS AND CONTRACTS Title VI. Sales

313

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 (Art. 1599, Civil Code). Cases which are not specifically covered by the foregoing rules are governed by the other provisions of the Code on sales (see Art. 1594, Civil Code) and, in their default, by the remedies applicable to obligations and contracts in general. Chapter 7 Extinguishment of Sale Art. 1600. Sales are extinguished by the same causes as all other obligations, by those stated in the preceding articles of this Title, and by conventional or legal redemption. (1506)

Sales are extinguished by the same causes as all other obligations, by those stated in the preceding provisions on Sales, and by conventional or legal redemption (see Art. 1600; see also Art. 1231, Civil Code), regardless of whether the contract is a perfected sale or a consummated sale (Ocejo, Perez & Co. vs. International Bank, 37 Phil. 631). Section 1 — Conventional Redemption Art. 1601. 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 which may have been agreed upon. (1507) Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

314

CIVIL LAW

Arts. 1603-1606

(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; (4) When the purchaser retains for himself a part of the purchase price; (5) 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 case, 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. (n) Art. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. (n) Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale. (n) Art. 1605. In the cases referred to in Articles 1602 and 1604, the apparent vendor may ask for the reformation of the instrument. (n) Art. 1606. The right referred to in Article 1601, in the absence of an express agreement, shall last four years from the date of the contract. Should there be an agreement, the period cannot exceed ten years. However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis

Arts. 1607-1613

OBLIGATIONS AND CONTRACTS Title VI. Sales

315

that the contract was a true sale with right to repurchase. (1508a) Art. 1607. In case of real property, the consolidation of ownership in the vendee by virtue of the failure of the vendor to comply with the provisions of Article 1616 shall not be recorded in the Registry of Property without a judicial order, after the vendor has been duly heard. (n) Art. 1608. The vendor may bring his action against every possessor whose right is derived from the vendee, even if in the second contract no mention should have been made of the right to repurchase, without prejudice to the provisions of the Mortgage Law and the Land Registration Law with respect to third persons. (1510) Art. 1609. The vendee is subrogated to the vendor’s rights and actions. (1511) Art. 1610. The creditors of the vendor cannot make use of the right of redemption against the vendee, until after they have exhausted the property of the vendor. (1512) Art. 1611. In a sale with a right to repurchase, the vendee of a part of an undivided immovable who acquires the whole thereof in the case of Article 498, may compel the vendor to redeem the whole property, if the latter wishes to make use of the right of redemption. (1513) Art. 1612. If several persons, jointly and in the same contract, should sell an undivided immovable with a right of repurchase, none of them may exercise this right for more than his respective share. The same rule shall apply if the person who sold an immovable alone has left several heirs, in which case each of the latter may only redeem the part which he may have acquired. (1514) Art. 1613. In the case of the preceding article, the vendee may demand of all the vendors or co-heirs that they come to an agreement upon the repurchase of the

316

CIVIL LAW

Arts. 1614-1618

whole thing sold; and should they fail to do so, the vendee cannot be compelled to consent to a partial redemption. (1515) Art. 1614. Each one of the co-owners of an undivided immovable who may have sold his share separately, may independently exercise the right of repurchase as regards his own share, and the vendee cannot compel him to redeem the whole property. (1516) Art. 1615. If the vendee should leave several heirs, the action for redemption cannot be brought against each of them except for his own share, whether the thing be undivided, or it has been partitioned among them. But if the inheritance has been divided, and the thing sold has been awarded to one of the heirs, the action for redemption may be instituted against him for the whole. (1517) Art. 1616. The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition: (1) The expenses of the contract, and any other legitimate payments made by reason of the sale; (2) The necessary and useful expenses made on the thing sold. (1518) Art. 1617. If at the time of the execution of the sale there should be on the land, visible or growing fruits, there shall be no reimbursement for or prorating of those existing at the time of redemption, if no indemnity was paid by the purchaser when the sale was executed. Should there have been no fruits at the time of the sale, and some exist at the time of redemption, they shall be prorated between the redemptioner and the vendee, giving the latter the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of the sale. (1519a) Art. 1618. The vendor who recovers the thing sold shall receive it free from all charges or mortgages con-

Arts. 1601-1618

OBLIGATIONS AND CONTRACTS Title VI. Sales

317

stituted by the vendee, but he shall respect the leases which the latter may have executed in good faith, and in accordance with the custom of the place where the land is situated. (1520)

Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to return to the vendee the purchase price and the expenses of the contract and other legitimate expenses made by reason of the sale, as well as the necessary and useful expenses made on the thing sold, and other stipulations which may have been agreed upon (Art. 1601, in relation to Art. 1616, Civil Code). Meanwhile, the vendee is subrogated to the vendor’s rights and actions (see Art. 1609, Civil Code; Floro vs. Granada, 83 Phil. 487). The contract, however, 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 (Cabigao vs. Lim, 50 Phil. 844); (2) When the vendor remains in possession as lessee or otherwise (see Capulong vs. Court of Appeals, 130 SCRA 245); (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 (Reyes vs. De Leon, 20 SCRA 369); (4) When the purchaser retains for himself a part of the purchase price (Escoto vs. Arcilla, 89 Phil. 199); (5) When the vendor binds himself to pay the taxes on the thing sold (see Dalandan vs. Julio, 10 SCRA 400); and (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

318

CIVIL LAW

Arts. 1601-1618

performance of any other obligation (Diaz vs. Court of Appeals, 84 SCRA 483; Buce vs. Court of Appeals, 157 SCRA 330; Escudero vs. Dulay, 158 SCRA 69; Bundalian vs. Court of Appeals, 129 SCRA 645). 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 usury laws (see Art. 1602, Civil Code). In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage (Art. 1603, Civil Code; see De la Paz vs. Garcia, 18 SCRA 779). The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale (see Art. 1604, Civil Code; Ramos vs. Court of Appeals, 180 SCRA 635). In this case, as well as in those referred to in Article 1602, the apparent vendor may ask for the reformation of the instrument (see Art. 1605, Civil Code; Buce vs. Court of Appeals, 157 SCRA 330). The right to repurchase (referred to in Art. 1601), in the absence of an express agreement, shall last for four years from the date of the contract (Heirs of Parco vs. Haw Pia, 45 SCRA 164; Medel vs. Francisco, 51 Phil. 367; Rosales vs. Reyes, 25 Phil. 495). It was held in one case that where the sale provided that the repurchase cannot be made within two years, the four-year period is to be counted from the time the right can be exercised (Badayos vs. Court of Appeals, 207 SCRA 209). Should there be an agreement, the intent of the parties is primordial (Alojado vs. Lim, 51 Phil. 339). But the period cannot exceed ten years counted from the execution of the contract (Dalandan vs. Julio, 10 SCRA 400; Baluyot vs. Venegas, 22 SCRA 412); the excess shall be deemed void (Anchuelo vs. Intermediate Appellate Court, 147 SCRA 434; see also Art. 1606, Civil Code). The vendor, however, may still exercise the right to repurchase within thirty days from the time final judgment was rendered in

Arts. 1601-1618

OBLIGATIONS AND CONTRACTS Title VI. Sales

319

a civil action on the basis that the contract was a true sale with right to repurchase (Art. 1606, Civil Code; Feria vs. Sava, 91 Phil. 963; Gerardino, Sr. vs. CFI [Br. III], Capiz, 80 SCRA 646). This rule allowing, in effect, the vendor who failed to repurchase the property within the period agreed upon to still redeem the property within 30 days from final judgment in a civil action in which the true nature of the contract (whether it is a sale with pacto de retro or an equitable mortgage) is the main issue (see Gonzales vs. De Leon, 4 SCRA 333; Rosario vs. Rosario, 110 Phil. 394), does not apply where the transaction is admittedly a sale with a right of repurchase. The pendency of action tolls the terms of the right of redemption where the action concerning the validity of a sale with pacto de retro is brought in good faith, said the Court in Consolidated Bank and Trust Corporation (Solidbank) vs. Intermediate Appellate Court (150 SCRA 591; reiterating Fernandez vs. Suplido, 96 Phil. 541). The rule is also applicable to statutory rights of redemption and appeals (citing Philadelphia Mortgage Co. vs. Gusters, 75 N.W. 1107). The non-payment of a balance of the purchase price does not relieve the vendor-a-retro from exercising within the time stipulated the right to repurchase the property by a valid tender of payment, preferably (but not a necessity) followed by consignation. In fine, the fact that the purchase price is not as yet fully paid does not suspend the efficacy of the repurchase provisions (Catangcatang vs. Legayada, 84 SCRA 51). Persons Entitled to Exercise Redemption The vendor-a-retro himself normally exercises the right of redemption. He may also bring his action against every possessor whose right is derived from the vendee even if in the second contract no mention should have been made of the right to repurchase, without prejudice to the provisions of the Mortgage Law and the Land Reg-

320

CIVIL LAW

Arts. 1601-1618

istration laws with respect to third persons (see Art. 1908, Civil Code; Rivera vs. Court of Appeals, 176 SCRA 169; Alarcon vs. Esteva, 16 SCRA 123). The creditors of the vendor cannot make use of the right of redemption against the vendee until after they have exhausted the property of the vendor (Art. 1610, Civil Code). Each one of the co-owners of an undivided immovable, who may have sold his share separately, may independently exercise the right of repurchase as regards his own share, and the vendee cannot compel him to redeem the whole property (Art. 1614, Civil Code). The vendee, however, of a part of an undivided immovable who acquires the whole thereof in the case of Article 498 (supra., on Co-ownership) may compel the vendor to redeem the whole property, if the latter wishes to make use of the right of redemption (see Art. 1611, Civil Code). If several persons, jointly and in the same contract, should sell an undivided immovable with a right of repurchase, none of them may exercise this right for more than his respective share. This rule shall also apply if the person who has sold an immovable alone has left several heirs, in which case each of the latter may only redeem the part which he may have acquired (see De Guzman vs. Court of Appeals, 148 SCRA 75; Art. 1612, Civil Code). In this latter case, the vendee may demand of all the vendors or co-heirs that they come to an agreement upon the repurchase of the whole thing sold; and should they fail to do so, the vendee cannot be compelled to consent to a partial redemption (Art. 1613, Civil Code). If the vendee should leave several heirs, the action for redemption cannot be brought against each of them except for his own share, whether the thing be divided, or it has been partitioned among them. But if the inheritance has been divided and the thing sold has been awarded to one of the heirs, the action for redemption may be instituted against him for the whole (Art. 1615, Civil Code).

Arts. 1601-1618

OBLIGATIONS AND CONTRACTS Title VI. Sales

321

Exercise and Effects of Redemption “Art. 1616. The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition: (1) The expenses of the contract, and any other legitimate payments made by reason of the sale; (2) The necessary and useful expenses made on the thing sold.” (Civil Code; see Calagan vs. Court of First Instance, 95 SCRA 498). The proper exercise of the conventional right of redemption requires a tender of payment; a mere letter expressing that desire is not sufficient (Uy Lee vs. Court of Appeals, 68 SCRA 196). Judicial consignation is not necessary (see Badayos vs. Court of Appeals, 207 SCRA 209; Legaspi vs. Court of Appeals, 142 SCRA 82). The right of redemption is correctly availed of, held the Court in Anchuelo vs. Intermediate Appellate Court (147 SCRA 434), by returning the price of the sale; it is not sufficient to intimate or to state to the vendee a retro the vendor’s desire to redeem, who must thereupon offer to repay the price (citing Fructo vs. Fuentes, 15 Phil. 394 and other cases). In Hulganza vs. Court of Appeals (147 SCRA 77), the Court was more explicit, thus: “The only issue raised herein, is whether or not it is necessary that the formal offer to redeem the land in question be accompanied by a bona fide tender of the redemption price, or the repurchase price be consigned in Court, within the period of redemption even if the right is exercised through the filing of a judicial action. (Brief for Petitioners, p. 5; Rollo, p. 110). “x x x “The issue has already been laid to rest in successive decisions of the Supreme Court which ruled:

322

CIVIL LAW

Arts. 1601-1618

‘The formal offer to redeem, accompanied by a bona fide tender of the redemption price, within the period of redemption prescribed by law, is only essential to preserve the right of redemption for future enforcement beyond such period of redemption and within the period prescribed for the action by the statute of limitations. Where, as in the instant case, the right to redeem is exercised thru the filing of judicial action within the period of redemption prescribed by the law, the formal offer to redeem, accompanied by a bona fide tender of the redemption price, might be proper, but it is not essential. The filing of the action itself, within the period of redemption, is equivalent to a formal offer to redeem. Any other construction, particularly with reference to redemption of homesteads conveyed to third parties, would work hardships on the poor homesteaders who cannot be expected to know the subtleties of the law, and would defeat the evident purpose of the Public Land Law — to give the homesteader or patentee every chance to preserve for himself and his family the land that the state granted him as a reward for his labor in cleaning and cultivating it. (Avendaño vs. Hao Su Ton, 47 Off. Gaz., 357; Pascua vs. Talens, 45 Off. Gaz., Supp. No. 9, 413; Reveros vs. Abel, et al., 48 Off. Gaz., 5318-5319 [1952]; recently reiterated in Tolentino vs. Court of Appeals, 106 SCRA 526 [1981]).’ “In view of the foregoing consideration, it appears evident that the bona fide tender of the redemption price or its equivalent — consignation of said price in court is not essential or necessary in the case at bar where the filing of the action itself is equivalent to a formal offer to redeem.” If at the time of the execution of the sale there should be on the land visible or growing fruits, there shall be no

Arts. 1601-1618

OBLIGATIONS AND CONTRACTS Title VI. Sales

323

reimbursement for or prorating of those existing at the time of redemption if no indemnity was paid by the purchaser when the sale was executed. Should there have been no fruits at the time of the sale and some exist at the time of redemption, they shall be pro-rated between the redemptioner and the vendee, giving the latter the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of the sale (Art. 1617, Civil Code). The parties, however, may provide for different rules (see Almeda vs. Daluro, 79 SCRA 327). The vendor who recovers the thing sold shall receive it free from all charges or mortgages constituted by the vendee, but he shall respect the leases which the latter may have executed in good faith, and in accordance with the custom of the place where the land is situated (Art. 1618, Civil Code). Failure of Redemption If the vendor fails to redeem the property within the prescribed period, the right is lost and all rights pertaining to the property and all those incidental thereto are irrevocably consolidated in the buyer (see Penaco vs. Ruaya, 110 SCRA 46). In the case of real property, however, the consolidation of ownership in the vendee by virtue of the failure of the vendor to comply with the provisions of Article 1616 (see supra.) shall not be recorded in the Registry of Property without a judicial order in an ordinary civil action, after the vendor has been duly heard (see Art. 1607, Civil Code; Yturralde vs. Court of Appeals, 43 SCRA 313). The judicial hearing refers not to the consolidation itself which vests by operation of law but to the registration of the consolidation (De Bayquen vs. Balaoro, 143 SCRA 412; but see Flores vs. So, 162 SCRA 117 and Medida vs. Court of Appeals, 208 SCRA 887 on foreclosed property).

324

CIVIL LAW

Arts. 1619-1622

Section 2 — Legal Redemption Art. 1619. Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. (1521a) Art. 1620. A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one. Should two or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common. (1522a) Art. 1621. The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land. This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates. If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption. (1523a) Art. 1622. Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of pre-emption at a reasonable price. If the re-sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price.

Arts. 1619-1623

OBLIGATIONS AND CONTRACTS Title VI. Sales

325

When two or more owners of adjoining lands wish to exercise the right of pre-emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred. (n) Art. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners. The right of redemption of co-owners excludes that of adjoining owners. (1524a)

Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title (Art. 1619, Civil Code). Illustrative Instances (1) A co-owner of a thing may exercise the right of redemption not right of pre-emption (Reyes vs. Hon. Judge, 190 SCRA 171) in case the shares of all the other coowners or of any of them are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one. Should two or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common (Art. 1620, Civil Code; see Salatandol vs. Retes, 162 SCRA 568). In Villanueva vs. Florendo (139 SCRA 329), the petitioners and respondent Concepcion Villanueva were the children of the spouses Macario Villanueva and Basilia Garcia. The spouses owned a small lot in Aparri. In 1944, Basilia Garcia died intestate. In 1964, Macario Villanueva sold to Erlinda Villangca, wife

326

CIVIL LAW

Arts. 1619-1623

of Concepcion Villanueva, one-half of the lot. The lot had not been partitioned. Having been informed of the sale, the petitioners signified the intention to redeem the portion of the lot sold but the vendee refused to allow the redemption, contending that redemption would not lie against her. The petitioners filed a complaint for rescission of sale and legal redemption. The trial court rendered judgment declaring the vendee the absolute owner of the lot. The petitioners went to the Supreme Court. The Supreme Court ruled: “A co-owner of a thing may exercise the right of redemption in case the shares of all the other coowners or of any of them are sold to a third person. x x x’ “It is not disputed that co-ownership exists but the lower court disallowed redemption because it considered the vendee, Erlinda Villangca, a co-heir, being married to Concepcion Villanueva, and the conveyance was held valid since it was in favor of the conjugal partnership of the spouses in the absence of any statement that it is paraphernal in character. Within the meaning of Article 1620, the term ‘third person’ or ‘stranger’ refers to all persons who are not heirs in succession, and by heirs are meant only those who are called either by will or the law to succeed the deceased and who actually succeed. In short, a third person is any one who is not a coowner. x x x “The co-owners should therefore be allowed to exercise their right to redeem the property sold to Erlinda Villangca.” The law grants a co-owner the exercise of the right of redemption when the shares of the other owners are sold to a “stranger’’ or “third person.’’ There is no legal redemption either in case of a mere lease and the purchaser is also a tenant (Fernandez vs. Spouses Tarun, G.R. No. 143868, 14 November 2002).

Arts. 1619-1623

OBLIGATIONS AND CONTRACTS Title VI. Sales

327

(2) The owners of adjoining lands shall have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land. This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates. If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption (Art. 1621, Civil Code). (3) Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be resold, the owner of any adjoining land has a right of pre-emption at a reasonable price. If the resale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price. When two or more owners of adjoining lands wish to exercise the right of pre-emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred (Art. 1622, Civil Code). This provision of the Civil Code only deals with small urban lands that have been purchased for speculation where only adjoining lot owners can exercise the right of pre-emption or redemption (Sen Po Ek Marketing Corporation vs. Martinez, 120 SCAD 712, 325 SCRA 210). The right of redemption of co-owners excludes that of adjoining owners (Art. 1623, Civil Code; Alonzo vs. Intermediate Appellate Court, 150 SCRA 259). Period of and Exercise of Redemption The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in

328

CIVIL LAW

Arts. 1619-1623

the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners (Art. 1623, Civil Code; Cabrera vs. Villanueva, 160 SCRA 672, Salatandol vs. Retes, 162 SCRA 568). Notice is indispensable, and actual knowledge by the redemptioner is not legally sufficient (Conejero vs. Court of Appeals, 16 SCRA 775). In a later case, however, it was held that written notice to a co-owner is not necessary if the latter is actually aware, being an intermediary, of the sale (see Distrito vs. Court of Appeals, 197 SCRA 606). In Spouses Si vs. Court of Appeals (135 SCAD 754, 342 SCRA 653), it was held that a written notice should be treated as being a formal requisite to make certain that the co-owners had actual notice of the sale to enable them to exercise their right of redemption within the limited period of thirty days. But where the co-owners had actual notice of the sale at the time thereof and/or afterwards, a written notice of a fact already known to them would be superfluous. To exercise the right, tender of payment, unlike in conventional redemption, is not required; it is enough that an offer to redeem is made in proper form (see Torio vs. Del Rosario, 93 Phil. 800). Substantial compliance with the requirements for legal redemption is sufficient to exercise the right to redeem the property. Thus, the failure to include in the redemption price the registration fee of P3.00 paid by the auction buyer is not a substantial defect (see Rosales vs. Yoa, 120 SCRA 869). Other instances of legal redemption include the right of redemption in the foreclosure of mortgages (Sec. 6, Act 3135), execution sales (Sec. 29, Rule 39), levy of real property for unpaid taxes (National Internal Revenue Code and Local Government Code) and other cases under special laws. In execution sales, the exercise of the right of redemption is not conditioned upon ownership of the property sold on execution but by virtue of a writ of execution directed against such judgment debtor. Thus, it is the judgment debtor who has the right to redeem the prop-

Arts. 1619-1623

OBLIGATIONS AND CONTRACTS Title VI. Sales

329

erty and not any third-party claimant. In no case may a third party claimant be allowed to exercise right of redemption unless he is a successor-in-interest of the judgment debtor or a redemptioner (creditor) (CMS Stock Brokerage, Inc. vs. Court of Appeals, G.R. No. 124347, 21 July 1997). The use of a check is not improper in the exercise of the right of redemption by judicial action (Tolentino vs. Court of Appeals, 106 SCRA 513). Redemption Distinguished from Option to Buy One must take note of the distinction between the right of repurchase and an option to buy. In Villarica vs. Court of Appeals (26 SCRA 189; reiterated in Vda. de Cruzo vs. Carriaga, Jr., 174 SCRA 330), the Supreme Court made this observation: “x x x. An option to buy is different and distinct from the right of repurchase which must be reserved by the vendor, by stipulation to that effect, in the contract of sale. This is clear from the provision of Article 1601 of the Civil Code. “The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but is a right reserved by the vendor in the same instrument of sale as one of the stipulations of the contract. Once the instrument of absolute sale is executed, the vendor can no longer reserve the right to repurchase, and any right thereafter granted the vendor by the vendee in a separate instrument cannot be a right of repurchase but some other right like the option to buy in the instant case.” Where the deed of sale and option to repurchase, although written on separate documents, are executed on the same date, the same, said the Court in one case, can be considered as a sale with a right of repurchase (Claravall vs. Court of Appeals, 190 SCRA 439; Capulong vs. Court of Appeals, 130 SCRA 248). When made after

330

CIVIL LAW

Arts. 1624-1628

the sale, the right to repurchase, without independent consideration becomes a mere promise to sell (Diamante vs. Court of Appeals, 206 SCRA 52). In a pacto de retro sale, the vendor imposes the right to repurchase as a condition of the sale; in an option to buy or in a promise to sell, it is the vendee who grants the right and subjects the act to the rules governing offers or options. Chapter 8 Assignment of Credits and Other Incorporeal Rights Art. 1624. An assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475. (n) Art. 1625. An assignment of a credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. (1526) Art. 1626. The debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation. (1527) Art. 1627. The assignment of a credit includes all the accessory rights, such as a guaranty, mortgage, pledge or preference. (1528) Art. 1628. The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge. Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of Article 1616. The vendor in bad faith shall always be answerable for the payment of all expenses, and for damages. (1529)

Arts. 1629-1634

OBLIGATIONS AND CONTRACTS Title VI. Sales

331

Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the maturity. (1530a) Art. 1630. One who sells an inheritance without enumerating the things of which it is composed, shall only be answerable for his character as an heir. (1531) Art. 1631. One who sells for a lump sum the whole of certain rights, rents, or products, shall comply by answering for the legitimacy of the whole in general; but he shall not be obliged to warrant each of the various parts of which it may be composed, except in the case of eviction from the whole or the part of greater value. (1532a) Art. 1632. Should the vendor have profited by some of the fruits or received anything from the inheritance sold, he shall pay the vendee thereof, if the contrary has not been stipulated. (1533) Art. 1633. The vendee shall, on his part, reimburse the vendor for all that the latter may have paid for the debts of and charges on the estate and satisfy the credits he may have against the same, unless there is an agreement to the contrary. (1534) Art. 1634. When a credit or other incorporeal right in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefore, the judicial costs incurred by him, and the interest on the price from the day on which the same was paid. A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same is answered. The debtor may exercise his right within thirty days from the date the assignee demands payment from him. (1535)

332

CIVIL LAW

Arts. 1624-1635

Art. 1635. From the provisions of the preceding article shall be excepted the assignments or sales made: (1)

To a co-heir or co-owner of the right assign-

(2)

To a creditor in payment of his credit;

ed;

(3) To the possessor of a tenement or piece of land which is subject to the right in litigation assigned. (1536)

Assignment of Credit An assignment of credit is an act of transferring, either onerously or gratuitously, the right of an assignor to an assignee who would then be capable of proceeding against the debtor for enforcement or satisfaction of the credit. The transfer of rights takes place upon perfection of the contract, and ownership of the right, including all appurtenant accessory rights, is thereupon acquired by the assignee. The assignment binds the debtor only upon acquiring knowledge of the assignment but he is entitled, even then, to raise against the assignee the same defenses he could set up against the assignor. Where the assignment is on account of pure liberality on the part of the assignor, the rules on donation would likewise be pertinent; where valuable consideration is involved, the assignment partakes of the nature of a contract of sale or purchase. Upon an assignment of a contract to sell, the assignee is effectively subrogated in place of the assignor and in a position to enforce the contract to sell to the same extent as the assignor could (Project Builders Inc. vs. Court of Appeals, G.R. No. 99433, 19 June 2001, 358 SCRA 626). An assignment of credit and other incorporeal rights is perfected, as in a contract of sale, at the moment there is a meeting of the minds upon the object and the consideration of the transfer (see Art. 1624, in relation to Art.

Arts. 1624-1635

OBLIGATIONS AND CONTRACTS Title VI. Sales

333

1475, Civil Code; see also Arts. 1459, 1461 and 1462, Civil Code; C & C Commercial Corporation vs. Philippine National Bank, 175 SCRA 1). An assignment of a credit, right or action shall produce no effect, however, as against third persons (not successors-in-interest), unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property (see Art. 1625, Civil Code). The debtor’s consent is not required (Rodriguez vs. Court of Appeals, 207 SCRA 553), but a debtor who pays his creditor before having knowledge of the assignment shall be released from the obligation (see Art. 1626, Civil Code; Elizalde & Co. vs. Biñan Transp. Co. [CA], 56 O.G. 5886). Where the juridical relation intended to be established is one of conventional subrogation, such as when it varies certain rights and obligations of the parties, Articles 13001304 (supra.) of the Code govern. Effects of Assignment In General The assignment of a credit includes all the accessory rights, such as guaranty, mortgage, pledge or preference (Art. 1627, Civil Code). The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge. Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of Article 1616 (supra.). The vendor in bad faith shall always be answerable for the payment of all expenses and for damages (Art. 1628, Civil Code). In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only from the

334

CIVIL LAW

Arts. 1624-1635

time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the maturity (Art. 1629, Civil Code). A person is deemed insolvent who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not (see Art. 1636, Civil Code). In Sale of Inheritance One who sells an inheritance, without enumerating the things of which it is composed, shall only be answerable for his character as an heir (Art. 1630, Civil Code). Should the vendor have profited by some of the fruits or received anything from the inheritance sold, he shall pay the vendee thereof if the contrary has not been stipulated (Art. 1632, Civil Code). The vendee shall, on his part, reimburse the vendor for all that the latter may have paid for the debts of and charges on the estate and satisfy the credits he may have against the same, unless there is an agreement to the contrary (Art. 1633, Civil Code). But a contract upon future inheritance is not allowed except in cases expressly authorized by law (Art. 1347, Civil Code) such as one that partakes the nature of a partition inter vivos of an estate (Art. 1180, Civil Code, Chavez vs. Intermediate Appellate Court, 191 SCRA 211). An “affidavit of conformity” seeking to validate or ratify a sale of future inheritance is a useless document (Tanedo vs. Court of Appeals, 67 SCAD 57, 252 SCRA 80). One who sells for a lump sum the whole of certain rights, rents, or products shall comply by answering for the legitimacy of the whole in general; but he shall not be obliged to warrant each of the various parts of which it may be composed, except in the case of eviction from the whole or the part of greater value (Art. 1631, Civil Code).

Art. 1636

OBLIGATIONS AND CONTRACTS Title VI. Sales

335

In Sale of Credit under Litigation When a credit or other incorporeal right in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefor, the judicial costs incurred by him, and the interest on the price from the day on which the same was paid. A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same is answered. The debtor may exercise his right within thirty days from the date the assignee demands payment from him (Art. 1634, Civil Code; see NIDC vs. De los Angeles, 40 SCRA 487). From these provisions shall be excepted the assignments or sales made: (1) To a co-heir or co-owner of the right assigned; (2) To a creditor in payment of his credit; (3) To the possessor of a tenement or piece of land which is subject to the right in litigation assigned (see Art. 1635, Civil Code). Chapter 9 General Provisions Art. 1636. In the preceding articles in this Title governing the sale of goods, unless the context or subject matter otherwise requires: (1) “Document of title to goods” includes any bill of lading, dock warrant, “quedan,” or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by indorsement or by delivery, goods represented by such document. “Goods” includes all chattels personal but not things in action or money of legal tender in the Philippines. The term includes growing fruits or crops.

336

CIVIL LAW

Arts. 1636-1637

“Order” relating to documents of title means an order by indorsement on the documents. “Quality of goods” includes their state or condition. “Specific goods” means goods identified and agreed upon at the time a contract of sale is made. An antecedent or pre-existing claim, whether for money or not, constitutes “value” where goods or documents of title are taken either in satisfaction thereof or as security therefore. (2) A person is insolvent within the meaning of this Title who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not. (3) Goods are in a “deliverable state” within the meaning of this Title when they are in such a state that the buyer would, under the contract, be bound to take delivery of them. (n) Art. 1637. The provisions of this Title are subject to the rules laid down by the Mortgage Law and the Land Registration Law with regard to immovable property. (1537a)

The definition of terms in Article 1636 are helpful guides but are subordinate to the express stipulation of the parties. Article 1637 must be understood to include such special laws as may be made explicitly applicable.

337

TITLE VII. BARTER OR EXCHANGE Art. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. (1538a) Art. 1639. If one of the contracting parties, having received the thing promised him in barter, should prove that it did not belong to the person who gave it, he cannot be compelled to deliver that which he offered in exchange, but he shall be entitled to damages. (1539a) Art. 1640. One who loses by eviction the thing received in barter may recover that which he gave in exchange with a right to damages, or he can only demand an indemnity for damages. However, he can only make use of the right to recover the thing which he has delivered while the same remains in the possession of the other party, and without prejudice to the rights acquired in good faith in the meantime by a third person. (1540a) Art. 1641. As to all matters not specifically provided for in this Title, barter shall be governed by the provisions of the preceding Title relating to sales. (1541a)

One of the parties to a contract of barter or exchange binds himself to give one thing in consideration of the other’s promise to give another thing (Art. 1638, Civil Code; see Murphy vs. Trinidad, 44 Phil. 649). If one of the contracting parties, having received the thing promised him in barter, should prove that it did not belong to the person who gave it, he cannot be compelled to deliver that which he offered in exchange, but he shall 337

338

CIVIL LAW

Arts. 1638-1641

be entitled to damages (Art. 1639, Civil Code; see Biagtan vs. Oller, 62 Phil. 933). One who loses by eviction the thing received in barter may recover that which he gave in exchange with a right to damages, or he may only demand an indemnity for damages. However, he can only make use of the right to recover the thing which he has delivered while the same remains in the possession of the other party, and without prejudice to the rights acquired in good faith in the meantime by a third person (Art. 1640, Civil Code). As to all matters not specifically provided for above, barter shall be governed by the provisions of the Code relating to sales (see Art. 1641, Civil Code).