Jurado Comments Jurisprudence on Obligations and Contracts PDF

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.1 Concept of Obligations. — Evidently, the above definition of an obligation is adopted from Sanchez Roman’s classic definition of an obligation as “the juridical necessity to comply with a prestation.”2 Manresa, on the other hand, defines it as a “legal relation established between one person and another, whereby the latter is bound to the fulfillment of a prestation which the former may demand of him.’’3 It must be observed, however, that obligations may be either civil or natural.4 A civil obligation is one which has a binding force in law, and which gives to the obligee or creditor the right of enforcing it against the obligor or debtor in a court of justice. This is the obligation which is defined in Art. 1156 of the Code. A natural obligation, on the other hand, is one which cannot be enforced by action, but which is binding on the party who makes it in conscience and according to

New provision. 4 Sanchez Roman 53. 3 8 Manresa, 5th Ed., Bk. 1, p. 21. 4 Art. 1423, Civil Code. 1 2

1

Art. 1156

OBLIGATIONS

the natural law.5 Thus, when an action has prescribed in accordance with the statute of limitations, a natural obligation still subsists, although the civil obligation is extinguished. This may be illustrated by the following example: If A has a right of action, evidenced by a promissory note, to collect one thousand pesos from B, and such promissory note prescribes after the expiration of ten years from the time it accrues,6 although the latter is no longer bound to pay the obligation in accordance with the statute of limitations, he is still bound to pay in accordance with equity and natural law.7 It is, therefore, clear that a civil obligation and a natural obligation may be distinguished from each other as follows: (1) A civil obligation is based on positive law, while a natural obligation is based on equity and natural law; and (2) The former is enforceable in courts of justice, while the latter is not.8 Requisites of Obligations. — An obligation has four essential requisites. They are: (1) A juridical or legal tie, which binds the parties to the obligation, and which may arise from either bilateral or unilateral acts of persons; (2) An active subject known as the obligee or creditor, who can demand the fulfillment of the obligation; (3) A passive subject known as the obligor or debtor, against whom the obligation is juridically demandable; and (4) The fact, prestation or service which constitutes the object of the obligation.9 The form in which the obligation is manifested is sometimes added as a fifth requisite. As a general rule, however, it cannot be considered as essential. Obligations arising from law, quasi-contracts, acts or omissions punished by law, and quasi-delicts do not require any form whatsoever, yet there can be no question regard-

3 Bouvier’s Law Dictionary, 2394-2395. Art. 1144, Civil Code. 7 Agoncillo vs. Javier, 38 Phil. 424; Villaroel vs. Estrada, 71 Phil. 40. 8 Art. 1423, Civil Code. 9 Giorgi, Teoria de las Obligaciones, Vol. 1, p. 13; 3 Castan, 7th Ed., p. 20. 5 6

2

GENERAL PROVISIONS

Art. 1156

ing their validity or binding force. It is only in obligations arising from certain contracts that it becomes essential. Thus, in a contract involving a donation of personal property whose value exceeds P5,000.00, the law requires that the donation and the acceptance shall be made in writing;10 in a contract of sale of a piece of land or any interest therein through an agent, the law requires that the authority of the latter shall be in writing;11 in a contract of simple loan or mutuum, the law requires that any agreement with respect to interest shall be expressly stipulated in writing;12 in a contract of antichresis, the law requires that the amount of the principal and of the interest shall be specified in writing;13 in a contract involving a donation of immovable property, the law requires that the donation shall be made in a public document, while the acceptance shall be made either in the same deed of donation or in a separate public document;14 in a contract of partnership where immovable property or real rights are contributed to the common fund, the law requires that the contract shall be in a public instrument to which an inventory of the property or real rights, signed by the partners, must be attached;15 in a contract of chattel mortgage, the law requires that the personal property which is the subject matter of the contract shall be recorded in the Chattel Mortgage Register as a security for the performance of an obligation;16 and in a contract involving the sale or transfer of large cattle, the law requires that the sale or transfer shall be registered.17 Non-compliance with such formalities would have the effect of rendering the contract or agreement void or inexistent. Classification of Obligations. — The following is the primary classification of obligations under the Civil Code: (1)

Pure and conditional (Arts. 1179-1192).

(2)

With a period (Arts. 1193-1198).

(3)

Alternative and facultative (Arts. 1199-1206).

Art. 748, Civil Code. Art. 1874, Civil Code. 12 Art. 1956, Civil Code. 13 Art. 2134, Civil Code. 14 Art. 749, Civil Code. 15 Arts. 1771, 1773, Civil Code. 16 Art. 2140, Civil Code. 17 Sec. 22, Act No. 1147; Art. 1581, Civil Code. 10 11

3

Art. 1156

OBLIGATIONS

(4)

Joint and solidary (Arts. 1207-1222).

(5)

Divisible and indivisible (Arts. 1223-1225).

(6)

With a penal clause (Arts. 1226-1230).

There are, however, other classifications of a secondary character which can be gathered from scattered provisions of the Civil Code, such as: (1)

Legal, conventional and penal;18

(2)

Real and personal;19

(3)

Determinate and generic;20

(4)

Positive and negative;21

(5)

Unilateral and bilateral;22

(6)

Individual and collective;23

(7)

Accessory and principal.24

The following, on the other hand, is the classification of obligations according to Sanchez Roman:25 (1)

As to juridical quality:

(a) Natural — when the obligation is in accordance with natural law. (b) Civil — when the obligation is in accordance with positive law. (c) Mixed — when the obligation is in accordance with both natural and positive law.

Arts. 1158-1162, Civil Code. Arts. 1163-1168, Civil Code. 20 Arts. 1163-1166, Civil Code. 21 Arts. 1167-1168, Civil Code. 22 Arts. 1169-1191, Civil Code. 23 Arts. 1207, 1223, Civil Code. 24 Arts. 1166, 1226, et seq., Civil Code. 25 8 Sanchez Roman 20-40. 18 19

4

GENERAL PROVISIONS

2.

Art. 1156

As to parties:

(a) Unilateral and bilateral — unilateral, where only one party is bound, and bilateral, where both parties are mutually or reciprocally bound. (b) Individual and collective — individual, where there is only one obligor, and collective, where there are several obligors. The latter may be joint, when each obligor is liable only for his proportionate share of the obligation, or solidary, when each obligor may be held liable for the entire obligation. 3.

As to object:

(a) Determinate and generic — determinate, when the object is specific; generic, when the object is designated by its class or genus. (b) Simple and multiple — simple, when there is only one undertaking; multiple, when there are several undertakings. Multiple obligations may be conjunctive, when all of the undertakings are demandable at the same time, or distributive, when only one undertaking out of several is demandable. Distributive obligations, on the other hand, may be alternative, when the obligor is allowed to choose one out of several obligations which may be due and demandable, or facultative, when the obligor is allowed to substitute another obligation for one which is due and demandable. (c) Positive and negative — positive, when the obligor is obliged to give or do something; negative, when the obligor must refrain from giving or doing something. (d) Real and personal — real, when the obligation consists in giving something; personal, when the obligation consists in doing or not doing something. (e) Possible and impossible — possible, when the obligation is capable of fulfillment in nature as well as in law; impossible, when the obligation is not capable of fulfillment either in nature or in law. (f) Divisible and indivisible — divisible, when the obligation is susceptible of partial performance; indivisible, when the obligation is not susceptible of partial performance. 5

Art. 1157

OBLIGATIONS

(g) Principal and accessory — principal, when it is the main undertaking; accessory, when it is merely an undertaking to guarantee the fulfillment of the principal obligation. 4.

As to perfection and extinguishment:

(a) Pure — when the obligation is not subject to any condition or term and is immediately demandable. (b) Conditional — when the obligation is subject to a condition which may be suspensive, in which case the happening or fulfillment of the condition results in the birth of the obligation, or resolutory, in which case the happening or fulfillment of the condition results in the extinguishment of the obligation. (c) With a term or period (a plazo) — when the obligation is subject to a term or period which may be suspensive or from a day certain, in which case the obligation is demandable only upon the expiration of the term, or resolutory or to a day certain, in which case the obligation terminates upon the expiration of the term. Art. 1157. Obligations arise from: 1.

Law;

2.

Contracts;

3.

Quasi-contracts;

4.

Acts or omissions punished by law; and

5.

Quasi-delicts.26

Sources of Obligations. — In Roman law, the sources of obligations are: (1) contractu; (2) quasi-contractu; (3) maleficio; and (4) quasi-maleficio.27 These sources are preserved in the Civil Code with the addition of law or lege.28 The addition of lege as an independent source of obligations, however, has been criticized as theoretically erroneous. Thus, according to the Supreme Court:

Art. 1089, Spanish Civil Code, in amended form. 8 Manresa, 5th Ed., Bk. 1, p. 35. 28 Art. 1157, Civil Code. 26 27

6

GENERAL PROVISIONS

Art. 1158

“This enumeration of the sources of obligations supposes that the quasi-contractual obligation and the obligation imposed by law are of different types. The learned Italian jurist, Jorge Giorgi, criticizes this assumption and says that the classification embodied in the Code is theoretically erroneous. His conclusion is that one or the other of these categories should have been suppressed and merged in the other. (Giorgi, Teoria de las Obligaciones, Spanish Ed., Vol. 5, Arts. 5, 7, 9) The validity of the criticism is, we think, self-evident and it is of interest to note that the common law makes no distinction between the two sources of liability. The obligations which in the Code are indicated as quasi-contracts, as well as those arising ex lege, are in the common law system merged into the category of obligations imposed by law, and all are denominated implied contracts.’’29 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.30 Obligations Arising from Law. — Unlike other obligations, those derived from law can never be presumed. Consequently, only those expressly determined in the Civil Code or in special laws are demandable. These obligations shall be regulated by the precepts of the law which establishes them, and as to what has not been foreseen, by the provisions of Book IV of the Civil Code.31 How can we determine whether an obligation arises from law or from some other source, such as a contract, quasi-contract, criminal offense or quasi-delict? It must be noted that in the birth or generation of an obligation, there is always a concurrence between the law which establishes or recognizes it and an act or condition upon which the obligation is based or predicated. According to Manresa, when the law establishes the obligation and the act or condition upon which it is based is nothing more than a factor for determining the moment when it becomes demandable, then the law

Leung Ben vs. O’Brien, 38 Phil. 182. Art. 1090, Spanish Civil Code. 31 Art. 1158, Civil Code. 29 30

7

Art. 1159

OBLIGATIONS

itself is the source of the obligation; however, when the law merely recognizes or acknowledges the existence of an obligation generated by an act which may constitute a contract, quasi-contract, criminal offense or quasi-delict and its only purpose is to regulate such obligation, then the act itself is the source of the obligation and not the law.32 Thus, if A loses a certain amount to B in a game of chance, according to Art. 2014 of the Civil Code, the former may recover his loss from the latter, with legal interest from the time he paid the amount lost. It is evident that in this particular case the source of the obligation of B to refund to A the amount which he had won from the latter is not a contract, quasi-contract, criminal offense or quasidelict, but the law itself.33 The same can also be said with regard to the obligation of the spouses to support each other,34 the obligations of employers under the Labor Code,35 the obligations of the owners of the dominant and servient estates in legal easements,36 and others scattered in the Civil Code and in special laws. Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.37 Obligations Arising from Contracts. — 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.38 As a rule, 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 of the consequences which according to their nature may be in keeping with good faith, usage and law.39 These contracts are commonly called consensual contracts. Once the contract is perfected, the valid contract has the force of law binding the parties to comply therewith in good faith, where neither one may renege therefrom without the consent of the other. (Tiu Peck vs. CA 221 SCRA 618 [1993]) There are certain 8 Manresa, 5th Ed., Bk. 1, p. 48. Leung Ben vs. O’Brien, 38 Phil. 182. 34 Art. 291, Civil Code; Pelayo vs. Lauron, 12 Phil. 453. 35 Bautista vs. Borromeo, 35 SCRA 119. 36 Arts. 634, 687, Civil Code. 37 Art. 1091, Spanish Civil Code, in modified form. 38 Art. 1305, Civil Code. 39 Art. 1315, Civil Code. 32 33

8

GENERAL PROVISIONS

Art. 1160

contracts, however, called real contracts, such as deposit, pledge and commodatum, which are not perfected until the delivery of the object of the obligation.40 Whether the contract is consensual or real, the rule is that from the moment it is perfected, obligations which may be either reciprocal or unilateral arise. Reciprocal obligations are those where the parties are mutually or reciprocally obliged to do or to give something; unilateral obligations, on the other hand, are those where only one of the parties, the obligor, is obliged to do or to give something. Unlike other kinds of obligations, those arising from contracts are governed primarily by the agreement of the contracting parties. This is clearly deducible not only from the nature of contracts, but also from Art. 1169 of the Code which declares that such obligations have the force of law between the contracting parties and should be complied with in good faith. “Compliance in good faith’’ means performance in accordance with the stipulations, clauses, terms and conditions of the contract. Consequently, the Code recognizes the right of such contracting parties to establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy.41 Good faith must, therefore, be observed to prevent one party from taking unfair advantage over the other party. In the case of Royal Lines, Inc. vs. Court of Appeals, 143 SCRA 608 (1986), it was ruled that evasion by a party of legitimate obligations after receiving the benefits under the contract would constitute unjust enrichment on his part. However, in default of an agreement, the rules found in the Civil Code regulating such obligations are applicable.42 Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book.43 Obligations Arising from Quasi-Contracts. — Quasicontracts are those juridical relations arising from lawful, voluntary Art. 1316, Civil Code. Art. 1306, Civil Code. 42 Art. 1305, et seq., Civil Code. 43 New provision. 40 41

9

Art. 1161

OBLIGATIONS

and unilateral acts, by virtue of which the parties become bound to each other, based on the principle that no one shall be unjustly enriched or benefited at the expense of another.44 The most important of these juridical relations which are recognized and regulated by the Civil Code are negotiorum gestio45 and solutio indebiti.46 Negotiorum gestio is the juridical relation which arises whenever a person voluntarily takes charge of the agency or management of the business or property of another without any power or authority from the latter.47 In this type of quasi-contract, once the gestor or officious manager has assumed the agency or management of the business or property, he shall be obliged to continue such agency or management until the termination of the affair and its incidents,48 exercising such rights and complying with such obligations as provided for in the Code.49 Solutio indebiti, on the other hand, is the juridical relation which arises whenever a person unduly delivers a thing through mistake to another who has no right to demand it.50 In this type of quasi-contract, once the delivery has been made, the person to whom the delivery is unduly made shall have the obligation to return the property delivered or the money paid.51 The Civil Code provides other instances of quasi-contract. Examples are those found in Articles 2159, 2164 to 2175. In the case of Perez vs. Palomar, 2 Phil. 682, it was significantly noted that in a quasi contract where no express consent is given by the other party, the consent needed in a contract is provided by law through presumption (presumptive consent). Presumptive consent gives rise to multiple juridical relations resulting in obligations for delivery of the thing and rendering of service. Art. 1161. Civil obligations arising from offenses shall be governed by the penal laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2,

Art. 2142, Civil Code. Art. 2144, Civil Code. 46 Art. 2154, Civil Code. 47 Art. 2144, Civil Code. 48 Ibid. 49 Arts. 2144-2152, Civil Code. 50 Art. 2154, Civil Code. 51 Ibid. 44 45

10

GENERAL PROVISIONS

Art. 1161

Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages.52 Obligations Arising from Criminal Offenses. — As a rule, every person liable for a felony is also civilly liable.53 This principle is based on the fact that, generally, a crime has a dual aspect — the criminal aspect and the civil aspect. Although these two aspects are separate and distinct from each other in the sense that one affects the social order and the other, private rights, so that the purpose of the first is to punish or correct the offender, while the purpose of the second is to repair the damages suffered by the aggrieved party, it is evident that the basis of the civil liability is the criminal liability itself. Please note, however, that there are offenses and special crimes without civil liability. Examples are crimes of treason, rebellion, illegal possession of firearm and gambling. But a person who is not criminally liable may still be civilly liable. Idem; Enforcement of civil liability. — In general and prior to the Revised Rules of Criminal Procedure 2000, the following rules are observed in the enforcement or prosecution of civil liability arising from criminal offenses: (1) Institution of criminal and civil actions. — When a criminal action is instituted, the civil action for recovery of civil liability arising from the offense charged is impliedly instituted with the criminal action, unless the offended party (i) expressly waives the civil action, or (ii) reserves his right to institute it separately, or (iii) institutes the civil action prior to the criminal action. (2) Independent civil action. — In the cases provided in Articles 31, 32, 33, 34 and 2177 of the Civil Code of the Philippines, an independent civil action entirely separate and distinct from the criminal action, may be brought by the injured party during the pendency of the criminal case, provided the right is reserved. Such civil action shall proceed independently of the criminal prosecution, and shall require only a preponderance of evidence.

Art. 1092, Spanish Civil Code, in amended form. Art. 100, Revised Penal Code. This rule, however, is subject to the rules stated in Arts. 101, 102 and 103, Revised Penal Code. 52 53

11

Art. 1161

OBLIGATIONS

(3) Other civil actions arising from offenses. — In all cases not included in the preceding rules, the following rules are observed: (a) Criminal and civil actions arising from the same offense may be instituted separately, but after the criminal action has been commenced, the civil action cannot be instituted until final judgment has been rendered in the criminal action; (b) If the civil action has been filed ahead of the criminal action, and the criminal action is subsequently commenced, the civil action shall be suspended in whatever stage before final judgment it may be found, until final judgment in criminal action has been rendered. However, if no final judgment has been rendered by the trial court in the civil action, the same may be consolidated with the criminal action upon application with the court trying the criminal action. If the application is granted, the evidence prevented and admitted in the civil action shall be deemed automatically reproduced in the criminal action, without prejudice to the admission of additional evidence that any party may wish to present. In case of consolidation, both the criminal and the civil action shall be tried and decided jointly; (c) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. In other cases, the person entitled to the civil action may institute it in the jurisdiction and in the manner provided by law against the person who may be liable for restitution of the thing and reparation or indemnity for the damage suffered. Pursuant to Sec. 2, Rule III of the Revised Rules of Criminal Procedure 2000, however, it is stated that except for civil actions provided for in Articles 32, 33, 34 and 2176 of the Civil Code, the civil action which has been reserved cannot be instituted until final judgment has been rendered in the criminal action. The action contemplated, as pointed out by Justice Oscar Herrera in his Treatise on Criminal Procedure, is a civil action arising from a crime if reserved or filed separately and a criminal case is filed if it has to be suspended to await final judgment in the criminal action. The rule clarifies that, “During the pendency of the criminal action, the period of prescription of the civil action which cannot 12

GENERAL PROVISIONS

Art. 1161

be instituted separately or whose proceeding has been suspended shall not run.’’ Otherwise stated, the period of prescription of the civil actions under Section 3 of the aforementioned rules shall not be suspended because they can be instituted separately. This refers to civil actions arising from the offense charged which have not been reserved or civil actions that have been filed ahead of the criminal action but have been suspended. (Justice Oscar M. Herrera, Treatise on Historical Development and Highlights of Amendment of Rules on Criminal Procedure, February 2001). (4) Judgment in civil action not a bar. — A final judgment rendered in a civil action absolving the defendant from civil liability is no bar to a criminal action. (5) Suspension by reason of prejudicial question. — A petition for suspension of the criminal action based upon the pendency of a prejudicial question in a civil action may be filed in the office of the fiscal (prosecutor) or the court conducting the preliminary investigation. When the criminal action has been filed in court for trial, the petition to suspend shall be filed in the same criminal action at any time before the prosecution rests. Section 7 of the Revised Rules of Criminal Procedure 2000 provides for the elements of a prejudicial question. They are: (a) the previously instituted civil action which involves an issue similar or intimately related to the issue raised in the subsequent criminal action, and (b) the resolution of such issue determines whether or not the criminal action may proceed. Section 7 limits a prejudicial question to a “previously instituted civil action’’ in order to minimize possible abuses by the subsequent filing of a civil action as an after thought for the purpose of suspending the criminal action. (Justice Oscar M. Herrera, Treatise on Criminal Procedure, February 2001) At a glance, therefore, the following are the salient changes brought about by the Revised Rules of Criminal Procedure 2000, as more specifically discussed hereunder by Justice Herrera in his Treatise on Criminal Procedure: a. The rule changes the 1985 rule as amended in 1988. Under the 1985 Rule, the action for recovery of civil liability arising from crime including the civil liability under Articles 32, 33, 34 and 2176 of the Civil Code of the Philippines arising 13

Art. 1161

OBLIGATIONS

from the same act or omission are deemed impliedly instituted with the criminal action unless the offended party waives the civil action, reserves his right to institute it separately, or institutes the civil action prior to the criminal action. Under the present rule, only the civil liability arising from the offense charged is deemed instituted with the criminal unless the offended party waives the civil action, reserves his right to institute it separately, or institutes the civil action prior to the criminal action. b. Under the former rule, a waiver of any of three civil actions extinguishes the others. The institution of, or the reservation of the right to file any of said civil actions separately waives the others. This is no longer provided for. The reservation and waiver refers only to the civil action for the recovery of civil liability arising from the offense charged. This does not include recovery of civil liability under Articles 32, 33, 34 and 2176 of the Civil Code of the Philippines arising from the same act or omission which may be prosecuted separately even without a reservation. c. The rulings in Shafer vs. Judge, RTC of Olongapo City, 167 SCRA 376, allowing a third-party complaint, and the ruling in Javier vs. Intermediate Appellate Court, 171 SCRA 376, as well as Cabaero vs. Cantos allowing a counterclaim are no longer in force. Under the 2000 Rules, these pleadings are no longer allowed. Any claim which could have been the subject thereof may be litigated in a separate civil action. d. The rule also incorporated Circular 57-97 on the filing of actions for violation of Batas Pambansa Blg. 22 mandating the inclusion of the corresponding civil action for which the filing fee shall be paid based on the amount of the check involved. In other cases, no filing fees shall be required for actual damages. Idem; Id. — Effect of acquittal. — If the accused in a criminal action is acquitted of the offense charged, can a civil action for damages based on the same act or omission still be instituted? This question requires a qualified answer. If the acquittal of the accused is based on the ground that his guilt has not been proved beyond reasonable doubt, a civil action to recover damages based 14

GENERAL PROVISIONS

Art. 1161

on the same act or omission may still be instituted.54 In such case, mere preponderance of evidence shall be sufficient in order that the plaintiff will be able to recover from the defendant.55 On the other hand, if the acquittal is based on the ground that he did not commit the offense charged, or what amounts to the same thing, if the acquittal proceeds from a declaration in a final judgment that the fact from which the civil liability might arise did not exist, the subsequent institution of a civil action to recover damages is, as a general rule, no longer possible.56 Idem; id. — Effect of independent civil actions. — As a rule, the civil action to recover damages from the person criminally liable is not independent from the criminal action. This is true even where it has, to a certain extent, been separated by the injured party from the criminal proceedings either by reserving his right to file a separate civil action or by commencing the action to recover damages ahead of the criminal action. In the first, the right to file a civil action shall depend upon the result of the criminal action, while in the second, once the criminal action is instituted, the action to recover damages shall be suspended.57 There are, however, certain exceptional cases or instances under the Civil Code where the civil action to recover damages is entirely separate and independent from the criminal action, although the act or omission which is the basis thereof may be a criminal offense. They are: first, where the civil action is based on an obligation not arising from the act or omission complained of as a criminal offense or felony;58 and second, where the law grants to the injured party the right to institute a civil action which is entirely separate and distinct from the criminal action.59 As a matter of fact, we can even go to the extent of saying that these cases or instances also constitute the exceptions to the rule that if the accused in the criminal action is acquitted on the ground that he did not commit the offense charged, the subsequent institution of a civil action is no longer possible.

Art. 29, Civil Code. Ibid. 56 Sec. 3(c), Rule 111, New Rules of Court. 57 Sec. 3(b), Rule 111, New Rules of Court. 58 Arts. 31, 177, Civil Code. 59 Arts. 32, 33, 34, Civil Code. 54 55

15

Art. 1161

OBLIGATIONS

With regard to the first, it must be noted that where the civil action is based on an obligation not arising from the act or omission complained of as a criminal offense or felony, such action may proceed independently of the criminal action and regardless of the result of the latter.60 It is evident that in such case the basis of the civil action may be an obligation arising from the law, contract, quasi-contract, or quasi-delict. Thus, a postmaster, who has been charged criminally for malversation of government funds under his custody, may still be made a defendant in a civil case for the recovery of the funds, not on the ground of malversation, but on the ground that under Sec. 633 of the Revised Administrative Code, he can be held accountable therefor.61 The basis of the civil action in such case is not the obligation arising from the criminal offense of malversation, but the obligation arising from the law. Similarly, if a passenger in a certain bus institutes a civil action to recover damages from the operator of the bus line for injuries sustained in an accident, such action is separate and distinct from the criminal prosecution of the driver for criminal negligence and may, therefore, be continued regardless of the result of the latter. Consequently, he can still recover damages even if the driver is acquitted in the criminal action, because it is clear that the action in such case is based on culpa contractual and not on the act or omission of the driver complained of as felony.62 The same principle is also applicable if the offense charged constitutes what is known as culpa aquiliana or quasi-delict under the Civil Code.63 In such case, the injured party can always institute a civil action to recover damages independently of the criminal action and regardless of the result of the latter. This is so even granting that the accused is acquitted in the criminal action either on the ground of reasonable doubt or on the ground that he did not commit the offense charged. The reason for this is that the basis of the civil action is no longer the criminal liability of the defendant, but a quasi-delict or tort.64

Art. 31, Civil Code. Tolentino vs. Carlos, 39 Off. Gaz., No. 6, p. 121. 62 San Pedro Bus Line vs. Navarro, 94 Phil. 840; Bernaldes vs. Bohol Land Trans. Co., 7 SCRA 276. 63 Art. 2176, et seq., Civil Code. 64 Art. 2177, Civil Code; Barredo vs. Garcia and Almario, 73 Phil. 607; Dyogi vs. Yatco, 100 Phil. 1095; Calo vs. Peggy, 103 Phil. 1112; Stanvac vs. Tan, 107 Phil. 109. 60 61

16

GENERAL PROVISIONS

Art. 1161

With regard to the second, it must be observed that there are five exceptional cases or instances, in addition to that which is stated in Art. 31 of the New Civil Code, where the law itself expressly grants to the injured party the right to institute a civil action which is entirely separate and distinct from the criminal action. They are: (1) interferences by public officers or employees or by private individuals with civil rights and liberties,65 (2) defamation,66 (3) fraud,67 (4) physical injuries,68 and (5) refusal or neglect of a city or municipal police officer to render aid or protection in case of danger to life or property.69 In all of these cases or instances, although the act or omission may constitute a criminal offense in accordance with our penal laws, the injured party may institute a civil action to recover damages which is entirely separate and distinct from the criminal action. Once the action is instituted, then it may proceed independently of the criminal action, and shall require only a preponderance of evidence.70 Idem; id.; id. — Effect of failure to make reservation. — Section 2 of Rule 111 of the New Rules of Court states: “In the cases provided for in Articles 31, 32, 33, 34 and 2177 of the Civil Code of the Philippines, an independent civil action entirely separate and distinct from the criminal action, may be brought by the injured party during the pendency of the criminal case, provided that the right is reserved as required in the preceding section.’’ The insertion in the foregoing provision of the phrase provided the right is reserved as required in the preceding section, resulted in a debate among academicians which lasted for more than twenty years. Finally, interpreting the above provision, the Supreme Court, in Garcia vs. Florido,71 declared: “As we have stated at the outset, the same negligent act causing damages may produce a civil liability arising from crime or create an action for quasi-delict or culpa extra-contractual.

Art. 32, Civil Code. Art. 33, Civil Code. 67 Ibid. 68 Ibid. 69 Art. 34, Civil Code. 70 Arts. 32, 33, 34, Civil Code. 71 52 SCRA 420. This case was also cited and quoted in Mendoza vs. Arrieta, 91 SCRA 113. 65 66

17

Art. 1161

OBLIGATIONS

The former is a violation of the criminal law, while the latter is a distinct and independent negligence, having always had its own foundation and individuality. Some legal writers are of the view that in accordance with Article 31, the civil action based upon quasi-delict may proceed independently of the criminal proceeding for criminal negligence and regardless of the result of the latter. Hence, ‘the proviso in Section 2 of Rule 111 with reference to Articles 32, 33 and 34 of the Civil Code is contrary to the letter and spirit of the said articles, for these articles were drafted and are intended to constitute as exceptions to the general rule stated in what is now Section 1 of Rule 111. The proviso, which is procedural, may also be regarded as an unauthorized amendment of substantive law.’ x x x’’

Again, in Abellana vs. Marabe,72 the Supreme Court declared: “The restrictive interpretation x x x does not only result in its emasculation but also gives rise to a serious constitutional doubt. Article 33 is quite clear: ‘In case of x x x physical injuries, a civil action for damages entirely separate and distinct from the criminal action, may be brought by the injured party. Such civil action shall proceed independently of the criminal prosecution, and shall require only preponderance of evidence.’ That is a substantive right not to be frittered away by a construction that would render it nugatory, if through oversight, the offended parties failed at the initial stage to seek recovery for damages in a civil suit. x x x The grant of power to this Court both in the present Constitution and under the 1935 Charter does not extend to any diminution, increase or modification of substantive right. It is a well-settled doctrine that a court is to avoid construing a statute or legal norm in such a manner as would give rise to a constitutional doubt. x x x The law as an instrument of social control will fail in its function if through an ingenious construction sought to be fastened on a legal norm, particularly a procedural rule, there is placed an impediment to a litigant being given an opportunity of vindicating an alleged right.’’

Thus, in Elcano vs. Hill,73 where the first defendant had been previously charged with the criminal offense of homicide and subsequently acquitted on the ground that his act is not criminal,

72 73

57 SCRA 106. 77 SCRA 98.

18

GENERAL PROVISIONS

Art. 1162

because of lack of intent to kill, coupled with a mistake, the Supreme Court held, despite the fact that the plaintiffs (who are the parents of the alleged victim) failed to make a reservation of their right to institute the civil action separately, that such acquittal of the defendant in the criminal case has not extinguished his liability for quasi-delict under Art. 2176 of the Civil Code; hence, that acquittal is not a bar to the civil action against him. The same ruling was applied in Mendoza vs. Arrieta.74 In effect, the procedural requirement provided for in Section 2 of Rule 111 of the New Rules of Court is not mandatory. Removal of Reservation Requirement For Independent Civil Actions Accordingly, Section 2 of the New Rules of Court was likewise amended to read as: “SEC. 3. When civil action may proceed independently. — In the cases provided in Articles 32, 33, 34 and 2176 of the Civil Code of the Philippines, the independent civil action may be brought by the offended party. It shall proceed independently of the criminal action and shall require only a preponderance of evidence. In no case, however, may the offended party recover damages twice for the same act or omission charged in the criminal action.’’ (Revised Rules of Criminal Procedure 2000).

Under the former rule, the foregoing actions may only be allowed if there is a reservation, or were filed ahead of the criminal action. (Justice Oscar M. Herrera, Treatise on Criminal Procedure, February 2001). Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of the Book, and by special laws.75 Obligations Arising from Quasi-Delicts. — As it is used in this part of the Civil Code, the term “quasi-delicts”76 refers to all of those obligations which do not arise from law, contracts, quasi91 SCRA 113. Art. 1093, Spanish Civil Code, in amended form. 76 In Spanish law, “cuasi-delitos’’ is sometimes known as “culpa aquiliana’’ or “culpa extra-contractual.’’ 74 75

19

Art. 1162

OBLIGATIONS

contracts, or criminal offenses.77 Thus, using Art. 2176 of the Civil Code and decided cases as bases or anchors, it may be defined as the fault or negligence of a person, who, by his act or omission, connected or unconnected with, but independent from, any contractual relation, causes damage to another person. It is, therefore, the equivalent of the term “tort” in Anglo-American law.78 Idem; Persons liable. — Obligations arising from quasidelicts are demandable not only from the person directly responsible for the damage incurred,79 but also against the following: (1) The father and, in case of his death or incapacity, the mother, with respect to damages caused by the minor children who live in their company; (2) Guardians, with respect to damages caused by the minors or incapacitated persons who are under their authority and who live in their company; (3) The owners and managers of an establishment or enterprise, with respect to damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions; (4) Employers with respect to damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry; (5) The State, when it acts through a special agent; but not when the damage has been caused by the official to whom the task done properly pertains; and (6) Lastly, teachers or heads of establishments of arts and trades, with respect to damages caused by their pupils and students or apprentices, so long as they remain in their custody.80 It must be noted, however, that the responsibility of the above persons or entities shall cease if they can prove that they have

Report of the Code Commission, p. 161. See Elcano and Elcano vs. Hill and Hill, 77 SCRA 98. 79 Art. 2176, Civil Code. 80 Art. 2180, Civil Code. 77 78

20

GENERAL PROVISIONS

Art. 1162

observed all the diligence of a good father of a family to prevent damage.81 Idem; Requisites of liability. — In actions based on quasidelicts, before the person injured can recover damages from the defendant, it is necessary that he must be able to prove the following facts: (1)

The fault or negligence of the defendant;

(2)

The damage suffered or incurred by the plaintiff; and

(3) The relation of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff.82 Idem; Quasi-delicts and crimes. — Quasi-delicts and criminal offenses are sometimes difficult to distinguish from each other. However, they may be distinguished from each other in the following ways: (1) Crimes affect the public interest, while quasi-delicts are only of private concern; (2) The Penal Code punishes or corrects the criminal act, while the Civil Code, by means of indemnification, merely repairs the damages incurred; (3) Generally, there are two liabilities in crime: criminal and civil. In quasi-delict, there is only civil liability; and (4) Crimes are not as broad as quasi-delicts, because the former are punished only if there is a law clearly covering them, while the latter include all acts in which any kind of fault or negligence intervenes.83 Idem; Scope of quasi-delicts. — In Elcano vs. Hill (G.R. No. L-24303, May 26, 1977), the Supreme Court held that quasi-delicts include acts which are criminal in character or in violation of the penal law, whether voluntary or negligent. Using the exact language of the Court, “it is ‘more congruent with the spirit of law, equity and justice, and more in harmony with modern progress,’ to hold, as Ibid. Taylor vs. Manila Electric Co., 16 Phil. 8. 83 Barredo vs. Garcia and Almario, 73 Phil. 607. 81 82

21

Art. 1162

OBLIGATIONS

we do hold, that Article 2176, where it refers to fault or negligence, covers not only acts not punishable by law but also acts criminal in character, whether intentional or voluntary or negligent.’’ The above pronouncement of the Supreme Court is startling. It expands the coverage of quasi-delicts beyond what was originally contemplated by the lawmaker. Under the general plan of our law on obligations, the scope of obligations arising from the law, contracts, quasi-contracts, and acts or omissions punished by law is well-defined. Their boundaries are clearly delineated and drawn with precision. It is only with respect to obligations arising from quasi-delicts that there is a problem and this is natural because of the very nature of such obligations. Under our system of liabilities, quasi-delicts must necessarily be a sort of “dumping ground’’ or “garbage can’’ for all kinds of actionable wrongs not falling within the purview of the four sources of obligations. As we look at it, the original plan envisaged by the lawmaker is as follows: The coverage of quasi-delicts which do not overlap with crimes under the Revised Penal Code and special laws (and which we can very well call the general rule) are: first, negligent acts or omissions not punishable as criminal offenses; second, intentional quasi-delicts or torts, such as those regulated by Arts. 19, 21, 22, 26, 27, 28 and 1314 of the Civil Code; and third, the so-called strict liability torts where there is neither negligence nor intent to cause damage or injury, such as in the case contemplated in Art. 23 of the Civil Code or in the case of actionable nuisances under Arts. 694 and 705 of the Civil Code. The coverage of quasi-delicts which overlap with acts or omissions punishable under the Revised Penal Code (and which we can very well call the exceptions) are: first, criminal negligence; and second, acts or omissions punishable as crimes under the Revised Penal Code but the Civil Code expressly declares that the civil action arising therefrom is separate and independent from the criminal action. (Arts. 31, 32, 33 and 34 of the Civil Code) We believe that the above arrangement was deliberately planned. Thus, according to the Code Commission in its Report: “The Commission also thought of the possibility of adopting the word ‘tort’ from Anglo-American law. But ‘tort’ under that system is much broader than the Spanish-Philippine concept of obligations arising from non-contractual negligence. ‘Tort’ in Anglo-American jurisprudence includes not only negligence, but

22

GENERAL PROVISIONS

Art. 1162

also intentional criminal acts, such as assault and battery, false imprisonment and deceit. In the general plan of the Philippine legal system, intentional and malicious acts are governed by the Penal Code, although certain exceptions are made in the Project.’’ (Report, pp. 161-162)

Idem; Character of remedy. — In Padua vs. Robles,84 in his concurring opinion, Justice Barredo declared: “It is by now beyond all cavil, as to dispense with the citation of jurisprudence, that a negligent act, such as that committed in this case, gives rise to at least two separate and independent liabilities, namely (1) the civil liability arising from crime or culpa criminal and (2) the liability arising from civil negligence or the so-called culpa aquiliana. These two concepts of faults are so distinct from each other that exoneration from one does not result in exoneration from the other. Adjectively and substantively, they can be prosecuted separately and independently of each other, although Article 2177 of the Civil Code precludes recovery of damages twice for the same negligent act or omission, which means that should there be varying amounts awarded in two separate cases, the plaintiff may recover, in effect, only the bigger amount. That is to say, if the plaintiff had already been ordered paid an amount in one case and in the other case the amount adjudged is bigger, he shall be entitled in the second case only to the excess over the one fixed in the first case, but if he had already been paid a bigger amount in the first case, he may not recover anymore in the second case.’’ The above opinion was confirmed in Elcano vs. Hill.85 Thus, according to the Supreme Court: “Consequently, a separate civil action lies against the offender in a criminal act, whether or not he is criminally prosecuted and found guilty or acquitted, provided that the offended party is not allowed, if he is actually charged criminally, to recover damages on both scores, and would be entitled in such eventuality only to the bigger award of the two assuming that the awards made in the two cases vary. In other words, the extinction of the civil liability referred to in Par. (e) of Section 3, Rule 111, refers exclusively to civil liability founded on Article 100 of the Revised Penal Code, whereas the civil liability for the same act considered 84 85

66 SCRA 485. 77 SCRA 98.

23

Art. 1162

OBLIGATIONS

as a quasi-delict only and not as a crime is not extinguished even by a declaration in the criminal case that the criminal act charged has not happened or has not been committed by the accused.” However, in Mendoza vs. Arrieta,86 a more recent case, there was a return to the old doctrine of selection of remedies. In this case, the Supreme Court categorically held that since the offended or injured party had chosen the remedy of proceeding under the Revised Penal Code by allowing the civil action to be impliedly instituted in the criminal action, and since the court had expressly declared that the fact from which the civil liability did not exist, therefore, the civil action for damages subsequently commenced by said injured party against the defendant has already been extinguished in consonance with Sec. 3(c), Rule 111 of the Rules of Court. And even if plaintiff’s cause of action against defendant is not ex-delicto, the end result would be the same, it being clear from the judgment in the criminal case that defendant’s acquittal was not based upon reasonable doubt. Thus, the problem is still very much with us. The debate rages on. Barredo vs. Garcia and Almario 73 Phil. 607 This case come up from the Court of Appeals which held the petitioner herein, Fausto Barredo, liable in damages for the death of Faustino Garcia caused by the negligence of Pedro Fontanilla, a taxi driver employed by said Fausto Barredo. At about half past one in the morning of May 3, 1936, on the road between Malabon and Navotas, Province of Rizal, there was a head-on collision between a taxi of the Malate Taxicab driven by Pedro Fontanilla and a carretela guided by Pedro Dimapilis. The carretela was overturned, and one of its passengers, 16-year-old Faustino Garcia, suffered injuries from which he died two days later. A criminal action was filed against Fontanilla in the Court of First Instance of Rizal, and he was convicted and sentenced to an indeterminate sentence of one year and one day to two years of prision correccional. The court in the criminal case granted the petition that the right to bring a separate civil action be reserved. The Court of Appeals affirmed 86

91 SCRA 113.

24

GENERAL PROVISIONS

Art. 1162

the sentence of the lower court in the criminal case. Severino Garcia and Timotea Almario, parents of the deceased on March 7, 1939, brought an action in the Court of First Instance of Manila against Faustino Barredo as the sole proprietor of the Malate Taxicab and employer of Pedro Fontanilla. On July 8, 1939, the Court of First Instance of Manila awarded damages in favor of the plaintiffs for P2,000 plus legal interest from the date of the complaint. This decision was modified by the Court of Appeals by reducing the damages to P1,000 with legal interest from the time the action was instituted. It is undisputed that Fontanilla’s negligence was the cause of the mishap, as he was driving on the wrong side of the road, and at high speed. As to Barredo’s responsibility, the Court of Appeals found: “* * * It is admitted that defendant is Fontanilla’s employer. There is no proof that he exercised the diligence of a good father of a family to prevent the damage. (See p. 22, appellant’s brief.) In fact it is shown he was careless in employing Fontanilla who had been caught several times for violation of the Automobile Law and speeding (Exhibit A) — violations which appeared in the records of the Bureau of Public Works available to the public and to himself. Therefore, he must indemnify plaintiffs under the provisions of Article 1903 of the Civil Code.’’ The main theory of the defense is that the liability of Fausto Barredo is governed by the Revised Penal Code; hence, his liability is only subsidiary, and as there has been no civil action against Pedro Fontanilla, the person criminally liable, Barredo cannot be held responsible in this case. The petitioner’s brief states on page 10: “* * * The Court of Appeals holds that the petitioner is being sued for his failure to exercise all the diligence of a good father of a family in the selection and supervision of Pedro Fontanilla to prevent damages suffered by the respondents. In other words, the Court of Appeals insists on applying in this case Article 1903 of the Civil Code. Article 1903 of the Civil Code is found in Chapter 11, Title 16, Book IV of the Civil Code. This fact makes said article inapplicable to a civil liability arising from a crime as in the case at bar simply because Chapter II of Title 16 of Book lV of the Civil Code, in precise words of Article 1903 of the Civil Code itself, is applicable only to “those (obligations) arising from wrongful or negligent acts or omissions not punishable by law.’ ’’ The gist of the decision of the Court of Appeals is expressed thus:

25

Art. 1162

OBLIGATIONS

“* * * We cannot agree to the defendant’s contention. The liability sought to be imposed upon him in this action is not a civil obligation arising from a felony or a misdemeanor (the crime of Pedro Fontanilla), but an obligation imposed in Article .1903 of the Civil Code by reason of his negligence in the selection or supervision of his servant or employee.”

Speaking through Justice Bocobo, the Supreme Court held: “The pivotal question in this case is whether the plaintiffs may bring this separate civil action against Fausto Barredo, thus making him primarily and directly responsible under Article 1903 (now Art. 2180, New Civil Code) of the Civil Code as an employer of Pedro Fontanilla. The defendant maintains that Fontanilla’s negligence being punishable by the Penal Code, his (defendant’s) liability as an employer is only subsidiary, according to said Penal Code, but Fontanilla has not been sued in a civil action and his property has not been exhausted. To decide the main issue, we must cut through the tangle that has, in the minds of many, confused and jumbled together delitos and cuasi delitos, or crimes under the Penal Code and fault or negligence under Articles 1902-1910 (now Arts. 2176 to 2194, New Civil Code) of the Civil Code. “Authorities support the proposition that a quasi-delict or “culpa aquiliana’’ is a separate legal institution under the Civil Code, with a substantivity all its own, and individuality that is entirely apart and independent from a delict or crime. Upon this principle, and on the wording and spirit of Article 1903 of the Civil Code, the primary and direct responsibility of employers may be safely anchored. xxx “It will thus be seen that while the terms of Article.1902 of the Civil Code seem to be broad enough to cover the driver’s negligence in the instant case, nevertheless Article 1093 limits cuasi-delitos to acts or omissions “not punishable by law.’’ But inasmuch as Article 365 of the Revised Penal Code punishes not only reckless but even simple imprudence or negligence, the fault or negligence under Article 1902 of the Civil Code has apparently been crowded out. It is this overlapping that makes the “confusion worse confounded.’’ However, a closer study shows that such a concurrence of scope in regard to negligent acts does not destroy the distinction between the civil liability arising from a crime and the responsibility for cuasi-delitos

26

GENERAL PROVISIONS

Art. 1162

or culpa extra-contractual. The same negligent act causing damages may produce civil liability arising from a crime under Article 100 of the Revised Penal Code, or create an action for cuasi-delito or culpa extra-contractual under Articles 1902-1910 of the Civil Code. xxx The foregoing authorities clearly demonstrate the separate individuality of cuasi-delitos or culpa aquiliana under the Civil Code. Specifically they show that there is a distinction between civil liability arising from criminal negligence (governed by the Penal Code) and responsibility for fault of negligence under Articles 1902 to 1910 of the Civil Code, and that the same negligent act may produce either a civil liability arising from a crime under the Penal Code, or a separate responsibility for fault or negligence under Articles 1902 to 1910 of the Civil Code. Still more concretely, the authorities above cited render it inescapable to conclude that the employer — in this case the defendant-petitioner — is primarily and directly liable under Article 1903 of the Civil Code. The legal provisions, authors, and cases already invoked should ordinarily be sufficient to dispose of this case. But inasmuch as we are announcing doctrines that have been little understood in the past, it might not be inappropriate to indicate their foundations. “Firstly, the Revised Penal Code in Article 366 punishes not only reckless but also simple negligence. If we were to hold that Articles 1902 to 1910 of the Civil Code refer only to fault or negligence not punished by law according to the literal import of Article 1093 of the Civil Code, the legal institution of culpa aquiliana would have very little scope and application in actual life. Death or injury to persons and damage to property through any degree of negligence — even the slightest — would have to be indemnified only through the principle of civil liability arising from a crime. In such a state of affairs, what sphere would remain for cuasi-delito or culpa aquiliana? We are loath to impute to the lawmaker any intention to bring about a situation so absurd and anomalous. Nor are we, in the interpretation of the laws, disposed to uphold the letter that killeth rather than the spirit that giveth life. We will not use the literal meaning of the law to smother and render almost lifeless a principle of such ancient origin and such full-grown development as culpa aquiliana or cuasi-delito, which is conserved and made enduring in Articles 1902 to 1910 of the Spanish Civil Code.

27

Art. 1162

OBLIGATIONS

“Secondly, to find the accused guilty in a criminal case, proof of guilt beyond reasonable doubt is required, while in a civil case, preponderance of evidence is sufficient to make the defendant pay in damages. There are numerous cases of criminal negligence which can not be shown beyond reasonable doubt, but can be proved by a preponderance of evidence. In such cases, the defendant can and should be made responsible in a civil action under Articles 1902 to 1910 of the Civil Code. Otherwise, there would be many instances of unvindicated civil wrongs. Ubi jus ibi remedium. “Thirdly, to hold that there is only one way to make defendant’s liability effective, and that is, to sue the driver and exhaust his (the latter’s) property first, would be tantamount to compelling the plaintiff to follow a devious and cumbersome method of obtaining relief. True, there is such a remedy under our laws, but there is also a more expeditious way, which is based on the primary and direct responsibility of the defendant under Article. 1903 of the Civil Code. Our view of the law is more likely to facilitate remedy for civil wrongs, because the procedure indicated by the defendant is wasteful and productive of delay, it being a matter of common knowledge that professional drivers of taxis and similar public conveyances usually do not have sufficient means with which to pay damages. Why, then, should the plaintiff be required in all cases to go through this roundabout, unnecessary, and probably useless procedure? In construing the laws, courts have endeavored to shorten and facilitate the pathways of right and justice. “At this juncture, it should be said that the primary and direct responsibility of employers and their presumed negligence are principles calculated to protect society. Workmen and employees should be carefully chosen and supervised in order to avoid injury to the public. It is the masters or employers who principally reap the profits resulting from the services of these servants and employees. It is but right that they should guarantee the latter’s careful conduct for the personal and patrimonial safety of others. As Theilhard has said, “they should reproach themselves, at least, some for their weakness, others for their poor selection and all for their negligence.” And according to Manresa, “It is much more equitable and just that such responsibility should fall upon the principal or director who could have chosen a careful and prudent employee, and not upon the injured person who could not exercise such selection and who used such employee because of his confidence in the principal or director.” (Vol. 12, p. 622, 2nd Ed.) Many jurists also

28

GENERAL PROVISIONS

Art. 1162

base this primary responsibility of the employer on the principle of representation of the principal by the agent. Thus, Oyuelos says in the work already cited (Vol. 7, p. 747) that before third persons the employer and employee “vienen a ser como una sola personalidad, por refundicion de la del dependiente en la de quien le emplea y utiliza” (“become as one personality by the merging of the person of the employee in that of him who employs and utilizes him.”) All these observations acquire a peculiar force and significance when it comes to motor accidents, and there is need of stressing and accentuating the responsibility of owners of motor vehicles. “Fourthly, because of the broad sweep of the provisions of both the Penal Code and the Civil Code on this subject, which has given rise to the overlapping or concurrence of spheres already discussed, and for lack of understanding of the character and efficacy of the action for culpa aquiliana, there has grown up a common practice to seek damages only by virtue of the civil responsibility arising from a crime, forgetting that there is another remedy, which is by invoking Articles 1902-1910 of the Civil Code. Although this habitual method is allowed by our laws, it has nevertheless rendered practically useless and nugatory the more expeditious and effective remedy based on culpa aquiliana or extra-contractual. “In view of the foregoing, the judgment of the Court of Appeals should be and is hereby affirmed, with costs against the defendant-petitioner.’’ Elcano vs. Hill 77 SCRA 98 This is an appeal from an order of the Court of First Instance of Quezon City dismissing the complaint of plaintiffs for recovery of damages from defendant Reginald Hill, a minor, married at the time of occurrence, and his father, defendant Marvin Hill, with whom he was living and getting subsistence, for the killing by Reginald of the son of the plaintiffs, of which when criminally prosecuted, the said accused was acquitted on the ground that his act was not criminal, because of lack of intent to kill, coupled with a mistake. According to the Supreme Court, speaking through Justice Barredo: “As We view the foregoing background of this case, the two decisive issues presented for Our resolution are: 1.

Is the present civil action for damages barred by the

29

Art. 1162

OBLIGATIONS

acquittal of Reginald in the criminal case wherein the action for civil liability was not reserved? 2. May Article 2180 (2nd and last paragraphs) of the Civil Code be applied against Atty. Hill, notwithstanding the undisputed fact that at the time of the occurrence complained of, Reginald, though a minor, living with and getting subsistence from his father, was already legally married? “The first issue presents no more problem than the need for a reiteration and further clarification of the dual character, criminal and civil, of fault or negligence as a source of obligation which was firmly established in this jurisdiction in Barredo vs. Garcia, 73 Phil. 607. In that case, this Court postulated, on the basis of a scholarly dissertation by Justice Bocobo on the nature of culpa aquiliana in relation to culpa criminal or delito and mere culpa or fault, with pertinent citation of decisions of the Supreme Court of Spain, the works of recognized civilians, and earlier jurisprudence of our own, that the same given act can result in civil liability not only under the Penal Code but also under the Civil Code. “Contrary to an immediate impression one might get upon a reading of x x x Garcia — that the concurrence of the Penal Code and the Civil Code therein referred to contemplate only acts of negligence and not intentional voluntary acts — deeper reflection would reveal that the thrust of the pronouncements therein is not so limited, but that in fact it actually extends to fault or culpa. This can be seen in the reference made therein to the Sentence of the Supreme Court of Spain of February 14, 1919, supra, which involved a case of fraud or estafa, not a negligent act. Indeed, Article 1093 of the Civil Code of Spain, in force here at the time of Garcia, provided textually that obligations which are derived from acts or omissions, in which fault or negligence, not punishable by law, intervene shall be the subject of Chapter II, Title XV of this book (which refers to quasi-delicts.)’’ And it is precisely the underlined qualification, “not punishable by law,’’ that Justice Bocobo emphasized could lead to an undesirable construction or interpretation of the letter of the law that “killeth, rather than the spirit that giveth life’’ hence, the ruling that “(W)e will not use the literal meaning of the law to smother and render almost lifeless a principle of such ancient origin and such full-grown development as culpa aquiliana or cuasi-delito, which is conserved and made enduring in Articles 1902 to 1910 of the Spanish Civil Code.’’ And so, because Justice Bocobo was Chairman of the Code Commission that drafted the original text of the new Civil Code, it is to be noted that the said Code,

30

GENERAL PROVISIONS

Art. 1162

which was enacted after the Garcia doctrine, no longer uses the term, “not punishable by law,’’ thereby making it clear that the concept of culpa aquiliana includes acts which are criminal in character or in violation of the penal law, whether voluntary or negligent. Thus, the corresponding provision to said Article 1093 in the new code, which is Article 1162, simply says, “Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book (on quasi-delicts), and by special laws.’’ More precisely, a new provision, Article 2177 of the new code provides: “ART. 2177. Responsibility for fault or negligence under the preceding article is entirely separate and distinct from the civil liability arising from negligence under the Penal Code. But the plaintiff cannot recover damages twice for the same act or omission of the defendant.’’ According to the Code Commission: “The foregoing provision (Article 2177) though at first sight startling, is not so novel or extraordinary when we consider the exact nature of criminal and civil negligence. The former is a violation of the criminal law, while the latter is a culpa aquiliana or quasi-delict, of ancient origin, having always had its own foundation and individuality separate from criminal negligence. Such distinction between criminal negligence and culpa extra-contractual or cuasi-delito has been sustained by decisions of the Supreme Court of Spain and outstanding Spanish jurists. Therefore, under the proposed Article 2177, acquittal from an accusation of criminal negligence, whether on reasonable doubt or not, shall not be a bar to a subsequent civil action, not for civil liability arising from criminal negligence, but for damages due to a quasi-delict or culpa aquiliana. But said article forestalls a double recovery.” (Report of the Code Commission, p. 162.) Although, again, this Article 2177 does seem to literally refer to only acts of negligence, the same argument of Justice Bocobo about construction that upholds “the spirit that giveth life’’ rather than that which is literal that killeth the intent of the lawmaker should be observed in applying the same. And considering that the preliminary chapter on human relations of the new Civil Code definitely establishes the separability and independence of liability in a civil action for acts criminal in character (under Articles .29 to 32) from the civil responsibility arising from crime fixed by Article 100 of the Revised Penal Code, and, in a sense, the Rules of Court, under Sections 2 and 3(c), Rule III, contemplate also the same separability, it is “more

31

Art. 1162

OBLIGATIONS

congruent with the spirit of law, equity and justice, and more in harmony with modern progress,’’ to borrow the felicitous relevant language in Rakes vs. Atlantic Gulf and Pacific Co., 7 Phil. 359, to hold, as We do hold, that Article 2176, where it refers to “fault or negligence,’’ covers not only acts “not punishable by law’’ but also acts criminal in character, whether intentional and voluntary or negligent. Consequently, a separate civil action lies against the offender in a criminal act, whether or not he is criminally prosecuted and found guilty or acquitted, provided that the offended party is not allowed, if he is actually charged also criminally, to recover damages on both scores, and would be entitled in such eventuality only to the bigger award of the two, assuming the awards made in the two cases vary. In other words, the extinction of civil liability referred to in Par. (e) of Section 3, Rule III, refers exclusively to civil liability founded on Article 100 of the Revised Penal Code, whereas the civil liability for the same act considered as a quasi-delict only and not as a crime is not extinguished even by a declaration in the criminal case that the criminal act charged has not happened or has not been committed, by the accused. Briefly stated, We here hold, in reiteration of Garcia, that culpa aquiliana includes voluntary and negligent acts which may be punishable by law. It results, therefore, that the acquittal of Reginald Hill in the criminal case has not extinguished his liability for quasidelict, hence that acquittal is not a bar to the instant action against him. Coming now to the second issue about the effect of Reginald’s emancipation by marriage on the possible civil liability of Atty. Hill, his father, it is also Our considered opinion that the conclusion of appellees that Atty. Hill is already free from responsibility cannot be upheld. While it is true that parental authority is terminated upon emancipation of the child (Article 327, Civil Code), and under Article 397, emancipation takes place “by the marriage of the minor (child),” it is, however, also clear that pursuant to Article 399, emancipation by marriage of the minor is not really full or absolute. Thus “Emancipation by marriage or by voluntary concession shall terminate parental authority over the child’s person. It shall enable the minor to administer his property as though he were of age, but he cannot borrow money or alienate or encumber real property without the consent of his father or mother, or guardian. He can sue and be sued in court only with the assistance of his father, mother or guardian.’’

32

GENERAL PROVISIONS

Art. 1162

Now, under Article 2180, “The obligation imposed by Article 2176 is demandable not only for one’s own acts or omissions, but also for those of persons for whom one is responsible. The father and, in case of his death or incapacity, the mother, are responsible for the damages caused by the minor children who live in their company.’’ In the instant case, it is not controverted that Reginald, although married, was living with his father and getting subsistence from him at the time of the occurrence in question. Factually, therefore, Reginald was still subservient to and dependent on his father, a situation which is not unusual. “It must be borne in mind that, according to Manresa, the reason behind the joint and solidary liability of parents with their offending child under Article 2180 is that it is the obligation of the parent to supervise their minor children in order to prevent them from causing damage to third persons. On the other hand, the clear implication of Article 399, in providing that a minor emancipated by marriage may not nevertheless, sue or be sued without the assistance of the parents, is that such emancipation does not carry with it freedom to enter into transactions or do any act that can give rise to judicial litigation. (See Manresa, id., Vol. II, pp. 766-767, 776.) And surely, killing someone else invites judicial action. Otherwise stated, the marriage of a minor child does not relieve the parents of the duty to see to it that the child, while still a minor, does not give cause to any litigation, in the same manner that the parents are answerable for the borrowing of money and alienation or encumbering of real property which cannot be done by their minor married child without their consent. (Art. 399; Manresa, supra.) “Accordingly, in Our considered view, Article 2180 applies to Atty. Hill notwithstanding the emancipation by marriage of Reginald. However, inasmuch as it is evident that Reginald is now of age, as a matter of equity, the liability of Atty. Hill has become merely subsidiary to that of his son. “WHEREFORE, the order appealed from is reversed and the trial court is ordered to proceed in accordance with the foregoing opinion. Costs against appellees.’’ Mendoza vs. Arrieta 91 SCRA 113 The records show that a three-way vehicular accident occurred involving a Mercedes Benz owned and driven by Edgardo Mendoza, a private jeep owned and driven by Rodolfo Salazar and a sand-and-gravel truck owned by Felipino Timbol

33

Art. 1162

OBLIGATIONS

and driven by Freddie Montoya. As a consequence of the mishap, two separate criminal actions for damage to property through reckless imprudence were instituted. The first was instituted by Mendoza against Salazar, while the second was instituted by Salazar against Montoya. There was no reservation made by both complainants of their right to institute a civil action separately. After hearing the two cases jointly, the court rendered judgment acquitting Salazar on the ground that his jeep was bumped from behind by the truck causing it to collide with the Mercedes Benz. Montoya, on the other hand, was convicted on the ground that his guilt was established beyond reasonable doubt. He was ordered to pay to Salazar the amount of P972.50 for actual damages to the latter’s jeep. After the termination of the criminal cases, Mendoza filed a civil case. against both Salazar and Timbol, either in the alternative or in solidum, for indemnification for damages. Upon motions of both defendants, the respondent court dismissed the case. The plaintiff, as a consequence, went up to the Supreme Court by means of a petition for certiorari seeking a review of the orders of dismissal. Speaking through Justice Herrera, the Supreme Court held: “We shall first discuss the validity of the Order, dated September 12, 1970, dismissing petitioner’s Complaint against truck-owner Timbol. “In dismissing the complaint against the truck-owner, respondent Judge sustained Timbol’s allegations that the civil suit is barred by the prior joint judgment in Criminal Cases Nos. SM-227 and SM-228, wherein no reservation to file a separate civil case was made by petitioner and where the latter actively participated in the trial and tried to prove damages against jeep-driver Salazar only; and that the Complaint does not state a cause of action against truck-owner Timbol inasmuch as petitioner prosecuted jeep-owner-driver Salazar as the one solely responsible for the damage suffered by his car. “Well-settled is the rule that for a prior judgment to constitute a bar to a subsequent case, the following requisites must concur: (1) it must be a final judgment; (2) it must have been rendered by a Court having jurisdiction over the subject matter and over the parties; (3) it must be a judgment on the merits; and (4) there must be, between the first and second actions, identity of parties, identity of subject matter and identity of cause of action. “It is conceded that the first three requisites of res judicata are present. However, we agree with petitioner that there is

34

GENERAL PROVISIONS

Art. 1162

no identity of cause of action between Criminal Case No. SM227 and Civil Case No. 80803. Obvious is the fact that in said criminal case truck-driver Montoya was not prosecuted for damage to petitioner’s car but for damage to the jeep. Neither was truck-owner Timbol a party in said case. In fact as the trial Court had put it “the owner of the Mercedes Benz cannot recover any damages from the accused Freddie Montoya, he (Mendoza) being a complainant only against Rodolfo Salazar in Criminal Case No. SM-228.’’ And more importantly, in the criminal cases, the cause of action was the enforcement of the civil liability arising from criminal negligence under Article 100 of the Revised Penal Code, whereas Civil Case No. 80803 is based on quasi-delict under Article 2180, in relation to Article 2176 of the Civil Code. As held in Barredo vs. Garcia, et al.: “The foregoing authorities clearly demonstrate the separate individuality of cuasi-delitos or culpa aquiliana under the Civil Code. Specifically they show that there is a distinction between civil liability arising from criminal negligence (governed by the Penal Code) and responsibility for fault or negligence under Articles 1902 to 1910 of the Civil Code, and that the same negligent act may produce either a civil liability arising from a crime under the Penal Code, or a separate responsibility for fault or negligence under Articles 1902 to 1910 of the Civil Code. Still more concretely, the authorities above cited render it inescapable to conclude that the employer, in this case the defendant-petitioner, is primarily and directly liable under Article 1903 of the Civil Code.” “The petitioner’s cause of action against Timbol in the Civil case is based on quasi-delict is evident from the recitals in the complaint, to wit: that while petitioner was driving his car along MacArthur Highway at Marilao, Bulacan, a jeep owned and driven by Salazar suddenly swerved to his (petitioner’s) lane and collided with his car; that the sudden swerving of Salazar’s jeep was caused either by the negligence and lack of skill of Freddie Montoya, Timbol’s employee, who was then driving a gravel-andsand truck in the same direction as Salazar’s jeep; and that as a consequence of the collision, petitioner’s car suffered extensive damage amounting to P12,248.20 and that he likewise incurred actual and moral damages, litigation expenses and attorney’s fees. Clearly, therefore, the two factors that a cause of action must consist of, namely: (1) plaintiff’s primary right, i.e., that he is the owner of a Mercedes Benz; and (2) defendants’ delict or wrongful act or omission which violated plaintiff’s primary right, i.e., the negligence or lack of skill either of jeep-owner

35

Art. 1162

OBLIGATIONS

Salazar or of Timbol’s employee, Montoya, in driving the truck, causing Salazar’s jeep to swerve and collide with petitioner’s car, were alleged in the Complaint. “Consequently, petitioner’s cause of action being based on quasi-delict, respondent Judge committed reversible error when he dismissed the civil suit against the truck-owner, as said case may proceed independently of the criminal proceedings and regardless of the result of the latter. “Art. 31. When the civil action is based on an obligation not arising from the act or omission complained of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of the result of the latter.” “But it is truck-owner Timbol’s submission (as well as that of jeep-owner-driver Salazar) that petitioner’s failure to make a reservation in the criminal action of his right to file an independent civil action bars the institution of such separate civil action, invoking Section 2, Rule 111, Rules of Court, which says: “Section 2. Independent civil action. — In the cases provided for in Articles 31, 32, 33, 34 and 2177 of the Civil Code of the Philippines, an independent civil action entirely separate and distinct from the criminal action may be brought by the injured party during the pendency of the criminal case, provided the right is reserved as required in the preceding section, Such civil action shall proceed independently of the criminal prosecution, and shall require only a preponderance of evidence.’’ “Interpreting the above provision, this Court, in Garcia vs. Florido, said: “As we have stated at the outset, the same negligent act causing damages may produce a civil liability arising from crime or create an action for quasi-delict or culpa extra-contractual. The former is a violation of the criminal law, while the latter is a distinct and independent negligence, having always had its own foundation and individuality. Some legal writers are of the view that in accordance with Article 31, the civil action based upon quasi-delict may proceed independently of the criminal proceeding from criminal negligence and regardless of the result of the latter. Hence, ‘the proviso in Section 2 of Rule 111 with reference to x x x Articles 32, 33 and 34 of the Civil Code is contrary to the letter and spirit

36

GENERAL PROVISIONS

Art. 1162

of the said articles, for these articles were drafted x x x and are intended to constitute as exceptions to the general rule stated in what is now Section 1 of Rule 111. The proviso, which is procedural may also be regarded as an unauthorized amendment of substantive law, Articles 32, 33 and 34 of the Civil Code, which do not provide for the reservation required in the proviso.’ x x x” “In his concurring opinion in the above case, Mr. Justice Antonio Barredo further observed that inasmuch as Articles 2176 and 2177 of the Civil Code create a civil liability distinct and different from the civil action arising from the offense of negligence under the Revised Penal Code, no reservation, therefore, need be made in the criminal case; that Section 2 of Rule 111 is inoperative, “it being substantive in character and is not within the power of the Supreme Court to promulgate; and even if it were not substantive but adjective, it cannot stand because of its inconsistency with Article 2177, an enactment of the legislature superseding the Rules of 1940.” “We declare, therefore, that in so far as truck-owner Timbol is concerned, Civil Case No. 80803 is not barred by the fact that petitioner failed to reserve, in the criminal action, his right to file an independent civil action based on quasi-delict. “The case as against jeep-owner-driver Salazar, who was acquitted in Criminal Case No. SM-228, presents a different picture altogether. “At the outset it should be clarified that inasmuch as civil liability co-exists with criminal responsibility in negligence cases, the offended party has the option between an action for enforcement of civil liability based on culpa criminal under Article 100 of the Revised Penal Code, and an action for recovery of damages based on culpa aquiliana under Article 2177 of the Civil Code. The action for enforcement of civil liability based on culpa criminal under Section 1 of Rule 111 of the Rules of Court is deemed simultaneously instituted with the criminal action, unless expressly waived or reserved for separate application by the offended party. “The circumstances attendant to the criminal case yields the conclusion that petitioner had opted to base his cause of action against jeep-owner-driver Salazar on culpa criminal and not on culpa aquiliana, as evidenced by his active participation and intervention in the prosecution of the criminal suit against said Salazar. The latter’s civil liability continued to be involved in the criminal action until its termination. Such being the case,

37

Art. 1162

OBLIGATIONS

there was no need for petitioner to have reserved his right to file a separate civil action as his action for civil liability was deemed impliedly instituted in Criminal Case No. SM-228. “Neither would an independent civil action lie. Noteworthy is the basis of the acquittal of jeep-owner-driver Salazar in the criminal case, expounded by the Trial Court in this wise: “In view of what has been proven and established during the trial, accused Freddie Montoya would be held liable for having bumped and hit the rear portion of the jeep driven by the accused Rodolfo Salazar. “Considering that the collision between the jeep driven by Rodolfo Salazar and the car owned and driven by Edgardo Mendoza was the result of the hitting on the rear of the jeep by the truck driven by Freddie Montoya, this Court believes that accused Rodolfo Salazar cannot be held liable for the damages sustained by Edgardo Mendoza’s car.” “Crystal clear is the trial court’s pronouncement that under the facts of the case, jeep-owner-driver Salazar cannot be held liable for the damages sustained by petitioner’s car. In other words, “the fact from which the civil might arise did not exist.’’ Accordingly, inasmuch as petitioner’s cause of action as against jeep-owner-driver Salazar is ex-delictu, founded on Article 100 of the Revised Penal Code, the civil action must be held to have been extinguished in consonance with Section 3(c), Rule 111 of the Rules of Court which provides: “Sec. 3. Other civil actions arising from offenses. — In all cases not included in the preceding section the following rules shall be observed: xxx (c) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. x x x’’ “And even if petitioner’s cause of action as against jeepowner-driver Salazar were not ex-delictu, the end result would be the same, it being clear from the judgment in the criminal case that Salazar’s acquittal was not based upon reasonable doubt, consequently, a civil action for damages can no longer be instituted. This is explicitly provided for in Article 29 of the Civil Code quoted hereunder:

38

GENERAL PROVISIONS

Art. 1162

“Art. 29. When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been proved beyond reasonable doubt, a civil action for damages for the same act or omission may be instituted. Such action requires only a preponderance of evidence. x x x “If in a criminal case the judgment of acquittal is based upon reasonable doubt, the court shall so declare. In the absence of any declaration to that effect, it may be inferred from the text of the decision whether or not the acquittal is due to that ground.’’ ‘’In so far as the suit against jeep-owner-driver Salazar is concerned, therefore, we sustain respondent Judge’s Order dated January 30, 1971 dismissing the complaint, albeit on different grounds. “WHEREFORE, 1) the Order dated September 12, 1970 dismissing Civil Case No. 80803 against private respondent Felipino Timbol is set aside, and respondent Judge, or his successor, is hereby ordered to proceed with the hearing on the merits; 2) but the Orders dated January 30, 1971 and February 23, 1971 dismissing the Complaint in Civil Case No. 80803 against respondent Rodolfo Salazar are hereby upheld.’’

As discussed by Justice Herrera in his Treatise on Criminal Procedure: The Revised Rules on Criminal Procedure 2000 is a virtual return to the 1940 Rules of Court which deemed as instituted with the criminal action only the civil liability arising from the offense charged. The civil liability is deemed instituted — not merely “impliedly” instituted with the institution of the criminal action. The amendment modified the recommendation of the Committee on the Revision of the Rules of Court to deem as impliedly instituted only the civil liability of the accused from all sources of obligation arising from the same act or omission. The purpose of the Committee was to limit the civil liability to be instituted with the criminal action to that of the accused and not the employer. The court, however, went further by limiting the civil action that is deemed instituted with the criminal only to the civil liability arising from the offense charged. ALL decisions to the contrary are no longer controlling. The independent civil actions under Articles 32, 33, 34 and 2176 are no longer deemed or impliedly instituted with the criminal action or considered as waived even if there is no reservation. The reservation applies

39

Art. 1162

OBLIGATIONS

only to the civil liability arising from the offense charged. The employer may no longer be held civilly liable for quasi-delict in the criminal action as ruled in Maniago (infra.); San Ildefonso Lines (infra.) and the pro hac vice decision in Rafael Reyes Trucking Corporation (infra.), and all other similar cases, since quasi delict is not deemed instituted with the criminal. If at all, the only civil liability of the employer in the criminal action would be his subsidiary liability under the Revised Penal Code. The rule has also done away with third-party complaints and counterclaims in criminal actions. These claims must have to be ventilated in a separate civil action.’’ The Revised Rules of Criminal Procedure 2000 “is similar to the original rule in Rule 107 of the Rules of Court.’’ “Rule 107 contemplates a case where the offended party desires to press his right to demand indemnity from the accused in the criminal case which he may assert either in the same criminal case or in a separate action. Under this rule, a waiver from failure to reserve does not include a cause of action not arising from civil liability involved in the criminal case but from culpa contractual, such as a civil case is based on alleged culpa contractual incurred by the Philippine Air Lines, Inc. because of its failure to carry safely the deceased passenger to his place of destination. The criminal case involves the civil liability of the accused, who bear no relation whatsoever with said entity and are complete strangers to it. The accused are complete strangers to the respondent company. The latter is not in any way involved therein. Plaintiff is concerned with the civil liability of the latter, regardless of the civil liability of the accused in the criminal case. The failure, therefore, on the part of the plaintiff to reserve her right to institute the civil action in the criminal case cannot in any way be deemed as a waiver on her part of the right to institute a separate civil action against the respondent company based on its contractual liability, or on culpa aquiliana under Articles 1902 to 1910 to of the Civil Code. The two actions are separate and distinct and should not be confused one with the other.’’ (Parker vs. Panlilio, 91 Phil. 1 [1952]) “The rule has abandoned Maniago vs. Court of Appeals, 253 SCRA 174 and San Ildefonso Lines vs. Court of Appeals, G.R. No. 119771, April 24, 1998, 289 SCRA 568, which deemed the employer’s liability on quasi delict as instituted with the criminal action in the absence of a reservation. The present rule virtually adopted the ruling in Elcano vs. Hill, 77 SCRA 98 (1977), where it was expressly held that the extinction of the

40

GENERAL PROVISIONS

Art. 1162

civil liability referred to in par. (c), Sec. 2 of Rule 111, refers exclusively to civil liability arising from crime; whereas, the civil liability for the same act considered as a quasi-delict only and not as a crime is not extinguished even by a declaration in the criminal case that the criminal act charged has not happened or has not been committed by the accused. Both actions may proceed separately; the only limitation is the prohibition to recover damages twice based on the same act or omission.’’

Finally, in his Treatise on Criminal Procedure, Justice Herrera discussed the effect of death on the civil liability of the accused during the pendency of the criminal action as follows: Death of Accused on Appeal “The death of the accused after arraignment and during the pendency of the criminal action shall extinguish the civil liability arising from the delict. The original proposal of the Committee was to require the criminal court to proceed with the determination of the civil liability that is deemed impliedly instituted with the criminal action other than the civil liability arising from the crime to modify the ruling in Bayotas vs. Court of Appeals, which then held that since death extinguished the civil liability of the accused and the corresponding civil liability arising from a crime, the offended party should file a separate civil action to recover civil liability arising from other sources of civil liability. The ruling was then criticized. Since the civil liability arising from other sources were deemed impliedly instituted with the criminal action unless there is a waiver, reservation or separate civil, then the same should be resolved in the same proceedings despite the death of the accused. Since, however, The Revised Rules on Criminal Procedure limited the civil liability to what is deemed impliedly instituted with the criminal action to civil liability arising from crime, there would have been no need for the amendment as death of the accused would only extinguish such civil liability. The rule was, however, retained by the court to apply to the civil actions under Section 3 of the Rule. The rule would, however, apply only if any of the civil actions under Section 3 is consolidated with the criminal action, otherwise, since the actions under Section 3 are purely civil actions, the effects of death of a party are to be governed by the Rules on Civil Procedure.’’ (Rule 3, Secs. 16, 17 and 20, 1997 RCP)

41

OBLIGATIONS

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.1 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.2 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 any fortuitous event until he has effected the delivery.3 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.4

Art. 1094, Spanish Civil Code, in modified form. Art. 1095, Spanish Civil Code. 3 Art. 1096, Spanish Civil Code, in modified form. 4 Art. 1097, par. 1, Civil Code. 1 2

42

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1163-1166

Obligations To Give. — An obligation to give a thing may be either determinate or generic. It is determinate when the object is particularly designated or physically segregated from all others of the same class.5 It is generic or indeterminate when the object is designated merely by its class or genus without any particular designation or physical segregation from all others of the same class. In other words, in the first the object is a concrete, particularized thing, indicated by its own individuality, while in the second the object is one whose determination is confined to that of its nature — to the genus to which it pertains, such as a horse or a chair.6 Thus, when the obligor or debtor binds himself to deliver to the obligee or creditor the white horse which won the Senior Grand Derby in 1979, the object of the obligation is said to be determinate. Since it has already been individually determined, the obligor cannot fulfill his obligation by delivering another horse as a substitute.7 On the other hand, when the obligor or debtor binds himself to deliver “a horse” or “ten horses,’’ the object of the obligation is said to be indeterminate or generic. Since the horse or horses have not yet been particularly designated or physically segregated from all others of the same class, the obligor can fulfill his obligation by delivering any horse or horses which are neither of superior nor inferior quality.8 Idem; Nature of right of creditor. — In obligations to give, the obligee or creditor has a right to the thing which is the object of the obligation as well as the fruits thereof from the time the obligation to deliver it arises. This is evident from the provision of Art. 1164 of the Code. The question, however, is — when does the obligation to deliver the thing and the fruits arise? The answer to this question depends upon the nature of the obligation itself. In case of obligations arising from the law, quasi-contracts, criminal offenses, and quasi-delicts, the obligation to deliver arises from the time designated by the provisions of the Civil Code or of special laws creating or regulating them. In case of obligations arising from contracts, the obligation to deliver arises, as a general rule, from the moment of the perfection of the contract. The basis for the latter rule can be found in Art. 1537 of the Code which states that the vendor is bound to deliver the thing sold and its accessions and accessories in Art. 1460, par. 1, Civil Code. Soriano vs. De Leon, 48 Off. Gaz. 2245; 8 Manresa, 5th Ed., Bk. 1, p. 102. 7 Art. 1244, Civil Code. 8 Art. 1246, Civil Code. 5 6

43

Arts. 1163-1166

OBLIGATIONS

the condition in which they were upon the perfection of the contract. According to Manresa, the principle declared in Art. 1164 is merely an extension of that declared in Art. 1537 considering the fact that an obligation arising from a contract of sale is the prototype of all contractual obligations.9 Generalizing the provision of the latter article, we can, therefore, say that the obligor or debtor is bound to deliver the thing which is the object of the obligation as well as the fruits thereof from the moment the contract is perfected. In other words, with respect to the thing itself, the obligation to deliver arises from the time of perfection of the contract; with respect to the fruits, the obligation to deliver also arises from the time of the perfection of the contract. It must be noted, however, that these rules are not absolute in character. In case there is a contrary stipulation of the parties with respect to the time when the thing or fruits shall be delivered, such stipulation shall govern. Hence, if the obligation is subject to a suspensive condition, the obligation to deliver the thing as well as the fruits shall arise only from the moment of the fulfillment of the condition, and if it is subject to a suspensive term or period, the obligation to deliver arises only upon the expiration of the designated term or period. If the creditor has a right to the thing as well as to the fruits thereof from the time the obligation to deliver it arises, what is the nature of such right? Before answering this question, we must first know the meaning of personal and real right. According to an eminent Spanish commentator, a personal right is “a right pertaining to a person to demand from another, as a definite passive subject, the fulfillment of a prestation to give, to do or not to do.’’ It is a jus ad rem, a right enforceable only against a definite person or group of persons, such as the right of a creditor to demand from the debtor the delivery of the object of the obligation after the perfection of the contract. A real right, on the other hand, is a “right pertaining to a person over a specific thing, without a passive subject individually determined against whom such right may be personally enforced.’’10 It is a jus in re, a right enforceable against the whole world, such as the right of ownership, possession, usufruct or easement. It is clear from these definitions that before delivery, the creditor, in obligations to give, has merely a personal right against the debtor

9

8 Manresa, 5th Ed., Bk. 1, pp. 97-98. 3 Sanchez 6-8.

10

44

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1163-1166

— a right to ask for delivery of the thing and the fruits thereof. Once the thing and the fruits are delivered, then he acquires a real right over them, a right which is enforceable against the whole world. This explains why according to Art. 1164 of the Code, although the creditor acquires a right to the fruits of the thing from the time the obligation to deliver it arises, he does not acquire any real right over it until the same has been delivered to him. Thus, if A and B enter into a written agreement whereby the former promises to deliver a parcel of land to the latter for a price of P100,000, the obligations to deliver the land on the part of the former and the purchase price of P100,000 on the part of the latter arise only from the moment of the perfection of the contract. As far as B is concerned, although he is entitled to all of the fruits of the land from the moment of the perfection of the contract, at most, he has only a personal right to compel A to deliver the land and such fruits in case he, himself, is also ready to comply with what is incumbent upon him.11 In other words, he does not acquire a real right or right of ownership over the land and over the fruits thereof, until the same have been delivered to him. That is why, according to Art. 1477 of the Civil Code, the ownership of the thing sold shall be transferred to the vendee only upon the actual or constructive delivery thereof. Idem; Rights of creditor in determinate obligations. — If the obligation to give is determinate, the rights of the creditor are as follows: (1) To compel specific performance. This right is expressly recognized by the first paragraph of Art. 1165 of the Code which states that the creditor may compel the debtor to make the delivery. It is complemented by the first paragraph of Art. 1244 which states that 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. Consequently, if the debtor does not comply with his obligation at the time when the obligation to deliver arises or if he insists on delivering a different one, the remedy of the creditor is to file an action against the debtor to compel specific performance. In such case, the debtor cannot even plead pecuniary impossibility of performance. It is an undisputed principle of equity 11 Cruzado vs. Bustos and Escaler, 34 Phil. 17; see also Fidelity and Deposit Co. vs. Wilson, 8 Phil. 51; Garchitorena vs. Almeda, CA, 48 Off. Gaz. 3432; Lundberg vs. Gancayco, CA, 50 Off. Gaz. 172.

45

Arts. 1163-1166

OBLIGATIONS

jurisprudence, and this is also true in this jurisdiction, that mere pecuniary inability to fulfill an engagement does not discharge the obligation, nor does it constitute any defense to a decree for specific performance.12 (2) To recover damages for breach of the obligation. Besides the right to compel specific performance, the creditor has also the right to recover damages from the debtor in case of breach of the obligation through delay, fraud, negligence or contravention of the tenor thereof.13 It will be observed that the above remedies are not incompatible with each other. Hence, the creditor may file an action against the debtor for specific performance under the first paragraph of Art. 1165 and, at the same time, avail of the action for damages against the said debtor under Art. 1170.14 Idem; Rights of creditor in generic obligations. — If the obligation to give is generic, the rights of the creditor are as follows: (1) To ask for performance of the obligation. Whether the object of an obligation to give is determinate or generic, it is undeniable that the creditor has the right to ask for the performance of the obligation. The only difference is that in determinate obligations to give, the creditor can compel specific performance, while in indeterminate or generic obligations to give, he can only ask for the delivery of a thing or object belonging to the class or genus stipulated which must be neither of superior nor inferior quality.15 Thus, if the debtor binds himself to deliver ten horses to the creditor, the former must comply with the obligation by delivering to the latter any ten horses which must be neither of the highest nor poorest quality. The creditor in such case cannot compel specific performance by demanding the delivery of ten horses of superior quality. (2) To ask that the obligation be complied with at the expense of the debtor. If the debtor refuses or is unable to comply with his obligation, the creditor can even ask that the obligation be complied with at the expense of such debtor.16 Thus, if the debtor Gutierrez Repide vs. Afzelius, 39 Phil. 190. Arts. 1165, par. 1, and 1170, Civil Code. 14 8 Manresa, 5th Ed., Bk. 1, p. 103. 15 Art. 1246, Civil Code. 16 Art. 1165, par. 2, Civil Code. 12 13

46

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1163-1166

had promised to deliver ten horses to the creditor at a specific date, and upon the arrival of the stipulated date he was unable to comply with the obligation after demand was made, the creditor can then order the delivery of ten horses which must be neither of superior nor inferior quality from any third person and all expenses incurred shall be charged against him. (3) To recover damages for breach of the obligation. In case of failure of the debtor to comply with his obligation, or in case of breach by reason of fraud, negligence, delay or contravention of the tenor of the obligation, the creditor can demand for indemnification for damages. Although Art. 1165 is silent with respect to the applicability of Art. 1170 to indeterminate or generic obligations, the scope of the article is broad enough to apply even to such class of obligations.17 Idem; Obligations of debtor in determinate obligations. — If the obligation to give is determinate, the obligations of the debtor are as follows: (1) To perform the obligation specifically. In obligations to give a determinate thing, the obligor or debtor binds himself to deliver to the obligee or creditor a thing or object which is particularly designated or physically segregated from all others of the same class. Hence, he cannot comply with his obligation by delivering a thing which is different from that which is designated although belonging to the same class or genus. This is so even though the thing delivered may be of superior quality.18 Thus, if he binds himself to deliver to the creditor a certain 80 Toyota Corona specifically described in the contract, he must deliver the specified car and no other. (2) To take care of the thing with the proper diligence of a good father of a family. This accessory obligation which is expressly imposed upon the debtor by the provision of Art. 1163 of the Code and which is applicable only to determinate obligations and not to generic ones,19 is established merely for the purpose of insuring the efficacy and performance of the obligation. As a general rule, the standard of care which must be exercised for the preservation of the

8 Manresa, 5th Ed., Bk. 1, p. 104. Art. 1244, Civil Code. 19 2 De Diego 65. 17 18

47

Arts. 1163-1166

OBLIGATIONS

thing must be the diligence of a good father of a family.20 This rule, however, is subject to two exceptions. The first is if the law requires another standard of care. Thus, Art. 1733 of the Civil Code provides that common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods, and for the safety of the passengers transported by them, according to all of the circumstances of each case. The second is if the parties stipulate another standard of care. Thus, the parties may agree that the standard to be followed by the debtor in taking care of the thing pending its delivery or in the delivery itself shall be either extraordinary care or slight care. (3) To deliver all accessions and accessories of the thing, even though they may not have been mentioned. This accessory obligation is expressly imposed upon the debtor by the provision of Art. 1166 of the Code. The term “accessions’’ signifies all of those things which are produced by the thing which is the object of the obligation as well as all of those which are naturally or artificially attached thereto.21 Consequently, it comprehends all of the different kinds of accessions which are defined and regulated by the provisions of Art. 441 to Art. 475 of the Civil Code, such as accesión discreta (natural, industrial and civil fruits) as well as accesión industrial (building, planting and sowing), accesión natural (alluvion, avulsion, abandoned river beds, and islands formed in non-navigable or non-floatable rivers) and accession with respect to movable property (adjunction or conjunction, confusion or commixtion, and specification). “Accessories,’’ on the other hand, must be understood in its current and popular sense. It signifies all of those things which have for their object the embellishment, use or preservation of another thing which is more important and to which they are not incorporated or attached. In other words, it includes all of those things which are necessary or convenient for the perfection of another thing, such as the equipment of a factory, the spare parts and tools of a machine, the key of a house, and others of a similar nature.22 It must be noted that under the old law, “accessions” were not included, in view of which, according to the Supreme Court of Spain, Art. 1163, Civil Code; see Bishop of Jaro vs. De la Peña, 26 Phil. 144. Art. 440, Civil Code. 22 8 Manresa, 5th Ed., Bk. 1, pp. 109-110. 20 21

48

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1163-1166

if a piece of land is sold without mentioning the house thereon, the sale does not include the house because it is not an “accessory,” but an “accession.” However, the Code Commission, considering that when a piece of land is sold, ordinarily all the improvements thereon are intended as included in the sale, inserted the word “accessions.”23 In the case of Pormellosa vs. Land Tenure Administration, 1 SCRA 375 (1961), it was ruled that a sale of the house and improvements upon a land is not sufficient to convey title or any right to the land, thus enunciating the rule that an obligation to deliver the accessions or accessories of a thing does not include the thing unless otherwise stipulated. (4) To be liable for damages in case of breach of the obligation by reason of delay, fraud, negligence or contravention of the tenor thereof. This obligation is expressly imposed upon the debtor by the provision of Art. 1170 of the Code. It must be noted, however, that this liability does not arise if the breach is due to a fortuitous event.24 In other words, such liability extends only to a breach which is voluntary in character, and not to one which is involuntary. Thus, if the debtor binds himself to deliver to the creditor a specified automobile by the end of November, 1980, and said automobile was destroyed when the garage in which it was kept was gutted by a fire of accidental origin before the date of delivery, the obligation is extinguished. There can, therefore, be no liability of the debtor for breach of the obligation. It must also be noted that under the third paragraph of Art. 1165, it is provided that 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 any fortuitous event until he had effected the delivery. It is evident that this rule is applicable only to obligations to give a determinate thing. This is so because only a determinate thing can be destroyed by a fortuitous event. An indeterminate or generic thing, on the other hand, can never perish. It is also evident that the two cases mentioned in the provision are exceptions expressly specified by law to the rule that there can be no liability in case of fortuitous events. In both cases, when the determinate thing which is the object of the obligation is lost or

23 24

Capistrano, Civil Code, 1950 Ed., Vol. 3, p. 2. Art. 1174, Civil Code.

49

Arts. 1163-1166

OBLIGATIONS

destroyed before the date of the delivery, the obligor or debtor shall be liable to the creditor. Idem; Obligations of debtor in generic obligations. — If the obligation to give is innominate or generic, the obligations of the debtor are as follows: (1) To deliver a thing which is neither of superior nor inferior quality.25 Consequently, the creditor cannot demand a thing of superior quality; neither can the debtor deliver a thing of inferior quality. However, in the determination of the quality of the thing which is to be delivered, the purpose of the obligation and other circumstances shall have to be taken into consideration.26 (2) To be liable for damages in case of breach of the obligation by reason of delay, fraud, negligence or contravention of the tenor thereof.27 This liability includes the obligation to reimburse all expenses incurred by the creditor in those cases where the latter avails himself of the right to ask a third person to perform the obligation at the expense of the debtor.28 It must be noted, however, that the doctrine enunciated in Art. 1174 of the Code, by virtue of which the obligation is extinguished in case the object thereof is lost or destroyed through a fortuitous event, is not applicable to this type of obligation. This is clearly deducible from the provision of Art. 1263 of the Civil Code which states that in an obligation to deliver a generic thing, the loss or destruction of anything of the same class or genus as that which constitutes the object thereof shall not extinguish the obligation. This precept is based on the maxim that the genus of a thing can never perish (genus nunquam peruit). Thus, if a certain company agreed to pay a pension to any of its employees who may have completed 20 years of service and who may have attained the age of 50, the fact that heavy losses were incurred by said company during the war does not exempt it from liability on the ground that such obligation to pay is generic and, consequently, is not extinguished.29 Similarly, if a certain person promised to deliver

Art. 1246, Civil Code. Ibid. 27 Art. 1170, Civil Code. 28 Art. 1165, par. 2, Civil Code. 29 Philippine Long Distance Co. vs. Jeturian, 97 Phil. 78; see also Reyes vs. Caltex, 47 Off. Gaz. 1193. 25 26

50

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1163-1166

5,700 cavans of rice to another within a stipulated period, but due to Huk depredations in Central Luzon he was unable to comply fully with the terms of the contract, he can still be held liable.30 Problem — A bound himself to deliver to B a 21-inch 1983 model TV set, and the 13 cubic feet White Westinghouse refrigerator, with Motor No. WERT-385, which B saw in A’s store, and to repair B’s piano. A did none of these things. May the court compel A to deliver the TV set and the refrigerator and repair the piano? Why? If not, what relief may the court grant B? Why? (1983) Answer — B cannot compel A to deliver the 21-inch 1983 model TV set. The reason is obvious. The obligation is a generic obligation because the object is designated merely by its class or genus without any particular designation or physical segregation from others of the same class. An action for specific performance is, therefore, legally and physically impossible. Consequently, the remedy of B is to ask for the delivery of a 21inch 1983 model TV set which must be neither of superior nor inferior quality. This is explicitly recognized by the New Civil Code. As a matter of fact, he can even ask that the obligation be complied with at the expense of A. Additionally, he can ask for damages. These remedies are also explicitly recognized by the New Civil Code. In the case of the refrigerator, the situation is different. The court may compel A to comply with the obligation specifically. The reason is obvious. The obligation is determinate. Under the New Civil Code, if the debtor or obligor refuses or is unable to comply with his obligation, assuming that the obligation is a determinate obligation to give, the remedy of the creditor or obligee is to bring an action against the debtor or obligor for specific performance. Additionally, he can recover damages. On the other hand, the court cannot compel A to repair the piano. The reason is also obvious. The obligation of A is an obligation to do. In this type of obligation, the law recognizes the individual’s freedom to choose between doing that which he has promised to do and not doing it. It falls within what commentators call a personal act, of which courts may not compel compliance as it is an act of violence to do so. The remedy, therefore, of B is to have the obligation executed at the expense

30

Soriano vs. De Leon, 48 Off. Gaz. 2245.

51

Art. 1167

OBLIGATIONS

of A. Additionally, he can recover damages from A. (Note: The above answer is based on Arts. 1165, par. 1, 1167 and 1170, New Civil Code.)

Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. The 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.31 Obligations To Do; Effects of Breach. — In obligation to do (positive personal obligations), if the obligor fails to do that which he has obligated himself to do, the obligee can have the obligation performed or executed at the expense of the former,32 and, at the same time, demand for damages by reason of the breach.33 Unlike obligations to give, in obligations to do the obligee does not possess the power to compel the obligor to comply with his obligation. In this type of obligation the law recognizes the individual’s freedom or liberty to choose between doing that which he has promised to do and not doing it. It falls within what Spanish commentators have called a personal act (acto personalisimo), of which courts may not compel compliance as it is considered an act of violence to do so.34 Consequently, since compliance or fulfillment can only be voluntary, the Code in the first paragraph of Art. 1167 has granted a remedy to the obligee to have the obligation performed or executed at the expense of the obligor, a remedy which, although irregular, is most analogous to fulfillment.35 Thus, if A has an obligation to construct a garage for B for P5,000 and he fails or refuses to construct it within the period specified in the contract, B has a right to ask another contractor to perform the undertaking even for a higher price. In such case, he can recover the difference from A. It must be observed, however, that the right of the obligee to have the prestation executed at the expense of the obligor cannot be Art. 1098, Spanish Civil Code. Art. 1167, par. 2, Civil Code. 33 Art. 1170, Civil Code. 34 Woodhouse vs. Halili, 93 Phil. 526, quoting 19 Scaevola 428, 431-432. 35 8 Manresa, 5th Ed., Bk. 2, pp. 116-117. 31 32

52

NATURE AND EFFECT OF OBLIGATIONS

Art. 1167

availed of when such prestation consists of an act where the personal and special qualification of the obligor is the principal motive for the establishment of the obligation, as for instance, the talent and prestige of an artist. In such case, there is no other remedy of the obligee except to proceed against the obligor for damages under Art. 1170 of the Code.36 On the other hand, if there has been a performance of the obligation, but in contravention of the tenor thereof, the following rights are available to the obligee: (1) To have the obligation performed or executed at the expense of the obligor;37 (2) to ask that what has been poorly done be undone;38 and (3) to recover damages because of breach of the obligation.39 Problem — “O,’’ lot owner, contracted with “B,” builder, to build a multi-storey building designed by “A,’’ architect. “A” was paid a fee to supervise the construction and execution of his design. When completed, “O” accepted the work and occupied the building, but within one year, it collapsed in an earthquake that destroyed only the building and not the surrounding buildings. Construction was faulty. The building cost P3,000,000.00, but reconstruction cost would reach P10,000,000.00. Question No. 1. — What are the rights of “O’’ against “A’’ and “B’’? Explain briefly. (1981 Bar Problem) Answer — “O’’ can hold “A’’ and “B’’ solidarily liable for damages. This is clear from the Civil Code, which declares that the contractor is liable for damages if within fifteen years from the completion of the edifice or structure, the same should collapse on account of defects in the construction. lf the engineer or architect who drew up the plans and specifications of the building supervises the construction, he shall be solidarily liable with the contractor. Acceptance of the building, after completion, does not imply waiver of the cause of action. However, the action must be brought within ten years following the collapse of the building. (Note: The above answer is based on Art. 1723 of the Civil Code.)

Ibid. Art. 1167, par. 1, Civil Code. 38 Art. 1167, par. 2, Civil Code. 39 Art. 1170, Civil Code. 36 37

53

Art. 1168

OBLIGATIONS

Question No. 2 — Could “O’’ demand reconstruction of the building? On what ground? Amplify. (1981 Bar Problem) Answer — “O’’ can demand reconstruction of the building. The obligation of both “A” and “B” is an obligation to do. Consequently, Art. 1167 of the Civil Code is applicable. According to this article, if a person obliged to do something does it in contravention of the tenor of the obligation, the same shall be executed at his cost. It is obvious that the builder “B” and the architect “A’’ performed their jobs in contravention of the tenor of the obligation. As a matter of fact, had the building not collapsed, under the same article, it may even be decreed that what has been poorly done be undone. Consequently, “C’’ can now demand for the reconstruction of the building by “A’’ and “B’’ or by another at their cost. (Note: The above answer is based on Art. 1167 of the Civil Code and on Manresa, vol. 8, pp. 116-117.) Problem — X delivered a play station to Y for repair, Y did not finish the job. Finally, despite repeated reminders of X for Y to finish the job, Y returned the play station with his job undone and where some parts were missing. Z then repaired the play station. Z charged X the amount of P500.00 for the repair and the amount of P300.00 for the missing parts. The lower court ruled that Y should pay only P300.00. Question — Is Y liable also for the cost of the repair or the amount of P300.00? Answer — Yes. Since Y failed to repair the play station, with some missing parts, Y contravened the tenor of his obligation. Y is liable for such contravention under Art. 1167 of the Civil Code, considering that the obligation of Y was to repair the play station. He is likewise liable under Art. 1170 of the Code for the missing parts considering that Y failed to return the play station in the same condition as when it was received. (Tanguilig vs. Court of Appeals, 266 SCRA 78 [1997].)

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.40 Obligations Not To Do; Effects of Breach. — In obligations not to do (negative personal obligations), the object of the obligation 40

Art. 1099, Spanish Civil Code, in modified form.

54

NATURE AND EFFECT OF OBLIGATIONS

Art. 1169

is fulfilled or realized so long as that which is forbidden is not done by the obligor. If the obligor does what has been forbidden him, two remedies are available to the obligee — to have it undone at the expense of the obligor in accordance with Art. 1168 and to ask for damages in accordance with Art. 1170. Thus, if the obligor obligated himself not to construct his house beyond a certain height in order not to obstruct the view from the house of the obligee, and subsequently, he adds another story beyond the stipulated height, the obligee has the right to demand for the demolition of the additional storey at the expense of the obligor. In addition, he can also demand indemnity for damages. The first remedy is logical because it is the only way by which the end or object of the obligation may be effectively realized since what is demanded is not the performance of an act but an omission. With respect to the second remedy, it must be noted that in obligations of this type (not to do), delay or mora is not possible unlike positive obligations. This is so because in negative obligations, the obligation is either fulfilled or not fulfilled.41 There are, however, certain cases where the remedy provided for in Art. 1168 is not available. In the first place, there are those cases where the effects of the act which is forbidden are definite in character, in which case, even if it is possible for the obligee to ask that the act be undone at the expense of the obligor, consequences contrary to the object of the obligation will have been produced which are permanent in character. In the second place, there are those cases where it would be physically or legally impossible to undo what has been done because of the very nature of the act itself, or because of a provision of the law, or because of conflicting rights of third persons. Hence, in these cases, the only remedy available to the obligee would be to proceed against the obligor for damages under Art. 1170 of the Code.42 Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

41 42

8 Manresa, 5th Ed., Bk. 1, pp. 121-122. Ibid., p. 123.

55

Arts. 1170-1173

OBLIGATIONS

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 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.43 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.44 Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void.45 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.46 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.

Art. 1100, Spanish Civil Code, in amended form. Art. 1101, Spanish Civil Code. 45 Art. 1102, Spanish Civil Code, in modified form. 46 Art. 1103, Spanish Civil Code. 43 44

56

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

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.47 Breach of Obligations. — In general, the breach of an obligation may be either voluntary or involuntary. It is voluntary if the debtor or obligor in the performance of his obligation is guilty of default (mora), or fraud (dolo), or negligence (culpa), or in any manner contravenes the tenor thereof.48 It is involuntary if he is unable to comply with his obligation because of an event which cannot be foreseen, or which, though foreseen, was inevitable.49 In the first he is liable for damages, in the second he is not. Voluntary Breach Through Default or Mora. — The first kind of voluntary breach of an obligation regulated by the Civil Code is that which takes place by reason of default or mora. Default or mora signifies the idea of delay in the fulfillment of an obligation with respect to time. There are three kinds of default or mora. They are: (1) Mora solvendi or the delay of the obligor or debtor to perform his obligation. This delay is called mora solvendi ex re when the obligation is an obligation to give or mora solvendi ex persona when the obligation is an obligation to do. (2) Mora accipiendi or the delay of the obligee or creditor to accept the delivery of the thing which is the object of the obligation. (3) Compensatio morae or the delay of the parties or obligors in reciprocal obligations.50 There are three requisites which should be present in order that the obligor or debtor may be considered in default. They are: (1)

The obligation is demandable and already liquidated;

(2)

The obligor or debtor delays performance; and

Art. 1104, Spanish Civil Code, in amended form. Art. 1170, Civil Code. 49 Art. 1174, Civil Code. 50 8 Manresa, 5th Ed., Bk. 1, p. 125. 47 48

57

Arts. 1170-1173

OBLIGATIONS

(3) The creditor requires the performance judicially or extrajudicially. (Aerospace Chemical Industries, Inc. vs. CA, 315 SCRA 94.) In the case of Bricktown Devt. Corp. vs. Amor Tierra Devt. Corp., 239 SCRA 126 (1994), the Court ruled that a grace period is not an obligation of the debtor but a right. It must not be likened to an obligation the non-payment of which under Art. 1169 would generally still require judicial or extrajudicial demand before default can arise. When unconditionally conferred, it is effective without further need of demand either for the payment of the obligation or for honoring the right. Idem; Default in positive obligations. — In obligations to give or to do (positive obligations), the obligor or debtor incurs in delay from the time the obligee or creditor demands from him the fulfillment of the obligation.51 This demand may be judicial or extrajudicial. It is judicial if the creditor files a complaint against the debtor for the fulfillment of the obligation; it is extrajudicial if the creditor demands from the debtor the fulfillment of the obligation either orally or in writing. Whether the demand is judicial or extrajudicial, if the obligor or debtor fails to fulfill or perform his obligation, he is in mora solvendi, and therefore, liable for damages. The significance of this rule may be illustrated by the following problem: On October 1, 1976, A borrowed P10,000 from B evidenced by a promissory note whereby he undertook to pay the indebtedness on October 1, 1978. On October 1, 1980, B brought an action against A for the payment of the obligation as well as legal interest from the date of maturity by way of damages. There is no evidence that any demand for payment was ever made prior to the presentation of the complaint. From what time shall the legal interest be computed — shall it be computed from October 1, 1978, when the obligation became due and demandable, or from October 1, 1980, when the complaint was filed? According to the decided cases, the interest shall be computed from October 1, 1980, when the complaint was filed, because it was only then that the debtor had incurred in delay.52 Art. 1169, par. 1, Civil Code. Compania General de Tabacos vs. Araza, 7 Phil. 55; Veloso vs. Fontanosa, 13 Phil. 79; Bayala vs. Silang Traffic Co., 73 Phil. 557; Adiarte vs. Court of Appeals, 49 Off. Gaz. 1421. 51 52

58

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

The result would be different had the creditor made an extrajudicial demand upon the debtor on October 1, 1978, when the obligation became due and demandable, or soon thereafter. In such case, the legal interest would have to be computed from such date. Idem; id. — When demand is not necessary. — However, demand by the creditor is not necessary in order that delay may exist in the following cases: (1) When the obligation or the law expressly so declares.53 Attention must be called to the fact that what the law means is that the obligation or the law itself must expressly declare that the demand is not necessary in order that the debtor shall incur in delay. This may be illustrated by the following examples: Let us assume that D borrowed P20,000 from C on Dec. 5, 1976. He executed a promissory note promising to pay the indebtedness on Dec. 5, 1978. Upon the arrival of the designated date for payment, is it necessary that C shall make a demand upon D for payment in order that the latter shall incur in delay? Evidently, such a demand is necessary. In order that the exception stated in No. 1 of the second paragraph of Art. 1169 shall apply, it is indispensable that the obligation itself must expressly declare that “demand is not necessary in order that D shall incur in delay” or that “D shall incur in delay if he does not pay the obligation upon the arrival of the designated date for payment.’’54 Let us, however, assume that A and B entered into a contract of partnership for the purpose of buying and selling textbooks, with the former as capitalist partner and the latter as industrial partner. It was agreed that A shall contribute P20,000 to the common fund on January 5, 1980. Upon the arrival of the designated date for payment, is demand necessary in order that A shall incur in delay? In this case, such a demand is not necessary in order that A shall incur in delay. According to Art. 1788 of the Civil Code, where one of the partners who has undertaken to contribute a sum of money to the common fund at a specified date fails to do so, he becomes a debtor of the partnership not only for the amount which he has Art. 1169, No. 1, Civil Code. Bayala vs. Silang Traffic Co., 73 Phil. 557; Adiarte vs. Court of Appeals, 49 Off. Gaz., 1421; 8 Manresa, 5th Ed., Bk. 1, p. 127. 53 54

59

Arts. 1170-1173

OBLIGATIONS

promised to contribute but also for interest and damages from the time he should have complied with his obligation. (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.55 The basis of this exception is the fact that the designation of the time is of such fundamental importance in the fulfillment of the obligation that it would be logical to assume that the intention of the parties was to make fulfillment of the obligation upon the arrival of such designated time an essential part of the contract. In other words, the time element for the fulfillment of the obligation is of the essence of the contract. Therefore, it must be established that the designation of the time when the obligation shall be fulfilled was a controlling motive for the execution of the contract. This can be inferred from the nature and circumstances of the obligation.56 Thus, where in the contract of sale entered into between plaintiff and defendant there is a stipulation that the machinery which is the object of the sale was already on the way from the United States to Manila, but it is established that it was actually shipped several days after the execution of the contract and, as a consequence, plaintiff was unable to deliver it within a reasonably short time to the defendant, it was held that the plaintiff has already incurred in delay since, undoubtedly, the representation that such machinery was already on the way was one of the determining elements of the contract. Consequently, the subsequent refusal of the defendant to accept the delivery is justified.57 (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.58 Thus, if A, for instance, has promised to deliver his automobile to B on the 15th day of November, 1980, but a few days before such date, the automobile was completely destroyed through his fault, and the fact of its destruction was known to B, demand by the latter would be useless.

Art. 1169, par. 2, No. 2, Civil Code. 8 Manresa, 5th Ed., Bk. 1, pp. 127-128. 57 Soler vs. Chesley, 43 Phil. 529. To the same effect: Hanlon vs. Hausserman and Beam, 40 Phil. 795. 58 Art. 1169, par. 2, No. 3, Civil Code. 55 56

60

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

In such case, A will incur in delay without the need of any demand from B. Idem; Default in negative obligations. — The obligor can not possibly incur in delay in negative obligations (not to do). According to Manresa, these obligations have a peculiarity of their own which the law does not show but which is evident from their special nature. Fulfillment and violation are possible, but not default or mora. This peculiarity is what differentiates this class of obligations from positive obligations (to give and to do).59 Idem; Default in reciprocal obligations. — Reciprocal obligations are those which are created or established at the same time, out of the same cause, and which result in mutual relationships of creditor and debtor between the parties. These obligations are conditional in the sense that fulfillment of an obligation by one party depends upon the fulfillment of the obligation by the other. Thus, in a contract of sale of an automobile for P54,000, the vendor is obliged to deliver the automobile to the vendee, while the vendee is obliged to pay the price of P54,000 to the vendor. It is clear that the vendor will not deliver the automobile to the vendee unless the latter will pay the price, while the vendee will not pay the price to the vendor unless the latter will deliver the automobile. Hence, in reciprocal obligations, the general rule is that fulfillment by both parties should be simultaneous or at the same time. There are, however, cases in which different dates for performance or fulfillment of the reciprocal obligations may be fixed by the parties, in which case, the rule stated in the first paragraph in Art. 1169 shall apply.60 The rule then is that in reciprocal obligations, one party incurs in delay from the moment the other party fulfills his obligation, while he himself does not comply or is not ready to comply in a proper manner with what is incumbent upon him.61 If neither party complies or is ready to comply with what is incumbent upon him, the default of one compensates for the default of the other. In such case, there can be no legal delay. These rules may be illlustrated by the following example: A sold his automobile to B for P30,000. They agreed that delivery and payment shall be made on the 15th

8 Manresa, 5th Ed., Bk. 1, p. 127. Ibid., pp. 133-134. 61 Art. 1169, par. 3, Civil Code. 59 60

61

Arts. 1170-1173

OBLIGATIONS

of November, 1980. On that date, A was not ready to deliver the automobile, neither was B ready to pay. In such case, neither party has incurred in delay. If A, however, delivered or was ready to deliver the automobile, but B did not pay or was not ready to pay, then B is said to have incurred in delay.62 Idem; id. — Effect of default. — Once the obligor or debtor has incurred in delay, he can be held liable by the obligee or creditor for damages.63 This liability subsists even if the thing which constitutes the object of the obligation may have been lost or destroyed through a fortuitous event.64 If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest.65 Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.66 In Malayan Insurance Co., Inc. vs. IAC, 146 SCRA 45, the Supreme Court reiterated the rule that a debtor who is in delay (default) is liable for damages, in the form of interest. The Supreme Court ruled in the case of Llorente, Jr. vs. Sandiganbayan, 287 SCRA 382 (1998) that the provisions under Title XV of the Civil Code on Damages govern in determining the measure of recoverable damages. It is fundamental in the law on Damages that one who is injured by a breach of a contract, or by a wrongful act or omission, shall have a fair and just compensation commensurate to the loss sustained as a consequence of the defendant’s act. Voluntary Breach Through Fraud or Dolo. — The second kind of voluntary breach of an obligation regulated by the Civil Code is that which takes place by reason of fraud or dolo. According to Manresa, fraud or dolo consists in the conscious and intentional

62 For illustrative cases — see Martinez vs. Cavives, 25 Phil. 581; Causing vs. Bencer, 37 Phil. 417. 63 Art. 1170, Civil Code. 64 Art. 1165, par. 3, Civil Code. 65 Art. 2209, Civil Code, see Reforma vs. Tomol, 139 SCRA 260, with regard to the meaning of legal interest. 66 Art. 2212, Civil Code.

62

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

proposition to evade the normal fulfillment of an obligation.67 This type of fraud, which is present during the performance of an obligation, must not be confused with the causal or incidental fraud, which is present at the time of the birth of an obligation. Under our legal system, fraud in general may be classified into civil and criminal fraud. Civil fraud, in turn, may be classified into the following: first, the fraud or dolo in the performance of an obligation;68 and second, the fraud or dolo in the constitution or establishment of an obligation.69 The two may be distinguished from each other as follows: (1) The first is present only during the performance of a preexisting obligation, while the second is present only at the time of the birth of the obligation. (2) The first is employed for the purpose of evading the normal fulfillment of an obligation, while the second is employed for the purpose of securing the consent of the other party to enter into the contract. (3) The first results in the nonfulfillment or breach of the obligation, while the second, if it is the reason for the other party upon whom it is employed for entering into the contract, results in the vitiation of his consent. (4) The first gives rise to a right of the creditor or obligee to recover damages from the debtor or obligor, while the second gives rise to a right of the innocent party to ask for the annulment of the contract if the fraud is causal or to recover damages if it is incidental. Thus, if A engages to tow a launch belonging to B from Iloilo to Manila, using a steamer for that purpose, and on the way the launch is cast adrift and lost, Art. 1170, in relation to Art. 1171, is applicable. B can hold A liable for damages.70 On the other hand, if a certain applicant for an insurance substitutes another person for himself during the medical examination, it is evident that there has been causal fraud or dolo causante in securing the consent of the

8 Manresa, 5th Ed., Bk. 1, p. 168. Arts. 1170, 1171, Civil Code. 69 Arts. 1338-1344, Civil Code. 70 Guzman vs. Behn, Meyer & Co., 9 Phil. 112. 67 68

63

Arts. 1170-1173

OBLIGATIONS

insurance company which will entitle the latter to ask for annulment of the contract.71 Idem; Effect of fraud. — If there is a breach or non-fulfillment of the obligation by reason of fraud or dolo on the part of the obligor or debtor, he can be held liable for damages. As a ground for damages, malice or dishonesty is implied. It cannot cover cases of mistake and errors of judgment made in good faith. Fraud or dolo is synonymous to bad faith. (O’leary Macondray & Co., 45 Phil. 812 [1924].) The liability is expressly recognized by the provisions of Arts. 1170 and 1171 of the Code. It is also a rule that the liability cannot be waived or renounced. It must be noted, however, that what is prohibited is the waiver or renunciation which is made in advance or in anticipation of the fraud, and not that which is made after the fraud has already been committed. In other words, under Art. 1171, what is prohibited is the renunciation of the action for a fraud which has not yet been committed.72 Thus, waiver for future fraud is contrary to law and public policy. As such, said waiver is void. But waiver for a past fraud is valid since such waiver can be deemed an act of generosity. Further, what is renounced is the effect of fraud, more particularly the right of the party to indemnity. What is the extent of damages which the obligee or creditor can recover from the obligor or debtor in case of breach or nonfulfillment of the obligation by reason of fraud or dolo? According to the law on damages in the Civil Code, it shall comprehend all damages which may be reasonably attributed to the breach or nonfulfillment of the obligation, regardless of whether such consequences are natural or unnatural, probable or improbable, foreseeable or unforeseeable.73 In addition to such damages, the obligee or creditor can also recover moral and exemplary damages.74 Moral damages may be recovered in addition to other damages. (Far East Bank & Trust Co. vs. Court of Appeals, 59 SCAD 253, 241 SCRA 671 [1995].) Voluntary Breach Through Negligence or Culpa. — The third kind of voluntary breach of an obligation regulated by the Civil

Eguaras vs. Great Eastern Life Ass. Co., 33 Phil. 263. 8 Manresa, 5th Ed., Bk. 1, p. 176. 73 Art. 2201, par. 2, Civil Code. 74 Arts. 2220 and 2232, Civil Code. 71 72

64

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

Code is that which takes place by reason of the negligence or culpa of the debtor or obligor. It 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.75 From this definition, it is evident that negligence is simply the absence of due care required by the nature of the obligation.76 It is a relative or comparative, not an absolute term, and its application depends upon the situation of the parties and the degree of care and vigilance which the circumstances reasonably require. Where the danger is great, a high degree of care is necessary, and the failure to observe it is a want of ordinary care under the circumstances.77 It is in each case practically a question of fact whether the proper degree of care has been exercised taking into consideration what a reasonable and prudent man would have done under the circumstances.78 Thus, according to the second paragraph of Art. 1173, if the law or contract does not state the diligence which is to be observed in the performance of the obligation, that which is expected of a good father of a family shall be required. Hence, the law has adopted the standard supposed to be supplied by the imaginary conduct of the discreet pater familias of the Roman Law.79 It is, therefore, clear that the degree of care that must be observed by the obligor in the performance of his obligation shall depend not only upon the nature of the obligation, but also upon the circumstances of persons, time and place. In other words, there are as many degrees of care as there are obligations. Idem; Kinds of negligence. — Negligence or culpa may be either civil or criminal. The first is governed by Arts. 1170, 1172, 1173, and other provisions of the New Civil Code, while the second is governed by Art. 365 of the Revised Penal Code. Civil negligence, in turn, may be either culpa contractual or culpa aquiliana (quasi-delicts). Using the general definition of negligence enunciated in Art. 1173 as basis, the first may be defined as the fault or negligence of the obligor by virtue of which he is unable to perform his obligation arising from a pre-existing contract, Art. 1173, Civil Code. Picart vs. Smith, 37 Phil. 809. 77 U.S. vs. Juanillo, 23 Phil. 212. 78 Picart vs. Smith, 37 Phil. 809. 79 Ibid. 75 76

65

Arts. 1170-1173

OBLIGATIONS

because of the omission of the 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. The second, on the other hand, may be defined as the fault or negligence of a person, who, because of the omission of the diligence which is required by the nature of the obligation and which must correspond with the circumstances of the persons, of the time and of the place, causes damage to another. From the above definitions, it is clear that whether the negligence is culpa contractual or culpa aquiliana, the provision of Art. 1173 of the Civil Code applies. The negligence of the defendant in both cases is characterized by 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. The similarity, however, ends there. They are different with respect to antecedents and consequences. They may be distinguished from each other as follows: (1) As regards the character of the negligence of the defendant: In culpa contractual, the negligence of the defendant is merely an incident in the performance of an obligation; in culpa aquiliana it is substantive and independent. (2) As regards the relationship of the parties: In the first there is always a pre-existing contractual relation; in the second there may or may not be a pre-existing contractual relation. (3) As regards the source of the obligation: In the first the source of the obligation of the defendant to pay damages to the plaintiff is the breach or nonfulfillment of the contract; in the second the source is the defendant’s negligent act or omission itself. (4) As regards the proof required for recovery: In the first proof of the existence of the contract and of its breach or nonfulfillment is sufficient prima facie to warrant a recovery; in the second the negligence of the defendant must be proved. (5) As regards the availability of due diligence as a defense: In the first proof of diligence in the selection and supervision of employees is not available as a defense; in the second it is. Problem — Taxi driver D, driving recklessly, killed pedestrian P and his passenger Y. Discuss the source of the

66

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

obligation of D and of his employer to P and to Y, and the defense available to the employer. (1977 Bar Problem) Answer — There are three overlapping sources of the obligation of D and of his employer. They are: (1) Under the Revised Penal Code: The heirs of P and Y may proceed against D and his employer under the Penal Code. In this case, the source of the liability of D and of his employer is the crime committed by D (culpa criminal). The liability of D is direct and primary (Art. 100, RPC); the liability of his employer is subsidiary (Art. 103, RPC). The latter cannot relieve himself of liability by proving due diligence of a good father of a family. This is so because of the very nature of his obligation. (2)

Under the Civil Code:

(a) Heirs of P: The heirs of pedestrian P may proceed against both D and his employer, or against the latter only. In this case, the source of the liability of D and his employer is the quasi-delict (culpa aquiliana) committed by D (Arts. 2176, 2180, CC). The liability of both is direct and primary. D’s employer can relieve himself of liability by proving due diligence of a good father of a family in the selection and supervision of his drivers (Art. 2180, CC). (b) Heirs of Y: On the other hand, the heirs of Y may proceed against D’s employer only. The source of the liability of D’s employer, in this case, is the breach of his contract of carriage with Y (culpa contractual). His liability is direct and primary. He cannot relieve himself of liability by proving due diligence of a good father of a family (Art. 1759, CC). This is so because under our law on common carriers, we do not adhere to the principle of respondeat superior; we adhere to the principle that there is always an implied duty of a common carrier to carry the passenger safely to his place of destination. However, although not available as a defense, such proof of due diligence may serve to mitigate the employer’s liability.

Idem; Negligence distinguished from fraud. — Negligence or culpa, especially in relation to obligations, signifies an act or omission which is voluntary in character by virtue of which another person suffers damage or injury due to a failure to observe the diligence which is required by the nature of the obligation and which must correspond with the circumstances of persons, time and place. It should be distinguished from fraud or dolo which is the conscious and intentional proposition to evade the normal fulfillment of the 67

Arts. 1170-1173

OBLIGATIONS

obligation. The distinguishing element, therefore, is the element of intention. If there is intent to cause damage or injury, there is dolo; if there is merely abandonment, inattention, carelessness, or lack of diligence, there is culpa.80 It must be observed, however, that when negligence shows bad faith the rules on fraud or dolo shall govern.81 In other words, when the negligent act or omission of the obligor while performing his obligation is so gross that it amounts to a wanton attitude on his part, the laws governing the liability of an obligor in case of fraud shall then apply. In such a case, the boundary line between negligence and fraud practically disappears. Idem; Test of negligence. — The test by which we can determine the existence of negligence in a particular case may be stated as follows: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet pater familias of the Roman Law.82 Cangco vs. Manila Railroad Co. 38 Phil. 763 The records show that plaintiff, who was a passenger in a train belonging to the defendant company, alighted from the said train while it was still moving before coming to a complete stop. In so alighting, he stepped upon a sack of watermelons and as a result he fell violently on the platform. Because of the violence of his fall, he rolled from the platform and was drawn under the moving car, as a result of which his right arm was badly crashed and lacerated. In this action for damages commenced by the plaintiff against the defendant company, the former contends that the proximate cause of the accident was the negligence of the latter in allowing the sack of watermelons to be placed in its platform where passengers may alight, while the latter contends that the proximate cause was the negligence of the former in alighting while the train was still moving. Granting that the defendant company was negligent in allowing the sack of watermelons to be placed in its platform, was the

8 Manresa, 5th Ed., Bk. 1, p. 180. Art. 1173, par. 1, Civil Code. 82 Picart vs. Smith, 37 Phil. 809; Cangco vs. Manila Railroad Co., 38 Phil. 768. 80 81

68

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

plaintiff also negligent in alighting from the train while it was still moving? Held: “The test by which to determine whether the passenger has been guilty of negligence in attempting to alight from a moving railway train, is that of ordinary or reasonable care. It is to be considered whether an ordinarily prudent person, of the age, sex and condition of the passenger, would have acted as the passenger acted under the circumstances disclosed by the evidence. This care has been defined to be not the care which may or should be used by the prudent man generally, but the care which a man of ordinary prudence would use, under similar circumstances, to avoid injury. (Thompson, Commentaries on Negligence, Vol. 3, Sec. 2010.) Or, if we prefer the mode of exposition used by this court in Picart vs. Smith (37 Phil. Rep. 809), we may say that the test is this: Was there anything in the circumstances surrounding the plaintiff at the time he alighted from the train which would have admonished a person of average prudence that to get off the train under the conditions then existing was dangerous? If so, the plaintiff should have desisted from alighting; and his failure to so desist was contributory negligence. “As the case now before us presents itself, the only fact from which a conclusion can be drawn to the effect that the plaintiff was guilty of contributory negligence is that he stepped off the car without being able to discern clearly the condition of the platform and while the train was yet slowly moving. In considering the situation thus presented, it should not be overlooked that plaintiff was ignorant of the fact of the obstruction which was caused by the sacks of watermelons piled on the platform. The place was dark, or dimly lighted. Furthermore, the plaintiff was possessed of the vigor and agility of young manhood, and it was by no means so risky for him to get off while the train was yet moving as the same act would have been in an aged or feeble person. In determining the question of contributory negligence in performing such act — that is to say, whether the passenger acted prudently or recklessly — the age, sex and physical condition of the passenger are circumstances necessarily affecting the safety of the passenger, and should be considered. Women, it has been observed, as a general rule, are less capable than men of alighting with safety under such conditions, as the nature of their wearing apparel obstructs the free movement of the limbs. Again, it may be noted that the place was perfectly familiar to the plaintiff as it was his daily custom to get on and off the train at this station. There could, therefore, be no uncertainty in his mind with regard

69

Arts. 1170-1173

OBLIGATIONS

either to the length of the step which he was required to take or the character of the platform where he was alighting. Our conclusion is that the conduct of the plaintiff in undertaking to alight while the train was yet slightly under way was not characterized by imprudence and that, therefore, he was not guilty of contributory negligence.”

Idem; Effects of negligence. — If the debtor or obligor is unable to comply with his obligation because of his fault or negligence, the creditor or obligee can hold him liable for damages.83 This liability subsists even if he has been acquitted in a criminal action charging him with a criminal offense based on his negligent act or omission.84 It must be observed, however, that Art. 1172 which enunciates the principle of the demandability of the responsibility of the obligor in case of negligence is different from Art. 1171 which also enunciates the same principle in case of fraud in the sense that in the former, nothing is said with regard to the renunciation or waiver of the action, while in the latter, it is stated that any waiver of an action for future fraud is void. Consequently, may an action for negligence be waived? There is no question that if the action is based on a negligent act or omission which has already happened, the action may be waived since it can also be done in the case of fraud and negligence is certainly not as serious as fraud. The question is with respect to an action for future negligence. Can it be waived? Authorities agree that it can be waived, unless the nature of the obligation and public policy should require extraordinary diligence as in the case of common carriers.85 Thus, the Supreme Court in the case of Heacock vs. Macondray & Co.,86 stated: “Three kinds of stipulation have often been made in a bill of lading. The first is one exempting the carrier from any and all liability for loss or damage occasioned by its own negligence. The second is one providing for an unqualified limitation of such liability to an agreed valuation, and the third is one limiting the

83 Art. 1170, Civil Code; Baer, Senior & Co. vs. Compania Maritima, 6 Phil. 215; Guzman vs. Behn, Meyer & Co., 9 Phil. 112. 84 San Pedro Bus Lines vs. Navarro, 94 Phil. 846; see Art. 31, Civil Code. 85 Art. 1733, Civil Code; see also Arts. 1745, 1749, 1750, Civil Code. 86 42 Phil. 205. This excerpts from Heacock vs. Macondray is now modified by the provisions of Arts. 1749 to 1750 of the New Civil Code.

70

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight. According to an almost uniform weight of authority the first and second kinds of stipulations are is valid as being contrary to public policy, but the third is valid and enforceable.”

In the case of Southeastern College, Inc., vs. Court of Appeals, Juanita de Jesus Vda. De Dimaano, et al., (July 10, 1998, 292 SCRA 422), the Supreme Court observed that at the outset, it bears emphasizing that a person claiming damages for the negligence of another has the burden of proving the existence of fault or negligence causative of his injury or loss. The facts constitutive of negligence must be affirmatively established by competent evidence, not merely by presumptions and conclusions without basis in fact. Private respondents, in establishing the culpability of petitioner, merely relied on the aforementioned report submitted by a team which made an ocular inspection of petitioner’s school building after the typhoon. As the term imparts, an ocular inspection is one that is conducted by means of actual sight or viewing. What is visual to the eye though, is not always reflective of the real cause behind. For instance, one who hears a gunshot and then sees a wounded person, cannot always definitely conclude that a third person shot the victim. It could have been self-inflicted or caused accidentally by a stray bullet. The relationship of cause and effect must be clearly shown. Idem; id. — Regulatory power of the courts. — Under Art. 1172, liability arising from negligence in the performance of every kind of obligation may be regulated by the courts. Consequently, the court may increase or decrease the liability of the party at fault depending upon the circumstances of each case. Thus, the court may take into consideration the good or bad faith of the obligor (defendant) or the conduct of the obligee (plaintiff) when the damage was incurred. Idem; id.; id. — Effect of good faith. — If the debtor or obligor has acted in good faith, he shall be liable only for natural and probable consequences of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.87 87

Art. 2201, par. 1, Civil Code; De Guia vs. Manila Electric Co., 40 Phil. 706.

71

Arts. 1170-1173

OBLIGATIONS

Idem; id.; id. — Effect of bad faith. — If the negligence of the obligor shows bad faith, then, by express provision of Art. 1173, the provisions of Arts. 1171 and 2201, par. 2, shall apply. It is in this case that the boundary line, at least with regard to effects, between negligence and fraud disappears altogether. Hence, the obligor can be held responsible for all damages which may be reasonably attributed to the nonperformance of the obligation.88 Furthermore, any waiver or renunciation which is made in anticipation of such liability is null and void.89 Idem; id.; id. — Effect of contributory negligence. — If there was contributory negligence of the obligee or creditor, the effect is to reduce or mitigate the damages which he can recover from the obligor or debtor as a result of the breach of the obligation. This doctrine has always been consistently upheld by the Supreme Court.90 Attention, however, must be called to the fact that if the negligent act or omission of the obligee concurred with the negligent act or omission of the obligor in causing the injury complained of, in other words, if the negligent act or omission of the obligee was a proximate cause of the event which led to the damage or injury complained of, he cannot recover. It is, therefore, of the utmost importance to determine whether the negligence of the obligee or creditor was a proximate cause of the accident or event which led to the injury or merely contributory to his own injury. The test is given in the following case: Rakes vs. Atlantic Gulf and Pacific Co. 7 Phil. 359 This is an action to recover damages. The plaintiff, one of a gang of eight Negro laborers in the employment of the defendant, was at work transporting rails from a barge in the harbor to the company’s yard near the Malecon in Manila. The rails lay upon two crosspieces secured to the cars, but without sidepieces or guards to prevent them from slipping off. At a certain spot at or near the water’s edge the track sagged, the tie

Art. 2201, par. 2, Civil Code. Art. 1171, Civil Code. 90 Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. 359; Cangco vs. Manila Railroad Co., 36 Phil. 766; Borromeo vs. Manila Railroad Co., 44 Phil. 165; Del Prado vs. Manila Electric Co., 52 Phil. 900. 88 89

72

NATURE AND EFFECT OF OBLIGATIONS

Arts. 1170-1173

broke, the car canted, the rails slid off and caught the plaintiff, breaking his leg, which was afterwards amputated at about the knee. The cause of the sagging of the track is admitted to be the dislodging of the crosspiece under the stringer by the water of the bay raised by a recent typhoon. The superintendent of the company attributed it to the giving way of the block laid in the sand. No effort was made to repair the injury at the time of the occurrence. According to the plaintiff’s witnesses, a depression of the track was apparent to the eye, and a fellow workman of the plaintiff swears that the day before the accident he called the attention of the foreman to it and asked him to have it repaired. It is also admitted that there was a prohibition imposed by the defendant company against walking by the side of the car and that the plaintiff was walking by the side of the car when the rails slid off. The question now is — what effect is to be given to such act of contributory negligence? Held: “Difficulty seems to be apprehended in deciding which acts of the injured party shall be considered immediate causes of the accident. The test is simple. Distinction must be made between the accident and the injury, between the event itself, without which there could have been no accident, and those acts of the victim not entering into it, but contributing to his own proper hurt. For instance, the cause of the accident under review was the displacement of the crosspiece or the failure to replace it. This produced the event giving occasion for damages that is the sinking of the track and the sliding of the iron rails. To this event, the act of the plaintiff in walking by the side of the car did not contribute although it was an element of the damage which came to himself. Had the crosspiece been out of place wholly or partly through his act or omission of duty, that would have been one of the determining causes of the event or accident, for which he would have been responsible. Where he contributes to the principal occurrence, as one of its determining factors, he cannot recover. Where, in conjunction with the occurrence, he contributes only to his own injury, he may recover the amount that the defendant responsible for the event should pay for such injury, less a sum deemed a suitable equivalent for his own imprudence. “Accepting, though with some hesitation, the judgment of the trial court, fixing the damage incurred by the plaintiff at 5,000 pesos, the equivalent of 2,500 dollars, United States money, we deduct therefrom 2,500 pesos, the amount fairly attributed to his negligence, and direct judgment to be entered in favor of the plaintiff for the resulting sum of 2,500 pesos, with

73

Art. 1174

OBLIGATIONS

costs to both instances and ten days thereafter let the case be remanded to the court below for proper action.”

Idem; id.; id. — Other circumstances. — Besides the circumstances referred to in the preceding sections, the courts may also equitably mitigate the damages in the following instances: (1) Where the plaintiff himself has contravened the terms of the contract; (2) Where the plaintiff has derived some benefit as a result of the contract; (3) In cases where exemplary damages are to be awarded, where the defendant acted upon the advice of counsel; (4)

Where the loss would have resulted in any event; and

(5) Where upon the filing of the action, the defendant has done his best to lessen the plaintiff’s loss or injury.91 Voluntary Breach Through Contravention of Tenor of Obligation. — Under Art. 1170 of the Civil Code, not only debtors guilty of fraud, negligence or default in the performance of obligations are decreed liable; in general, every debtor who fails in the performance of his obligations is bound to indemnify the creditor for the damages caused thereby. The phrase “in any manner contravene the tenor” of the obligation includes not only any illicit act which impairs the strict and faithful fulfillment of the obligation, but also every kind of defective performance.92 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.93 Concept of Fortuitous Event. — According to the above article, fortuitous event may be defined as an event which could not be foreseen, or which, though foreseen, was inevitable. It is Art. 2215, Civil Code. Arrieta vs. National Rice and Corn Corp., 10 SCRA 79. 93 Art. 106, Spanish Civil Code, in amended form. 91 92

74

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

clear from this definition that the presence of either the element of unforeseability or inevitability would be sufficient to classify the event as fortuitous in character. Hence, even if the event was not inevitable if it could not have been foreseen, or even if it could have been foreseen if it was inevitable, it would be considered as a fortuitous event. It is evident, therefore, that the definition is broad enough to comprehend “acts of God” or those which are absolutely independent of human intervention, such as rains, typhoons, floods, cyclones, earthquakes or any other similar calamity brought about by natural forces. It is also broad enough to include force majeure or events which arise from legitimate or illegitimate acts of persons other than the obligor, such as commotions, riots, wars, robbery, and similar acts. The antecedent of fortuitous event or caso fortuito is found in the Partidas which defines it as “an event which takes place by accident and could not have been foreseen.’’ Escriche elaborates it as “an unexpected event or act of God which could neither be foreseen nor resisted.’’ Civilist Arturo M. Tolentino adds that “[f]ortuitous events may be produced by two general causes: (1) by nature, such as earthquakes, storms, floods, epidemics, fires, etc. and (2) by the act of man, such as an armed invasion, attack by bandits, governmental prohibitions, robbery, etc.’’ (Southeastern College, Inc. vs. Court of Appeals, July 10, 1998, 292 SCRA 422.) Classification. — Fortuitous events may be classified into fortuitous event proper (act of God) and force majeure (fuerza mayor) depending upon whether there is human intervention or not. The first refers to an event which is absolutely independent of human intervention, while the second refers to an event which arises from legitimate or illegitimate acts of persons other than the obligor.94 The distinction, however, is merely technical. Essentially, there is no substantial difference between the two; both refer to an event or cause which is independent of the will of the obligor.95 As to foreseeability, fortuitous events may also be classified into ordinary and extraordinary fortuitous event. The first refers to an event which usually happens or which could have been reasonably foreseen, while the second refers to an event which does not usually

94 95

8 Manresa, 5th Ed., Bk. 1, p. 205. University of Santo Tomas vs. Descals, 38 Phil. 267.

75

Art. 1174

OBLIGATIONS

happen and which could not have been reasonably foreseen, such as fire, war, pestilence, unusual flood, locust, earthquake, and others of a similar nature.96 Effect upon Obligation. — If the obligor is unable to comply with his obligation by reason of a fortuitous event, the general rule is that he is exempted from any liability whatsoever.97 In other words, his obligation is extinguished.98 Thus, where the obligor is unable to surrender his revolver to the government upon demand because it was lost during a storm,99 or to return some photographic negatives that were entrusted to him by the obligee because of a fire of accidental origin which destroyed his place of business,100 or to deliver certain animals which he had contracted to give to the obligee at a specified date because they dies of natural causes or were killed during an epidemic before he could deliver them to such obligee,101 it was held that since the breach of the obligation is due to a fortuitous event, it is thereby extinguished; consequently, he cannot be held liable for damages. The application of this rule is even more evident in motor vehicle accidents. Thus, where it was established that the defendant’s bus was bumped by another bus which caused the driver to swerve it to the left so as to prevent it from falling into a canal and as a result it struck a tree, which led the bus to skid and capsize, it was held that since the injury can be attributed or imputed only to an inevitable accident and not the misconduct or negligence of the operator or of the driver, there can be no possible recovery of damages.102 But where the accident is due to a defect of an equipment or of an appliance purchased from a manufacturer, it is clear that such a defect cannot be considered a fortuitous event within the meaning of the law. This doctrine is very well illustrated in the case of Necesito vs. Paras.103 In this case, it was proved that the bus, where one of the Art. 1680, Civil Code. Art. 1174, Civil Code. 98 See Arts. 1262, 1266, Civil Code. 99 Government vs. Bingham, 13 Phil. 185 but see Government vs. Amechazurra, 10 Phil. 637. 100 Brown vs. Robert, 40 Phil. 990; Lizares vs. Hernaez, 40 Phil. 981. 101 Palacio vs. Sudario, 7 Phil. 275; Crame vs. Gonzaga, 10 Phil. 646. 102 Ampang vs. Guinco Trans. Co., 92 Phil. 1085. 103 104 Phil. 75. 96 97

76

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

plaintiffs and his mother were riding as passengers, was on its regular run when all of a sudden the steering knuckle broke, as a result of which the driver lost control of the wheel, causing the bus to fall into a ditch. The aforesaid plaintiff was injured, while his mother was killed. Subsequently, an action to recover damages was brought directly against the operator of the bus. Defendant now claims that the cause of the accident is a fortuitous event. Refusing to accept this defense, the Supreme Court declared: “The preponderance of authority is in favor of the doctrine that a passenger is entitled to recover damages from a carrier for an injury resulting from a defect in an appliance purchased from a manufacturer, whenever it appears that the defect would have been discovered by the carrier if it had exercised the degree of care which under the circumstances was incumbent upon it with regard to the inspection and application of the necessary test. For the purposes of this doctrine, the manufacturer is considered as being in law the agent or servant of the carrier, as far as the work of constructing the appliance. According to this theory, the good repute of the manufacturer will not relieve the carrier from liability. (10 Am. Jur. 205, s. 1324; and cases cited therein.) The rationale of the carrier’s liability is the fact that the passenger has neither choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment, the passenger has no remedy against him, while the carrier usually has. It is but logical, therefore, that the carrier, while not an insurer of the safety of his passengers, should nevertheless be held to answer for the flaws of his equipment if such flaws were at all discoverable. “In the case at bar, the record is to the effect that the only test applied to the steering knuckle in question was a purely visual inspection every 30 days, to see if any crack developed. It nowhere appears that either the manufacturer or the carrier at anytime tested the steering knuckle to ascertain whether its strength was up to standard, or that it had no hidden flaws that would impair that strength. This periodical visual inspection of the steering knuckle as practised by the carrier’s agents did not measure up to the required legal standard of ‘utmost diligence of very cautious persons’ . . . ‘as far as human care and foresight can provide.’ Therefore the knuckle’s failure can not be considered a fortuitous event that would exempt the carrier from responsibility. (Lasam vs. Smith, 46 Phil. 657; Son vs. Cebu Autobus Co., L-6155, April 30, 1954.)”

77

Art. 1174

OBLIGATIONS

The above doctrine was also applied in a much more recent case — the case of La Mallorca vs. De Jesus.104 Although there is authority to the effect that a tire blowout as a proximate cause for a motor vehicle accident can be classified as a fortuitous event,105 nevertheless, where it was established that the bus involved in the accident was running quite fast immediately before said accident, and that the cause of the blowout was a mechanical defect of the conveyance or of its equipment which could easier have been discovered if the bus had been subjected to a more thorough or rigid check-up before its use, it was held that the plea of caso fortuito in such case cannot be entertained.106 In connection with the doctrine enunciated in the above cases, the following decision penned by Chief Justice Enrique Fernando is interesting. Tugade vs. Court of Appeals 85 SCRA 226 There is nothing impressive about this petition seeking to justify a review of a decision of respondent Court of Appeals on the ground that instead of relying on what counsel considers applicable rulings of respondent Court, the judgment was based on a case decided by this Tribunal. Moreover, counsel for petitioner ignored earlier doctrines of this Court consistently holding that a mishap caused by defective brakes could not be considered as fortuitous in character and thus called for an acquittal of the driver if subsequently haled to court. This Court, nonetheless, was persuaded to give due course to the petition primarily for clarifying the state of the law and thus hopefully avoid any further lurking doubt on the matter. It is quite evident that a reversal of the decision sought to be reviewed is not justified. The decision of respondent Court, with Justice Juliano Agrava as ponente, set forth the relevant facts thus: “At about 9:15 o’clock in the morning of January 4, 1972, Rodolfo [Rayandayan] was driving a Holden Kingwood car (the [Holden] car), bearing Plate No. 52-19V (L-Rizal ’71), owned by the Sta. Ines Mining Corp. and assigned for use of its manager, on Ayala

17 SCRA 23. Rodriguez vs. Red Line Trans. Co., CA, 51 Off. Gaz. 3006. 106 La Mallorca vs. De Jesus, 17 SCRA 23. 104 105

78

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

Avenue in Makati, Rizal, going northwards. At the intersection of Ayala Avenue and Makati Avenue, [Rayandayan] was going to turn left on Makati Avenue but he stopped to wait for the left-turn signal and because a jeep in front of him was also at a stop * * *. While in that stop position, the [Holden] car was bumped from behind by Blue Car Taxi, bearing Plate No. 5571R (TX-QC ’71) and driven by Inocencio [Tugade] causing damage to the [Holden] car, the repairs of which cost P778.10 * * * [Tugade] was then charged with Reckless Imprudence Resulting in Damage to Property. He pleaded not guilty and while admitting that the collision was caused by faulty brakes of his taxicab, sought to exculpate himself with the explanation that this fault could not and should not be traced to him. After trial, the lower court held: ‘[Accordingly], the Court finds that accused Inocencio Tugade was guilty beyond reasonable doubt of the crime of reckless imprudence resulting in damage to property and hereby sentences him to pay a [fine of one thousand (P1,000.00) pesos], with subsidiary imprisonment in case of insolvency in accordance with the provisions of Article 39 of the Revised Penal Code, as amended, to indemnify the Sta. Ines Mining Corporation in the amount of P778.10 by way of actual damages; and to pay the costs.’ While [Tugade] admitted the facts of the case as set out above, he, nevertheless, appealed from the judgment reiterating that ‘the malfunctioning of the brakes at the time of the accident was due to a mechanical defect which even the exercise of due diligence of a good father of a family cannot have prevented.’ As the lower court had found: ‘this witness ([Tugade]) testified that after the accident, he admitted that his taxicab bumped the car on his front because the brakes of his vehicle malfunctioned; and that the document * * * is the handwritten statement he prepared to this effect.’ ’’ Respondent Court of Appeals, after stating that upon review of the record, it agreed with the trial court, rendered its decision affirming in toto the judgment appealed from. As noted at the outset, petitioner is not entitled to acquittal. His plea for the reversal of the decision reached by respondent Court is not impressed with merit. At the most, as was likewise previously mentioned, the fine imposed could be reduced. 1. Counsel for petitioner vigorously contends that respondent Court of Appeals ought not to have applied the pronouncement in La Mallorca and Pampanga Bus Co. vs. De Jesus on the ground that it was obiter dictum. That is not the case at all. A little more time and attention in the study of the above decision could have resulted in its correct appraisal.

79

Art. 1174

OBLIGATIONS

He would have realized then that respondent Court acted correctly. This Tribunal passed squarely on the specific issue raised. The opinion penned by the then Justice, later Chief Justice Makalintal is categorical: “Petitioner maintains that a tire blow-out is a fortuitous event and gives rise to no liability for negligence, citing the rulings of the Court of Appeals in Rodriguez vs. Red Line Transportation Co., CA-G.R. No. 8136, December 29, 1954, and People vs. Palapal, CA-G.R. No. 18480, June 27, 1958. These rulings, however, not only are not binding on this Court but were based on considerations quite different from those that obtain in the case at bar.’’ The above doctrine is controlling. The reference to the Court of Appeals decisions is of no moment. 107 It may be pointed out that they were not ignored in the opinion of Justice Agrava, six of its nine pages being devoted to distinguishing them. Even without the La Mallorca ruling then, the decision of respondent Court sought to be reviewed can stand the test of strict scrutiny. It is this Tribunal, not respondent Court of Appeals, that speaks authoritatively. 2. Respondent Court of Appeals really was devoid of any choice at all. It could not have ruled in any other way on the legal question raised. This Tribunal having spoken, its duty was to obey. It is simple as that. There is relevance to this excerpt from Barrera vs. Barrera:108 “The delicate task of ascertaining the significance that attaches to a constitutional or statutory provision, an executive order, a procedural norm or a municipal ordinance is committed to the judiciary. It thus discharges a role no less crucial than that appertaining to the other two departments in the maintenance of the rule of law. To assure stability in legal relations and avoid confusion, it has to speak with one voice. It does so with finality, logically, and rightly, through the highest judicial organ, this Court. What it says then should be definitive and authoritative, binding on those occupying the lower ranks in the judicial hierarchy. They have to defer and to submit.”109 The ensuing paragraph of the opinion in Barrera further emphasizes the point: “Such a thought was reiterated in an opinion of Justice J.B.L. Reyes and further 107 The cases follow: People vs. Hatton, CA-GR No. 8310-R, Feb. 11, 1953; People vs. Oligan, CA-G.R. No. 05583-CR, Aug. 17, 1967; People vs. Palapal, CA-G.R. No. 18480-Cr., June 27, 1958; People vs. Bandonil, CA-G.R. No. 25513-R, May 25, 1959; People vs. Aralar, CA-GR No. 01451-Cr., November 29, 1963; and People vs. Buenaventura, CA-G.R. No. 00626-Cr., April 30, 1964. 108 L-31589, July 31, 1970, 34 SCRA 98. 109 Ibid., 107. The opinion of Justice Laurel in People vs. Vera, 65 Phil. 56 (1937) was cited.

80

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

emphasized in these words: ‘Judge Gaudencio Cloribel need not be reminded that the Supreme Court, by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justifiable controversy. There is only one Supreme Court whose decisions all other courts should take their bearings.’ ’’110 3. The lack of merit in this petition becomes even more obvious when it is recalled that the La Mallorca decision did not enunciate a new principle. As far back as Lasam vs. Smith,111 promulgated more than half a century ago, in 1924 to be exact, this Court has been committed to such a doctrine. Thus: “As will be seen, these authorities agree that some extraordinary circumstance independent of the will of the obligor, or of his employees, is an essential element of a caso fortuito. Turning to the present case, it is at once apparent that this element is lacking. It is not suggested that the accident in question was due to an act of God or to adverse road conditions which could not have been foreseen. As far as the record shows, the accident was caused either by defects in the automobile or else through the negligence of its driver. That is not a caso fortuito.’’112 Lasam was cited with approval in the two subsequent cases of Son vs. Cebu Autobus Co.113 and Necesito vs. Paras.114 WHEREFORE, The decision of respondent Court of Appeals of December 15, 1977 is affirmed. No costs. The following decision penned by Justice Gutierrez, Jr. is equally interesting: Juntilla vs. Fontanar 136 SCRA 625 This is a petition for review, on questions of law, of the decision of the Court of First Instance of Cebu which reversed the decision of the City Court of Cebu and exonerated the respondents from any liability arising from a vehicular accident. The background facts which led to the filing of a complaint for breach of contract and damages against the respondents are summarized by the Court of First Instance of Cebu as follows:

110 Ibid., Justice J.B.L. Reyes spoke thus in Albert vs. Court of First Instance of Manila (Br. VI), L-26364, May 29, 1968, 23 SCRA 948, 961. 111 45 Phil. 657. 112 Ibid., 661-662. 113 94 Phil. 892 (1954). 114 104 Phil. 75 (1958).

81

Art. 1174

OBLIGATIONS

“The facts established after trial show that the plaintiff was a passenger of the public utility jeepney bearing plate No. PUJ-71-7 on the course of the trip from Danao City to Cebu City. The jeepney was driven by defendant Berfol Camoro. It was registered under the franchise of defendant Clemente Fontanar but was actually owned by defendant Fernando Banzon. When the jeepney reached Mandaue City, the right rear tire exploded causing the vehicle to turn turtle. In the process, the plaintiff who was sitting at the front seat was thrown out of the vehicle. Upon landing on the ground, the plaintiff momentarily lost consciousness. When he came to his senses, he found that he had a lacerated wound on his right palm. Aside from this, he suffered injuries on his left arm, right thigh and on his back. (Exh. “D”) Because of his shock and injuries, he went back to Danao City but on the way, he discovered that his ‘Omega’ wrist watch was lost. Upon his arrival in Danao City, he immediately entered the Danao City Hospital to attend to his injuries, and also requested his father-in-law to proceed immediately to the place of the accident and look for the watch. In spite of the efforts of his father-in-law, the wrist watch, which he bought for P852.70 (Exh. “B’’) could no longer be found.’’ xxx

xxx

xxx

Petitioner Roberto Juntilla filed Civil Case No. R-17378 for breach of contract with damages before the City Court of Cebu City, Branch I against Clemente Fontanar, Fernando Banzon and Berfol Camoro. The respondents filed their answer, alleging inter alia that the accident that caused losses to the petitioner was beyond the control of the respondents taking into account that the tire that exploded was newly bought and was only slightly used at the time it blewout. After trial, Judge Romulo R. Senining the City Court of Cebu rendered judgment in favor of the petitioner and against the respondents. The dispositive portion of the decision reads: “WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants and the latter are hereby ordered, jointly and severally, to pay the plaintiff the sum of P750.00 as reimbursement for the lost Omega wrist watch, the sum of P246.64 as unrealized salary of the plaintiff from his employer, the further sum of P100.00 for the doctor’s fees and medicine, an additional sum of P300.00 for attorney’s fees and the costs.”

82

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

The respondents appealed to the Court of First Instance of Cebu Branch XIV. Judge Leonardo B. Cañares reversed the judgment of the City Court of Cebu upon finding that the accident in question was due to a fortuitous event. The dispositive portion of the decision reads: “WHEREFORE, judgment is hereby rendered exonerating the defendants from any liability to the plaintiff without pronouncement as to costs.” A motion for reconsideration was denied by the Court of First Instance. The petitioner raises the following alleged errors committed by the Court of First Instance of Cebu on appeal — “a. The Honorable Court below committed grave abuse of discretion in failing to take cognizance of the fact that defendants and/or their employee failed to exercise ‘utmost and/or extraordinary diligence’ required of common carriers contemplated under Art. 1755 of the Civil Code of the Philippines. “b. The Honorable Court below committed grave abuse of discretion by deciding the case contrary to the doctrine laid down by the Honorable Supreme Court in the case of Necesito, et al. vs. Paras, et al.’’ We find the petition impressed with merit. The City Court and the Court of First Instance of Cebu found that the right rear tire of the passenger jeepney in which the petitioner was riding blewout causing the vehicle to fall on its side. The petitioner questions the conclusion of the respondent court drawn from this finding of fact. The Court of First Instance of Cebu erred when it absolved the carrier from any liability upon a finding that the tire blowout is a fortuitous event. The Court of First Instance of Cebu ruled that: “After reviewing the records of the case, this Court finds that the accident in question was due to a fortuitous event. A tire blowout, such as what happened in the case at bar, is an inevitable accident that exempts the carrier from liability, there being absence of a showing that there was misconduct or negligence on the part of the operator in the operation and maintenance of the vehicle involved.

83

Art. 1174

OBLIGATIONS

The fact that the right rear tire exploded, despite being brand new, constitutes a clear case of caso fortuito which can be a proper basis for exonerating the defendants from liability. x x x’’ The Court of First Instance relied on the ruling of the Court of Appeals in Rodriguez vs. Red Line Transportation Co., CA-G.R. No. 8136, December 29, 1954, where the Court of Appeals ruled that: “A tire blowout does not constitute negligence unless the tire was already old and should not have been used at all. Indeed, this would be a clear case of fortuitous event.’’ The foregoing conclusions of the Court of First Instance of Cebu are based on a misapprehension of overall facts from which a conclusion should be drawn. The reliance of the Court of First Instance on the Rodriguez case is not in order. In La Mallorca and Pampanga Bus Co. vs. De Jesus, et al. (17 SCRA 23), we held that: “Petitioner maintains that a tire blowout is a fortuitous event and gives rise to no liability for negligence, citing the rulings of the Court of Appeals in Rodriguez vs. Red Line Transportation Co., CA-G.R. No. 8136, Decembr 29, 1954, and People vs. Palapad, CA-G.R. No. 18480, June 27, 1958. These rulings, however, not only are not binding on this Court but were based on considerations quite different from those obtained in the case at bar. The appellate court there made no findings of any specific acts of negligence on the part of the defendants and confined itself to the question of whether or not a tire blowout by itself alone and without a showing as to the causative factors would generate liability. x x x’’ In the case at bar, there are specific acts of negligence on the part of the respondents. The records show that the passenger jeepney turned turtle and jumped into a ditch immediately after its right rear tire exploded. The evidence shows that the passenger jeepney was running at a very fast speed before the accident. We agree with the observation of the petitioner that a public utility jeep running at a regular and safe speed will not jump into a ditch when its right rear tire blows up. There is also evidence to show that the passenger jeepney was overloaded at the time of the accident. The petitioner stated that there were three (3) passengers in the front seat and fourteen (14) passengers in the rear.

84

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

While it may be true that the tire that blewout was still good because the grooves of the tire were still visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence was presented to show that the accident was due to adverse road conditions or that precautions were taken by the jeepney driver to compensate for any conditions liable to cause accidents. The sudden blowing out, therefore, could have been caused by too much air pressure injected into the tire coupled by the fact that the jeepney was overloaded and speeding at the time of the accident. In Lasam vs. Smith (45 Phil. 657), we laid down the following essential characteristics of caso fortuito: xxx

xxx

xxx

x x x ‘In a legal sense and, consequently, also in relation to contracts, 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 impossible 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.’ (5 Encyclopedia Juridica Española, 309.)’’ In the case at bar, the cause of the unforeseen and unexpected occurrence was not independent of the human will. The accident was caused either through the negligence of the driver or because of mechanical defects in the tire. Common carriers should teach their drivers not to overload their vehicles, not to exceed safe and legal speed limits, and to know the correct measures to take when a tire blows out thus insuring the safety of passengers at all times. Relative to the contingency of mechanical defects, we held in Necesito, et al. vs. Paras, et al. (102 Phil. 75), that: “x x x The preponderance of authority is in favor of the doctrine that a passenger is entitled to recover damages from a carrier for an injury resulting from a defect in an appliance purchased from a manufacturer, whenever it appears that the defect would have been discovered by the carrier if it had exercised the degree of care which under the circumstances was incumbent upon it, with regard to

85

Art. 1174

OBLIGATIONS

inspection and application of the necessary tests. For the purposes of this doctrine, the manufacturer is considered as being in law the agent or servant of the carrier, as far as regards the work of constructing the appliance. According to this theory, the good repute of the manufacturer will not relieve the carrier from liability.’ (10 Am. Jur. 205, s. 1324; see also Pennsylvania R. Co. vs. Roy, 102 U.S. 451; 20 L. Ed. 141; Southern R. Co. vs. Hussey, 74 ALR 1172, 42 Fed. 2d 70; and Ed. Note, 29 ALR 788; Ann. Cas. 1916E 929) The rationale of the carrier’s liability is the fact that the passenger has neither choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment, the passenger has no remedy against him, while the carrier usually has. It is but logical, therefore, that the carrier, while not an insurer of the safety of his passengers, should nevertheless be held to answer for the flaws of his equipment if such flaws were at all discoverable. x x x” It is sufficient to reiterate that the source of a common carrier’s legal liability is the contract of carriage, and by entering into the said contract, it binds itself to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person, with a due regard for all the circumstances. The records show that this obligation was not met by the respondents. The respondents likewise argue that the petitioner cannot recover any amount for failure to prove such damages during the trial. The respondents submit that if the petitioner was really injured, why was he treated in Danao City and not in Mandaue City where the accident took place. The respondents argue that the doctor who issued the medical certificate was not presented during the trial, and hence not cross-examined. The respondents also claim that the petitioner was not wearing any wrist watch during the accident. It should be noted that the City Court of Cebu found that the petitioner had a lacerated wound on his right palm aside from injuries on his left arm, right thigh and on his back and that on his way back to Danao City, he discovered that his “Omega” wrist watch was lost. These are findings of facts of the City Court of Cebu which we find no reason to disturb. More so when we consider the fact that the Court of First Instance

86

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

of Cebu impliedly concurred in these matters when it confined itself to the question of whether or not the tire blowout was a fortuitous event. WHEREFORE, the decision of the Court of First Instance of Cebu, Branch IV appealed from is hereby REVERSED and SET ASIDE, and the decision of the City Court of Cebu, Branch I is REINSTATED, with the modification that the damages shall earn interest at 12% per annum and the attorney’s fees are increased to SIX HUNDRED PESOS (P600.00). Damages shall earn interest from January 27, 1975. SO ORDERED.

Further, in the case of Southeastern College, Inc. vs. Court of Appeals (July 10, 1998, 292 SCRA 422), the Supreme Court ruled that in order that a fortuitous event may exempt a person from liability, it is necessary that he be free from any previous negligence or misconduct by reason of which the loss may have been occasioned. An act of God cannot be invoked for the protection of a person who has been guilty of gross negligence in not trying to forestall its possible adverse consequences. When a person’s negligence concurs with an act of God in producing damage or injury to another, such person is not exempt from liability by showing that the immediate or proximate cause of the damage or injury was a fortuitous event. When the effect is found to be partly the result of the participation of man — whether it be from active intervention, or neglect, or failure to act — the whole occurrence is hereby humanized, and removed from the rules applicable to acts of God. Moreover, in the aforementioned case of Southeastern College, Inc. vs. Court of Appeals, the Supreme Court also ruled that there is no question that a typhoon or storm is a fortuitous event, a natural occurrence which may be foreseen but is unavoidable despite any amount of foresight, diligence or care. In order to be exempt from liability arising from any adverse consequence engendered thereby, there should have been no human participation amounting to a negligent act. In other words, the person seeking exoneration from liability must not be guilty of negligence. Negligence, as commonly understood, is conduct which naturally or reasonably creates undue risk or harm to others. It may be the failure to observe that degree of care, precaution, and vigilance which the circumstances justly demand, or the omission to do something which a prudent and 87

Art. 1174

OBLIGATIONS

reasonable man, guided by considerations which ordinarily regulate the conduct of human affairs, would do. It must be observed, however, that the general rule stated in Art. 1174 can be applied only to determinate obligations and not to generic ones.115 Consequently, where the obligation consists in the payment of money,116 or in the delivery of any generic or indeterminate thing, such as several cavans of rice117 or several piculs of sugar118 or several tons of copra,119 the fact that the obligor was unable to comply with his obligation by reason of a fortuitous event will not constitute a valid defense; he can still be held liable. Idem; Essential conditions. — There are several essential conditions which must concur in order that the general rule stated in Art. 1174 can be applied. These conditions are: first, that the event must be independent of the will of the obligor; second, that the event must be either unforeseeable or inevitable; third, that the event must be of such a character as to render it impossible for the obligor to fulfill his obligation in a normal manner; and fourth, that the obligor must be free from any participation in the aggravation of the injury resulting to the obligee or creditor.120 In other words, there must be an entire exclusion of human agency from the cause of injury or loss (Virginia Real vs. Sisenando H. Belo, G.R. No.146224, Jan. 26, 2007). In the Virginia Real vs. Sisenando case, the Court held that it is established by evidence that the fire originated from leaking fumes from the LPG stove and tank installed at petitioner’s fastfood stall and her employees failed to prevent the fire from spreading and destroying the other fastfood stalls. Such circumstances do not support the petitioner’s theory of fortuitous event. Hence, if the negligence of the obligor or debtor concurred with the fortuitous event in bringing about the injury complained of, the obligation is not extinguished. In other words, if the loss or destruction of the object of the obligation was caused by an act of

See supra. Reyes vs. Caltex, 47 Off. Gaz. 1193; Philippine Long Distance Co. vs. Jeturian, 97 Phil. 781. 117 Soriano vs. De Leon, 48 Off. Gaz. 2245. 118 Yu Tek Co. vs. Gonzales, 29 Phil. 384; Lacson vs. Diaz, 47 Off. Gaz. 337. 119 Bunje Corp. vs. Elena Camenforte & Co., 48 Off. Gaz. 3377. 120 5 Encyclopedia Juridica Española, 309 cited in Lasam vs. Smith, 45 Phil. 990. 115 116

88

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

God, with the negligence of the obligor or debtor mingling with it as an active and cooperative cause, such obligor or debtor is still responsible. In order to relieve such obligor or debtor of any liability, the act of God or fortuitous event must not only be the proximate cause of the loss or destruction, but the better opinion is that it must be the sole cause. This doctrine, which is well established in American law, was enunciated by the Supreme Court in the cases of Tan Chiong Sian vs. Inchausti & Co.121 and Limpangco vs. Yangco Steamship Co.122 and the latest of which is in Nakpil & Sons, et al. vs. CA, et al., (144 SCRA 596). Thus, in the Tan Chiong case, the Supreme Court declared: “An act of God cannot be urged for the protection of a person who has been guilty of gross negligence in not trying to avert its result. One who has accepted responsibility to pay cannot weakly fold his hand and say he was prevented from meeting that responsibility by an act of God when the exercise or ordinary care and prudence would have averted the results flowing from the act. One who has placed the property of another, entrusted to his care, in an unseaworthy craft, upon dangerous waters, cannot absolve himself by crying ‘an act of God’ when every effect which a typhoon produced upon that property could have been avoided by the exercise of common care and prudence. When the negligence of the carrier concurs with an act of God in producing a loss, the carrier is not exempted from liability by showing that the immediate cause of the damage was the act of God; or, as it has been expressed, ‘when the loss is caused by the act of God, if the negligence of the carrier mingles with it as an active and cooperative cause, he is still liable.’ The loss and damage to perishable articles in consequence of the weather will not excuse the carrier if it could have been prevented by due care and diligence. The carrier must not only show that it did all that was usual, but all that was necessary to be done under the circumstances. To be exempt from liability for loss because of an act of God, the common carrier must be free from any previous negligence or misconduct by which the loss or damage may have been occasioned. For, although the immediate or proximate cause of a loss in any given instance may have been what is termed an act of God, yet if the carrier unnecessarily exposed the property to such accident by a culpable act or omission of his own he is not excused. In the case of Wolf vs. American Express 121 122

32 Phil. 152. 34 Phil. 597.

89

Art. 1174

OBLIGATIONS

Co., 43 Mo., 421, Wagner, J., said: ‘The act of God which excuses the carrier must not only be the proximate cause of the loss; the better opinion is that it must be the sole cause. And where the carrier mingles with it as an active and cooperative cause, he is still responsible.’ (Ames vs. Stevens, 1 Stra., 128.)” Austria vs. Court of Appeals 39 SCRA 527 Defendant received from plaintiff a pendant with diamonds to be sold on commission basis or to be returned on demand. In the evening of Feb. 1, 1961, while walking home, two men snatched her purse containing the pendant. Subsequently, the snatchers were apprehended and charged. During the pendency of the criminal case, plaintiff brought an action against defendant for recovery of the pendant or of its value and damages. The latter interposed the defense of fortuitous event, but the former contended: (a) that the defense is untenable because there was negligence on the part of the defendant; and (b) that if the defense is tenable, nevertheless, there must be a prior conviction for robbery before it can be availed of. Held: Defendant is not liable. To constitute a caso fortuito that would exempt a person from responsibility, it is necessary (1) that the event must be independent of the will of the debtor; (2) that it must be either unforeseeable or unavoidable; (3) that the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and (4) that the debtor must be free of participation in, or aggravation of, the injury to the creditor. All of the above requisites or conditions are present in this case. It is undeniable that in order to completely exonerate the debtor by reason of a fortuitous event, such debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or negligence. We believe, however, that her act in traveling alone in the evening, carrying jewelry of considerable value, cannot be considered as either concurrent or contributory negligence. While it may be so considered now, we are not persuaded that the same rule should obtain ten years previously when the robbery in question took place, for at that time criminality had not by far reached the levels attained in the present day. There is likewise no merit in the contention that to allow the fact of robbery to be recognized in this case before conviction

90

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

is secured in the criminal action would prejudice the latter case, or would result in inconsistency should the accused obtain an acquittal or should the criminal case be dismissed. It must be realized that a court finding that a robbery has happened would not necessarily mean that those accused in the criminal action would be found guilty of the crime; nor would a ruling that those actually accused did not commit the robbery be inconsistent with a finding that a robbery did take place. The evidence to establish these facts would not necessarily be the same. Vasquez vs. Court of Appeals 138 SCRA 553 Plaintiffs Pedro Vasquez and Soledad Ortega are the parents of Alfonso Vasquez; plaintiffs Cleto Bagaipo and Agustina Virtudes are the parents of Filipinas Bagaipo; and plaintiffs Romeo Vasquez and Maximina Cainay are the parents of the child, Mario Marlon Vasquez. They seek the recovery of damages due to the loss of Alfonso Vasquez, Filipinas Bagaipo and Mario Marlon Vasquez during said voyage. At the pre-trial, the defendant admitted its contract of carriage with Alfonso Vasquez, Filipinas Bagaipo and Mario Marlon Vasquez, and the fact of the sinking of the MV ‘Pioneer Cebu.’ The issues of the case were limited to the defenses alleged by the defendant that the sinking of the vessel was caused by force majeure, and that the defendant’s liability had been extinguished by the total loss of the vessel. The evidence on record as to the circumstances of the last voyage of the MV ‘Pioneer Cebu’ came mainly, if not exclusively, from the defendant. The MV ‘Pioneer Cebu’ was owned and operated by the defendant and used in the transportation of goods and passengers in the inter-island shipping. Scheduled to leave the Port of Manila at 9:00 p.m. on May 14, 1966, it actually left port at 5:00 a.m. the following day, May 15, 1966. It had a passenger capacity of three hundred twenty-two (322) including the crew. It undertook the said voyage on a special permit issued by the Collector of Customs inasmuch as, upon inspection, it was found to be without an emergency electrical power system. The special permit authorized the vessel to carry only two hundred sixty (260) passengers due to the said deficiency and for lack of safety devices for 322 passengers (Exh. 2). A headcount was made of the passengers on board, resulting on the tallying of 168 adults and 20 minors, although the passengers manifest only listed 106 passengers. It has been admitted, however, that the

91

Art. 1174

OBLIGATIONS

headcount is not reliable inasmuch as it was only done by one man on board the vessel. When the vessel left Manila, its officers were already aware of the typhoon Klaring building up somewhere in Mindanao. There being no typhoon signals on the route from Manila to Cebu, and the vessel having been cleared by the Customs authorities, the MV ‘Pioneer Cebu’ left on its voyage to Cebu despite the typhoon. When it reached Romblon island, it was decided not to seek shelter thereat, inasmuch as the weather condition was still good. After passing Romblon and while near Jintotolo island, the barometer still indicated the existence of good weather condition and this continued until the vessel approached Tanguingui island. Upon passing the latter island, however, the weather suddenly changed and heavy rains fell. Fearing that due to zero visibility, the vessel might hit the Chocolate island group, the captain ordered a reversal of the course so that the vessel could ‘weather out’ the typhoon by facing the winds and the waves in the open. Unfortunately, at about noontime on May 16, 1966, the vessel struck a reef near Malapascua Island, sustained leaks and eventually sunk, bringing with her Captain Flor Yap who was in command of the vessel.’’ Due to the loss of their children, petitioners sued for damages before the Court of First Instance of Manila (Civil Case No. 67139). Respondent defended on the plea of force majeure, and the extinction of its liability by the actual total loss of the vessel. After proper proceedings the Trial Court awarded damages, thus: WHEREFORE, judgment is hereby rendered ordering the defendant to pay: (a) Plaintiffs Pedro Vasquez and Soledad Ortega the sums of P15,000.00 for the loss of earning capacity of the deceased Alfonso Vasquez; P2,100.00 for support; and P10,000.00 for moral damages; (b) Plaintiffs Cleto B. Bagaipo and Agustina Virtudes the sum of P17,000.00 for loss of earning capacity of deceased Filipinas Bagaipo; and P10,000.00 for moral damages; and (c) Plaintiffs Romeo Vasquez and Maximina Cainay the sum of P10,000.00 by way of moral damages by reason of the death of Mario Marlon Vasquez.

92

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

On appeal, respondent Court reversed the aforementioned judgment and absolved private respondent from any and all liability. Hence, this Petition for Review on Certiorari, the basic issue being the liability for damages of private respondent for the presumptive death of petitioners’ children. The Trial Court found the defense of caso fortuito untenable due to various decisive factors, thus: “x x x It is an admitted fact that even before the vessel left on its last voyage, its officers and crew were already aware of the typhoon brewing somewhere in the same general direction to which the vessel was going. The crew of the vessel took a calculated risk when it proceeded despite the typhoon advisory. This is quite evident from the fact that the officers of the vessel had to conduct conferences amongst themselves to decide whether or not to proceed. The crew assumed a greater risk when, instead of seeking shelter in Romblon and other islands the vessel passed enroute, they decided to take a chance on the expected continuation of the good weather the vessel was encountering, and the possibility that the typhoon would veer to some other directions. The eagerness of the crew of the vessel to proceed on its voyage and to arrive at its destination is readily understandable. It is undeniably lamentable, however, that they did so at the risk of the lives of the passengers on board.’’ Contrariwise, respondent Appellate Court believed that the calamity was caused solely and proximately by fortuitous event which not even extraordinary diligence of the highest degree could have guarded against; and that there was no negligence on the part of the common carrier in the discharge of its duties. Upon the evidence and the applicable law, we sustain the Trial Court. “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.’’123 123 Lasam vs. Smith, 45 Phil. 657, 661 (1924); Austria vs. Court of Appeals, 39 SCRA 527 (1971).

93

Art. 1174

OBLIGATIONS

In the language of the law, the event must have been impossible to foresee, or if it could be foreseen, must have been impossible to avoid.124 There must be an entire exclusion of human agency from the cause of injury or loss.125 Turning to this case, before they sailed from the port of Manila, the officers and crew were aware of typhoon “Klaring’’ that was reported building up at 260 kms. east of Surigao. In fact, they had lashed all the cargo in the hold before sailing in anticipation of strong winds and rough waters.126 They proceeded on their way, as did other vessels that day. Upon reaching Romblon, they received the weather report that the typhoon was 154 kms. east southeast of Tacloban and was moving west northwest.127 Since they were still not within the radius of the typhoon and the weather was clear, they deliberated and decided to proceed with the course. At Jintotolo Island, the typhoon was already reported to be reaching the mainland of Samar.128 They still decided to proceed noting that the weather was still “good’’ although, according to the Chief Forecaster of the Weather Bureau, they were already within the typhoon zone.129 At Tanguingui Island, about 2:00 A.M. of May 16, 1966, the typhoon was in an area quite close to Catbalogan, placing Tanguingui also within the typhoon zone. Despite knowledge of that fact, they again decided to proceed relying on the forecast that the typhoon would weaken upon crossing the mainland of Samar.130 After about half an hour of navigation towards Chocolate Island, there was a sudden fall of the barometer accompanied by heavy downpour, big waves, and zero visibility. The Captain of the vessel decided to reverse course and face the waves in the open sea but because the visibility did not improve they were in total darkness and, as a consequence, the vessel ran aground a reef and sank on May 16, 1966 around 12:45 P.M. near Malapascua island somewhere north of the island of Cebu. Under the circumstances, while, indeed, the typhoon was an inevitable occurrence, yet, having been kept posted on the course of the typhoon by weather bulletins at intervals of six hours, the captain and crew were well aware of the risk they Art. 1174, Civil Code; Lasam vs. Smith, 45 Phil. 657 (1924). Tolentino, Commentaries on the Civil Code, Vol. V, p. 252. 126 T.s.n, August 8, 1967, p. 22. 127 Domestic Bulletin No. 16 of the Weather Bureau. 128 Domestic Bulletin, No. 17. 129 T.s.n., December 15, 1967, p. 21. 130 Domestic Bulletin, No. 18. 124 125

94

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

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,131 they decided to take a calculated risk. In so doing, they failed to observe that extraordinary diligence required of them explicitly by law for the safety of the passengers transported by them with due regard for all circumstances132 and unnecessarily exposed the vessel and passengers to the tragic mishap. They failed to overcome that presumption of fault or negligence that arises in case of death or injuries to passengers.133 While the Board of Marine Inquiry, which investigated the disaster, exonerated the captain from any negligence, it was because it had considered the question of negligence as “moot and academic,” the captain having “lived up to the true tradition of the profession.” While we are bound by the Board’s factual findings, we disagree with its conclusion since it obviously had not taken into account the legal responsibility of a common carrier towards the safety of the passengers involved. With respect to private respondent’s submission that the total loss of the vessel extinguished its liability pursuant to Article 587 of the Code of Commerce134 as construed in Yangco vs. Laserna, 73 Phil. 330 (1941), suffice it to state that even in the cited case, it was held that the liability of a shipowner is limited to the value of the vessel or to the insurance thereon. Despite the total loss of the vessel therefore, its insurance answers for the damages that a shipowner or agent may be held liable for by reason of the death of its passengers. WHEREFORE, the appealed judgment is hereby REVERSED and the judgment of the then Court of First Instance of Manila, Branch V, in Civil Case No. 67139, is hereby reinstated. No costs. SO ORDERED.

Arts. 1755, 1756, Civil Code. Art. 1733, Ibid. 133 Art. 1756, Ibid. 134 “Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the vigilance over the goods which the vessel carried; but he may exempt himself therefrom by abandoning the vessel with all her equipments and the freight he may have earned during the voyage.’’ 131 132

95

Art. 1174

OBLIGATIONS

Idem; Exceptions. — There are, however, exceptions to the rule that the obligor or debtor cannot be held liable in case of his inability to comply with his obligation by reason of a fortuitous event. They are: first, where such liability is expressly specified by law; second, where it is declared by stipulation of the parties; and third, where the nature of the obligation requires the assumption of risk.135 The first exception may be illustrated by provisions of the Civil Code, such as those found in Arts. 552, par. 2, 1165, par. 3, 1268, 1942, 1979, 2147, 2148, and 2159. Assumption of risk, on the other hand, ordinarily requires knowledge and appreciation of the risk and a voluntary choice to encounter it. As applied to obligations, it refers to a situation in which the obligor or debtor, with full knowledge of the risk voluntarily enters into some relation with the obligee or creditor. It is based on the doctrine of volenti non fit injuria — no wrong is done to one who consents.136 Hence, if the obligor enters into an obligation which by its very nature involves the assumption of risks, he shall be liable to the obligee for breach even in case of fortuitous events. This is illustrated by obligations arising from insurance contracts and workmen’s compensation acts. To a certain extent, it is also illustrated by obligations of common carriers.137 The liability of a common carrier which is for public service, however, should be limited to those risks which are typical of the business; it cannot extend to those which are not typical, such as lightning or earthquake causing injury to a passenger.138 Problem — A received from X a pendant with diamonds valued at P4,500 to be sold on commission basis or to be returned on demand. In the evening of Feb. 1, 1961, while walking home to her residence, two men snatched her purse containing the pendant and ran away. Subsequently, the snatchers were apprehended and charged. During the pendency of the criminal case, X brought an action against A for recovery of the pendant or of its value and damages. The latter interposed the defense

Art. 1174, Civil Code. Prosser on Torts, pp. 377-378. 137 Art. 1733, et seq., Civil Code. 138 4 Tolentino, Civil Code, 1956 Ed., p. 123. 135 136

96

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

of fortuitous event, but the former contends: (a) that the defense of fortuitous event is untenable because there was negligence on the part of the defendant; and (b) that if the defense is tenable, nevertheless, there must be a prior conviction for robbery before it can be availed of. Decide the case. Answer — The factual setting of the above problem is identical to that of Austria vs. CA 39 SCRA 527. In that case, the Supreme Court held that defendant is not liable. To constitute a caso fortuito that would exempt a person from responsibility, it is necessary: (1) that the event must be independent of the will of the debtor; (2) that it must be either unforeseeable or unavoidable; (3) that the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and (4) that the debtor must be free of participation in, or aggravation of the injury to the creditor. All of the above requisites or conditions are present in this case. It is undeniable that in order to completely exonerate the debtor by reason of a fortuitous event, such debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or negligence. We believe, however, that her act in travelling alone in the evening, carrying jewelry of considerable value, cannot be considered as either concurrent or contributory negligence. While it may be so considered now, we are not persuaded that the same rule should obtain ten years previously when the robbery in question took place, for at that time criminality had not by far reached the levels attained in the present day. There is likewise no merit in the contention that to allow the fact of robbery to be recognized in this case before conviction is secured in the criminal action, would prejudice the latter case, or would result in inconsistency should the accused obtain an acquittal or should the criminal case be dismissed. It must be realized that a court finding that a robbery has happened would not necessarily mean that those accused in the criminal action would be found guilty of the crime; nor would a ruling that those actually accused did not commit the robbery be inconsistent with a finding that a robbery did take place. The evidence to establish these facts would not necessarily be the same. Problem — A barge belonging to the Luzon Stevedoring Corporation, while passing under the Nagtahan Bridge in Manila, rammed the bridge supports causing damage thereto. In this action for damages instituted by the Government against the defendant corporation, the latter interposed the defense

97

Art. 1174

OBLIGATIONS

that there was no negligence or fault on its part and that the proximate cause of the accident was a fortuitous event. Decide the case. Answer — As far as the negligence of the defendant corporation is concerned, it is clear that the doctrine of res ipsa loquitur is applicable. It is undeniable that the unusual event that the barge, exclusively controlled by defendant, rammed the bridge supports raises a presumption of negligence on the part of defendant or its employees manning the barge or the tugs that towed it. In the ordinary course of events, such a thing does not happen if proper care is used. As far as the defense of fortuitous event is concerned, caso fortuito by definition refers to those extraordinary events not foreseeable or avoidable, “events that could not be foreseen, or which though foreseen, were inevitable.” (Art. 1174, NCC.) It is, therefore, not enough that the event could not have been foreseen or anticipated, as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossible to foresee the same. Hence, the proximate cause of the accident cannot be classified as a fortuitous event. Consequently, defendant is liable. (Rep. of the Phil. vs. Luzon Stevedoring Corp., 21 SCRA 279.) Problem — A was injured while he was a passenger in a bus operated by X Co. The proximate cause of the accident was the failure of the steering knuckle to work causing the driver to lose control of the wheel as a result of which the bus fell into a ditch. Can the operator now relieve itself of liability by claiming that the real cause of the accident was a fortuitous event? Suppose that the proximate cause of the accident was a tire blowout, would that make a different in your answer? Answer —The operator cannot relieve itself of liability by claiming that the real cause of the accident was a fortuitous event. The weight of authority sustains the view that a passenger is entitled to recover damages from the carrier for an injury resulting from a defect in an equipment purchased from a manufacturer, unless extraordinary diligence has been exercised with regard to inspection and application of the necessary tests. For the purpose of this doctrine, the manufacturer is considered in law the agent of the carrier. The rationale of the carrier’s liability is that the passenger has no privity with the manufacturer and, therefore, has no remedy whatever against him, while the carrier usually has. (Necesito vs. Paras, 104 Phil. 75.) If the proximate cause of the accident

98

NATURE AND EFFECT OF OBLIGATIONS

Art. 1174

is a tire blowout, that will not make a difference in my answer so long as it can be established that the bus involved in the accident was running fast immediately before the accident and that the cause of the blowout could have been discovered if the bus had been subjected to a more rigid check-up before its use. This was the doctrine enunciated in La Mallorca vs. De Jesus (17 SCRA 23). (Note: The question of whether or not a defective part of a vehicle, such as a defective brake, or a tire blowout can be classified per se as a fortuitous event was again taken up by the SC in Tugade vs. CA , 85 SCRA 226. In this case, a Holden car was badly damaged when it was bumped from behind by a Blue Car Taxi driven by petitioner. The latter admits that the accident was caused by the faulty brakes of the taxicab but he contends that the sudden malfunctioning of the brakes at that particular moment before the accident was something which even the due diligence of a good father of a family could not have prevented. Consequently, the cause of the accident is a fortuitous event. He then invokes a long line of decisions of the CA in order to support his theory. Speaking through Justice [now deceased Chief Justice] Fernando, the SC declared that the primary reason why the petition was given due course was to clarify the state of the law and thus hopefully avoid any further lurking doubt on the matter. Speaking of the decisions of the CA cited by petitioner in support of his theory, the SC reminded the petitioner of what Justice J.B.L. Reyes once said that “the SC, by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justiciable controversy. There is only one SC from whose decisions all other courts should take their bearings.’’ Speaking of the merits of the theory of petitioner, the SC finally held that the doctrine enunciated in La Mallorca vs. De Jesus [17 SCRA 23], Lasam vs. Smith [45 Phil. 657], Son vs. Cebu Autobus Co. [94 Phil. 892], and Necesito vs. Paras [104 Phil. 75] controls. Defective brakes, tire blowouts and others of a similar nature cannot be classified as fortuitous events per se within the meaning of the law. Problem — What are the exceptions to the rule that the obligor or debtor cannot be held liable for breach of the obligation by reason of a fortuitous event? Illustrate.

99

Art. 1174

OBLIGATIONS

Answer — The exceptions to the rule that the obligor or debtor cannot be held liable for breach of the obligation by reason of a fortuitous event are as follows: (1) Where such liability is expressly specified by the law. This may be illustrated by provisions of the NCC, such as those found in Arts. 552, par. 2, 1165, par. 3, 1268, 1942, 1979, 2147, 2148, and 2159, NCC. (2) Where such liability is declared by stipulation of the parties. Thus, if the contracting parties expressly agree that the debtor can be held liable even in case of fortuitous events, such an agreement shall be binding. (3) Where the nature of the agreement requires the assumption of risk. This is an aspect of what is known as the doctrine of assumption of risk. As applied to obligations, it refers to a situation in which the obligor or debtor, with full knowledge of the risk, voluntarily enters into some obligatory relation with the creditor or obligee. It is based on the principle of volenti non fit injuria — no wrong is done to one who consents. This is illustrated by obligations arising from insurance contracts and workmen’s compensation acts. Problem — Cite three instances where a person is made civilly liable for failure to comply with his obligations although he was prevented from doing so by a fortuitous event. (1983) Answer —In the following instances, a person is still civilly liable for failure to comply with his obligation although he was prevented from doing so by a fortuitous event: (1) events;

When by law, the debtor is liable even for fortuitous

(2) When by stipulation of the parties, the debtor is liable even for fortuitous events; (3) When the nature of the obligation requires the assumption of risk; (4) When the object of the obligation is lost and the loss is due partly to the fault of the debtor; (5) When the object of the obligation is lost and the loss occurs after the debtor has incurred in delay; (6) When the debtor promised to deliver the same thing to two or more persons who do not have the same interest; (7) When the obligation to deliver arises from a criminal offense; and

100

NATURE AND EFFECT OF OBLIGATIONS

(8)

Art. 1175

When the obligation is generic.

(Note: Any 3 of the 8 should be a correct answer. Nos. 1, 2 and 3 are based on Arts. 1174 and 1262, NCC; Nos. 4, 5, and 6 are based on Arts. 1165 and 1262, NCC; while Nos. 7 and 8 are based on Arts. 1268 and 1263, NCC.) Problem — Jacinto Tanguilig constructed a windmill system for Vicente Herce, Jr. for P60,000 with a one-year guaranty. Herce made a downpayment of P30,000 and an installment payment of P15,000, leaving a balance of P15,000. He refused to pay the balance because the windmill system collapsed after a strong wind hit the place. Is Tanguilig exempt from liability due to fortuitous event? Answer — No. In order for a party to claim exemption from liability due to fortuitous event, one requisite is that the event must be either unforeseeable or unavoidable. A strong wind in this case cannot be fortuitous, unforeseeable, or unavoidable. On the contrary, a strong wind should be present in places where windmills are constructed, otherwise the windmills will not turn. Given the newly-constructed windmill system, the same would not have collapsed had there been no inherent defect in it which could only be attributable to Tanguilig. When the windmill failed to function properly, it became incumbent upon Tanguilig to repair it in accordance with his guaranty and bear the expenses therefor. (Tanguilig vs. CA and Herce, G.R. No. 117190, Jan. 2, 1997).)

Art. 1175. Usurious transactions shall be governed by special laws.139 Usurious Transactions. — Usury may be defined as contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money, goods or chattels. It is the taking of more interest for the use of money, goods or chattels or credit than the law allows.140 The special laws referred to in Art. 1175 are the Usury Law (Act No. 2655) and the different laws amending it.141

New Provision. Tolentino vs. Gonzales, 50 Phil. 558. 141 See comments under Art. 1413, infra. 139 140

101

Art. 1176

OBLIGATIONS

Note: Prior to January 1, 1983 and under the Treasury Laws, no person shall receive a rate of interest, including commissions, premiums, fines and penalties, higher than 12% per annum or the maximum rate prescribed by the Monetary Board for a loan secured by a mortgage upon real estate the title to which is duly registered. Under Central Bank (CB) Circular No. 905, which became effective on Jan. 1, 1983, whereby the Monetary Board is authorized to fix interest rates, the ceiling rates under the Usury law [Act No. 2655, as amended by P.D. No. 116] have been abolished. It should be noted that Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity. The legislation of usury is wholly the creature of legislation. A CB Circular cannot repeal a law. Only a law can repeal another law. Thus, retroactive application of a CB Circular cannot, and should not, be presumed. (Development Bank of the Philippines vs. Perez, G.R. No. 148541, Nov. 11, 2004.) 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.142 Extinguishment of Interests and Prior Installments. — According to the first paragraph of Art. 1176, if the debtor is issued a receipt by the creditor and on the face of the receipt it is shown that the principal has been paid without any reservation with respect to the interest, there arises a disputable presumption that the interest has also been paid. This is in conformity with the rule that if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.143 According to the second paragraph, if the debtor is issued a receipt by the creditor acknowledging payment of a latter installment of a specified debt without any reservation with respect

Art. 1110, Spanish Civil Code, in modified form. Art. 1253, Civil Code; Hill vs. Veloso, 31 Phil. 160; Vda. de Ongsiaco vs. Cabatuando, 105 Phil. 1262. 142 143

102

NATURE AND EFFECT OF OBLIGATIONS

Art. 1177

to prior installments, there also arises a disputable presumption that such prior installments have already been paid. This rule is in conformity with the rule stated in Rule 131, Sec. 5, subsec. (i), of the New Rules of Court. Thus, in the case of a lease of a certain property, such as, let us say, an apartment, if the lessor gives a receipt to the lessee acknowledging payment of the rental for the month of November without any reservation as to the rentals for the months of September and October which are not yet paid, there arises a presumption that such rentals have already been paid. This presumption, however, can be properly rebutted by competent evidence to the contrary. 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.144 Remedies of Creditor To Protect Credit. — Under Art. 1177, there are three general remedies which are available to the creditor for the protection and enforcement of his right against the debtor. They are: first, to exhaust the property in possession of the debtor; second, to be subrogated to all of the rights and actions of the debtor save those which are inherent in his person; and third, to impugn all of the acts which the debtor may have done to defraud him. The second and third, however, are subsidiary to the first. Idem; Exhaustion of debtor’s property. — The principal remedy of the creditor to protect and enforce his credit is to exhaust all properties in the possession of the debtor. This remedy is in conformity with the rule stated in Art. 2236 of the Civil Code which states that the debtor is liable with all his property, present and future, for the fulfillment of his obligations subject to the exemptions provided by law. The exemptions referred to are found in Sec. 12, Rule 39 of the New Rules of Court, Sec. 118 of the Public Land Law (Com. Act No. 141), and in scattered provisions of the Civil Code, such as Arts. 223, 232, 243, 302 and 1708. 144

Art. 1111, Spanish Civil Code.

103

Art. 1177

OBLIGATIONS

Idem; Accion subrogatoria. — Actually, the debtor may defeat the right of the creditor by mere omission or inaction. In other words, he may simply fail, or neglect, or refuse to collect any credit which he may have against a third person. In order to prevent this, the law expressly grants to the creditor the right to exercise all of the rights and bring all of the actions which the debtor may have against third persons. This right or remedy is sometimes known in Spanish law as accion subrogatoria. It must be noted that the property of the debtor which can be attached or exhausted for the payment of his debts may consist of corporeal as well as incorporeal properties. It may happen, however, that his corporeal or tangible properties may not be sufficient to pay all of his debts, but his incorporeal or intangible properties may be more than sufficient. Such properties may be in the form of rights and actions against third persons. Because of his inaction or his failure to proceed against such third persons, his own creditors are prejudiced. Hence, in order to prevent this, the law expressly recognizes the right of a creditor to proceed against such third persons invested as it were with the personality of the debtor.145 But certain conditions must be present before the creditor can avail of this remedy. In the first place, the debtor to whom the right or action properly pertains must be indebted to the creditor; in the second place, the latter must be prejudiced by the inaction or failure of the debtor to proceed against the third person; and in the third place, the creditor must have first pursued or exhausted all of the properties of the debtor which are not exempted from execution. When all of these conditions are present, the creditor can then proceed directly against the third person in place of the debtor.146 Attention must be called to the fact that this right is different from legal and conventional subrogations which will be taken up in a subsequent chapter. The latter involves a change of creditors, while the former does not. In accion subrogatoria, the creditor merely acts in the name and for the account of the debtor after exhausting all of the assets of the latter.147 The right of the creditor to exercise all of the rights and to bring all of the actions of the debtor against third persons is, howevCastan, 7th Ed., pp. 173-174; 2 De Diego 35. 2 De Diego, 35-36; 3 Castan, 7th Ed., pp. 175-176. 147 3 Castan, 7th Ed., p. 174; 8 Manresa, 5th Ed., Bk. 1, p. 272. 145 146

104

NATURE AND EFFECT OF OBLIGATIONS

Art. 1178

er, subject to one very important exception. Rights which are purely personal in the sense that they are inherent in the person of the debtor, such as rights arising from purely personal or family relations or those which are public or honorary in character, cannot be included within the scope of this remedy.148 Idem; Accion pauliana. — Another method by which the debtor may defeat the right of the creditor is by means of a positive act whereby the latter is defrauded or prejudiced. This may be illustrated by alienations or conveyances of property made by the debtor to third persons in fraud of creditors. According to Art. 1177, such acts can be impugned or attacked directly by means of a rescissory action at the instance of the creditors who are prejudiced.149 This action is sometimes known as accion pauliana in Spanish law. As in the case of accion subrogatoria, it is based on the principle that the property of the debtor, whether present or future, stands as a guaranty for the payment of the obligation or credit. Accion pauliana, therefore, refers to the right available to the creditor by virtue of which he can secure the rescission of any act of the debtor which is in fraud and to the prejudice of his rights as a creditor. By its very nature, it is subsidiary in character.150 In other words, it can only be availed of in the absence of any other legal remedy to obtain reparation for the injury.151 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.152 Transmissibility of Rights. — Rights of obligations or those rights which are acquired by virtue of an obligation are as a general rule transmissible in character. Consequently, they may be alienated or assigned to third persons. There are, however, several exceptions to this rule. They are: first, where they are not transmissible by their very nature, such as in the case of a purely personal right; second, where there is a stipulation of the parties that they are not transmissible; and third, where they 8 Manresa, 5th Ed., Bk. 1, p. 267. This rescissory action is regulated by Arts. 1380-1389, Civil Code. 150 Art. 1383, Civil Code. 151 2 Diego, 37-38. 152 Art. 1112, Spanish Civil Code. 148 149

105

Art. 1178

OBLIGATIONS

are not transmissible by operation of law.153 It must be observed, however, that intransmissibility by stipulation of the parties, being exceptional and contrary to the general rule, should not be easily implied, but must be clearly established, or at the very least, clearly inferable from the provisions of the contract itself.154

153 154

Arts. 1178, 1311, Civil Code. Estate of Hernandez vs. Luzon Surety Co., 100 Phil. 388.

106

CHAPTER 3 DIFFERENT KINDS OF OBLIGATIONS

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. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event.1 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 1197.2 Pure Obligations. — The effects as well as the concept of pure obligations are contained in the formula which is given in the first paragraph of Art. 1179, although, as Castan says, the concept is incomplete because it only excludes the condition and not the term.3 Using the provision as a basis and bearing in mind this criticism, we can, therefore, define a pure obligation as one whose effectivity or extinguishment does not depend upon the fulfillment or nonfulfillment of a condition or upon the expiration of a term or period, and which, as a consequence, is characterized by the quality of immediate demandability. The distinctive characteristic of a pure obligation is its immediate demandability. This quality, however, must not be understood Art. 1113, Spanish Civil Code. New provision. 3 3 Castan, 7th Ed., p. 104. 1 2

107

Arts. 1179-1180

OBLIGATIONS

in such a way as to lead to absurd interpretations which would literally require the obligor or debtor to comply immediately with his obligation. A distinction must be made between the immediate demandability of the obligation and its performance or fulfillment by the obligor or debtor. Although the obligee or creditor can demand the performance of the obligation immediately, the quality of immediate demandability is not infringed or violated when a reasonable period is granted for performance.4 Thus, where the debtor had executed a simple and unconditional promissory note promising to pay a certain indebtedness to the creditor without fixing any particular date for payment, it was held that the obligation is pure and that, although the creditor can demand for the payment of the same immediately, a reasonable period of grace, which in this case was fixed at ten days after the obligation was contracted, should be given to the debtor within which to pay.5 Conditional Obligations. — In its juridical sense, a condition may be defined as a future and uncertain fact or event upon which an obligation is subordinated or made to depend. A conditional obligation may, therefore, be defined as one whose effectivity is subordinated to the fulfillment or nonfulfillment of a future and uncertain fact or event.6 Although the first paragraph of Art. 1179 would seem to indicate that either the requisite of futurity or uncertainty would be sufficient in order that the event upon which the performance of the obligation shall depend will be considered a condition, it is, however, essential that both requisites must concur. In other words, the event must not only be future, but it must also be uncertain. The reason why the disjunctive term is used is that said paragraph is intended primarily as a definition of a pure obligation using the process of exclusion. Hence, it must exclude not only conditional obligations, but also obligations with a term.7 From the literal text of the first paragraph of Art. 1179, it seems that a past but uncertain event is also considered a condition. 8 Manresa, 5th Ed., Bk 1, pp. 305-306. Floriano vs. Delgado, 11 Phil. 154; for other cases — see People’s Bank vs. Odom, 64 Phil. 128; Galar vs. Isasi; Aberri vs. Galar, CA, 47 Off. Gaz. 6241. 6 8 Manresa, 5th Ed., Bk 1, p. 309. 7 Ibid., pp. 309-310. 4 5

108

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Arts. 1179-1180

This is not, however, accurate. The event itself can never constitute a condition because in order that it can be classified as such, the requisites of futurity and uncertainty must be present. But the proof or ascertainment of the fact or event, as distinguished from the fact or event itself, may constitute either a condition or a term depending upon the circumstances of each case. Thus, if the proof or ascertainment of the fact or event will surely come to pass, although it may not be known when, it is clear that it constitutes a term or period, such as when A promises to pay B a certain sum of money if the latter can prove by proper authorities that the Civil Code of the Philippines took effect on Aug. 30, 1950. In such case, the requisites of futurity and certainty in order that a fact or event shall constitute a term or period are certainly present. On the other hand, if the past event is unknown to the parties as well as to the whole world, so that the proof or ascertainment thereof may or may not happen or come to pass, it is also clear that it constitutes a condition, such as when A promises to pay B a certain sum of money if the latter can prove by proper evidence that Rizal did not retract Freemasonry, or that a priest broke the seal of the confessional in order to reveal the secret of the Katipunan. However, 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 Art. 1197.8 Consequently, 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.9 Thus, it has been held that if it is stipulated by the contracting parties that the debtor shall pay “as soon as he has the money,” the creditor’s remedy is to resort to the courts for the determination of the duration of the period in accordance with the provisions of Art. 1197 of the Code.10 Idem; Classification of conditions. — Conditions are traditionally classified as follows: (1)

a.

Suspensive — when the fulfillment of the condition results in the acquisition of rights arising out of the obligation.

Art. 1197, Civil Code. Art. 1180, Civil Code. 10 Patente vs. Omega, 49 Off. Gaz. 4846. 8 9

109

Arts. 1179-1180

(2)

(3)

(4)

(5)

(6)

(7)

11

OBLIGATIONS

b.

Resolutory — when the fulfillment of the condition results in the extinguishment of rights arising out of the obligation.

a.

Potestative — when the fulfillment of the condition depends upon the will of a party to the obligation.

b.

Casual — when the fulfillment of the condition depends upon chance and/or upon the will of a third person.

c.

Mixed — when the fulfillment of the condition depends partly upon the will of a party to the obligation and partly upon chance and/or the will of a third person.

a.

Possible — when the condition is capable of realization according to nature, law, public policy or good customs.

b.

Impossible — when the condition is not capable of realization according to nature, law, public policy or good customs.

a.

Positive — when the condition involves the performance of an act.

b.

Negative — when the condition involves the omission of an act.

a.

Divisible — when the condition is susceptible of partial realization.

b.

Indivisible — when the condition is not susceptible of partial realization.

a

Conjunctive — when there are several conditions, all of which must be realized.

b.

Alternative — when there are several conditions, but only one must be realized.

a.

Express — when the condition is stated expressly.

b.

Implied — when the condition is tacit.11

8 Manresa, 5th Ed., Bk. 1, pp. 323-324.

110

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1181

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.12 Suspensive and Resolutory Conditions. — A suspensive condition (condition precedent) is a future and uncertain event upon the happening or fulfillment of which rights arising out of the obligation are acquired. Stated in another way, it signifies a future and uncertain event upon the fulfillment of which the obligation becomes effective. Hence, when the obligation depends upon a suspensive condition, the acquisition of rights by the obligee or creditor is subordinated to the fulfillment of the event which constitutes the condition. In other words, the birth or effectivity of the obligation is suspended until the happening or fulfillment of the event which constitutes the condition. Thus, if A obligates himself to give to B P100,000 if the latter gets married to C, the condition is suspensive in character. In such case, B cannot acquire the P100,000 unless he gets married to C. If X obligates himself to give to Y a certain house and lot if the latter passes the bar examinations in his first attempt, the condition is also suspensive in character. He cannot acquire the house and lot unless the condition is fulfilled. It is, therefore, evident that when the obligation is subject to a suspensive condition, its birth or effectivity can take place only if and when the event which contitutes the condition happens or is fulfilled. Thus, the Supreme Court, in the case of Javier vs. Court of Appeals (183 SCRA 172) held that when a contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the event which constitutes the condition happens or is fulfilled. If the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed. A resolutory condition (condition subsequent), on the other hand, is a future and uncertain event upon the happening or fulfillment of which rights which are already acquired by virtue of the obligation are extinguished or lost. Hence, when the obligation is subject to a resolutory condition, the juridical relation which is established as a result of the obligation is subject to the threat of extinction. Thus, if a person donates a parcel of land to the City of Manila subject to the

12

Art. 1114, Spanish Code.

111

Art. 1181

OBLIGATIONS

condition that the City shall transform it into a public park within a period of one year from the time of the perfection of the donation, the condition which is imposed is resolutory in character. If the City fails to transform the land into a public park within the stipulated period, the rights which it acquired over the land as a result of the donation are resolved or extinguished altogether. The same is true in case a person sells a parcel of land with right of repurchase. Once the sale with pacto de retro is perfected, the vendee a retro becomes the owner of the property. However, his right is not absolute in character because it may be extinguished or lost if the vendor a retro exercises his right of repurchase within the legal or stipulated period of redemption. Idem; Effects. — It is, therefore, clear from what had been stated that if an obligation is subject to a suspensive condition, the acquisition of rights shall depend upon the happening or fulfillment of the fact or event which constitutes the condition.13 In other words, the obligation shall become effective only upon the fulfillment of the condition. Consequently, what is acquired by the obligee or creditor upon the constitution of the obligation is only a mere hope or expectancy. Unlike other hopes or expectancies, however, it is protected by the law.14 On the other hand, if the obligation is subject to a resolutory condition, it becomes demandable immediately after its establishment or constitution. This is evident from the provision of the second paragraph of Art. 1179. Consequently, unlike an obligation with a suspensive condition, rights arising out of the obligation are acquired immediately and vested in the obligee or creditor.15 However, this is without prejudice to the happening or fulfillment of the event which constitutes the condition. In other words, although rights are immediately vested in the obligee or creditor upon the constitution of the obligation, such rights are always subject to the threat or danger of extinction. Thus, in the case of a sale with pacto de retro, the vendee a retro becomes the owner of the property which is sold once it is delivered to him. This right of ownership, however, is subject

Art. 1181, Civil Code; for illustrative cases, see Wise & Co. vs. Kelly, 37 Phil. 696; Santiago vs. Millar, 68 Phil. 39; Phil. Nat. Bank vs. Phil. Trust Co., 68 Phil. 48; Panganiban vs. Batangas Trans. Co., CA, 46 Off. Gaz. 3167. 14 Art. 1188, Civil Code; Phil. Long Distance Co. vs. Jeturian, 97 Phil. 981. 15 Art. 1181, Civil Code. 13

112

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1181

to a resolutory condition. If the vendor a retro exercises his right of repurchase within the period of redemption, the right of the vendee a retro over the property is extinguished; if he does not, the right is consolidated.16 Problem — On June 5, 1960, DP delivered possession of his house and lot in the Poblacion of Polo, Bulacan to AB who in turn delivered to the former possession of his 2-hectare rice land. Both properties were unregistered. They executed a document entitled “Barter’’ which, among others, provided that both parties shall enjoy the material possession of their respective properties: that neither party shall encumber, alienate or dispose of their respective properties as bartered without the consent of the other; and that DP shall be obliged to return the property to AB when the latter’s son shall attain majority and decide to return DP’s property. After AB’s death and his son S attained majority in 1977, the latter demanded for the return of the 2 hectares of rice land which had then increased tremendously in value. DP refused and so S filed an action for recovery of the land. Will the action prosper? Why? (1979 Bar Problem) Answer — Yes, the action will prosper. The stipulations in the barter agreement are clear. All that the parties intended was to transfer the material possession and use of the subject properties to the other. There was, therefore, no conveyance of their right of ownership. In fact, the parties retained their rights to alienate their right of ownership, a right which is one element of ownership. What was, therefore, transferred was merely their right of usufruct. But then, the document also says that DP shall be obliged to return the property to AB when the latter’s son shall attain majority and decide to return DP’s property. The mutual agreement, therefore, was subject to a resolutory condition the happening of which would extinguish or terminate their right of usufruct over the subject properties. The facts are clear. Said condition has already been fulfilled. (Baluran vs. Navarro, 79 SCRA 309.)

It is, therefore, evident that a resolutory condition affects the obligation to which it is attached in a manner which is diametrically opposed to that of a suspensive condition. If the suspensive condition is fulfilled, the obligation arises or becomes effective; if the resolutory

16

Art. 1601, et seq., Civil Code.

113

Art. 1181

OBLIGATIONS

condition is fulfilled, the obligation is extinguished. If the first is not fulfilled, no juridical relation is created; if the second is not fulfilled, the juridical relation is consolidated. In other words, in the first, rights are not yet acquired, but there is a hope or expectancy that they will soon be acquired; in the second, rights are already acquired, but subject to the threat of extinction.17 These distinctions between a suspensive and a resolutory condition are illustrated in the following case: Parks vs. Province of Tarlac 49 Phil. 142 Plaintiff bought the land which is the subject matter of this litigation from Concepcion Cirer and James Hill, who, several years ago, prior to the sale, had donated the land to the municipality of Tarlac subject to the condition that it will be used absolutely and exclusively for the erection of a central school and a public park, the work to commence within a period of six months from the date of ratification of the donation by the parties. The question now is: has the plaintiff a right of action to recover the parcel of land from the municipality of Tarlac on the ground that the condition imposed is suspensive, and therefore, the said municipality had never acquired a right thereto since the condition was never performed? Held: “The appellant contends that a condition precedent having been imposed in the donation and the same not having been complied with, the donation never became effective. We find no merit in this contention. The appellant refers to the condition imposed that one of the parcels donated was to be used absolutely and exclusively for the erection of a central school and the other for a public park, the work to commence in both cases within the period of six months from the date of the ratification by the parties of the document evidencing the donation. lt is true that this condition has not been complied with. The allegation, however, that it is a condition precedent is erroneous. The characteristic of a condition precedent is that the acquisition of the right is not effected while said condition is not complied with or is not deemed complied with. Meanwhile, nothing is acquired and there is only an expectancy of right. Consequently, when a condition is imposed, the compliance

17

8 Manresa, 5th Ed., Bk. 1, p. 311.

114

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1182

of which cannot be effected except when the right is deemed acquired, such condition cannot be a condition precedent. In the present case, the condition that a public school be erected and a public park made on the donated land, work on the same to commence within six months from the date of the ratification of the donation by the parties, could not be complied with except after giving effect to the donation. The donee could not do any work on the donated land if the donation had not really been effected, because it would be an invasion of another’s title, for the land would have continued to belong to the donor so long as the condition imposed was not complied with. The condition, therefore, was a condition subsequent.’’18

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.19 Potestative, Casual and Mixed Conditions. — As regards the cause upon which its fulfillment depends, a condition may be either potestative, casual or mixed. A purely potestative condition is one whose fulfillment depends exclusively upon the will of either one of the parties to the obligation. A casual condition is one whose fulfillment depends exclusively upon chance and/or upon the will of a third person. A mixed condition is one whose fulfillment depends jointly upon the will of either one of the parties to the obligation and upon chance and/or the will of a third person. Idem; Effect of potestative conditions. — A distinction must be made between the effects of a potestative condition whose fulfillment depends exclusively upon the will of the creditor and the effects of one whose fulfillment depends exclusively upon the will of the debtor. In the first the condition as well as the obligation is valid, while in the second not only the condition, but even the obligation itself, is void. Although the law is silent with regard to potestative conditions whose fulfillment depends exclusively upon the will of the creditor, it is undeniable that it cannot have the effect of nullifying the 18 19

For a similar case, see Prieto vs. Quezon City, 99 Phil. 1059. Art. 1115, Spanish Civil Code.

115

Art. 1182

OBLIGATIONS

obligation to which it is attached. This is so because the creditor is naturally interested in the fulfillment of the condition since it is only by such fulfillment that the obligation can become effective. Furthermore, the prohibition directed against potestative conditions which can be clearly inferred from the provision of Art. 1182 extends only to those which are potestative to the debtor and not to those which are potestative to the creditor.20 On the other hand, the law expressly states that the conditional obligation shall be void if it is subject to a potestative condition whose fulfillment depends exclusively upon the will of the debtor.21 The reason behind this precept is evident. To allow conditions whose fulfillment depends exclusively upon the will of the debtor would be equivalent to sanctioning obligations which are illusory.22 Besides, it would be in direct contravention of the principle announced in Art. 1308 of the Code that the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties. Thus, where the obligor subscribed to 200 shares of capital stock to a certain college with a par value of P100.00 each subject to the condition that she will pay as soon as she had harvested fish from her fishpond, it was held that even granting that the college had accepted the condition, the obligation would still be void in accordance with Art. 1182 of the Code, since the fulfillment of the condition depends exclusively upon the will of the obligor.23 It must be noted, however, that the precept contained in the first sentence of Art. 1182 is applicable only to a suspensive condition. Hence, if the condition is resolutory and, at the same time, potestative, the obligation, as well as the condition, is valid even though the fulfillment of the condition is made to depend upon the sole will of the obligor or debtor. This is logical because it is but natural that the debtor is interested in the fulfillment of the resolutory condition since it is only by such fulfillment that he can reacquire the rights which have already been vested in the obligee or creditor upon the constitution of the obligation.24 In other words, the position of the debtor when the condition is resolutory is exactly the

8 Manresa, 5th Ed., Bk. 1, p. 327. Art. 1182, Civil Code. 22 8 Manresa, 5th Ed., Bk. 1, p. 324. 23 Trillana vs. Quezon Colleges, 93 Phil. 383. 24 Art. 1190, Civil Code. 20 21

116

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1182

same as the position of the creditor when the condition is suspensive. Hence, to make the fulfillment of the resolutory condition depend upon the debtor’s will does not render the obligation illusory. Thus, in the case of Taylor vs. Uy Tieng,25 where plaintiff and defendant agreed that should the machinery, which the latter had ordered from the United States, not arrive in Manila within six months for any reason whatsoever, he can then cancel the contract at his option, the Supreme Court, although admitting the potestative character of the condition, declared: “In Spanish jurisprudence a condition like that under discussion is designated by Manresa a facultative condition (Vol. 7, p. 611), and we gather from his comment on Articles 1115 and 1119 (now Arts. 1182 and 1186) of the Civil Code that a condition, facultative as to the debtor, is obnoxious to the first sentence contained in Article 1115 (now Art. 1182) and renders the whole obligation void (Vol. 8, p. 131). That statement is no doubt correct in the sense intended by the learned author, but it must be remembered that he evidently has in mind the suspensive condition, such as is contemplated in Article 1115 (now Art. 1182). Said article can have no application to the resolutory condition, the validity of which is recognized in Article 1113 (now Art 1179) of the Civil Code. ln other words, a condition at once facultative and resolutory may be valid though the condition is made to depend upon the will of the obligor.’’

It must also be noted that the rule that the conditional obligation shall be void is applicable only to an obligation which depends for its perfection upon a condition which is potestative to the debtor and not to a pre-existing obligation. Thus, if the debtor binds himself to deliver to the creditor a certain automobile by the end of December, 1980, provided that he is in the mood to do so, the obligation is void; in this case it is evident that the obligation depends for its perfection upon the fulfillment of a condition which is potestative. If the debtor, however, binds himself to pay a previous indebtedness of P2,000 to the creditor by the end of December, 1980, provided that he is in the mood to do so, although the condition is void on the ground that its fulfillment depends exclusively upon the will of the debtor, the obligation itself is not void since it refers to a pre-existing indebtedness. 25

43 Phil. 873.

117

Art. 1182

OBLIGATIONS

Osmeña vs. Rama 14 Phil. 99 This is an action commenced by the plaintiff in the Court of First Instance of Cebu for the collection of an indebtedness evidenced by a promissory note, signed by the defendant. Under this note, defendant stated: “I promise, in the presence of two witnesses, that, if the house of strong materials in which I live is sold, I will pay my indebtedness to Don Tomas Osmeña x x x.’’ Is the condition potestative within the meaning of the prohibition in what is now Art. 1182 of the Civil Code or not? Held: “The only questions raised by the appellant were questions of fact. It was suggested during the discussion of the case in this court that, in the acknowledgment above-quoted of the indebtedness made by the defendant, she imposed the condition that she would pay the obligation if she sold her house. If that statement found in her acknowledgment of the indebtedness should be regarded as a condition, it was a condition which depended upon her exclusive will and this is, therefore, void.’’26

Idem; Effect of casual conditions. — When the fulfillment of the condition depends upon chance and/or the will of a third person, the obligation including such condition shall take effect.27 Thus, if the obligor promises to deliver his automobile to the obligee if a certain candidate is elected to the position of President of the Philippines in 1969, the obligation is valid because it is evident that the fulfillment of the condition to which it is subject depends upon the will of others. The same is true if the obligor promises to give P10,000 to the obligee after the lapse of two years, provided that during such period war shall not break out between Russia and the United States. Idem; Effect of mixed conditions. — When the fulfillment of the condition depends partly upon the will of a party to the obligation and partly upon chance and/or the will of a third person, the obligation including such condition shall take effect. Thus, where the payment of the balance of the purchase price of a house and lot

26 In Hermosa vs. Longara (93 Phil. 971), a much more recent case, the Supreme Court declared that the above ruling was merely an assumption and the same was not the actual ruling of the case. 27 Art. 1182, Civil Code.

118

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1182

is subject to the condition that the premises shall be vacated by the occupant and that the vendee shall see to it that said premises shall be vacated, it was held that the fulfillment of the condition depends partly upon the will of the debtor and partly upon the will of a third person, and therefore, the contract is valid and enforceable.28 Similarly, where the debtor promises to pay his debts to the creditor as soon as he shall have received funds derived from the sale of his house, it was held that the fulfillment of the condition depends partly upon the will of the debtor and partly upon the will of third persons, as a consequence of which it is perfectly valid and enforceable.29 But where the debtor promises to pay his debts “if he decides to sell his house’’ or “if he likes to pay the sums advanced,” the condition would be void, since its fulfillment would then depend exclusively upon his will.30 Smith, Bell & Co. vs. Sotelo Matti 44 Phil. 875 In August, 1918, during the first World War, plaintiff and defendant entered into several contracts whereby the former agreed to sell, and the latter to purchase, two steel tanks for P21,000, the same to be shipped from New York and delivered in Manila “within three or four months,” two expellers at P25,000 each, which were to be shipped from San Francisco in “September, 1918, or as soon as possible,” and two electric motors, approximate delivery of which was to be made “within ninety days, although not guaranteed.” Because of the war that was going on, there was a stipulation in all of the contracts that delivery of the machineries shall be subject to government regulations, embargoes and other requirements. Upon their arrival in Manila, defendant refused to accept the machineries on the ground that plaintiff had incurred in delay. As a result, the latter brought this action against the former for specific performance. Holding that the defendant can still be compelled to comply with the obligation, the Supreme Court declared: “Considering these contracts in the light of the civil law, we cannot but conclude that the term which the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, these articles could be brought to Manila or Jacinto vs. Chua Leng, CA, 45 Off. Gaz. 2919. Hermosa vs. Longara, 93 Phil. 971. 30 Ibid. 28 29

119

Art. 1182

OBLIGATIONS

not. If that is the case, as we think it is, the obligation must be regarded as conditional. “And as the export of the machinery in question was, as stated in the contract, contingent upon the sellers obtaining a certificate of priority and permission of the United States Government, subject to the rules and regulations, as well as the railroad embargoes, then the delivery was subject to a condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon the will of third persons who could not be compelled to fulfill the condition. In cases like this, which are not expressly provided for, but impliedly covered by the Civil Code, the obligor will be deemed to have sufficiently performed his part of the obligation, if he has done all that was in his power, even if the condition has not been fulfilled in reality.” Problem — Give the effects of potestative, casual and mixed conditions upon the obligation. Answer — If the condition is potestative in the sense that its fulfillment depends exclusively upon the will of the debtor, the conditional obligation shall be void. (Art. 1182, NCC.) If the condition is potestative in the sense that its fulfillment depends exclusively upon the will of the creditor, the conditional obligation shall be valid. This is so because the provision of the first sentence of Art. 1182 extends only to conditions which are potestative to the obligor or debtor. Besides, the creditor is naturally interested in the fulfillment of the condition since it is only by such fulfillment that the obligation arises or becomes effective. (Art. 1181, NCC; 8 Manresa, 5th Ed., Bk. 1, p. 327.) If the condition is casual in the sense that its fulfillment depends upon chance and/or upon the will of a third person, the obligation shall be valid. (Art. 1182, NCC.) If the condition is mixed in the sense that its fulfillment depends partly upon the will of a party to the obligation and partly upon chance and/or the will of a third person, the obligation shall be valid. (Smith, Bell & Co. vs. Sotelo, 44 Phil. 875; Hermosa vs. Longara, 93 Phil. 971.) Problem — Suppose that the debtor executed a promissory note promising to pay his obligation to the creditor as soon as he has received funds derived from the sale of his property in a certain place, is the condition potestative or mixed? Answer — According to the Supreme Court in the case of Hermosa vs. Longara, 93 Phil. 971, the condition is mixed

120

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1182

because its fulfillment depends not only upon the will of the debtor but also upon the concurrence of other factors, such as the acceptability of the price and other conditions of the sale, as well as the presence of a buyer, ready, able and willing to purchase the property. Problem — Suppose that in the above problem, the debtor promised to pay his obligation if a house belonging to him is sold, will that make a difference in your answer? Answer — It will not make a difference in my answer. The condition is still mixed because its fulfillment depends not only upon the will of the debtor but also upon the concurrence of other factors, such as the acceptability of the price and other conditions of the sale, as well as the presence of a buyer, ready, able and willing to purchase the property. True, apparently, in Osmeña vs. Rama (14 Phil. 99), the Supreme Court declared that the above condition is potestative with respect to the debtor, but a closer perusal of the case will show that the declaration or statement was merely an assumption and the same was not the actual ruling. (Hermosa vs. Longara.) Hence, the condition is valid. And it cannot be said that if the debtor so desires, he can always prevent the sale. According to the NCC (Art. 1186.), if he prevents the consummation of the sale voluntarily, the condition would be deemed or considered complied with. (Ibid.) Problem — Suppose that in the above problem, the debtor promised to pay his obligation as soon as he has received the funds derived from the sale of the property if he finally decides to sell it, will that make a difference in your answer? Answer — Yes. In such case, it is evident that the condition is potestative with respect to the debtor because its fulfillment would then depend exclusively upon his will. Consequently, the condition is void. (Hermosa vs. Longara.) The validity of the obligation is, of course, not affected, because the rule stated in Art. 1182 of the NCC to the effect that when the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation itself shall be void, is applicable only when the obligation shall depend for its perfection upon the fulfillment of the condition and not when the obligation is a preexisting one. (See Trillana vs. Quezon Colleges, 93 Phil. 383.) Problem — Art. 1182 of the New Civil Code declares that when the fulfillment of the condition depends upon the sole will

121

Art. 1183

OBLIGATIONS

of the debtor, and conditional obligation shall be void. Is this rule absolute in the sense that it is applicable to all conditional obligations regardless of the nature of the condition as well as of the obligation? Answer — The rule is not absolute. There are 2 wellknown limitations. They are as follows: The rule is applicable only to a suspensive condition. Hence, if the condition is resolutory and potestative, the obligation is valid even if the fulfillment of the condition is made to depend upon the sole will of the debtor. This is logical because it is but natural that the debtor is interested in the fulfillment of the condition since it is only by such fulfillment that he can reacquire the rights which have already been vested in the creditor upon the constitution of the obligation. In other words, the position of the debtor when the condition is resolutory is exactly the same as the position of the creditor when the condition is suspensive. (Taylor vs. Uy Tieng Piao, 43 Phil. 873.) The rule that even the obligation itself shall be void is applicable only to an obligation which depends for its perfection upon the fulfillment of the potestative condition and not to a pre-existing obligation. Thus, if the debtor binds himself to pay a previous indebtedness as soon as he decides to sell his house, although the condition is void because of its potestative character, the obligation itself is not affected since it refers to a pre-existing indebtedness. (Trillana vs. Quezon Colleges, 93 Phil. 383.)

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.31 Possible and Impossible Conditions. — The condition upon which an obligation is made to depend may also be classified as possible or impossible. It is possible when it is capable of realization not only according to its nature, but also according to the law, good 31

Art. 1116, Spanish Civil Code, in modified form.

122

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1183

customs and public policy. It is impossible when it is not capable of realization either according to its nature or according to law, good customs or public policy. Idem; Effects. — According to Art. 1183 of the Civil Code, impossible conditions as well as those which are contrary to good customs or public policy and those which are prohibited by law shall annul the obligation which depends upon them.32 This rule is logical considering that the obligation depends for its perfection upon the fulfillment of a condition which is either impossible, illegal, inappropriate or illicit in character. Thus, if A obligates himself to pay to B P10,000 if the latter can contract the inhabitants of Mars, the obligation is a nullity because the condition is impossible. If C promises to give to D a parcel of land if the latter secures a divorce from his wife, the obligation is also a nullity because the condition is contrary to law, good customs and public policy. If E binds himself to deliver to F an automobile if the latter will go with him around the world on a trial honeymoon, the obligation is certainly void because the condition is contrary to good customs. If the obligation, however, is a pre-existing obligation, and therefore, does not depend upon the fulfillment of the condition for its perfection, it is quite clear that only the condition is void, but not the obligation. It must be observed that if the obligation is divisible, that part which is not affected by the impossible or unlawful condition shall be valid.33 Thus, if A and B enter into an agreement whereby the former binds himself to give P5,000 to the latter in two equal installments — the first installment to be given if the latter is able to dispose of a cache of opium belonging to the former and the second installment to be given if the latter gets married to C, since the obligation is divisible, that part (the second part) which is not affected by the unlawful condition shall be valid. Furthermore, if the condition is not to do an impossible thing, it shall be considered as not having been agreed upon.34 Consequently, the obligation becomes pure, and therefore, immediately demandable.

Luneta Motor Co. vs. Abad, 67 Phil. 23; Reyes vs. Gonzales, CA, 45 Off. Gaz. 831; Theater’s Supply Corp. vs. Malolos, CA, 48 Off. Gaz. 1803; Santos vs. Sec. of Agriculture, 48 Off. Gaz. 3367. 33 Art. 1183, Civil Code. 34 Ibid. 32

123

Arts. 1184-1185

OBLIGATIONS

Attention must also be called to the fact that there is a difference with respect to effect between a condition which is impossible, illegal, inappropriate or illicit when it is attached to an obligation35 and the same condition when it is attached to a simple or remuneratory donation36 or to a testamentary disposition.37 In the first, the obligation itself is void, while in the second, the condition is considered as not imposed, although the donation or testamentary disposition itself is valid. 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.38 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.39 Positive and Negative Conditions. — The condition upon which an obligation is made to depend may also be classified as positive or negative. It is positive if it involves the performance of an act or the fulfillment of an event; it is negative if it involves the nonperformance of an act or the nonfulfillment of an event. Idem; Effects. — The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it becomes indubitable that the event will not take place.40 Thus, if A binds himself to give to B P2,000 if the latter passes the bar examinations in his first attempt, and B flunks the examinations, the obligation is extinguished. If X binds himself

Ibid. Art. 727, Civil Code. 37 Art. 873, Civil Code. 38 Art. 1117, Spanish Civil Code. 39 Art. 1118, Spanish Civil Code. 40 Art. 1184, Civil Code. 35 36

124

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1186

to give a new Studebaker car to Y if the latter gets married to Z within a period of five years from the time of the constitution of the obligation, and at the expiration of five years, Y had not yet complied with the condition, the obligation is also extinguished. 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.41 Thus, if A binds himself to give P5,000 to B provided that the latter shall not get married before reaching the age of twenty-five, the condition is negative. If B is not yet married at the time when he finally reaches the age of twenty-five, the obligation becomes effective. Attention must be called to the rule stated in the second paragraph of Art. 1185. The intention of the parties, taking into consideration the nature of the obligation, shall govern if no time has been fixed for the fulfillment of the condition. It is evident that the same rule can also be applied to a positive condition. Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.42 Constructive Fulfillment of Suspensive Conditions. — The above article enunciates the doctrine of constructive fulfillment of suspensive conditions. In order that this doctrine can be applied, it is, however, necessary that the obligor must have actually prevented the obligee from complying with the condition, and that such prevention must have been voluntary or willful in character. Thus, where the conditions which are imposed by a certain company in order that its employees will be entitled to retirement benefits can no longer be complied with because the retirement or pension plan was willfully abrogated by a unilateral act of the Board of Directors of the company, it was held that such conditions are deemed complied with in conformity with Art. 1186; consequently, such employees are now entitled to retirement benefits.43

Art. 1185, Civil Code. Art. 1119, Civil Code. 43 Phil. Long Distance Co. vs. Jeturian, 97 Phil. 981. 41 42

125

Arts. 1187-1188

OBLIGATIONS

It must be noted, however, that the doctrine can be applied only to suspensive and not to resolutory conditions. In the words of the Supreme Court: “This provision supposes a case where the obligor intentionally impedes the fulfillment of a condition which would entitle the obligee to exact performance from the obligor; and an assumption underlying the provision is that the obligor prevents the obligee from performing some act which the obligee is entitled to perform as a condition precedent to the exaction of what is due to him. Such an act must be considered unwarranted and unlawful, involving per se a breach of the implied terms of the contract. The article can have no application to an external contingency which is lawfully within the control of the obligor.”44

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 or the condition that has been complied with.45 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.46 Effect of Suspensive Conditions Before Fulfillment. — If the obligation depends upon a suspensive condition, the demand-

Taylor vs. Uy Tieng, 43 Phil. 760. Art. 1120, Spanish Civil Code. 46 Art. 1121, Spanish Civil Code, in modified form. 44 45

126

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Arts. 1187-1188

ability as well as the acquisition or effectivity of rights arising from the obligation is suspended pending the happening or fulfillment of the fact or event which constitutes the condition. It is but logical, therefore, that during the pendency of the condition, the obligee or creditor has only a mere hope or expectancy. This hope or expectancy, however is protected by the law. This is evident from the provision of the first paragraph of Art. 1188. Inasmuch as the obligee or creditor has an expectant right to the eventual fulfillment or performance of the obligation, it is but just and proper that the law accords to him the right to avail of all remedies for the protection or preservation of such right. Thus, if the obligor has promised in writing to sell a parcel of land to the obligee upon the happening of a certain condition, and subsequently, before the fulfillment of the condition, he changes his mind and finally decides to sell the land to another person, the obligee can bring an appropriate action, such as a petition for the issuance of a writ of injunction, to prevent the sale in order to preserve his right. In the case of the obligor or debtor, it is also logical that during the pendency of the condition, his obligation to comply with the prestation which constitutes the object of the obligation is held in suspense until the fulfillment of the condition. Or more accurately, his obligation to comply with the prestation arises only if and when the event which constitutes the condition is finally fulfilled. Consequently, if he has paid anything by mistake during the pendency of the condition, he can recover what has been paid.47 Problem — Before the war, the Phil. Long Distance Co. (PLDT) adopted a pension plan for its employees by virtue of which all employees who have reached the age of 50 years and who have rendered 20 years or more service may be retired with a pension. After the war, the Board of Directors of the Company passed a resolution abrogating the pension plan. Subsequently, sixty employees who were affected filed a complaint against the Company claiming monetary benefits under the pension plan. The Company interposed the following defenses: (1) that the obligation to pay a pension to the plaintiffs is subject to certain suspensive conditions; consequently, such plaintiffs have no personality to ask for monetary benefits until after such conditions are fulfilled; (2) that even granting without 47

Art. 1188, par. 2, Civil Code.

127

Arts. 1187-1188

OBLIGATIONS

admitting that they have, they are not entitled to such benefits until after the conditions are fulfilled; and (3) that war losses had extinguished the Company’s obligation to proceed with the pension plan. If you are the judge, how will you decide the case? Reasons. Answer — The facts of the above problem are exactly the same as those in the case of PLDT Co. vs. Jeturian, et al., 97 Phil. 981, where the Supreme Court decided in favor of the plaintiffs. For purposes of clarity, let us take up the defenses advanced by the defendant company separately. (1) The 1st defense is untenable. While it is true that when an obligation is subject to a suspensive condition, what is acquired by the creditor is only a mere hope or expectancy, nevertheless, it is a hope or expectancy that is protected by the law. According to Art. 1188 of the NCC, the creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. (2) The second defense is untenable. According to Art. 1186 of the NCC, the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. The act of the Board of Directors of the Phil. Long Distance Co. in abrogating the pension plan certainly falls within the sphere or purview of this rule. (3) The third defense is also untenable. This is so because the defense of fortuitous event is available only if the obligation is determinate and not if the obligation is generic. Here, the obligation is clearly generic since it involves the payment of money. From the foregoing, it is clear that the case should be decided in favor of the plaintiffs.

Effect of Suspensive Conditions After Fulfillment. — Once the event which constitutes the condition is fulfilled, the obligation arises or becomes effective. The right of the creditor, which, before the fulfillment of the condition, was a mere hope or expectancy, is perfected. It becomes effective and demandable. The obligor or debtor, on the other hand, can thereafter be compelled to comply with what is incumbent upon him. Idem; Retroactivity of effect. — There is, however, a very important precept or principle which must be noted once the condition upon which the obligation depends is finally fulfilled. This 128

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Arts. 1187-1188

refers to the retroactive character of the effects of the fulfillment of the condition.48 The basis of this precept is simple. The condition which is imposed is only an accidental, not an essential, element of the obligation. Consequently, once the event which constitutes the condition is fulfilled thus resulting in the effectivity of the obligation, its effects must logically retroact to the moment when the essential elements which gave birth to the obligation have taken place and not to the moment when the accidental element was fulfilled.49 The principle of retroactivity can only apply to consensual contracts. It can have no application to real contracts, such as deposit, pledge or commodatum which can only be perfected by delivery. Neither can it have any application to those contracts in which the obligation arising therefor can only be realized within successive periods or intervals, such as lease, hire of service, life annuity, and similar contracts.50 The application of the principle of retroactivity must, however, be tempered by principles of justice and practicability. The law, therefore, has provided for certain limitations which must be complied with in the application of the principle. Idem; id. — In obligations to give. — 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. Thus, if A had obligated himself to sell a certain parcel of land to B for P100,000 subject to a condition of a suspensive character, and such condition was fulfilled two years after the perfection of the contract, a literal application of the principle of retroactivity would have the effect of compelling A to deliver to B not only the land, but also all of the fruits which he may have gathered or received therefrom during the period from the time of the perfection of the contract to the time of the fulfillment of the condition; and as far as B is concerned, it would have the effect of compelling him to pay to A not only the P100,000, but also the interest thereon during the same period. But because of the reciprocal character of the obligation, the law, as a matter of justice and convenience, considers the fruits and interests as the equivalent

Art. 1187, Civil Code, pp. 334-335. 8 Manresa, 5th Ed., Bk. 1, p. 33. 50 7 Planiol and Ripert 353-354. 48 49

129

Art. 1189

OBLIGATIONS

of each other. In other words, they are deemed to compensate each other mutually.51 When the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it can be inferred that the intention of the person constituting the same was different. This rule is based on justice. Since the obligor or debtor does not receive any equivalent or valuable consideration from the obligee or creditor when the obligation is unilateral, it is but logical that he shall be entitled to all of the fruits or interests of the thing pending the fulfillment of the condition, unless there is a contrary intention on his part. Thus, if A had obligated himself to give to B a parcel of land if the latter gets married to C, and the condition is fulfilled only after two years from the time of the constitution of the obligation, he shall be obligated to deliver only the land and not the fruits which he may have gathered or received therefrom during the pendency of the condition.52 Idem; id. — In obligations to do or not to do. — In case of personal obligations, the courts will have to determine in each case the retroactive effect of the condition that has been complied with. This duty of the courts includes the power to determine whether the effects of the fulfillment of the condition shall retroact to the very moment of the constitution of the obligation or only to a specified date before fulfillment. It can even include the power to determine whether or not there will be any retroactivity of effects.53 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

8 Manresa, 5th Ed., Bk. 1, pp. 334-335. Ibid., p. 335. 53 Ibid. 51 52

130

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1189

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.54 Effect of Loss, Deterioration or Improvement. — What is the effect of the loss, deterioration or improvement of the thing which constitutes the object of the obligation during the pendency of the condition? This question is answered by the rules which are stated in Art. 1189. These rules are natural consequences of the principle of retroactivity which is embodied in Art. 1187. They refer only to conditional obligations to give a determinate thing. Although the loss, deterioration or improvement occurs during the pendency of the condition, such rules are predicated on the fulfillment of such conditions. Idem; Losses. — Loss of the thing due must be understood in its technical, not vulgar, sense. Thus, according to the Code, it is understood that the thing is lost: (1) when it perishes; or (2) when it goes out of commerce; or (3) when it disappears in such a way that its existence is unknown or it cannot be recovered.55 It is evident from an examination of the first and second rules stated in Art. 1189 that the effect of the loss or destruction of the thing which constitutes the object of the obligation shall depend upon whether the loss or destruction occurred without the fault of the debtor or through his fault. If the thing is lost without any fault of the debtor,

54 55

Art. 1122, Spanish Civil Code. Art. 1189, No. 2, Civil Code.

131

Art. 1189

OBLIGATIONS

the obligation is extinguished. However, if it is lost through his fault, the obligation is converted into one of indemnity for damages. The first rule is in conformity with Art. 1262 of the Code. Idem; Deteriorations. — The rules contained in Nos. 3 and 4 of Art. 1189 are self-explanatory. If the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor. However, if it deteriorates through the fault of the debtor, the creditor may choose between bringing an action for rescission of the obligation with damages and bringing an action for specific performance with damages. Idem; Improvements. — If the thing is improved by its nature or by time, the improvement shall inure to the benefit of the creditor. Thus, in case of natural accessions, such as alluvion, avulsion, abandoned river beds, or islands which are formed, the accession shall inure to the benefit of the creditor. However, if the thing is improved at the expense of the debtor, he shall have no other right than that granted to a usufructuary. Consequently, the debtor cannot ask reimbursement for the expenses incurred for useful improvements or for improvements for mere pleasure;56 he can, however, ask reimbursement for necessary expenses.57 Although he cannot ask the creditor to reimburse his expenses for useful improvements and improvements for mere pleasure, he has the right to remove such improvements, provided it is possible to do so without damage to the thing or property.58 He may also set off the improvements he may have made on the property against any damage to the same.59 Problem — Suppose that an obligation is subject to a suspensive condition, but before the fulfillment of the condition the object of the obligation was lost or it has deteriorated, or improvements were made thereon, what is the effect of such loss, or deterioration, or improvements if the condition is finally fulfilled? Answer — 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, Art. 579, Civil Code. Art. 546, Civil Code. 58 Art. 579, Civil Code. 59 Art. 580, Civil Code. 56 57

132

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1190

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, NCC.) Problem — Are the above rules also applicable if the condition is resolutory? Answer — Yes. (Art. 1190, NCC.) However, in applying these rules, the “debtor” is the person obliged to return the object of the obligation in case of fulfillment of the condition, while the “creditor” is the person to whom the thing or object must be returned.

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.60 60

Art. 1123, Spanish Civil Code.

133

Art. 1190

OBLIGATIONS

Effect of Resolutory Conditions Before Fulfillment. — Because of the fact that in obligations with a resolutory condition, the right which the obligee or creditor has already acquired by virtue of the obligation is always subject to the threat of extinction during the pendency of the condition, the obligor or debtor is placed in a position which is very similar to that of the obligee or creditor in obligations with a suspensive condition. Like the latter he has also a hope or expectancy during the pendency of the condition. This is so because if and when the event which constitutes the resolutory condition happens or is fulfilled, he will certainly reacquire whatever he may have paid or delivered to the obligee or creditor. Consequently, the same right which is available to the creditor during the pendency of the condition in obligations which a suspensive condition is also available to the debtor in obligations with a resolutory condition. Since the latter has a hope or expectancy of reacquiring whatever he may have paid or delivered to the creditor, this hope or expectancy must be protected. Hence, commentators are unanimous in holding that the right which is explicitly recognized in the first paragraph of Art. 1188 is also available to the debtor in obligations with a resolutory condition. Although apparently this right is available only to the creditor in obligations with a suspensive condition, justice demands that the rights must also be available to the debtor in obligations with a resolutory condition during pendency of the said condition.61 Effect of Resolutory Conditions After Fulfillment. — As noted in the preceding sections, rights which are vested in the obligee or creditor in obligations with a resolutory condition are always subject to a threat of extinction during the pendency of the condition. If the resolutory condition is not fulfilled, such rights are consolidated; in other words, they become absolute in character. If it is fulfilled, such rights are extinguished altogether; in other words, whatever may have been paid or delivered by one or both of the parties upon the constitution of the obligation shall have to be returned upon the fulfillment of the condition. There is, therefore, a return to the status quo.62 Idem; Retroactivity of effect. — It is evident from an examination of the first paragraph of Art. 1190 that the retroactivity 61 62

8 Manresa, 5th Ed., Bk. 1, p. 346. Ibid.

134

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1190

of effects of a resolutory condition is more patent than that of a suspensive condition, notwithstanding the fact that here there is no positive declaration of the principle as in the case of the first paragraph of Art. 1187. This is so because, unlike Art. 1187 which provides for certain exceptions or limitations to the principle of retroactivity, here there are no exceptions. Thus, in obligations to give, upon the fulfillment of the resolutory condition, the parties shall return to each other what they have received. This rule is applicable whether the obligation is reciprocal or unilateral. There are no exceptions or limitations similar to those provided for in suspensive conditions. The basis for the difference, according to Manresa, lies in the fact that in obligations with a resolutory condition, the fulfillment of the condition and its retroactivity have the effect of signifying the nonexistence of the obligation and what is nonexistent must not give rise to any effect whatsoever. Consequently, the fiction of retroactivity must be carried to its full consummation. Therefore, every vestige of the obligation must be effaced as much as possible through the process of restitution.63 However, the process of restitution must be accompanied by a consequence which is not stated in Art. 1190, but which is required by the most elementary concept of justice. According to Art. 443 of the Code, “he who receives the fruits has the obligation to pay the expenses made by a third person in their production, gathering, and preservation.’’ Consequently, when a party to the obligation is obliged to return whatever he may have received including the fruits thereof to the other by reason of the fulfillment of the condition, he has the right to demand reimbursement for all expenses which he may have incurred in the production, gathering, and preservation of the said fruits.64 In obligations to do or not do, the retroactivity of effects of the resolutory condition shall depend upon the discretion of the courts, as in the case of suspensive conditions. Idem; Effect of loss, deterioration or improvement. — In case of loss, deterioration or improvement of the thing during the pendency of the condition, the rules laid down in Art. 1189 63 64

Ibid., pp. 345-346. Ibid., p. 346.

135

Art. 1191

OBLIGATIONS

are applicable. Consequently, what had been said regarding the effect of loss, deterioration or improvement of the thing during the pendency of a suspensive condition once the condition is fulfilled are also applicable here. However, in the application of the rules stated in Art. 1189 to obligations subject to a resolutory condition, the “debtor” is the person obliged to return, while the “creditor” is the person to whom the thing or object must be returned. 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.65 Concept of Reciprocal Obligations. — Reciprocal obligations are those which are created or established at the same time, out of the same cause, and which result in mutual relationships of creditor and debtor between the parties. The outstanding characteristic of this type of obligation is reciprocity arising from identity of cause by virtue of which one obligation is a correlative of the other. Thus, in a contract of sale, the obligation of the vendee to pay the price is a correlative of the obligation of the vendor to deliver the thing sold; in a contract of lease, the obligation of the lessee to pay the rental or price of the lease is a correlative of the obligation of the lessor to permit the use by the lessee of the thing leased. Although reciprocal obligations are bilateral in character, they must not be confused with those obligations in which the parties are mutually, but not reciprocally obligated, as when a person is the debtor of another by 65

Art. 1124, Spanish Civil Code, in modified form.

136

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1191

virtue of a contract of loan and, at the same time, the creditor by virtue of a contract of agency.66 Tacit Resolutory Condition. — Because of the fact that in reciprocal obligations the obligation of one party is the correlative of the obligation of the other, the Code in the first paragraph of Art. 1191 has established the principle that if one of the parties fails to comply with what is incumbent upon him, there is a right on the part of the other to rescind (or “resolve” in accordance with accepted translations of the Spanish Civil Code) the obligation. This condition is implied as a general rule in all reciprocal obligations. Since it has the effect of extinguishing rights which are already acquired or vested, it is resolutory in character. Idem; Necessity of judicial action. — The right to rescind or resolve the obligation is a right which belongs to the injured party alone.67 However, it is essential that it must be invoked judicially.68 This is evident from the provision of the third paragraph of Art. 1191 which states that the court shall decree the rescission, unless there be a just cause authorizing the fixing of a period.69 Therefore, the mere failure of a party to comply with what is incumbent upon him does not ipso jure produce the rescission or resolution of the obligation. In other words, the party entitled to rescind must invoke judicial aid by filing the proper action for rescission. Consequently, in a contract of sale, the fact that the vendee failed to pay the purchase price of the thing sold does not mean that the vendor can just take possession of the thing which had already been delivered to the vendee. He must invoke judicial aid by filing an action for rescission or resolution of the contract if he so elects.70 As stated by the Supreme Court, it is the judgment of the court and not the mere will of the vendor which produces the rescission of the sale.71 It must be noted, however, that where the contract itself contains a resolutory provision by virtue of which the obligation maybe cancelled or extinguished by the injured party in case of

8 Manresa, 5th Ed., Bk 1, pp. 348-349. Mateos vs. Lopez, 6 Phil. 206; Bosque vs. Yu Chipeco, 14 Phil. 95. 68 Guevara vs. Pascual, 12 Phil. 311; Escueta vs. Pando, 76 Phil. 256; Republic of the Phil. vs. Hospital San Juan de Dios and Burt, 47 Off. Gaz. 1833. 69 Escueta vs. Pando, 76 Phil. 256. 70 Ocejo, Perez & Co. vs. International Banking Corp., 37 Phil. 631. 71 Ibid. 66 67

137

Art. 1191

OBLIGATIONS

breach, judicial permission to cancel or rescind the contract is no longer necessary.72 In Taylor vs. Uy Tieng Piao, 43 Phil. 873, the defendant was expressly given the right to terminate plaintiff’s employment should the machinery expected fail to arrive in six months. It was held that the defendant had the right to cancel the contract. In Caridad Estates, Inc. vs. Santero, 71 Phil. 114, a provision granting the vendor the option to recover possession of the property sold if the vendee should fail to make the necessary payments was also recognized and given full effect. The only limitation on the exercise of the right to terminate a contract is that it must not be contrary to law, morals, good customs, public order or public policy.73 In the recent case of Sison vs. CA (164 SCRA 339), the Supreme Court in deciding whether the rescission of the contract to sell a subdivision lot after the lot buyer has failed to pay several installments was valid, the Court said: judicial action for the rescission of a contract is not necessary where the contract provides that it may be cancelled for violation of any of its terms and conditions. Consequently, Art. 1191 of the Civil Code can be applied only to reciprocal contracts which contain no resolutory conditions. The use of the word “implied” in the article supports this conclusion. The right to rescind is “implied’’ only if not expressly granted; no right can be said to be implied if expressly recognized.74 It must also be noted that Art. 1191 cannot be applied to contracts of partnership where one of the partners fails to pay the whole amount which he has bound himself to contribute to the common fund. In such a case, the provisions of Arts. 1786 and 1788 would be applicable. This is so because Art. 1191 refers to the resolution of reciprocal obligations in general, while Arts. 1786 and 1788 refer to contracts of partnership in particular. And it is a well-known principle that special provisions prevail over general provisions.75 It must also be noted that the above article cannot be applied to sales of real property or sales of personal property by installments. The first is governed by the Recto Law (Arts. 1484 to 1486, Civil

Hanlon vs. Hausermann and Beam, 40 Phil. 796; De la Rama Steamship Co. vs. Tan, 99 Phil. 1034. 73 De la Rama Steamship Co. vs. Tan, 99 Phil. 1034. 74 See also Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276. 75 Sancho vs. Lizarraga, 55 Phil. 601. 72

138

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1191

Code), while the second is governed by the Maceda Law (Rep. Act No. 6552). Idem; Nature of Breach. — What must be the nature of the breach which will entitle the injured party to file an action for the rescission of the obligation? This question was answered by the Supreme Court in the case of Song Fo & Co. vs. HawaiianPhilippine Co.76 The facts of this case are as follows: Plaintiff and defendant had entered into a contract whereby the latter bound itself to deliver to the former 300,000 gallons of molasses within a certain period, payment to be made upon presentation of accounts at the end of each month. It appears that a request for payment of accounts for molasses delivered was sent to the plaintiff in January, 1923. Instead of paying at the end of said month, plaintiff defaulted and paid only on February 20, 1923. Thereupon, defendant gave notice to the plaintiff rescinding the contract for failure to pay at the stipulated date. Subsequently, the plaintiff commenced this action to recover damages from the defendant for breach of contract. The question, therefore, which must be resolved is whether the defendant company had the right to rescind the contract or not. The Supreme Court held: “The terms of payment fixed by the parties are controlling. The time of payment stipulated in the contract should be treated as of the essence of the contract. Theoretically, agreeable to certain conditions which could easily be imagined, the HawaiianPhilippine Co. would have the right to rescind the contract because of the breach of Song Fo & Co. But actually, there is here present no outstanding fact which would legally sanction the rescission of the contract by the Hawaiian-Philippine Co. “The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement. A delay in payment for a small quantity of molasses for some twenty days is not such a violation of an essential condition of the contract as warrants rescission for nonperformance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it arose by accepting payment of the overdue accounts and continuing

76 47 Phil. 821. See also Villanueva vs. Yulo, G.R. No. L-12985, Dec. 29, 1959; Universal Food Corp. vs. Court of Appeals, 33 SCRA 1.

139

Art. 1191

OBLIGATIONS

with the contract. Thereafter, Song Fo & Co. was not in default in payment so that the Hawaiian-Philippine Co. had in reality no excuse for writing its letter of April 2, 1923, cancelling the contract. “We rule that the appellant has no legal right to rescind the contract of sale because of the failure of Song Fo & Co. to pay for the molasses within the time agreed upon by the parties.”

In Delta Motor Corp. vs. Gentino (170 SCRA 29), the Supreme Court reiterated the rule that rescission will be ordered only where the breach complained of is substantial as to defeat the object of the parties in entering into the agreement. It will not be granted where the breach is slight or casual. Thus, in a subsequent case of Ang vs. CA (170 SCRA 2863) it was held that while it is true that in reciprocal obligation, such as the contract of purchase and sale, the power to rescind is implied and any of contracting parties may, upon non-fulfillment by other party of his part of the obligation, resolve the contract, rescission will not be permitted for a slight casual breach of the contract. Idem; Alternative remedies of injured party. — In case one of the parties 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. These remedies are alternative, not cumulative; in other words, the injured party cannot seek both.77 Thus, in a case where the lessee was unable to pay rentals for two months, holding that the lessor has the right to rescind the contract of lease, the Supreme Court declared: “In Article 1124 (now Art. 1191) of the Civil Code it is declared that an obligation may be resolved if one of the obligors fails to comply with that which is incumbent upon him; and it is declared that the person prejudiced may elect between the fulfillment of the obligation (specific performance) and its resolution, with compensation for damages and payment of interest in either case. This general principle is substantially reproduced in the special provisions of the Civil Code dealing 77 San Juan vs. Cotay, 26 Phil. 328; Rios vs. Jacinto, 49 Phil. 9; Heacock vs. Butal Manufacturing Co., 66 Phil. 245; Magdalena Estate, Inc. vs. Myrick, 71 Phil. 344; Ramirez vs. Court of Appeals, 52 Off. Gaz. 779; Castro vs. Lim, CA, 52 Off. Gaz. 2056; Albert vs. Univ. Publishing Co., 104 Phil. 1054.

140

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1191

with the rights and obligations of lessors and lessees. In the first paragraph of Article 1555 (now Art. 1657), it is declared to be the duty of the lessee to pay the price of the lease in the manner agreed upon. In Article 1556 (now Art. 1659), the failure of the lessee to comply with this obligation is declared to be a found for the rescission of the contract and the recovery of damages, or the latter only, leaving the contract in force. It will thus be seen that the lessor is permitted to elect between the two remedies of (1) rescission, or resolution, with damages and (2) specific performance, with damages.’’78

It must, however, be observed that even after the injured party has chosen fulfillment and such fulfillment should become impossible, he can still seek the rescission or resolution of the obligation.79 It must also be observed that the right to choose between fulfillment and rescission is not incompatible with an alternative prayer for fulfillment or rescission in the complaint.80 As a matter of fact, even if the plaintiff apparently seeks to avail of both remedies, the presumption is that he is leaving the matter to the sound discretion of the court.81 Idem; id. — Damages to be awarded. — Whether the injured party chooses specific fulfillment or rescission, the rule is that he can recover damages.82 In estimating the damages to be awarded in case of rescission, only those elements of damages can be admitted that are compatible with the idea of rescission; and of course, in estimating the damages to be awarded in case the injured party elects specific performance, only the elements of damages can be admitted which are compatible with the idea of specific performance. It follows that damages which would be inconsistent with the idea of specific performance cannot be awarded in an action where rescission is sought.83 Thus, in the case of the rescission of a contract of sale for failure of the purchaser to pay the stipulated price, the seller is entitled to be restored to the possession of the thing sold, if it has already been delivered. But he cannot have both the thing sold and Rios vs. Jacinto, et al., 49 Phil. 1. Art. 1191, par. 2, Civil Code. 80 4 Tolentino, Civil Code, 1956 Ed., p. 172. 81 Mindanao Prospecting Ass. Inc. vs. Golden Gate Mining Co., CA, 48 Off. Gaz. 3955. 82 Art. 1191, par. 2, Civil Code. 83 Rios vs. Jacinto, et al., 49 Phil. 7. 78 79

141

Art. 1191

OBLIGATIONS

the price agreed upon for the resolution or rescission of the contract has the effect of destroying the obligation to pay the price. Similarly, in case of the rescission of a contract of lease, the lessor is entitled to be restored to the possession of the leased premises but he cannot have both the possession of the leased premises and the rent which the other party had contracted to pay. The termination of the lease has the effect of destroying the obligation to pay rent for the future.84 Idem; Judicial discretion to decree rescission. — According to the third paragraph of Art. 1191, the court shall decree the rescission claimed, unless there is a just cause authorizing the fixing of a period. It is clear from this provision that the right of the injured party in reciprocal obligations to rescind in case of failure of the other to comply with what is incumbent upon him is not absolute in character. This is so because the court is given the discretionary power to fix a period within which the obligor in default may be permitted to comply with what is incumbent upon him.85 It must be noted, however, that this rule cannot be applied to reciprocal obligations arising from a contract of lease. This is so because such obligations are governed by the provisions of Art. 1659 of the Code and not by those of Art. 1191, and although Art. 1659 is practically a restatement of Art. 1191, and there is, however, a difference, for whereas under Art. 1191 courts have the discretionary power to refuse the rescission of contracts if in their judgment the circumstances of the case warrant the fixing of a term within which the obligor or debtor may fulfill his obligation, under Art. 1659 there is no such discretionary power granted to courts.86 Idem; Effect of rescission. — When an obligation has been rescinded or resolved, it is the duty of the court to require the parties to surrender whatever they may have received from the other; in other words, the parties must be placed as far as practicable in their original situation.87 This should, however, be understood to be without prejudice to the liability of the party who was unable to comply with what was incumbent upon him for damages. Thus, where a contract of sale of a certain lot was rescinded by

Ibid. Ocejo, Perez & Co. vs. International Banking Corp., 37 Phil. 361; Kapisanan Banahaw vs. Dejarme, 55 Phil. 338; Puerto vs. Go Ye Pin, 47 Off. Gaz. 264. 86 Mina and Bacalla vs. Rodriguez, CA, 40 Off. Gaz. 65. 87 Po Pauco vs. Singuenza, 49 Phil. 404. 84 85

142

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1191

the vendor because of the failure of the vendee to pay for several monthly installments, it was held that since the contract contains no provision authorizing the vendor, in the event of the failure of the vendee to continue in the payment of the stipulated monthly installments, to retain the amounts already paid to him, the parties should be restored as far as practicable to their original situation which can be approximated only by ordering the return of the things which are the object of the contract with their fruits and of the price with its interests computed from the date of the institution of the action.88 The rescission, however, may be partial in character.89 Idem; id. — Effect upon third persons. — According to the fourth paragraph of Art. 1191, the decree of rescission shall be understood to be without prejudice to the rights of third persons who have acquired the thing in accordance with Arts. 1385 and 1388 and the Mortgage Law. Consequently, the rescission of a contract can no longer be demanded when he who demands it is no longer in a position to return whatever he may be obliged to restore; neither can it be demanded when the thing which is the object of the contract is already legally in the possession of a third person who did not act in bad faith.90 In such case, the only remedy of the injured party is to proceed against the party responsible for the transfer or conveyance for damages.91 However, if the third person had acquired the thing in bad faith, the injured party can still go after the property. If for any cause the thing can no longer be recovered, the only remedy of the injured party is to proceed against the third person who had acted in bad faith for damages.92 Problem — What is the effect if one of the obligors in reciprocal obligations should not comply with what is incumbent upon him? Answer — 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 Magdalena Estate, Inc. vs. Myrick, 71 Phil. 344. Tan Guat vs. Pamintuan, CA, 37 Off. Gaz. 2494. 90 Art. 1385, Civil Code. 91 Ibid. 92 Art. 1388, Civil Code. 88 89

143

Art. 1191

OBLIGATIONS

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, 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. (Art. 1191, NCC.) Problem — A sold a parcel of land to B for P20,000. In the deed of sale, there is a stipulation that the purchase price shall be paid on a certain date and that in case of failure to pay on such a date, A can rescind the contract. Suppose that B fails to pay on the date stipulated in the contract, is Article 1191 of the NCC applicable? Why? Answer — Art. 1191 is not applicable. Where the contract itself contains a resolutory provision by virtue of which the obligation may be cancelled or extinguished in case of breach, judicial permission to rescind the contract is no longer necessary. (Hanlon vs. Hausermann, 40 Phil. 796; De la Rama Steamship Co. vs. Tan, 99 Phil. 1034.) The use of the word “implied” in the article supports this conclusion. The right to rescind is “implied” only if not expressly granted; no right can be said to be implied if expressly recognized. Consequently, in the instant case, Art. 1191 is not applicable. The rule that is applicable is found in Art. 1592 under the law on sales. Problem — L leased a house to J. The contract stipulates that in case of non-payment of the rent, L can eject L without court action. J defaulted for two months. As a result, L ejected him. Can J claim damages because the renunciation of his day in court as stipulated in the contract is void? (1977) Answer — J cannot claim damages because the renunciation of his day in court as stipulated in the contract is void. True, under the NCC, in reciprocal obligations there is always a tacit resolutory condition that if one party is unable to comply with what is incumbent upon him, the injured party has the power to rescind the obligation. (Art. 1191.) This is reiterated in the law on lease. (Art. 1659.) True also, it is a well-settled rule that the injured party must invoke judicial aid. But then, this rule can be applied only to a case where the obligation is silent with respect to the power to rescind. The right to rescind is implied only if not expressly granted; no right can be said to be implied if expressly recognized. This is also well-settled. In the instant

144

DIFFERENT KINDS OF OBLIGATIONS Pure and Conditional Obligations

Art. 1191

case, the right of L to eject J without a court action in case of non-payment of the rent was expressly recognized in the contract itself. What L did was merely to enforce what was agreed upon. Problem — (a) Are the provisions of Art. 1191 of the New Civil Code applicable to obligations arising from contracts of lease or of partnership? Explain. (b) What must be the nature or character of the breach which will justify the injured party in bringing an action either for fulfillment of the obligation plus damages or for rescission plus damages? Answer — (a) In the case of obligations arising from a contract of lease, what are applicable are the provisions of Art. 1659 of the New Civil Code and not those of Art. 1191. Although Art. 1659 is practically a restatement of Art. 1191, yet there is a difference. Under Art. 1191, courts have the discretionary power to refuse the rescission of contracts if in their judgment the circumstances of the case warrant the fixing of a term within which the obligor may fulfill the obligation, while under Art. 1659, there is no such discretionary power granted to courts. (Mina and Bacalla vs. Rodriguez, CA, 40 Off. Gaz. 65.) In the case of obligations arising from a contract of partnership, as a general rule, Art. 1191 is applicable. However, this article cannot be applied where one of the partners fails to pay the whole amount which he has bound to contribute to the common fund. This is so because in such case Arts. 1786 and 1788 of the NCC are applicable. These provisions are particular provisions. Consequently, they prevail over the general provisions of Art. 1191 which refer to the resolution of reciprocal obligations in general. (Sancho vs. Lizarraga, 55 Phil. 601.) (b) The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are substantial or fundamental as to defeat the object of the parties in making the agreement. Consequently, a delay in payment for a small quantity of molasses for some 20 days is not such a violation of an essential condition as warrants rescission for non-performance. (Song Fo vs. HawaiianPhilippine Co., 47 Phil. 821; Villanueva vs. Yulo, L-12985, Dec. 29, 1959; Universal Food Corp. vs. Court of Appeals, 33 SCRA 1.)

145

Arts. 1192-1193

OBLIGATIONS

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.93 Effect of Breach by Both Parties. — The above rules are deemed just. The first one is fair to both parties because the second infractor also derived, or thought he would derive, some advantage by his own act or neglect. The second rule is likewise just because it is presumed that both at about the same time tried to reap some benefit.94 Section 2. — Obligations with a Period Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding section.95 Concept of Term or Period. — According to Manresa’s classic definition, a term or period is an interval of time, which, exerting an influence on an obligation as a consequence of a juridical act, either suspends its demandability or produces its extinguishment.96 Hence, obligations with a period may be defined as those whose demandability or extinguishment is subject to the expiration of a term or period.

New provision. Report of the Code Commission, p. 130. 95 Art. 1125, Spanish Civil Code, in amended form. 96 8 Manresa, 5th Ed., Bk. 1, p. 370. 93 94

146

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Arts. 1192-1193

Idem; Distingished from condition. — A term or period must not be confused with a condition. As we have already seen, a condition is a future and uncertain fact or event upon which an obligation is made to depend. Hence, the two may be distinguished from each other in the following ways: (1) As to requisites: While a term or period refers to an interval of time which is future and certain, a condition refers to a fact or event which is future and uncertain. (2) As to fulfillment: While a term or period is an interval of time which must necessarily come, although it may not be known when, a condition is a future and uncertain fact or event which may or may not happen.97 (3) As to influence on obligation: While a term or period merely exerts an influence upon the time of the demandability or extinguishment of an obligation, a condition exerts an influence upon the very existence of the obligation itself.98 (4) As to retroactivity of effects: While a term or period does not have any retroactive effect unless there is an agreement to the contrary, a condition has retroactive effects. (5) As to effect of will of debtor: When a term or period is left exclusively to the will of the debtor, the existence of the obligation is not affected, but when a condition is left exclusively to the will of the debtor, the very existence of the obligation is affected.99 Classification of Term or Period. — A term or period may be classified as follows: (1) Suspensive or resolutory.— According to the first and second paragraphs of Art. 1193, a period may be suspensive (ex die) or resolutory (in diem). It is suspensive when the obligation becomes demandable only upon the arrival of a day certain; it is resolutory when the obligation is demandable at once, although it is terminated upon the arrival of a day certain. Day certain is defined in the third paragraph of the article. Thus, if A donates a parcel of land to B to be delivered after his death, there is a suspensive term. The time of the

Ibid., p. 370. Ibid., p. 371. 99 Arts. 1197, 1182, Civil Code. 97 98

147

Arts. 1192-1193

OBLIGATIONS

death of the donor is a day certain because it must necessarily come, although it may not be known when. On the other hand, if C donates the usufruct or use and enjoyment of a house and lot to D for ten years, the term is resolutory. As soon as the donation is perfected, D can demand the delivery of the house and lot immediately. However, after the expiration of ten years, he will have to return the house and lot to the donor. (2) Legal, conventional or judicial. — A period may also be legal, conventional or judicial. It is legal when it is granted by law; conventional, when it is stipulated by the parties; and judicial, when it is fixed by the courts. Examples of legal periods are those provided for in Arts. 1606, 1623, 1682, and 1687 of the Code. Judicial periods will be discussed at length in a subsequent part of this section. (3) Definite or indefinite. — A period may also be definite or indefinite. This classification can be deduced from the provision of the third paragraph of Art. 1193 which states that a day certain is understood to be that which must necessarily come, although it may not be known when. From this it is evident that a period is definite when the date or time is known beforehand, and indefinite when it can only be determined by an event which must necessarily come to pass, although it may not be known when. If the happening of a future event is fixed by the parties for the fulfillment or extinguishment of an obligation, what is the nature of the obligation — is it with a term or is it conditional? This question requires a qualified answer. If the event will necessarily happen or come to pass, although it may not be known when, the event constitutes a day certain; hence, the obligation is one with a term.100 However, if the uncertainty consists in whether the event will happen or come to pass, such event constitutes a condition; hence, the obligation is conditional.101 Thus, if the death of a person is fixed by the parties for the demandability or extinguishment of the obligation, it is clear that the obligation is one with a term or period because death is an event which will certainly come, although the date or time when it will come is uncertain. The same is true when the parties enter into a contract whereby it is agreed that the obligation cannot be performed “while the war goes on.” Although

100 101

Art. 1193, par. 3, Civil Code. Art. 1193, par. 4, Civil Code.

148

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Arts. 1192-1193

the date of the termination of the war may be uncertain yet there is no question that the termination of the war must necessarily come.102 However, if the obligor or debtor binds himself to perform his obligation as soon as he has obtained a loan of P400,000 from a certain bank, it is clear that the granting of such loan is not definite. Consequently, it cannot be considered a day certain, for it may or it may not happen, the obligation is conditional.103 Effects of Term or Period. — If the term or period is suspensive, the fulfillment or performance of the obligation is demandable only upon the arrival of the day certain or the expiration of the term.104 What is therefore suspended by the term is not the acquisition of the right or the effectivity of the obligation but merely its demandability. In other words, the obligation itself becomes effective upon its constitution or establishment, but once the term or period expires it becomes demandable. However, if the term or period is resolutory, the fulfillment or performance of the obligation is demandable at once, but it is extinguished or terminated upon the arrival of the day certain or the expiration of the term.105 Phil. National Bank vs. Lopez Vito 52 Phil. 41 This action is for the recovery of a mortgage credit. It appears that the defendant spouses had mortgaged certain realty to secure the payment of a loan of P24,000 granted to them by the plaintiff. It was agreed under the mortgage contract that payment was to be made in ten annual installments at an interest of 8 per cent per annum. Defendants, however, failed to pay the sums corresponding to six yearly installments. The question presented is with regard to the effect of defendants’ failure to pay those installments which are due and demandable upon those which, normally, are not yet due and demandable. Held: “It is undeniable that the effect of the period agreed upon by the parties is to suspend the demandability of the obligation, in accordance with Article 1125 (now Art. 1193) of the Civil Code, which provides that obligations for the performance Nepomuceno vs. Narciso, 84 Phil. 542. Berg vs. Magdalena Estate, 92 Phil. 110; see also Smith, Bell & Co. vs. Sotelo Matti, 44 Phil. 874. 104 Art. 1193, par. 1, Civil Code. 105 Art. 1193, par. 2, Civil Code. 102 103

149

Arts. 1192-1193

OBLIGATIONS

of which a day certain has been fixed shall be demandable only when that day arrives. But the defendants’ right to avail themselves of the period was by the will of the contracting parties themselves made subject to the resolutory condition contained in paragraph 5 of the contract. Said condition has resolutory effects, since its fulfillment resolves the period and leaves the creditor at liberty to demand the performance of the debtor’s obligation and to proceed to the foreclosure of the mortgage. According to the contract entered into by the parties, the obligation of the mortgagors was to pay the debt in yearly installments on a fixed day of each year, until it has been fully satisfied, but in case of nonfulfillment of any of the stipulations and conditions of the mortgage, such as the failure to pay any of the annual installments, the mortgagee could declare said stipulations and conditions violated and proceed to the foreclosure of the mortgage in accordance with law. We are of the opinion that the nonfulfillment of the conditions of the contract renders the period ineffective, and makes the obligation demandable at the will of the creditor.”

Idem; Effect of fortuitous event. — In obligations with a term or period, any stipulation in the contract to the effect that in case of a fortuitous event the contract shall be deemed suspended during the term or period does not mean that the happening of the fortuitous event shall stop the running of the term or period agreed upon. Its only effect is to relieve the contracting parties from the fulfillment of their respective obligations during the term or period.106 Problem — X Co. and Y Co. entered into a contract whereby the latter agreed that the sugar cane which it will produce shall be milled by the former for a period of 30 years. It was stipulated that in case of any fortuitous event, the contract shall be suspended during said period. For 4 years during the last war and for 2 years after liberation when the mill of X Co. was being rebuilt, Y Co. failed to deliver its sugar cane to the central of X Co. After the expiration of the 30-year period, Y Co. stopped the delivery of its sugar cane to the central of X Co. Subsequently, X Co. brought an action against Y Co. in order to compel the latter to deliver its sugar cane for 6 additional years on the ground that the fortuitous event had the effect of stopping the running of the term or period agreed upon. Will the action prosper? Reasons. 106

Victoria Planters vs. Victorias Milling Co., 97 Phil. 318.

150

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Arts. 1194-1195

Answer — The facts stated in the above problem are exactly the same as those in the case of Victorias Planters vs. Victorias Milling Co., 97 Phil. 318, where the SC held that the effect of a fortuitous event upon the term or period agreed upon is not to stop the running of the term or period but merely to relieve the contracting parties from the fulfillment of their respective obligations during the pendency of the event. According to the SC: “Fortuitous event relieves the obligor from fulfilling a contractual obligation. The stipulation in the contract that in the event of flood, typhoon, earthquake, or other force majeure, war, insurrection, civil commotion, organized strike, etc., the contract shall be deemed suspended during said period, does not mean that the happening of any of these events stops the running of the period agreed upon. It only relieves the parties from the fulfillment of their respective obligations during that time — the planters from delivering sugar cane and the central from milling it. x x x To require the planters to deliver the sugar cane which they failed to deliver during the four years of the Japanese occupation and the two years after liberation when the mill was being rebuilt is to demand from the obligors the fulfillment of an obligation which was impossible of performance at the time it became due. Memo tenetur ad impossibilia. x x x The performance of what the law has written off cannot be demanded and required. The prayer that the plaintiffs be compelled to deliver was impossible, if granted, would in effect be an extension of the term of the contract entered into by and between the parties.’’

Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules of Article 1189 shall be observed.107 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.108

107 108

New Provision. Art. 1126, Spanish Civil Code, in amended form.

151

Art. 1196

OBLIGATIONS

Effect of Advanced Payment or Delivery. — Under Art. 1195 of the Code, if the obligor, being unaware of the period or believing that the obligation has become due and demandable, paid or delivered anything before the arrival or expiration of the period, he may recover what he has paid or delivered with fruits and interests. This rule is different from that found in Art. 1126 of the Spanish Civil Code which states that the obligor may recover only the fruits or interests which the obligee may have received from the thing. The Code Commission explains the reason for the change in the following manner: “The present article (Art. 1126, Civil Code of Spain) is unjust. The thing or sum not being due when it was delivered or paid, why should only the interest be returned? Why should not the thing or sum delivered be returned to the debtor if he was unaware of the period or if he believed that the obligation had become due and demandable? The present article is contrary to the manifest intention of the parties.’’109

It is obvious that the above article (Art. 1195) can only apply to obligations to give. It is also obvious that before the rule can be applied the payment or delivery must have been made by the debtor either because he was unaware of the period or he believed that the obligation had become due and demandable. Consequently, if the payment or delivery was made voluntarily or with knowledge of the period or of the fact that the obligation has not yet become due and demandable, there can be no right of recovery whatsoever. 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 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.110 Benefit of Term or Period. — The general rule is that when a period is designated for the performance or fulfillment of an obligation, it is presumed to have been established for the benefit of both the creditor and the debtor. Consequently, as a general rule, the

109 110

Report of the Code Commission, pp. 130-131. Art. 1227, Spanish Civil Code.

152

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Art. 1196

creditor cannot demand the performance of the obligation before the expiration of the designated period; neither can the debtor perform the obligation before the expiration of such period.111 Thus, it has been held that in a monetary obligation contracted with a period, the debtor has no right, unless the creditor consents, to accelerate the time of payment even if the tender includes an offer to pay not only the principal, but also the interests in full.112 This is very well illustrated by the case of De Leon vs. Syjuco.113 In 1944, during the Japanese occupation, the debtor borrowed P216,000 in Japanese military notes from the creditor, promising to pay “within one year from May 5, 1948” in the legal tender of the Philippines. In the later part of 1944, after the Americans had landed in the Philippines, he tendered payment of the principal including interest up to the date of maturity. The creditor refused to accept the payment. Subsequently, he deposited the entire amount with the clerk of court. After liberation, he brought an action against the creditor to compel him to accept the amount deposited. The Supreme Court, however, held that the refusal of the creditor to accept the tender of payment was justified in view of the fact that the term or period in this case is presumed to have been established for the benefit of both the creditor and the debtor in accordance with Art. 1196 of the Code; consequently, the consignation made by the debtor is not valid. It may be argued that the creditor has nothing to lose and everything to gain by the acceleration of payment. There are, however, several reasons why the creditor cannot be compelled to accept payment. They are: first, payment of interest; second, the creditor may want to keep his money invested safely instead of having it in his hands, in which case, by fixing the period, he is thus able to protect himself against sudden decline in the purchasing power of the currency loaned especially at a time when there are many factors that influence the fluctuation of the currency;114 and third, under the Usury Law, there is a special prohibition of payment of interest in advance for more than one year.115

8 Manresa, 5th Ed., Bk. 1, p. 381; Sarmiento vs. Javellana, 38 Phil. 880. Nicolas vs. Matias, 89 Phil. 126; De Leon vs. Syjuco, 90 Phil. 311; Osorio vs. Salutillo, 48 Off. Gaz. 103; Garcia vs. De los Santos, 49 Off. Gaz. 4830; Ochoa vs. Lopez, CA, 50 Off. Gaz. 5890. 113 90 Phil. 311. 114 Ponce de Leon vs. Syjuco, 90 Phil. 311. 115 Nicolas vs. Matias, 89 Phil. 126. 111 112

153

Art. 1197

OBLIGATIONS

Idem; Exception. — However, if it can be proved either from the tenor of the obligation or from other circumstances that the period or term has been established in favor of the creditor or of the debtor, the general rule or presumption will not apply. Hence, if it should appear that such period has been established for the benefit of the creditor, he may demand the fulfillment or performance of the obligation at any time, but the obligor or debtor, on the other hand, cannot compel him to accept payment before the expiration of the period. If it should appear that the period has been established in favor of the obligor or debtor, he may oppose any premature demand on the part of the obligee or creditor for performance of the obligation, or if he so desires, he may renounce the benefit of the period by performing his obligation in advance.116 Thus, if the debtor executed a promissory note promising to pay his indebtedness to the creditor “al plazo de cinco años contados desde esta fecha’’ or within a period of five years to be counted from this date, it is evident that the term or period is for the benefit of the debtor; consequently, he can compel the creditor to accept the payment at any time within the stipulated period.117 But if the debtor executed a promissory note promising to pay his indebtedness “four years after date,’’ the presumption is that the term or period is for the benefit of both the creditor and the debtor; consequently, the debtor cannot compel the creditor to accept the payment until after the expiration of the fouryear period.118 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 will 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.119

8 Manresa, 5th Ed., Bk. 1, pp. 381-382. Sia vs. Court of Appeals, 48 Off. Gaz. 5259. 118 Garcia vs. De los Santos, 49 Off. Gaz. 4830. 119 Art. 1128, Spanish Civil Code, in amended form. 116 117

154

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Art. 1197

Judicial Term or Period. — A term or period is judicial when the duration thereof is fixed by a competent court in accordance with the causes expressly recognized by law. Once fixed by a competent court, the period can no longer be judicially changed.120 Idem; When court may fix term. — Under Art. 1197, there are two cases where the courts are empowered to fix the duration of the term or period. They are: first, if the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended by the parties; and second, if the duration of the period depends upon the will of the debtor. We might add a third — if the debtor binds himself to pay when his means permit him to do so.121 Strictly speaking, however, this case properly falls within the purview of the second, because in such a case the power to determine when the obligation will be fulfilled is in effect left exclusively to the will of the debtor. 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.122 Thus, where the donor donated to the city of Manila a parcel of land subject to the condition that it shall be converted into a public square, but the deed of donation is silent with regard to the term or period for the fulfillment of the condition, it is evident from the very nature of the condition that a term or period is intended by the parties for its fulfillment; consequently, the court may fix the duration thereof.123 The same is true if the parties failed to fix a definite period within which the obligor was to complete the construction of a house. It is clear that in such a case they intended some period but did not specify it; consequently, the fulfillment of the obligation cannot be demanded from the obligor until after the courts have fixed the period for compliance therewith, and such period has arrived.124 It must be observed, however, that the mere silence of the obligation with regard to the term or period for its fulfillment does not necessarily mean that the courts are empowered to fix the duration thereof. In the first place, the remedy cannot be applied to Art. 1197, Civil Code. Art. 1180, Civil Code. 122 Art. 1197, par. 1, Civil Code. 123 Barretto vs. City of Manila, 7 Phil. 416. 124 Concepcion vs. People of the Phil. 74 Phil. 163. 120 121

155

Art. 1197

OBLIGATIONS

contracts for services in which no period was fixed by the parties. In such contracts the period of employment is understood to be implicitly fixed, in default of express stipulation, by the period for the payment of the salary of the employee, in accordance with the custom universally observed throughout the world.125 In the second place, it cannot be applied to pure obligations.126 Thus, according to Manresa: “While that which is contemplated by the first paragraph of this article appears to be a limitation upon the efficacy and the immediate demandability of pure obligations, in reality, it is different; in pure obligations there is no intention to grant a period, otherwise they would not be pure; under this paragraph, such an intention exists. For this reason in the case of the first, there is no limitation upon the demandability of the obligation by the creditor; rather its fulfillment by the debtor is facilitated; on the other hand, in the case of the second, since there is actually a period, there is a limitation upon that demand- ability.”127

If the duration of the term or period depends exclusively upon the will of the debtor, the court may also fix the duration thereof.128 This rule is just and logical, because, otherwise, there would always be the possibility that the obligation will never be fulfilled or performed. Thus, where the debtor has executed a promissory note promising to pay his indebtedness to the creditor “in partial payments,”129 or “little by little,’’130 or “as soon as possible,”131 or “as soon as he has money,’’132 it is clear that the duration of the term or period for the fulfillment of the obligation depends exclusively upon the will of the debtor; consequently, the remedy of the creditor is to bring an action against the debtor in accordance with the provision of Art. 1197 in order to ask the court to fix the duration thereof. The same remedy is also available to the lessor where it is expressly stipulated in the contract of lease that the duration of the lease shall

Barretto vs. Santa Marina, 26 Phil. 440. People’s Bank vs. Odom, 64 Phil. 126. 127 8 Manresa 158, quoted in Patente vs. Omega, 49 Off. Gaz. 4846. 128 Art. 1197, par. 2, Civil Code. 129 Levy Hermanos vs. Paterno, 18 Phil. 353. 130 Seone vs. Franco, 24 Phil. 309. 131 Gonzales vs. Jose, 66 Phil. 369. 132 Patente vs. Omega, 49 Off. Gaz. 4846. 125 126

156

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Art. 1197

depend exclusively upon the will of the lessee.133 And where there is an agreement between the employer and the union representatives representing its employees and laborer regarding the payment of salary differentials which had remained unpaid because of the exhaustion of the funds appropriated for the purpose, the obligation to pay said salary differentials may be considered as one with a term whose duration has been left to the will of the debtor, so that pursuant to Art. 1197 of the Code, the remedy of the employees and laborers is to ask the courts to fix the duration of the term, it being admitted that in a going concern the availability of funds for a particular purpose is a matter that does not necessarily depend upon the cash position of the company but rather upon the judgment of its board of directors.134 Gonzales vs. Jose 66 Phil. 369 This action was instituted by the plaintiff to recover from the defendant the amount of two promissory notes worded as follows: “I promise to pay Mr. Benito Gonzales the sum of four hundred three pesos and fifty-five centavos (P403.55) as soon as possible. Anterior ...........................................................

P71.10 474.65

Sept. 12, 1922 ..................................................

300.00

Balance ............................................................

174.65

“Manila, June 22, 1922. (Sgd.) “FLORENTINO DE JOSE’’ “Quezon, Nueva Ecija’’ “I promise to pay Mr. Benito Gonzales the sum of three hundred and seventy-three pesos and thirty centavos (P373.30) as soon as possible. (Sgd.) “FLORENTINO DE JOSE” 133 134

Eleizegui vs. Manila Lawn Tennis Club, 2 Phil. 309. Tiglao vs. Manila Railroad Co., Off. Gaz. 179.

157

Art. 1197

OBLIGATIONS

“Defendant appealed from the decision of the Court of First Instance of Manila ordering him to pay the plaintiff the sum of P547.95 within thirty days from the date of notification of said decision, plus the costs. In his answer the defendant interposed the special defenses that the complaint is uncertain inasmuch as it does not specify when the indebtedness was incurred or when it was demandable, and that, granting that the plaintiff has any cause of action, the same has prescribed in accordance with law. Resolving the defense of prescription, the trial court held that the action for the recovery of the amount of the two promissory notes has not prescribed in accordance with Article 1128 (now Art. 1197) of the Civil Code, which provides: “Art. 1128. If the obligation does not specify a term, but it is to be inferred from its nature and circumstances that it was intended to grant the debtor time for its performance, the period of the term shall be fixed by the court. “The court shall also fix the duration of the term when it has been left to the will of the debtor.” It is practically admitted by the parties that the obligations arising from the two promissory notes should be governed by said article, inasmuch as it was the intention of the plaintiff, evidenced by the terms of the said notes, to grant the debtor a period within which to pay the debts. The four errors assigned by the defendant turn on the applicability of Article 1128 (now Art. 1197) and on the prescription of the action brought by the plaintiff. The defendant contends that Article 1113 (now Art. 1179) of the Civil Code should be applied inasmuch as the obligations derived from the promissory notes were demandable from the time of their execution, and adds that even supposing that Article 1128 is applicable, the action to ask the court to fix the period had already prescribed in accordance with Section 43(1) of the Code of Civil Procedure. The Supreme Court, speaking through Justice Imperial held: “We hold that the two promissory notes are governed by Article 1128 (now Art. 1197) because under the terms thereof the plaintiff intended to grant the defendant a period within which to pay his debts. As the promissory notes do not fix this period, it is for the court to fix the same. (Eleizegui vs. Manila Lawn Tennis Club, 2 Phil. 309; Barretto vs. City of Manila, 7 Phil. 416; Floriano vs.

158

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Art. 1197

Delgado, 11 Phil. 154; Levy Hermanos vs. Paterno, 18 Phil. 353.) The action to ask the court to fix the period has already prescribed in accordance with Section 43(1) of the Code of Civil Procedure. This period of prescription is ten years, which has already elapsed from the execution of the promissory note until the filing of the action on June 1, 1934. The action which should be brought in accordance with Article 1128 (now Art. 1197) is different from the action for the recovery of the amount of the notes, although the effects of both are the same, being, like other civil actions, subject to the rules of prescription. “The action brought by the plaintiff having already prescribed, the appealed decision should be reversed and the defendant absolved from the complaint, without special pronouncement as to the costs in both instances. So ordered.” Problem — D borrowed P2,000 from C in 1958. The debt is evidenced by a promissory note executed by D wherein he promised to pay as soon as he has money or as soon as possible. C has made repeated demands upon D for payment, but up to now no payment has been made. Suppose that C will bring an action against D for payment of the debt, will the action prosper? (1973 Bar Problem) Answer — No, the action will not prosper. In similar cases decided by the Supreme Court (Gonzales vs. Jose, 66 Phil. 369; Patente vs. Omega, 49 Off. Gaz. 4846), it was held, that where the debtor promises to pay his obligation as soon as he has money or as soon as possible, the duration of the term or period depends exclusively upon the will of the debtor; consequently, the only remedy of the creditor is to bring an action against the debtor in accordance with Art. 1197 of the Civil Code for the purpose of asking the court to fix the duration of the term or period. It is only after the duration of the term or period has been fixed by the court that any other action involving the fulfillment or performance of the obligation can be maintained. This has always been the consistent doctrine in this jurisdiction.

From what has been stated, it is quite clear that the effect of a potestative term or period is very different from that of a potestative condition. The latter cannot be left to the will of the debtor because it affects the very existence of the obligation itself, since what is delegated to the debtor is the power to determine whether or not the obligation shall be fulfilled; the former, on the other hand, can 159

Art. 1197

OBLIGATIONS

be left to the will of the debtor because its influence does not go as far as to determine the existence of the obligation, since what is delegated to the debtor is merely the power to determine when the obligation shall be fulfilled, but in order to prevent the obligation contracted from becoming ineffective by nonfulfillment the courts must fix the duration of the term or period.135 This article also applies to a lease agreement, where a contract of lease clearly exists. Thus, the SC in the case of Millare vs. Hernando (151 SCRA 484), it held that the first paragraph of Article 1197 is clearly inapplicable, since the Contract of Lease did in fact fix an original period of five years, which had expired. It is also clear from paragraph 13 of the Contract of Lease that the parties reserved to themselves the faculty of agreeing upon the period of the renewal contract. The second paragraph of Article 1197 is equally clearly inapplicable since the duration of the renewal period was not left to the will of the lessee alone, but rather to the will of both the lessor and the lessee. Most importantly, Article 1197 applies only where a contract of lease clearly exists. Here, the contract was not renewed at all, there was in fact no contract at all the period of which could have been fixed. Idem; Nature of action. — The only action that can be maintained under Art. 1197 is an action to ask the court to fix the duration of the term or period. It is only after the duration has been fixed by a proper court that any other action involving the fulfillment or performance of the obligation can be maintained.136 Thus, an action brought purely for the collection of a debt which falls within the purview of the article is obviously improper, because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for its compliance and such period has expired.137 Consequently, so long as such period has not yet been fixed by the court, legally, there can be no possibility of any breach of contract or of failure to perform the obligation, and if it so happens that this point was never raised before the trial court, the creditor cannot be allowed to raise it for the first time on appeal.138

8 Manresa 158, quoted in Patente vs. Omega, 49 Off. Gaz. 4846. Eleizegui vs. Manila Lawn Tennis Club, 2 Phil. 309; Seone vs. Franco, 24 Phil. 309; Gonzales vs. Jose, 66 Phil. 369. 137 Ungson vs. Lopez, CA, 50 Off. Gaz. 4297, citing Gonzales vs. Jose, 66 Phil. 369, and Concepcion vs. People of the Phil., 74 Phil. 62. 138 Pages vs. Basilan Lumber Co., 104 Phil. 882. 135 136

160

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Art. 1197

In the case of Pacific Banking Corp. vs. CA (173 SCRA 102), the Supreme Court reiterated the rule that if the obligation has no fixed period, a party is precluded from enforcing it. Thus, it held that even the pledge which modified the fixed period in the original promissory note, did not provide for date of payment of installments, nor of any fixed date of maturity of the whole amount of indebtedness. Accordingly, the date of maturity of the indebtedness should be determined by the proper court under Art. 1197 of the Civil Code. Hence, the disputed foreclosure and subsequent sale were premature. It is not, however, necessary that the creditor, in his complaint, must expressly ask the court to fix the duration of the term or period. Where the essential allegations of the pleadings describe an obligation with an indefinite period, the court can fix the duration of such period although the complaint does not ask for such relief. For this purpose two ultimate facts should be alleged in the complaint. They are: (1) facts showing that a contract was entered into imposing on one of the parties an obligation in favor of the other; and (2) facts showing that the performance of the obligation was left to the will of the obligor, or clearly showing or from which an inference can be reasonably drawn that a period was intended.139 It must also be noted that the action recognized in Art. 1197 may also prescribe like any ordinary civil action. Thus, in an action to ask the court to fix the duration of the period for the performance of an obligation which is evidenced by a promissory note filed after the lapse of ten years from the time of the execution of the note, it was held that the action had already prescribed.140 Idem; Effect of judicial period. — Once fixed by the courts, the period can no longer be judicially changed.141 This is so because from the very moment the parties gave their consent to the period fixed by the court, said period acquires the nature of a covenant; in other words, it becomes a law governing their contract; consequently, the courts can have no power to change or modify the same.142

Schenker vs. Gemperle, 5 SCRA 1042. Gonzales vs. Jose, 66 Phil. 369. 141 Art. 1197, par. 3, Civil Code. 142 Barretto vs. City of Manila, 11 Phil. 624. 139 140

161

Art. 1197

OBLIGATIONS

Problem — “M’’ and “N’’ were very good friends. “N’’ borrowed P10,000.00 from “M.” Because of their close relationship, the promissory note executed by “N’’ provided that he would pay the loan “whenever his means permit.” Subsequently, “M’’ and “N’’ quarelled. “M” now asks you to collect the loan because he is in dire need of money. What legal action, if any, would you take in behalf of “M”? (1980 Bar Problem) Answer — “M” must bring an action against “N’’ for the purpose of asking the court to fix the duration of the term or period for payment. According to the Civil Code, 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 Art. 1197. In other words, it shall be subject to those provisions of the Code with respect to obligations with a term or period which must be judiciary fixed. Thus, in the instant case, the court shall determine such period as may under the circumstances have been probably contemplated by the parties. Once determined or fixed, it becomes a part of the covenant of the two contracting parties. It can no longer be changed by them. If the debtor defaults in the payment of the obligation after the expiration of the period fixed by the court, the creditor can then bring an action against him for collection. Any action for collection brought before that would be premature. This is well-settled. (Note: The above answer is based on Arts. 1180 and 1197 of the Civil Code and on Gonzales vs. Jose, 66 Phil. 369; Concepcion vs. People of the Phil. 74 Phil. 62; Pages vs. Basilan, 104 Phil. 882, and others.) Alternative Answer — Normally, before an action for collection may be maintained by “M” against “N,’’ the former must first bring an action against the latter asking the court to fix the duration of the term or period of payment. However, an action combining such action with that of an action for collection may be allowed if it can be shown that a separate action for collection would be a mere formality because no additional proofs other than the admitted facts will be presented and would serve no purpose other than to delay. Here, there is no legal obstacle to such course of action. (Note: The above alternative answer is based on Borromeo vs. Court of Appeals, 47 SCRA 65. Probably, if we combine the two answers given above, the result would be a much more impressive answer.)

162

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Art. 1198

Problem — “A” Corporation, engaged in the sale of subdivision residential lots, sold to “B” a lot of 1,000 square meters. The contract provides that the corporation should put up an artesian well with tank, within a reasonable time from the date thereof and sufficient for the needs of the buyers. Five years thereafter, and no well and tank have been put up by the corporation, “B” sued the corporation for specific performance. The corporation set up a defense that no period having been fixed, the court should fix the period. Decide with reason. (1982 Bar Problem) Answer — The action for specific performance should be dismissed on the ground that it is premature. It is clear that the instant case falls within the purview of obligations with a term or period which must be judicially fixed. Thus, “B” instead of bringing an action for specific performance, should bring an action asking the court to determine the period within which “A’’ Corporation shall put up the artesian well with tank. Once the court has fixed the period, then such period as fixed by the court will become a part of the covenant between the contracting parties. It can no longer be changed by them. If the Corporation does not put up the artesian well with tank within the period fixed by the court, “B” can then bring an action for specific performance. Alternative Answer — Normally, before an action for specific performance may be maintained by “B” against “A’’ Corporation, the former must first bring an action against the latter asking the court to fix the duration of the term or period to install the artesian well with tank. However, an action combining such action with that of an action for specific performance may be allowed if it can be shown that a separate action for specific performance would be a mere formality because no additional proofs other than the admitted facts will be presented and would serve no purpose other than to delay. Here, there is no obstacle to such cause of action. (Note: The above answers are based on Art. 1197 of the Civil Code and on decided cases. Either answer should be considered correct.)

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 give a guaranty or security for the debt; 163

Art. 1198

OBLIGATIONS

(2) When he does not furnish to the creditor the guaranties or securities which he has promised; (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; (4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; (5)

When the debtor attempts to abscond.143

Extinguishment of Debtor’s Right to Period. — According to the above article, there are five different grounds or causes for the extinguishment of the debtor’s right to make use of the term or period. With respect to the first, the word “insolvent” must not be understood in its technical sense so as to require a judicial declaration in accordance with the Insolvency Law; it must be understood in its ordinary or popular sense. Consequently, it includes any case in which it would not be possible financially for the debtor to comply with his obligation. This situation is, of course, predicated upon the proposition that the insolvency of the debtor arose after the constitution of the obligation.144 However, if there is a guaranty or security for the debt, the debtor, in spite of his insolvency, does not lose his right to the period. With respect to the second, when the debtor does not furnish the stipulated guaranty or security, it is but logical that he shall lose his right to the term or period. Thus, where the debtor not only failed to register the mortgage over a parcel of land in favor of the creditor in order to secure the loan, but even mortgaged the same parcel of land in favor of the Rehabilitation Finance Corporation in order to secure another loan, it was held that the former obligation became pure and without any condition, and consequently, the loan became due and immediately demandable.145

Art. 1129, Spanish Civil Code, in modified form. 8 Manresa, 5th Ed., Bk. 1, p. 388. 145 Daguhoy Enterprises, Inc. vs. Ponce, 50 Off. Gaz. 5267. To the same effect Laplana vs. Garchitorena, 48 Phil. 163. 143 144

164

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Period

Art. 1198

With respect to the third, attention must be called to the difference between the effect of impairment and the effect of disappearance as applied to the guaranty or security. The rules may be restated as follows: (1) If the guaranty or security is impaired through the fault of the debtor, he shall lose his right to the benefit of the period; however, if it is impaired without his fault, he shall retain his right. (2) If the guaranty or security disappears through any cause, even without any fault of the debtor, he shall lose his right to the benefit of the period. In either case, however, the debtor shall not lose his right to the benefit of the period if he gives a new guaranty or security which is equally satisfactory. Problem — A executed in favor of B a promissory note for P10,000, payable after two years, secured by a mortgage on a certain building valued at P20,000. One year after the execution of the note, the mortgaged building was totally destroyed by a fire of accidental origin. Can B demand from A the payment of the value of the note immediately after the burning without waiting for the expiration of the term? Reasons. (1932 Bar Problem) Answer — Yes, B can demand from A the payment of the value of the note immediately after the burning without waiting for the expiration of the term, unless A immediately gives another security or guaranty which is equally satisfactory. This is clear from the provision of No. 3 of Art. 1198 of the Civil Code which declares that when by his own acts the debtor has impaired the guaranty or security, or when through a fortuitous event the guaranty or security disappears, the debtor shall lose the benefit of the term or period. It must be observed that there is a difference between the effect of impairment and the effect of disappearance as applied to the security or guaranty. The rules may be restated as follows: (1) If the guaranty or security is impaired through the fault of the debtor, he shall lose his right to the benefit of the period; however, if it is impaired without his fault, he shall retain his right. (2) If the guaranty or security disappears through any cause, even without any fault of the debtor, he shall lose his right to the benefit of the period. In either case, however, the debtor shall not lose his right to the benefit of the period if he gives a new guaranty or security.

The fourth and fifth cases are new provisions. Whether the debtor violates any undertaking, in consideration of which the creditor agreed to the period, or he attempts to abscond, the rule that he shall lose his right to the benefits of the period is proper. 165

Art. 1198

OBLIGATIONS

Song Fo vs. Oria 33 Phil. 3 This is an action commenced by plaintiff to recover the purchase price of a launch which was sold to the defendant for P16,000 payable in quarterly installments of P1,000 and for which the said launch was mortgaged as security. The records show that the launch was delivered to the defendant in Manila but it was wrecked while enroute to his place of business in Samar. The records also show that no part of the purchase price has yet been paid to the plaintiff. The lower court rendered judgment for P6,000 on the ground that this amount represents the unpaid installments which are due and demandable under the contract. The plaintifs, however, contend that the judgment should include the whole amount. Held: “Coming now to examine the contentions of the plaintiffs on their appeal, we think that the trial judge erred in declining to render judgment in their favor for the total amount of the purchase price of the launch. He appears to have relied upon the provisions of Article 1126 (now Art. 1193) of the Civil Code but to have overlooked the correlated provisions of Article 1129 (now Art. 1198) of the same code. “The security for the payment of the purchase price of the launch itself having disappeared as a result of the unforeseen event (vis major) and no other security having been substituted, therefore, the plaintiffs were clearly entitled to recover judgment not only for the installments of the indebtedness due under the terms of the contract at the time when they instituted their action, but also for all installments which but for the loss of the vessel, had not matured at the time.’’ Problem — A sold his entire interest in 24,000 tons of iron ore to B for P75,000, P10,000 of which was actually paid upon the signing of the contract. With respect to the balance of P65,000, it was agreed that it “will be paid from the first amount derived from the sale of the ore.’’ To insure payment thereof, B delivered to A a surety bond which provided that the liability of the surety liability would automatically expire after the lapse of two years. Inasmuch as the ore had not yet been sold and the surety bond had expired without being renewed and the balance had not yet been paid in spite of repeated demands, A finally brought an action against B for the recovery of said balance. B, however, interposed the defense that his obligation to pay is conditional and that inasmuch as the condition has not yet been fulfilled, therefore, it is not yet due and demandable. Is this defense tenable?

166

DIFFERENT KINDS OF OBLIGATIONS Alternative and Facultative Obligations

Art. 1198

Answer — This defense is untenable. The sale of the iron ore is not a condition precedent to the payment of the balance but only a suspensive term or period. There is no uncertainty whatsoever with regard to the fact of payment; what is undetermined is merely the exact date of payment. Normally, therefore, A will have to wait for the actual sale of the iron ore before he can demand from B for the payment of the unpaid balance. However, inasmuch as by his own act B has impaired the guaranty or security after its establishment without giving another one which is equally satisfactory, it is clear that he has now lost the benefit of the term or period. Consequently, the case now falls squarely within the purview of pars. 2 and 3 of Art. 1198 of the NCC. (Gaite vs. Fonacier, 112 Phil. 728.)

Section 3. — Alternative and Facultative Obligations Concept. — When an obligation comprehends several objects or prestations it may be either conjunctive or distributive. It is conjunctive when all of the objects or prestations are demandable at the same time; it is distributive when only one is demandable. The latter, in turn, may be either alternative or facultative. It is alternative when it comprehends several objects or prestations which are due, but it may be complied with by the delivery or performance of only one of them; it is facultative when it comprehends only one object or prestation which is due, but it may be complied with by the delivery of another object or the performance of another prestation in substitution.146 It is, therefore, clear that the characteristic feature of an alternative obligation is that various objects being due, the payment or performance of one of them, determined by the election which, as a general rule, pertains to the obligor or debtor, is sufficient.147 The characteristic feature of a facultative obligation, on the other hand, is that only one object or prestation is due, but the obligor or debtor may deliver another object or perform another prestation in substitution.148

8 Manresa, 5th Ed., Bk. 1, p. 393; 3 Castan, 7th Ed., pp. 75-76. Ibid. 148 Art. 1206, Civil Code. 146 147

167

Arts. 1199-1200

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.149 Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor. The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation.150 Right of Choice in Alternative Obligations. — In alternative obligations, the general rule is that the right of choice belongs or pertains to the debtor.151 Thus, where the debtor borrowed a certain amount from the creditor, and in the promissory note which he had executed it is expressly stipulated that he can fulfill his obligation either by the payment of the amount of the indebtedness or by the delivery of a house and lot at an appraised valuation, it was held that such obligations are alternative in character.152 Consequently, upon the maturity of the note, the debtor can comply with the obligation by paying the agreed amount or by delivering the house and lot. Under the general rule stated in Art. 1200, he alone has the right to make the choice. Once he has made it, and such choice is duly communicated to the creditor, the obligation becomes simple. There are, however, two exceptions to the general rule. They are: first, when the right of choice has been expressly granted to the creditor;153 and second, when it has been expressly granted to a third person. Although the Code does not expressly recognize the second,there is no reason why it should not be allowed, since it is not contrary to law, morals, good customs, public order or public policy. Idem; Limitations upon right of choice. — The limitations to the right of choice are given in the second paragraph of Art. 1200. According to this provision, the debtor cannot choose those prestations or undertakings which are impossible, unlawful or which could not Art. 1131, Spanish Civil Code. Art. 1132, Spanish Civil Code. 151 Art. 1200, Civil Code. 152 Agoncillo and Marino vs. Javier, 38 Phil. 244. 153 Art. 1200, par. 1, Civil Code. 149 150

168

DIFFERENT KINDS OF OBLIGATIONS Alternative and Facultative Obligations

Art. 1201

have been the object of the obligation. “Prestations which could not have been the object of the obligation” refer to those undertakings which are not included among those from which the obligor may select, or to those which are not yet due and demandable at the time the selection is made, or to those which, by reason of accident or some other cause, have acquired a new character distinct or different from that contemplated by the parties when the obligation was constituted.154 It must be noted that what is contemplated by the provision of the second paragraph of Art. 1200 is a case in which the right to choose or select is not lost or extinguished altogether, because there are still other objects or prestations from which the debtor can choose or select. Art. 1201. The choice shall produce no effect except from the time it has been communicated.155 When Choice Takes Effect. — The rule stated in the above article is applicable whether the right of choice is exercised by the debtor, or by the creditor, or by a third person. No special form is required for the communication or notification. Hence, any form may be employed provided that the other party is properly notified of the selection. Nevertheless, considering the fact that the choice shall produce no effect except from the time the other party is notified of the selection and the fact that the proof of such notification is incumbent upon him who made the selection, it is always much better to make the notification either in a notarized document or in any other authentic writing.156 Can the creditor to whom the selection had been duly communicated impugn such selection? In other words, before the choice or selection shall be binding upon the creditor, is it necessary that he must give his consent thereto? In a certain case, decided by the Supreme Court, where the alternative obligations of the obligor consisted of paying the insured value of the house or rebuilding it, and such obligor notified the obligee that it shall rebuild the house, the court declared that the “object of the notice is to give the creditor or obligee opportunity to express his consent, or to

8 Manresa, 5th Ed., Bk. 1, p. 398. Art. 1133, Spanish Civil Code. 156 8 Manresa, 5th Ed., Bk. 1, p. 399. 154 155

169

Art. 1202

OBLIGATIONS

impugn the election made by the debtor and only after said notice shall the election take legal effect when consented to by the creditor, or if impugned by the latter, when declared proper by a competent court.’’157 It is, however, submitted that this doctrine is not sound. Consent or concurrence of the creditor to the choice or selection made by the debtor is not necessary before the choice or selection can produce effect. To hold otherwise would destroy the very nature of the right to select and the alternative character of the obligation for that matter. Thus, according to Dean Capistrano: “The law does not require the creditor’s concurrence to the choice; if it did, it would have destroyed the very nature of alternative obligations, which empowers the debtor to perform completely one of them.’’158 Idem; Effect upon obligation. — Once the choice is made by the debtor (or by the creditor or by a third person as the case may be), the obligation ceases to be alternative from the moment the selection has been communicated to the other party. From that moment, both debtor and creditor are bound by the selection. In other words, the debtor can only comply with his obligation by performing the prestation which has been selected, while the creditor can only demand compliance in accordance there with. “An election once made is binding on the person who makes it, and he will not therefore be permitted to renounce his choice and take an alternative which was at first opened to him.”159 Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable.160 When Only One Prestation Is Practicable. — According to the above article, when among several prestations whereby the debtor is alternatively bound, only one prestation can be performed because all of the others are impracticable, the debtor loses his right of choice altogether. In other words, the obligation loses its alternative character; it becomes a simple obligation. The provision of the above article, however, must be distinguished from the provision of the Ong Guan Can vs. Century Insurance Co., 46 Phil. 592. 3 Capistrano, Civil Code, 1950 Ed., p. 131. To the same effect — 4 Tolentino Civil Code, 1956 Ed., p. 196. 159 Reyes vs. Martinez, 55 Phil. 492. 160 Art. 1134, Spanish Civil Code. 157 158

170

DIFFERENT KINDS OF OBLIGATIONS Alternative and Facultative Obligations

Arts. 1203-1205

second paragraph of Art. 1200. Under the first, there is only one prestation which can be performed; under the second, there are still two or more which can be performed. Under the first, the obligation is converted into a simple one because the debtor loses his right of election; under the second, the obligation is still alternative because the debtor can still exercise his right of election. 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.161 When Choice Is Rendered Impossible. — The above article does not have any counterpart in the Spanish Civil Code. The rule, however, is logical. Since the debtor’s right of choice is rendered ineffective through the creditor’s fault, his only possible recourse will be to bring an action to rescind the contract with damages. 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.162 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 161 162

New provision. Art. 1135, Spanish Civil Code, in modified form.

171

Arts. 1203-1205

OBLIGATIONS

creditor should choose from among the remainder, or that which remains if one only 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; (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.163 Effect of Loss of Objects of Obligation. — It is evident that Art. 1204 is applicable only to a case where the right of choice belongs to the debtor, while Art. 1205 is applicable only to a case where the right belongs to the creditor. In other words, the first article is the general rule, while the second is the exception. What is the effect upon the obligation if one or some or all of the things or prestations which are alternatively the object of the obligation have been lost or cannot be complied with? The answer to this question must depend upon two factors or circumstances — first, whether the right of choice belongs to the debtor or to the creditor, and second, whether the loss or impossibility was due to a fortuitous event or to the fault of the debtor. Idem; If right of choice belongs to the debtor. — If the right of choice belongs to the debtor and the loss or impossibility is due to a fortuitous event, then the provisions of Arts. 1174, 1262 and 1266 of the Code are applicable. The debtor cannot be held liable for damages. Consequently, if one of the things is lost or one of the prestations cannot be performed by reason of a fortuitous event, the debtor must still comply with the obligation by delivering or performing that which he shall choose from among the remainder; if all of the things, except one, are lost, or all of the prestations, except one, cannot be performed by reason of a fortuitous event, the debtor must still comply with his obligation by delivering or performing

163

Art. 1136, Spanish Civil Code, in modified form.

172

DIFFERENT KINDS OF OBLIGATIONS Alternative and Facultative Obligations

Art. 1206

that which remains; and if all of the things are lost or all of the prestations cannot be performed by reason of a fortuitous event, the debtor is released from the obligation. But if the loss or impossibility is due to the fault of the debtor, then the provisions of Art. 1204 are applicable. Consequently, if all of the things are lost or all of the prestations cannot be performed due to the fault of the debtor, the creditor shall have a right to indemnity for damages. Such indemnity shall be fixed taking as a basis the value of the last thing to be lost or that of the service which last became impossible. However, if one, or more, but not all, of the things are lost or one or some, but not all, of the prestations cannot be performed due to the fault of the debtor, the creditor cannot hold the debtor liable for damages. This is so because the debtor can still comply with his obligation. Idem; If right of choice belongs to creditor. — If the right of choice belongs to the creditor and the loss or impossibility is due to a fortuitous event, then the provisions of Arts. 1174, 1262 and 1266, which are reiterated in No. 1 of the second paragraph of Art. 1205, are applicable. The debtor cannot be held liable. Consequently, what had been stated in the preceding section can also be applied here. But if the loss or impossibility is due to the fault of the debtor, then the provisions of Nos. 2 and 3 of the second paragraph of Art. 1205 are applicable. Consequently, if all of the things are lost or all of the prestations cannot be performed due to the fault of the debtor, the creditor may claim the price or value of any one of them with indemnity for damages. However, if one or some, but not all, of the things are lost, or one or some, but not all, of the prestations cannot be performed due to the fault of the debtor, the creditor may claim any of those subsisting without any liability on the part of the debtor for damages or the price or value of that, which through the fault of the former, was lost or could not be performed, with indemnity, for damages. 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 173

Art. 1206

OBLIGATIONS

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.164 Nature of Facultative Obligations. — According to the above article, a facultative obligation is defined as an obligation wherein only one object or prestation has been agreed upon by the parties to the obligation, but which may be complied with by the delivery of another object or the performance of another prestation in substitution. It is evident that the characteristic feature of this type of obligation is that only one object or prestation is due, but if the obligor fails to deliver such object or to perform such prestation, he can still comply with his obligation by delivering another object or performing another prestation in substitution. Thus, where the debtor executed a promissory note promising to pay his indebtedness to the creditor at a specified date and in case of failure to do so, he shall execute a deed of mortgage over a certain property belonging to him in favor of the creditor, it was held that the obligation is facultative.165 Consequently, the provisions of Art. 1206 of the Civil Code may be applied. Idem; Distinguished from alternative obligations. — Facultative obligations may be distinguished from alternative obligations in the following ways: (1) As to objects due: In facultative obligations only one object is due, while in alternative obligations several objects are due. (2) As to compliance: Facultative obligations may be complied with by the delivery of another object or by the performance of another prestation in substitution of that which is due, while alternative obligations may be complied with by the delivery of one of the objects or by the performance of one of the prestations which are alternatively due. (3) As to choice: In the first, the right of choice pertains only to the debtor, while in the second, the right of choice may pertain even to the creditor or to a third person. (4) As to the effect of fortuitous loss: In the first, the loss or impossibility of the object or prestation which is due without any 164 165

New provision. Quizana vs. Redugerio, 50 Off. Gaz. 2444.

174

DIFFERENT KINDS OF OBLIGATIONS Alternative and Facultative Obligations

Art. 1206

fault of the debtor is sufficient to extinguish the obligation, while in the second, the loss or impossibility of all of the objects or prestations which are due without any fault of the debtor is necessary to extinguish the obligation. (5) As to effect of culpable loss: In the first, the culpable loss of the object which the debtor may deliver in substitution before the substitution is effected does not give rise to any liability on the part of such debtor; in the second, the culpable loss of any of the objects which are alternatively due before the choice is made may give rise to a liability on the part of the debtor. Idem; When substitution takes effect. — Although Art. 1206 is silent with respect to the time or moment when the substitution will take effect, it is clear that the provision of Art. 1201 can be applied by analogy. Of course, there is no question that the only one who is empowered to make the substitution is the debtor. In order that the creditor will be bound by the substitution, however, it is necessary that he must communicate such fact to the said creditor. Once the latter has been notified of the substitution, then the obligation ceases to be facultative; it is finally converted into a simple obligation to deliver the thing or to perform the prestation which has been substituted. Idem; Effect of loss of substitute. — Before the substitution is made by the obligor, the loss or deterioration of the thing intended as a substitute, through the negligence of the said obligor, does not render him liable.166 Hence, there seems to be an implication that if the loss or deterioration is through the bad faith or fraud of the obligor, then he is liable. As a matter of fact, Dean Capistrano says: “Whether the debtor is liable in case he acts with bad faith, the Code Commission thought it better to leave to the courts to decide. However, it may be pointed out that, as a matter of principle, there should always be liability for bad faith.”167 It must, however, be observed that if the debtor can be held liable for the loss or deterioration of the thing intended as a substitute, will this not destroy the facultative nature of this type of obligation? It is, therefore, submitted that whatever may be the cause of the loss or deterioration of the thing intended as a substitute, such loss or deterioration shall not render the debtor liable. 166 167

Art. 1206, par. 2, Civil Code. 3 Capistrano, Civil Code, 1950, Ed., p. 135.

175

Art. 1206

OBLIGATIONS

Once the substitution has been made, however, the debtor shall be liable for the loss or deterioration of the substitute on account of his delay, negligence or fraud.168 This rule is logical because once the substitution is made, the obligation is converted into a simple one with the substituted thing or prestation as the object of the obligation. Section 4. — Joint and Solidary Obligations Concept. — When there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation, the obligation may be either joint (obligación mancomunada) or solidary (obligación solidaria). A joint obligation may be defined as an obligation where there is a concurrence of several creditors, or of several debtors, or of several creditors and debtors, by virtue of which each of the creditors has a right to demand, and each of the debtors is bound to render, compliance with his proportionate part of the prestation which constitutes the object of the obligation. In other words, each of the creditors is entitled to demand the payment of only a proportionate part of the credit, while each of the debtors is liable for the payment of only a proportionate part of the debt. A solidary obligation, on the other hand, may be defined as an obligation where there is a concurrence of several creditors, or of several debtors, or of several creditors and several debtors, by virtue of which each of the creditors has a right to demand, and each of the debtors is bound to render, entire compliance with the prestation which constitutes the object of the obligation. In other words, each of the creditors is entitled to demand the payment of the entire credit, while each of the debtors is liable for the payment of the entire debt.169 Idem; Comparative jurisprudence. — In the case of Jaucian vs. Querol,170 the Supreme Court had occasion to discuss the comparative jurisprudence on the subject. According to the Court: “In Spanish law the comprehensive and generic term by which to indicate multiplicity of obligations arising from plurality of debtors or creditors, is mancomunidad, which term includes (1) mancomunidad simple or mancomunidad properly Art. 1206, par. 2, Civil Code. Art. 1207, Civil Code; 3 Castan, 7th Ed., pp. 65-66. 170 38 Phil. 707. 168 169

176

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1206

such and (2) mancomunidad solidaria. In other words, the Spanish system recognizes two species of multiple obligation, namely, the apportionable joint obligation and the solidary joint obligation. The solidary obligation is, therefore, merely a form of joint obligation. “The idea of the benefit of division as a feature of simple joint obligation appears to be a peculiar creation of Spanish jurisprudence. No such idea prevailed in the Roman law, and it is not recognized either in the French or in the Italian system. “The conception is a badge of honor to Spanish legislation, honorably shared with the Spanish-American, since French and Italian codes do not recognize the distinction or difference just expounded between the two sorts of multiple obligation. (Giorgi, Theory of Obligation, Span. Ed., Vol. 1, p. 77). “Considered with reference to comparative jurisprudence, liability in solidum appears to be the normal characteristic of the multiple obligation, while the benefit of division in the Spanish system is an illustration of the abnormal, evidently resulting from the operation of a positive rule created by the lawgiver. This exceptional feature of the simple joint obligation in Spanish law dates from an early period; and the rule in question is expressed with simplicity and precision in a passage transcribed into the Novisima Recopilación follows: “If two persons bind themselves by contract, simply and not otherwise, to do or accomplish something, it is thereby to be understood that each is bound for one-half, unless it is specified in the contract that each is bound in solidum, or it is agreed among themselves that they shall be bound in some other manner, and this notwithstanding any customary law to the contrary. x x x’ (Law X, Title I, Book X, Novisima Recopilación, copied from law promulgated at Madrid in 1488 by Henry IV). “The foregoing exposition of the conflict between the juridical conception of liability incident to the multiple obligation, as embodied respectively in the common law system and the Spanish Civil Code, prepares us for a few words of comment upon the problem of translating the terms which we have been considering from English into Spanish or from Spanish to English. “The Spanish expression to be chosen as the equivalent of the English word “joint” or “jointly’’ must, of course, depend upon the idea to be conveyed; and it must be remembered that the matter to be translated may be an enunciation either

177

Art. 1207

OBLIGATIONS

of a common law conception or of a civil law idea. In Sharruf vs. Tayabas Land Co. and Ginainati (37 Phil. Rep. 655), a judge of one of the Courts of First Instance in these Islands rendered judgment in English declaring the defendants to be ‘jointly’ liable. It was held that he meant ‘jointly’ in the sense of ‘mancomunadamente’ because the obligation upon which the judgment was based was apportionable under Article 1138 (now Art. 1208) of the Civil Code. This mode of translation does not, however, hold where the word to be translated has reference to a multiple common law obligation, as in Article 698 of the Code of Civil Procedure. Here it is necessary to render the word ‘joint’ by the Spanish word ‘solidaria.’ “In translating the Spanish word ‘mancomunada’ into English a similar difficulty is presented. In the Philippine Islands at least we must probably continue to tolerate the use of the English word ‘joint’ as an approximate equivalent, ambiguous as it may be to a reader indoctrinated with the ideas of the common law. The Latin phrase pro rata is a makeshift the use of which is not to be commended. The Spanish word ‘solidaria’ is properly rendered in English by the word ‘solidary,’ though it is not inaccurate here to use the compound expression ‘joint and several.’ The use of the Latin phrase ‘in solidum’ is also permissible. We close these observations with the suggestion that a person writing in English may at times find it conducive to precision to use the expanded expression ‘apportionable joint obligation’ and ‘solidary joint obligation’ as conveying the full juridical sense of ‘obligación mancomunada’ and ‘obligacion solidaria,’ respectively.’’

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.171 Nature of Collective Obligations in General. — According to the above article, when there is a concurrence of several creditors or of several debtors or of several creditors and debtors in one and the same obligation, there is a presumption that the obligation is joint 171

Art. 1137, Spanish Civil Code, in modified form.

178

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1207

and not solidary. Consequently, where the obligation is silent with respect to the nature or character of the right of the creditors or of the liability of the debtors, each of the creditors is entitled to demand only for the payment of his proportionate share of the credit, while each of the debtors can be compelled to pay only his proportionate share of the debt.172 Thus, if A, B and C had executed a promissory note binding themselves to pay an indebtedness of P9,000 to X, Y, and Z, since the note is silent with respect to the character of the right of the creditors as well as the liability of the debtors, the obligation is, therefore, presumed to be joint.173 Upon maturity of the note the only right of each creditor would be to demand for the payment of his proportionate share of the credit, which in this particular case is presumed to be P3,000.174 Each debtor, on the other hand, can be compelled to pay only for his proportionate share of the debt. Therefore, if X, for instance, will proceed against A for payment, the only amount which he can collect from the latter would be P1,000. Consequently, if he wants to collect his entire proportionate share of P3,000, he must proceed not only against A, but also against B and C. Idem; Exceptions. — There are, however, three exceptional cases or instances where collective obligations are solidary and not joint. They are: first, when the obligation expressly states that there is solidarity; second, when the law requires solidarity; and third, when the nature of the obligation requires solidarity.175 In all of these cases, each creditor is entitled to demand for the payment of the entire credit, while each debtor can be compelled to pay for the entire debt. Thus, if A, B, and C are solidarily bound to pay an indebtedness of P9,000 to X, Y, and Z, anyone of the creditors can proceed against one, or some, or all of the debtors for the payment of the entire credit.176 Before the first exception can be applied, the solidary character of the obligation must be made in express terms.177 It is not, how172 Pimentel vs. Gutierrez, 14 Phil. 49; White vs. Enriquez, 15 Phil. 113; Agoncillo vs. Javier, 38 Phil. 424; Ramos vs. Gibbon, 67 Phil. 371; Inciong, Jr. vs. Court of Appeals, June 26, 1996, 257 SCRA 580. 173 Art. 1297, Civil Code. 174 Art. 1208, Civil Code. 175 Art. 1207, Civil Code. 176 Art. 1216, Civil Code. 177 Gonzales vs. La Previsora Filipina, 74 Phil. 165.

179

Art. 1207

OBLIGATIONS

ever, necessary that the agreement shall employ precisely the word “solidary” in order that the obligation will be so; it is enough that the agreement will say, for example, that each one of them can be obligated for the aggregate value of the obligation.178 Thus, where the debtors agreed to pay the obligation “jointly and severally,”179 or “individually and collectively”180 everyone of them can be held responsible for the payment of the entire obligation. Another example is where the promissory note expressly states that the three signatories therein are “jointly and severally liable.’’ Any one, some or all of them may be proceeded against for the entire obligation. The choice is left to the solidary creditor to determine against whom he will enforce collection. (Inciong, Jr. vs. Court of Appeals, June 26, 1996, 257 SCRA 580.) Examples of the second exception are those provided for in Arts. 927, 1824, 1911, 1915, 2146, 2157, and 2194 of the Civil Code. Another example would be that provided for in Art. 110 of the Revised Penal Code regarding the liability of principals, accomplices, and accessories of a felony. Examples of the third exception are obligations arising from criminal offenses and torts. The responsibility of two or more persons guilty of a criminal offense or liable for a tort is solidary. This is so because of the very nature of the obligation itself. It must be noted, however, that under Art. 110 of the Revised Penal Code, it is expressly stated that the responsibility of principals, accomplices, and accessories, each within their respective class, is solidary, and under Art. 2194 of the Civil Code, it is also expressly stated that the responsibility of two or more persons liable for a quasi-delict is solidary. Apparently, the obligations comprehended by the exception on which we are commenting are also included within the scope of the second exception. There are, however, some torts which cannot be classified as quasi-delicts because the element of negligence does not enter as an essential requisite, such as interferences with human relations, nuisances, infringements of copyrights, patent or trademark, unfair competition and several others. Responsibility of joint tortfeasors in such cases is solidary because the nature of the Ysmael & Co. vs. Salinas and Delgado, 73 Phil. 601. Parot vs. Gemora, 7 Phil. 24. 180 Oriental Commercial Co. vs. La Fuente, CA, 38 Off. Gaz. 947. 178 179

180

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1208

obligation requires it. Thus, in a certain case, the Supreme Court declared: “It may be stated as a general rule that joint tortfeasors are all the persons who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done for their benefit. They are each liable as principals to the same extent and in the same manner as if they had performed the wrongful act themselves. Joint tortfeasors are jointly and severally liable for the tort which they commit. The person injured may sue all of them or any number less than all. Each is liable for the whole damage. It is no defense for one sued alone, that the others who participated in the wrongful act are not joined with him as defendants; nor is it any excuse for him that his participation in the tort was insignificant as compared with that of the others.’’181

Art. 1208. If from the law, or the nature of 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 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.182 Joint Divisible Obligations. — The most fundamental effect of joint divisible obligations is that each creditor can demand only for the payment of his proportionate share of the credit, while each debtor can be held liable only for the payment of his proportionate share of the debt.183 As a corollary to this rule, the credit or debt shall be presumed, in the absence of any law or stipulation to the contrary, to be divided into as many shares as there are creditors and debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing multiplicity of suits.184 From these rules which are expressly declared by the Code, it necessarily follows that a joint creditor cannot act in representation 181 Worcester vs. Ocampo, 22 Phil. 42. To the same effect: Verzosa vs. Lim, 45 Phil. 416; Torebillas vs. Soques, CA, 46 Off. Gaz. 5618; Padilla vs. Hipomia, CA, G.R. No. 4272-R, Feb. 17, 1951. 182 Art. 1138, Spanish Civil Code, in modified form. 183 Art. 1207, Civil Code. 184 Art. 1208, Civil Code.

181

Art. 1208

OBLIGATIONS

of the others; neither can a joint debtor be compelled to answer for the liability of the others. Consequently, if there is a breach of the obligation by reason of the act of one of the debtors, the damages due to its breach must be borne by him alone.185 Similarly, if there is any defense which is purely personal to one of the debtors, he alone can avail himself of such defense.186 Thus, it has been held that payment or acknowledgment by one of the joint debtors will not stop the running of the period of prescription as to the others.187 This doctrine is in conformity with the opinion of Manresa to the effect that one of the necessary consequences of the rule stated in what is now Art. 1208 of the Civil Code is that “the interruption of prescription by the claim of a creditor addressed to a single debtor or by an acknowledgment made by one of the debtors in favor of one or more of the creditors is not to be understood as prejudicial to or in favor of the other debtors or creditors.’’188 Problem No. 1. — A, B, and C executed a promissory note binding themselves to pay P9,000 to X, Y, and Z. The note is now due and demandable. (a) Can the creditors proceed against A alone for payment of the entire obligation? Why? (b) Can X alone proceed against A, B and C for payment of the entire obligation? Why? (c) Suppose that X proceeds against A alone for payment, how much can he collect? Why? (d) Suppose that C is insolvent, can A and B be held liable for his share in the obligations? Why? (e) Suppose that the obligation was about to prescribe, but X wrote a letter to A demanding for payment of the entire debt, will this have the effect of interrupting the running of the period of prescription? Why? Answer — (a) The creditors cannot proceed against A alone for the payment of the entire obligation. Since the promissory note is silent with respect to the right of the creditors as well as the liability of the debtors, the obligation is, therefore, presumed

Moller’s Ltd. vs. Sarile, 97 Phil. 985. 8 Manresa, 5th Ed., Bk. 1, p. 425. 187 Agoncillo vs. Javier, 38 Phil. 424. 188 8 Manresa 182, cited in Agoncillo vs. Javier, 38 Phil. 424. 185 186

182

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1208

to be joint (Art. 1207, CC). Consequently, the only right of such creditors if they proceed against A alone for payment would be to collect from him P3,000, which is his proportionate share in the obligation. (Ibid.) Once the amount is collected, it will then be divided equally among X, Y and Z. This is so because, under the law, in the absence of any legal provision or stipulation of the parties to the contrary, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the creditors or debts being considered distinct from one another (Art. 1208, CC). (b) X alone cannot proceed against A, B and C for the payment of the entire obligation for the same reason stated in the previous paragraph. The most that he will be able to collect from the three debtors will be his proportionate share in the obligation which is P3,000 (Arts. 1207, 1208, CC). As far as the debtors are concerned, because of the principle that in joint obligations the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another (Art. 1208, CC), the liability of each will be only with respect to his share in the P9,000. Consequently, X can collect only P1,000 from A, P1,000 from B, and P1,000 from C. (c) If X proceeds against A alone for payment, the most that he will be able to collect will be only P1,000. The reason has already been stated in the previous paragraph. (d) If C is insolvent, his co-debtors cannot be held liable for his share in the obligations. This necessarily follows from the principle that in joint obligation, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another (Art. 1208, CC). (e) The demand made by X upon A, for the purpose of interrupting the running of the period of prescription, shall prejudice the latter only, but not the other debtors. Consequently, if after ten years, X, Y and Z should bring an action against A, B and C to collect the debt, the defense of prescription would be absolute insofar as B and C are concerned, but partial insofar as A is concerned. In other words, A can still be compelled to pay P1,000 to X. The reason for this is the fact that the principle of mutual agency is not applicable in joint obligations. (Agoncillo vs. Javier, 38 Phil. 424.) Problem No. 2. — X, Y and Z owe A and B P12,000 in a joint obligation. How many obligations exist in this case, who

183

Art. 1209

OBLIGATIONS

are the parties in each obligation and for how much? Why? (1971 Bar Problem) Answer — There are six obligations in the above case. The parties and the amount of each obligation are: (1)

X as debtor for P2,000 in favor of A as creditor;

(2)

X as debtor for P2,000 in favor of B as creditor;

(3)

Y as debtor for P2,000 in favor of A as creditor;

(4)

Y as debtor for P2,000 in favor of B as creditor;

(5)

Z as debtor for P2,000 in favor of A as creditor;

(6)

Z as debtor for P2,000 in favor of B as creditor.

The above answers are clearly deducible from Art. 1208 of the Civil Code which declares that if the obligation is joint, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered as distinct from one another, subject to the Rules of Court governing the multiplicity of suits. Take the credit of P12,000 for instance. Since there are two creditors there will also be two credits of P6,000 for each creditor. In the case of the debt of P12,000, since there are three debtors there will also be three debts of P4,000 against each debtor. Now, as far as A, the first creditor, is concerned, if he wants to collect his credit of P6,000, he must proceed against all the debtors. Thus he will be able to collect P2,000 from X, P2,000 from Y, another P2,000 from Z. The same is true in the case of B, the second creditor.

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.189 Joint Indivisible Obligations. — A joint indivisible obligation is in a sense somewhat midway between the joint and the solidary obligation, although it still retains the two fundamental characteristics of the former — first, that no creditor can act in representation of the others, and second, that no debtor can be 189

Art. 1139, Spanish Civil Code.

184

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1209

compelled to answer for the liability of the others. However, unlike joint divisible and solidary obligations, in this type of obligation, which is joint with respect to the parties and indivisible with respect to the fulfillment of the obligation, the following characteristics are also present: (1) If there are two or more debtors, the fulfillment of or compliance with the obligation requires the concurrence of all of the debtors, although each for his own share.190 Consequently, according to the Code, the obligation can be enforced only by proceeding against all of the debtors.191 Thus, if A, B, and C obligated themselves to deliver jointly a certain horse to X, since the obligation is both joint and indivisible, X can compel its fulfillment only by proceeding against A, B and C. (2) If there are two or more creditors, the concurrence or collective act of all the creditors, although each for his own share, is also necessary for the enforcement of the obligation. This is so because the obligation is joint, and therefore, a creditor cannot act in representation of the others, and it is also indivisible, and therefore, not susceptible of partial fulfillment. It must be noted, however, that, unlike the case of the debtors, the Code is silent with respect to this point, although Art. 1209 states that the creditors may be prejudiced only by their collective acts. Idem; Effect of breach. — Since in a joint indivisible obligation, compliance can only be enforced by proceeding against all of the debtors, it necessarily follows that if one of the joint debtors fails to comply with his undertaking, the obligation can no longer be fulfilled or performed. Consequently, it is converted into one of indemnity for damages. However, the debtors who may have been ready to fulfill or perform what was incumbent upon them 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.192 Idem; Effect of insolvency of a debtor. — If one of the joint debtors should be insolvent, the others shall not be liable for his

Manresa, 5th Ed., Bk. 1, pp. 422, 466. Art. 1209, Civil Code. 192 Art. 1224, Civil Code. 190 191

185

Art. 1209

OBLIGATIONS

share.193 This rule is, of course, logical because to hold otherwise would destroy the joint character of the obligation. The different effects of a joint indivisible obligation with respect to the debtors may be illustrated by this example: A, B, and C, partners in business, bind themselves jointly to deliver a certain race horse, worth P300,000, to X at the end of January, 1980. X can compel the performance of the obligation only by proceeding against all of the obligors or debtors.194 However, if any one of the debtors, let us say, A, cannot or refuses to comply with his share in the undertaking, the obligation is converted into one of indemnity for damages.195 A shall be liable to X for his corresponding share of the price of the horse plus damages, while B and C shall be liable only for their corresponding shares of the price without damages.196 If B is insolvent, the others shall not be liable for the payment of his share.197 The right of X as against B will, therefore, be the same as the right of a creditor against an insolvent debtor. Idem; Interruption of period of prescription. — If there are two or more creditors or debtors, will the claim of a creditor addressed to a single debtor or the acknowledgment made by one of the debtors in favor of one or more of the creditors be sufficient to interrupt the period of prescription? According to one view, since Art. 1209 merely provides that the right of the creditors may be prejudiced only by their collective acts, it can, therefore, be inferred that should the act of a joint creditor be per se beneficial to the others, as for instance the interruption of the period of prescription, the act of one would be sufficient.198 According to another view, the act of a joint creditor which would ordinarily interrupt the period of prescription would not be valid because the indivisible character of the obligation requires collective action of the creditors to be effective. If a written demand is made by one creditor only, the debtor upon whom the demand is made cannot pay to him alone; payment must be made to all. Hence, the act of one alone is ineffective.199 It is submitted that the latter view is more logical. Art. 1209, Civil Code. Ibid. 195 Art. 1224, Civil Code. 196 Ibid. 197 Art. 1209, Civil Code. 198 8 Manresa, 5th Ed., Bk. 1, pp. 446-467. 199 4 Tolentino, Civil Code, 1956, pp. 213-214, citing De Buen and others. 193 194

186

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Arts. 1210-1211

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.200 Indivisibility and Solidarity. — The rule stated in the above article is logical. Indivisibility and solidarity are not identical. They may be distinguished from each other in the following ways: (1) As to nature: Indivisibility refers to the prestation which constitutes the object of the obligation, while solidarity refers to the legal tie or vinculum, and consequently, to the subjects or parties of the obligation. (2) As to requisites: Plurality of subjects is not required in indivisibility, while it is indispensable in solidarity. (3) As to effect of breach: In indivisible obligations, when the obligation is converted into one of indemnity for damages because of breach, indivisibility of the obligation is terminated; in solidary obligations, when there is liability on the part of the debtors because of breach, the solidarity among the debtors remains.201 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.202 Kinds of Solidarity. — Solidarity may be active (among creditors), passive (among debtors), or mixed (among creditors and debtors).203 Solidarity of creditors (active solidarity) may be defined as a tie or vinculum existing among several creditors of one and the same obligation by virtue of which each of them, in relation to his co-creditors, possesses the character of creditor only with respect to his share in the obligation, but in relation to the common debtor or debtors, represents all of the other creditors. Solidarity of debtors (passive solidarity), on the other hand, may be defined as a tie or vinculum existing among several debtors of one and the same obligation by virtue of which each of them, in relation to his co-debtors, possesses the character of debtor only with respect to his New provision. 8 Manresa, 5th Ed., Bk. 1, p. 469. 202 Art. 1140, Spanish Code. 203 4 Sanchez Roman 50; Giorgi, Teoria de las Obligaciones, Vol. 1, p. 89. 200 201

187

Arts. 1210-1211

OBLIGATIONS

share in the obligation, but in relation to the common creditor or creditors, represents all of the other debtors.204 Idem; Effect of active solidarity in general. — The most fundamental effect of active solidarity is the creation of a relationship of mutual agency among the solidary creditors by virtue of which each creditor is empowered to exercise against the debtor or debtors not only the rights which correspond to him, but also all the rights which correspond to the other creditors, with the consequent obligation to render an accounting of his acts to such creditors. In the words of Manresa: “The essence of solidarity among the creditors consists of the power of each to claim and exercise the rights of all, with the consequent obligation to pay to each what properly corresponds to him upon the exercise of said rights. There is, therefore, equal mutual representation from which none can be excluded without destroying the solidary character of the obligation. Hence, the essential feature of this obligation is that of mutual agency among the active subjects of the obligation, who are empowered to exercise not only their own rights, but also that of the others, against any debtor or debtors, with the consequent obligation to render an accounting of his acts to the other creditors.’’205

It is this relationship of mutual agency which is the basis of the different rules stated in Arts. 1212 to 1215 of the Code. Idem; Effect of passive solidarity in general. — In passive solidarity, each solidary debtor, insofar as the creditor or creditors are concerned, is the debtor of the entire amount; however, with respect to his co-debtors, he is a debtor only to the extent of his share in the obligation.206 Hence, the most fundamental effect of solidarity among the debtors is the liability of each debtor for the payment of the entire obligation, with the consequent right to demand reimbursement from the others for their corresponding shares once payment has been made. Idem; id. — Distinguished from suretyship. — Passive solidarity must be distinguished from solidary guaranty (suretyship).

Giorgi, Teoria de las Obligaciones, Vol. 1, pp. 90, 115. 8 Manresa, 5th Ed., Bk. 1, pp. 431-432. 206 3 Castan, 7th Ed., p. 73. 204 205

188

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Arts. 1210-1211

According to the second paragraph of Art. 2047 of the Code, a solidary guarantor or surety (fiador in solidum) is a person who binds himself solidarily with the principal debtor. Hence, it is evident that a solidary debtor and a surety are similar in the sense that they are both solidarily liable to the creditor for the payment of the entire obligation. Strictly speaking, however, they may be distinguished from each other as follows: (1) A solidary debtor, unlike a surety, is liable not only for the payment of the debt of another, but also for the payment of a debt which is properly his own; (2) If a solidary debtor pays the entire amount of the obligation, he has a right to demand reimbursement from his codebtors of the shares which correspond to them in the obligation, whereas if a surety pays the entire amount of the obligation, he has a right to demand reimbursement from the principal debtor of the entire amount that he has paid; and (3) The rights of a solidary debtor are more limited than those of a surety. Thus, in passive solidarity an extension of time granted by the creditor to one of the solidary debtors for the payment of the obligation without the knowledge or consent of the other solidary debtors would not have the effect of releasing the latter from their obligation,207 but in suretyship such an extension granted to the principal debtor would release the surety from the obligation.208 While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino explains guarantor is different from that of a solidary debtor. Thus, Tolentino explains: “A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed 207 208

Inchausti & Co. vs. Yulo, 34 Phil. 978. Villa vs. Garcia Bosque, 49 Phil. 126; Stevenson vs. Climaco, CA 36 Off. Gaz.

1571.

189

Arts. 1210-1211

OBLIGATIONS

upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.’’ (Inciong, Jr. vs. Court of Appeals, June 26, 1996, 257 SCRA 580). Idem; Effect of varied conditions or periods. — The vinculum or bond which binds the creditors and the debtors in solidary obligations may be either uniform or varied, depending upon whether they are bound in the same manner and by the same conditions or periods or not.209 Consequently, the relationship of solidarity is not destroyed by the fact that the obligation of one debtor is conditional, the obligation of another is with a term or period, and the obligation of a third is pure. Neither is the character of solidarity destroyed if the debtors are bound by different conditions or by different periods. A creditor in such cases, can still commence an action against anyone of the debtors for compliance with the entire obligation minus the portion or share which corresponds to the debtor affected by the condition or period.210 Thus, if A, B, and C borrowed P60,000 from X binding themselves jointly and severally to pay the entire obligation, but in the promissory note executed by them there is a stipulation that in the case of A, the obligation shall become due and demandable on June 15, 1972; in the case of B, it shall become due and demandable on June 15, 1974; and in the case of C, it shall become due and demandable on June 15, 1976, and subsequently, immediately, after June 15, 1972, X brought an action for collection of the entire obligation against A alone because of the latter’s failure to pay despite repeated demands, will the action prosper? Undoubtedly, the obligation here is solidary. This is clear from the provision of Art. 1211 of the Civil Code. However, in solidary obligations of this type, the right of the creditor is limited to the recovery of the share owed by the debtor whose obligation has already matured leaving in suspense his right to recover the shares corresponding to the other debtors whose obligations have not yet matured. This restriction does not destroy the solidary character of the obligation, because, ultimately, he can still compel one and the same debtor, if that is his wish, to pay the entire obligation. Therefore, in the instant case, X can collect only P20,000 from A, which is the latter’s share in the obligation. He shall have to wait for June 15, 1974, when B’s obligation shall have matured, and for June 15, 1976, when C’s obligation shall have also matured. On June 15,

209 210

4 Sanchez Roman 50. Inchausti & Co. vs. Yulo, 34 Phil. 978.

190

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Arts. 1210-1211

1974, he can collect P20,000 from either A or B. On June 15, 1976, he can again collect another P20,000 from either A or B or C. Inchausti & Co., vs. Yulo 34 Phil. 978 On August 12, 1909, six brothers and sisters, defendant among them, executed an instrument admitting their solidary indebtedness to the plaintiff for P253,446.42, at 10% interest per annum, payable in five annual installments, the first installment to be paid on June 13, 1910. Because of default in the payment of the first installment, plaintiff, in accordance with the acceleration clause expressly agreed upon, brought this action on March 27, 1911, against Gregorio Yulo for the payment of the entire indebtedness plus interests. Subsequently, on May 12, 1911, three of the debtors, Francisco, Manuel and Carmen, entered into an agreement with plaintiff, evidenced by a notarial instrument, by virtue of which the amount of the indebtedness was reduced to P225,000, at 6% interest per annum, payable in eight annual installments, the first installment to be paid on June 30,1912. Some of the questions now raised are the following: (1) Can the plaintiff sue Gregorio Yulo alone, considering that there are other debtors? (2) What is the effect of the partial remission of the debt made by the creditor in favor of three of the debtors? (3) What is the effect of the extension of time for payment granted by the creditor to three of the debtors? The Supreme Court, speaking through Chief Justice Arellano, held: “With respect to the question as to whether the plaintiff can sue the defendant alone, it cannot be doubted that, the debtors, having obliged themselves in solidum, the creditor can bring its action in toto against any one of them, inasmuch as this was surely its purpose in demanding that the obligation contracted in its favor should be solidary, and even though the creditor may have stipulated with some of the solidary debtors diverse installments and conditions, as in this case, Inchausti & Co. did with its debtors Manuel, Francisco and Carmen Yulo through the instrument of May 12, 1911, this does not lead to the conclusion that the solidarity stipulated in the instrument of August 12, 1909, is broken, as we already know the law provides that ‘solidarity may exist even though the debtors are not bound in the same manner and for the same periods and under the same conditions.’’ (Art. 1140, Civil Code — now Art. 1211, New Civil Code.)

191

Arts. 1210-1211

OBLIGATIONS

“With respect to the question involving the effect of the partial remission, the obligation being solidary, the remission of any part of the debt made by a creditor in favor of one or more of the solidary debtors necessarily benefits the others, and therefore, there can be no doubt that, in accordance with the provision of Article 1143 (now Art. 1215) of the Civil Code, the defendant has the right to enjoy the benefits of the partial remission of the debt granted by the creditor. “Wherefore, we hold that although the contract of May 12, 1911, has not novated that of August 12, 1909, it has affected that contract and the outcome of the suit brought against Gregorio Yulo alone for the sum of P253,445.42; and in consequence thereof, the amount stated in the contract of August 12, 1909, cannot be recovered but only that stated in the contract of May 12, 1911, by virtue of the remission granted to the three of the solidary debtors in this instrument, in conformity with what is provided in Article 1143 (now Art. 1215), Civil Code, cited by the creditor himself. “With respect to the question involving the effect of the extension of time for payment granted to the other solidary debtors, Gregorio Yulo cannot allege as a defense to the action that it is premature. When the suit was brought on March 27, 1911, the first installment of the obligation had already matured on June 30, 1910, and with the maturity of this installment, the first not having been paid, the whole debt had matured, according to the express agreement of the parties. Neither could he invoke a like exception for the shares of solidary co-debtors Pedro and Concepcion Yulo, they being in identical condition as he. But as regards Francisco, Manuel and Carmen Yulo, none of the installment payable under their obligation, contracted later, had as yet matured. The first payment, as already stated, was to mature on June 30, 1912. This exception or personal defense of Francisco, Manuel and Carmen Yulo ‘as to that part of the debt for which they were responsible’ can be set up by Gregorio Yulo as a partial defense to the action. The part of the debt for which these three are responsible is three-sixths of P225,000, or P112,500, so that Gregorio Yulo may claim that, even acknowledging that the debt for which he is liable is P225,000, nevertheless not all of it can now be demanded of him, for that of it which pertains to his co-debtors is not yet due, a state of affairs which not only prevents any action against the persons who were granted the term which has not yet matured, but also against the other solidary debtors who being ordered to pay could not now sue for a contribution, and for this reason the action will be only as to P112,500.

192

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Arts. 1210-1211

It has been said in the brief of the appellee that the prematurity of the action is one of the defenses derived from the nature of the obligation, according to the opinion of the commentator of the Civil Code, Mucius Scaevola, and consequently, the defendant Gregorio Yulo may make use of it in accordance with Article 1146 (now Art. 1222) of the Civil Code. It may be so and yet, taken in that light, the effect would not be different from that already stated in this decision; Gregorio Yulo could not be freed from making any payment whatever but only from the payment of the part of the debt which corresponds to his co-debtors Francisco, Manuel and Carmen. The same author, considering the case of the opposing contention of two solidary debtors as to one of whom the obligation is pure and unconditional and as to the other it is conditional and is not yet demandable, and comparing the disadvantages which must flow from holding that the obligation is demandable with those which must follow if the contrary view is adopted, favors this solution of the problem. “ ‘There is a middle ground (he says), from which we can safely set out, to wit, that the creditor may of course demand the payment of his credit against the debtor not favored by any condition or extension of time.’ And further on, he decides the question as to whether the whole debt may be recovered or only that part unconditionally owing or which has already matured, saying ‘Without failing to proceed with juridical rigor, but without failing into extravagances or monstrosities, we believe that the solution of the difficulty is perfectly possible. How? By limiting the right of the creditor to the recovery of the amount owed by the debtor bound unconditionally or as to whom the obligation has matured, and leaving in suspense the right to demand the payment of the remainder until the expiration of the term or the fulfillment of the condition. But what then is the effect of solidarity? How can this restriction of right be reconciled with the duty imposed upon each one of the debtors to answer for the whole obligation? Simply this, by recognizing in the creditor the power, upon the performance of the condition or the expiration of the term, of claiming from any one or all of the debtors that part of the obligation affected by those conditions. (Scaevola, Civil Code, 19, 800 and 801) “It has been said also by the trial judge in his decision that if a judgment be entered against Gregorio Yulo for the whole debt of P253,445.42 he cannot recover from Francisco, Manuel and Carmen Yulo that part of the amount which is owed by them because they are obliged to pay only P225,000 and this

193

Arts. 1210-1211

OBLIGATIONS

in eight installments none of which was due. For this reason he was of the opinion that he (Gregorio Yulo) cannot be obliged to pay his part of the debt before the contract of May 12, 1911, may be enforced, and consequently, he decided the case in favor of the defendant, without prejudice to the plaintiff proceeding in due time against him for his proportional part of the joint debt. “But in the first place, taking into consideration the conformity of the plaintiff and the provision of Article 1143 (now Art. 1215) of the Civil Code it is no longer possible to sentence the defendant to pay the P253,445.42 of the instrument of August 12, 1909, but if anything, the P225,000 of the instrument of May 12, 1911. In the second place, neither is it possible to curtail the defendant’s right of recovery from the signers of the instrument of May 12, 1911, for he was justly exonerated from the payment of that part of the debt corresponding to them by reason of there having been upheld in his favor the exception of an unmatured installment which pertains to them. In the third place, it does not seem just. Mucius Scaevola considers it ‘absurd,’ that, there being a debtor who is unconditionally obliged as to whom the debt has matured, the creditor should be forced to await the realization of the condition (or the expiration of the term). Hence, the contract of May 12, 1911 has affected the action and the suit, to the extent that Gregorio Yulo has been able to make in his favor the defense of remission of part of the debt, thanks to the provision of Article 1143 (now Art. 1222), because it is a defense derived from the nature of the obligation, so that although the said defendant was not a party to the contract in question, yet because of the principle of solidarity he was benefited by it. The defendant Gregorio Yulo cannot be ordered to pay the P253,445.42 claimed from him in the suit here, because he has been benefited by the remission made by the plaintiff to three of his co-debtors, many times named above. “Consequently, the debt is reduced P225,000. But, as it cannot be enforced against the defendant except as to the three-sixths part which is what he can recover from his joint codebtors Francisco, Manuel, and Carmen, at present judgment can be rendered only as to the P112,500. We, therefore, sentence the defendant Gregorio Yulo to pay the plaintiff Inchausti & Co. P112,500, with the interest stipulated in the instrument of May 12,1911, from March 15, 1911, and the legal interest on this interest due, from the time that it was claimed judicially in accordance with Article 1109 (now Art. 2212) of the Civil Code, without any special finding as to cost. The judgment appealed from is reversed. So ordered.”

194

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1212

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.211 Effect of Beneficial and Prejudicial Acts. — As a consequence of the relationship of mutual agency existing among the solidary creditors, each one of them may do whatever may be useful or beneficial to the others, but not anything which may be prejudicial to the latter.212 Hence, each solidary creditor may demand the payment or performance of the entire obligation from one, some or all of the debtors.213 Such a demand will have the effect of benefiting not only the solidary creditor who made it, but also the other solidary creditors. Consequently, if the entire obligation is paid, the latter will have the right to demand from the creditor who received the payment the shares corresponding to them in the obligation.214 As far as prejudicial acts are concerned, we must distinguish between the effect of such acts upon the relationship of the solidary creditors with the debtor or debtors, and the effect upon the entirely different relationship of the solidary creditors among themselves. As far as the debtor or debtors are concerned, a prejudicial act performed by a solidary creditor shall be valid and binding because of the principle of mutual representation which exists among the creditors; however, as far as the solidary creditors are concerned, the creditor who performed the act shall incur the obligation of indemnifying the others for damages.215 There is, therefore, no incompatibility between the rule regarding prejudicial acts stated in Art. 1212 and the rule regarding novation, compensation, confusion or remission stated in Art. 1215. The first refers to the effect of prejudicial acts upon the relationship of the creditors among themselves; the second refers to the effect upon the entirely different relationship of the creditors with the debtor or debtors. It is clear that the Code sanctions the efficacy of prejudicial acts such as novation, compensation, confusion or remission as far as the debtor or debtors are concerned, but not as far as the other solidary creditors are concerned.216 Consequently, according to Art. 1215, the novation, compensation, confusion or reArt. 1141, Spanish Civil Code, in modified form. Art. 1212, Civil Code. 213 rts. 1214, 1216, Civil Code. 214 Art. 1215, par. 2, Civil Code. 215 3 Castan, 7th Ed., p. 72. 216 8 Manresa, 5th Ed., Bk. 1, pp. 432-433. 211 212

195

Arts. 1213-1214

OBLIGATIONS

mission of the debt shall result in the extinguishment of the obligation, but the solidary creditor responsible for the act shall be liable to the others for the share in the obligation corresponding to them. Art. 1213. A solidary creditor cannot assign his rights without the consent of the others.217 Effect of Assignment of Rights. — The rule or precept stated in the above article is based on the opinion of Manresa and other Spanish commentators, that since active solidarity is essentially a mutual agency, and therefore, is predicated upon mutual confidence which implies that the personal qualifications of each of the solidary creditors had been taken into consideration when the obligation was constituted, it is only proper that a solidary creditor cannot assign his rights without the consent of the others. What is the effect if a solidary creditor assigns his rights without the consent of the other solidary creditors? The answer to this question shall have to be qualified. If the assignment is made to anyone of the other solidary creditors, it is clear that there is no violation of the precept stated in Art. 1213, because in such case there can be no invasion of the personal or confidential relationship existing among the solidary creditors. However, if the assignment is made to a third person, there would be a clear violation of the precept, in which case the other solidary creditors, as well as the debtor or debtors, are not bound to recognize the validity or the efficacy of the assignment. This is, of course, without prejudice to the liability of the creditor-assignor to the other solidary creditors for damages which may have been incurred by them as a result of the prohibited assignment. 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.218 Effect of Demand by a Creditor. — Any solidary creditor may demand the payment or performance of the obligation from one, some or all of the debtors. This is, of course, a logical consequence

217 218

New provision. Art. 1142, Spanish Civil Code, in modified form.

196

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1215

of the rule stated in Art. 1212 that each creditor may do what is beneficial to the others. Such a demand may be either judicial or extrajudicial. In such case, payment shall be made only to the creditor who made the demand and to no other. However, in the absence of any judicial or extrajudicial demand, payment may be made by the debtor to anyone of the solidary creditors.219 In case of mixed solidarity, a judicial or extrajudicial demand would prohibit the debtor upon whom the demand is made from making a payment to any creditor other than to the one who made the demand. This prohibition, however, does not extend to the other debtors upon whom no demand has been made and so each of such debtors can still validly tender payment to a creditor other than to the creditor who made the demand.220 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.221 Effect of Novation. — Novation is the change or substitution of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal condition, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor.222 The peculiar feature of this mode of extinguishing obligations is that while it extinguishes the obligation, it creates a new one in lieu of the old. Hence, the liability of the solidary creditor who effected the novation to the other solidary creditors shall depend upon the character of the new obligation which is created. If the novation of the obligation is effected by changing its object or principal condition, the new obligation which is created may be either prejudicial or beneficial

Art. 1214, Civil Code. 8 Manresa, 5th Ed., Bk. 1, p. 437. 221 Art. 1143, Spanish Civil Code. 222 8 Manresa, 5th Ed., Bk. 1, p. 751. 219 220

197

Art. 1215

OBLIGATIONS

to the other solidary creditors depending upon the circumstances of each particular case. If it is prejudicial, the solidary creditor who effected the novation shall reimburse the others for damages incurred by them; if it is beneficial and the creditor who effected the novation is able to secure performance of the new obligation, such creditor shall be liable to the others for the share which corresponds to them, not only in the obligation, but also in the benefits. If the novation is effected by substituting another person in place of the debtor, the solidary creditor who effected the novation is liable for the acts of the new debtor in case there is a deficiency in performance or in case damages are incurred by the other solidary creditors as a result of the substitution. If the novation is effected by subrogating a third person in the rights of the solidary creditor responsible for the novation, the obligation of the debtor or creditors is not in reality extinguished, because in this type of novation the relation between the other creditors not substituted and the debtor or debtors is still maintained. However, if the novation is effected by subrogating a third person in the rights of all the solidary creditors, the creditor responsible for such novation is liable to the other creditors for the share which corresponds to them in the obligation.223 As a general rule, extension of time for the payment of the obligation given by the creditor to a solidary debtor does not constitute a novation with respect to the other solidary debtors, because in order that an obligation may be extinguished by another which substitutes it, it is necessary that it should be so expressly declared or that the old and the new obligation are incompatible with each other on every point. However, if the creditor proceeds against the solidary debtor or debtors to whom no extension was given for payment of the whole obligation, such debtor or debtors can set up the partial defense of extension of time as regards that part of the debt for which the debtor or debtors to whom the extension was given are responsible.224 In suretyship, however, the rule is that an extension of time granted to the principal debtor by the creditor without the consent of the surety extinguishes the latter’s liability;225 but where a surety is liable for different payments, such as installments or Ibid., pp. 444-445. Art. 1222, Civil Code; Inchausti & Co. vs. Yulo, 34 Phil. 978. 225 Art. 2079, Civil Code; Asiatic Petroleum Co. vs. Hizon, 45 Phil. 532; National Bank vs. Veraguth, 50 Phil. 253. 223 224

198

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1215

rents, or upon a series of promissory notes, an extension of time as to one or more will not affect the liability of the surety for the others.226 Effect of Compensation and Confusion. — Compensation is a figurative operation of weighing two obligations simultaneously in order to extinguish them to the extent that the amount of one is covered by the amount of the other.227 Confusion, on the other hand, refers to the merger of the qualities of creditor and debtor in one and the same person with respect to one and the same obligation.228 If the confusion or compensation is partial, there may be some doubt as to the part of the obligation to which the confusion or compensation shall be applied. In such case, the question is resolved by applying the rules established in this Code regarding application of payment. This is, of course, without prejudice to the right of the other creditors who have not caused the confusion or compensation to be reimbursed to the extent that their rights are diminished or affected. If the confusion or compensation is total, the obligation is extinguished altogether and what is left is the ensuing liability for reimbursement within each group, the creditor causing the confusion or compensation being obliged to reimburse the other creditors, and the debtors benefited by the extinguishment of the obligation being obliged to reimburse the debtor who made the confusion or compensation possible.229 Effect of Remission. — Remission is an act of pure liberality by virtue of which the creditor, without having received any compensation or equivalent, renounces his right to enforce the obligation, thereby extinguishing the same either in its entirety or in the part or aspect thereof to which the remission refers.230 The remission or condonation referred to in Art. 1215 may be total or partial, effected by one, some, but not all, of the solidary creditors in favor of one, some or all of the debtors. Whether total or partial, the obligation is extinguished in its entirety or in that part or aspect thereof to which the remission refers, giving rise to a liability on the part of the creditor or creditors responsible for the remission to reimburse the others for the share in the obligation corresponding to

Villa vs. Garcia Bosque, 49 Phil. 126. 8 Manresa, 5th Ed., Bk. 1, p. 713. 228 4 Sanchez Roman 421. 229 8 Manresa, 5th Ed., Bk. 1, pp. 443-444. 230 Ibid., p. 673. 226 227

199

Art. 1215

OBLIGATIONS

them. However, as among the creditors responsible for the remission, such liability does not arise.231 As far as the solidary debtors are concerned, the effects of remission may be summarized as follows: (1) If the remission covers the entire obligation, then the obligation is totally extinguished and the entire juridical relation among the debtors is terminated altogether. This is true whether the remission is for the benefit of all of the debtors or of only one of them. As a matter of fact, the Code in Art. 1220 expressly declares that the remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. This rule is based on the character of remission as an act of pure liberality. In reality, the remission of a debt is a donation. Hence, if the whole obligation is condoned through the efforts of a solidary debtor or for his benefit, he is not entitled to any reimbursement from his co-debtors.232 (2) If the remission is for the benefit of one of the debtors and it covers his entire share in the obligation, he is completely released from the creditor or creditors, but he is still bound to his co-debtors. Consequently, if one of the latter subsequently pays the balance of the obligation which is not condoned and he proceeds against the others for reimbursement of their respective shares in the obligation, but one of them is insolvent, the debtor for whose benefit the remission had been effected, shall still have to share in the portion which corresponds to the insolvent. (3) If the remission is for the benefit of one of the debtors and it covers only a part of his share in the obligation, his character as a solidary debtor is not affected; it continues both with respect to the creditor or creditors and with respect to the other debtors. Whether the remission covers the entire share of a solidary debtor in the obligation or only a part thereof, if the creditor or creditors proceed against any one of the other solidary debtors for the payment of the entire obligation, such debtor can always avail himself of the defense of partial remission.233

Ibid., pp. 440-443. Ibid. 233 Art. 1222, Civil Code; Inchausti & Co. vs. Yulo, 34 Phil. 978. 231 232

200

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1216

It must be noted, however, that the above rules cannot be applied in case the debt had already been totally paid by anyone of the solidary debtors before the remission was effected.234 Otherwise, there would always be the possibility that the creditor might fraudulently condone the share of a solidary debtor whom he desires to favor even after the debt had already been totally paid by another solidary debtor.235 Effect of Payment to a Creditor. — If one of the solidary creditors is able to collect the entire amount of the debt from one or some or all of the solidary debtors, the obligation is totally extinguished, although there arises a consequent obligation on his part to render an account to his co-creditors. Under the law, he can be held liable to the others for the share in the obligation corresponding to them.236 Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.237 Effect of Demand upon a Debtor. — Since any one of the solidary debtors can be held liable for the payment of the entire obligation, it is but logical that the creditor may proceed against any one or some or all of them simultaneously.238 Furthermore, the demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others so long as the debt has not been fully collected.239 Thus, where the guarantor binds himself solidarily with the principal debtor to pay the latter’s debt, he cannot and should not complain that the creditor should thereafter proceed against him to collect his credit. This is so because the creditor may proceed against any one of the solidary debtors or against all of them simultaneously, the fact that action has been brought or that payment has been enforced against one of Art. 1219, Civil Code. 8 Manresa, 5th Ed., Bk. 1, pp. 442-443. 236 Art. 1215, par. 2, Civil Code. 237 Art. 1444, Spanish Civil Code, in modified form. 238 Art. 1216, Civil Code. 239 Ibid. 234 235

201

Art. 1216

OBLIGATIONS

them not being a bar thereto so long as there remains a balance to collect.240 And it cannot be contended that the failure of the creditor to include the solidary guarantor or surety as a defendant in the first suit implies a waiver of his right of action against such surety, since under the law the bringing of an action against the principal debtor to enforce the payment of the obligation is not inconsistent with, and does not preclude, the bringing of another to compel the surety to fulfill his obligation under the surety agreement.241 A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for a creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same as that of the principal, then as soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety and equally bound. (Palmares vs. Court of Appeals, March 31, 1998, 288 SCRA 426.) The Supreme Court further stated in the aforementioned case of Palmares vs. Court of Appeals that “in this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, and as such, is deemed an original promissor and debtor from the beginning. This is because in suretyship, there is but one contract, and the surety is bound by the same agreement which binds the principal. In essence, the contract of a surety starts with the agreement. 240 241

La Yebana vs. Valenzuela, 67 Phil. 482. Phil. Nat. Bank vs. Confesor, CA, 37 Off. Gaz. 3295.

202

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1216

“A surety is not even entitled as a matter of right to be given notice of the principal’s default. Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them since the commencement of the suit is a sufficient demand. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal’s default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship.’’ “A surety is liable as much as his principal is liable and absolutely liable as soon as default is made without any demand upon the principal whatsoever or any notice of default. The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account. The underlying principle therefore is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. (Palmares vs. Court of Appeals, supra.) As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulation of the parties or the nature of the obligation. Only obligations that are personal or are identified with the persons themselves are extinguished by death. Sec. 5 of Rule 86 of the Rules of Court expressly allows the prosecution of money claims arising from a contract against the estate of a deceased debtor. Evidently, those claim are not extinguished. What is extinguished is only the 203

Art. 1217

OBLIGATIONS

obligee’s action or suit filed before the court, which is not then acting as a probate court. As provided in the case of Stronghold Insurance Company Inc vs. Republic-Asahi Glass Corporation, whatever monetary liabilities or obligations the deceased Jose Santos (the proprietor of JDS Construction which executed a performance bond jointly and severally with petitioner-surety) had under his contracts with respondent Republic-Asahi were not intransmissible by their nature, by stipulation or by provision of law. Hence,death did not result in the extinguishment of those obligations or liabilities, which merely passed on to the estate of Santos. Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, the petitioner as surety cannot use his death to escape its monetary obligation under its performance bond. As a surety, petitioner is solidarily liable with Santos in accordance with Art. 2017, in relation to Art. 1216 of the New Civil Code. The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; In other words, he is directly and equally bound with the principal. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Despite the death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond. Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner , in view of the solidary nature of their liability (Stronghold Insurance Company Inc. vs. RepublicAsahi Glass Corporation, supra). Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before 204

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1218

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.242 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.243 Effect of Payment by a Debtor. — Where payment is made by one of the solidary debtors, the effect is either the total or partial extinguishment of the obligation depending upon whether the entire amount of the debt is paid or only a part thereof. Once payment is made by one of the solidary debtors of the entire obligation, there arises immediately a consequent right of such debtor to claim from his co-debtors the share which corresponds to them, with interest for the payment already made.244 This right, however, is not available to a debtor who makes the payment after the obligation has prescribed or has become illegal.245 As a rule, the interest shall be computed from the time payment was made. However, if payment was made before the debt became due, no interest during the intervening period may be demanded.246 In other words, the interest shall be computed not from the time payment was made, but from the time the debt became due. Thus, if A, B, and C became indebted jointly and severally to X for P30,000 and it was agreed that such debt shall be paid on December 1, 1966, but instead payment was made by A on June 1, 1965, he can demand from B and C only the share which corresponds to each in the obligation, as well as the interest thereon from December 1, 1966. What would be the effect if one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation? According to the third paragraph of Art. 1217, such

Art. 1145, Spanish Civil Code, in modified form. New provision. 244 Art. 1217, par. 2, Civil Code. 245 Art. 1218, Civil Code. 246 Art. 1217, par. 2, Civil Code. 242 243

205

Art. 1218

OBLIGATIONS

share shall be borne by all his co-debtors, in proportion to the debt of each. Idem; Nature of right of debtor. — It must be observed that, under the law, before the payment is actually made, the right of the solidary debtor to demand reimbursement from his co-debtors is merely contingent and conditional. Once payment has already been made, the right becomes real and existing. The old obligation in favor of the creditor is extinguished, but a new obligation is created in favor of the solidary debtor who made the payment. There is, therefore, no real case of subrogation.247 Bank of the P.I. vs. McCoy 52 Phil. 831 This action was originally instituted by plaintiff bank against McCoy and six other solidary debtors for the payment of an indebtedness of P16,000. When the case was ready for hearing, McCoy entered into a compromise with plaintiff and paid P12,000 in satisfaction of the debt. The question now is — can McCoy be substituted as plaintiff against her former codefendants for the purpose of compelling them to reimburse to her their proportionate shares in the obligation? Held: “By paying off the claim which was originally the subject of litigation, the executrix was subrogated to the rights of the original plaintiff, and if the situation was one involving a joint and several liability on the part of all of the original defendants, the executrix, upon paying off the claim, necessarily acquired the right to prosecute the action for contribution against her co-defendants. But it is said that the amendment by which the executrix was permitted to substitute the original plaintiff had the effect of changing the cause of action entirely, since the original action was founded upon a debt supposedly owing to the bank from the seven defendants, whereas after the instant debt was paid, the only right of action vested in the executrix was the right to obtain contribution. It must be remembered, however, that if the original action had proceeded to its end against all of the defendants, the court, in giving judgment, would have taken account of the obligation of each to contribute his proportionate share to the payment of the judgment, and what has been finally done, as the case shaped itself here, is to give effect to the same

247

Wilson vs. Berkenkotter, 49 Off. Gaz. 1410.

206

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1218

obligation. It was in our opinion a proper case of substitution of parties resulting from the subrogation of one of the defendants to the right of the plaintiff.”248 Wilson vs. Berkenkotter 49 Off. Gaz. 1410 On June 30, 1938, Berkenkotter, Wilson and Gulick executed a promissory note promising jointly and severally to pay an indebtedness of P90,000 to the Chartered Bank of India, Australia and China plus interest. Payment was made by Berkenkotter in November, 1944, with Japanese military notes. After liberation, Berkenkotter demanded from his codebtors reimbursement of their shares in the obligation. Wilson tendered payment of P625.51 in accordance with the Ballantyne Schedule, which Berkenkotter refused to accept. As a result, Wilson deposited the amount in the Court of First Instance of Manila and finally brought this action to compel Berkenkotter to accept the said amount. The question now is — is the Ballantyne Schedule applicable? Held: “In several cases involving the application of the Ballantyne Schedule, this Court has held that said schedule is applicable to obligations contracted during the Japanese occupation where said obligations are made payable on demand or during said Japanese occupation but not after the war or at a specified date speculating on the continuation or cessation of the war at the time of payment. If the obligation on the part of Wilson to pay Berkenkotter the amount paid by the latter to wipe out their debt to the Bank was created during the occupation, then the Ballantyne Schedule is applicable, but if said obligation was created before the war, particularly on the date when plaintiff and defendant signed the promissory note in favor of the Bank then the Ballantyne Schedule may not be applied. “Counsel for the appellant contends that said obligation was created in 1938 because by signing the promissory note, Wilson impliedly undertook to pay anyone of his co-debtors who might pay off the whole debt. He also claims that by paying the This doctrine seems to be in direct conflict with the doctrine enunciated in the case of Wilson vs. Berkenkotter that in a case of this sort there is no real case of subrogation. It is submitted, however, that when the Court held that “the executrix was subrogated to the rights of the original plaintiff,’’ it was only referring, not to subrogation in its technical sense, but to substitution of parties in its procedural sense. 248

207

Arts. 1219-1220

OBLIGATIONS

entire loan in 1944 to the Bank, appellant became a subrogee of said Bank and the entire credit was transmitted to him with all the rights inherent therein against the debtor or against third persons. (Art. 1212 — now Art. 1303, Civil Code.) “We regret to disagree. When appellant paid the entire loan plus interests in November, 1944, the whole obligation was extinguished. The solidary co-debtors were no longer under any obligation to the Bank but a new obligation was created in favor of the appellant to enforce his claim against the appellee. That is why the appellant to enforce his claim against the appellee has based his claim not on the obligation created in 1938 in favor of the Bank by virtue of the promissory note signed by the co-debtors, but on his having paid the entire loan. The present is not a real case of subrogation as contended by appellant because as Manresa says, in a case like the present the original obligation is extinguished and a new one is created. In other words, appellant does not, as claimed by his counsel, step into the shoes of the Bank. He cannot enforce the original obligation created in 1938. The Bank could collect the whole amount of the loan from any one of the solidary co-debtors, and in fact did from one of them. This, the appellant may not do just because he paid the entire loan. “In conclusion, we find and hold that the obligation in favor of the appellant to pay to him the share of the appellee in the original loan was created during the Japanese occupation, particularly in November 1944, and so comes under the ruling of this Court regarding the application of the Ballantyne Schedule. Finding no reversible error in the decision appealed from the same is hereby affirmed. No costs.’’

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 codebtors, in case the debt had been totally paid by anyone of them before the remission was effected.249 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.250

249 250

Art. 1146, Spanish Civil Code, in modified form. New provision.

208

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1221

Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply.251 Effect of Loss or Impossibility of Performance. — The rules stated in the above articles merely reiterate the rules stated in Arts. 1174, 1262, and 1266 of the Code. They may be restated as follows: (1) If the loss of the thing or the impossibility of complying with the prestation which constitutes the object of the obligation is not due to the fault of the solidary debtors, the obligation is extinguished. (2) If the loss or impossibility is due to the fault of one of the solidary debtors, the obligation is converted into an obligation of indemnity for damages, but the solidary character of the obligation remains. The creditor can still proceed against one, or some, or all of the debtors for the payment of the price, plus damages, without prejudice to the subsequent right of action of the debtor or debtors who paid to proceed against the guilty or negligent debtor for reimbursement. This rule may be illustrated by the following example: A, B, and C bound themselves solidarily to deliver thirty cavans of rice, valued at P3,000 to X at a specified date. The rice had already been segregated at the time of the perfection of the contract. All of the thirty cavans, however were lost through the fault of C. What are the rights and obligations of the parties? Anyone of the debtors can, of course, be held liable for the payment of the price or value of the rice, plus damages. Hence, if X decides to proceed against A alone, undoubtedly, the latter can be held responsible not 251

Art. 1147, Spanish Civil Code, in modified form.

209

Art. 1222

OBLIGATIONS

only for the price or value of the thirty cavans of rice, but even for damages. However, once A has settled his obligation to X, he can then proceed against the guilty debtor, C, for reimbursement of the entire amount which he has paid to X, plus interest. (3) If the loss or impossibility is due to a fortuitous event after one of the debtors had already incurred in delay, again the obligation is converted into an obligation of indemnity for damages, but the solidary character of the obligation remains. Anyone, or some, or all of the debtors can be held responsible for the price, plus damages but without prejudice to the right of action of the debtor or debtors who paid to proceed against the debtor responsible for the delay. 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.252 Defenses Available to a Solidary Debtor. — The creditor or creditors may proceed against any of the solidary debtors or all of them simultaneously for the payment of the obligation, but whether only one or all of the solidary debtors are sued jointly, any solidary debtor may interpose against the claim of the creditor or creditors any of the following defenses: first, defenses derived from the very nature of the obligation; second, defenses personal to him or pertaining to his own share; third, defenses personal to the others, but only as regards that part of the debt for which the latter are responsible.253 Examples of the first are payment or performance, res judicata, prescription, those which invalidate the contract such as mistake, violence, intimidation, undue influence, fraud, and others of a similar nature.254 Examples of the second are minority, insanity and other defenses which are purely personal to the debtor. The third, Art. 1148, Spanish Civil Code, in modified form. Art. 1222, Civil Code; Narvaez vs. De Leon, CA, 47 Off. Gaz. 160. 254 Chinese Chamber of Commerce vs. Pua Te Ching, 16 Phil. 405. 252 253

210

DIFFERENT KINDS OF OBLIGATIONS Joint and Solidary Obligations

Art. 1222

on the other hand, is merely a partial defense. Thus, if a mother and her two minor children had signed a promissory note promising to pay a certain indebtedness jointly and severally, and subsequently, the creditor proceeds against the mother for the payment of the entire obligation, undoubtedly, the latter can interpose the defense of minority of her co-signers, but such defense will benefit her only with regard to that part of the debt for which the minors are responsible.255 Similarly, if the creditor has granted to some of the solidary debtors an extension of time for payment by virtue of a new contract entered into with such debtors, the debtor against whom the action for payment of the entire obligation is brought can interpose the defense of extension of time for payment, but only with regard to that part of the debt for which the debtors benefited by the extension are responsible.256 Problem — A, B and C borrowed P12,000 from X on June 1, 1966. They executed a promissory note binding themselves jointly and severally to pay the obligation on June 1, 1968. For failure to pay, X brought an action against A for payment of the entire obligation plus interests. A interposed the following defenses: (1) that B was only a minor at the time of the celebration of the contract and that such fact was known to X; and (2) that X had granted an extension of two years to C within which to pay. (1)

Can A avail himself of these defenses?

(2) Granting that A can avail himself of these defenses, what would be the effect upon his liability, assuming that he can establish both defenses by competent evidence? Reasons. Answer — (a) A can avail himself of these defenses. Under Art. 1222 of the Civil Code, there are three kinds of defenses which are available to a solidary debtor if the creditor proceeds against him alone for payment of the entire obligation. They are: first, defenses derived from the nature of the obligation; second, defenses personal to him or pertaining to his share; and third, defenses personal to the others, but only as regards that part of the debt for which the latter are responsible. It is evident that both defenses interposed by A fall within the purview of the third. 255 256

Braganza vs. Villa Abrille, 105 Phil. 456. Inchausti & Co. vs. Yulo, 34 Phil. 978; Narvaez vs. De Leon, CA, 47 Off. Gaz.

160.

211

Art. 1222

OBLIGATIONS

(b) Since A can avail himself of both defenses, and since such defenses are not absolute but merely partial in character, undoubtedly, X can collect from A the following: (a) P4,000 corresponding to the share of A in the obligation; and (b) an amount equivalent to the extent that B had been benefitted by his share in the obligation, applying the rule enunciated in Art. 1399 regarding the effect if the defect of a contract consists in the incapacity of one of the contracting parties. As far as the share corresponding to C is concerned, X must wait for the expiration of the two years extension which he had given to C before he can collect such share from A.

Section 5. — Divisible and Indivisible Obligations Concept. — Obligations may be divisible or indivisible. Divisible obligations are those which have as their object a prestation which is susceptible of partial performance without the essence of the obligation being changed. Indivisible obligations, on the other hand, are those which have as their object a prestation which is not susceptible of partial performance, because, otherwise, the essence of the obligation will be changed.257 Relation to Divisibility or Indivisibility of Things. — The divisibility of an obligation must not be confused with the divisibility of the thing or prestation which constitutes the object of the obligation. The former refers to the performance of the prestation which constitutes the object of the obligation; the second refers to the prestation itself. This does not mean, however, that the divisibility or indivisibility of the object can have no effect upon the divisibility or indivisibility of the obligation itself. On the contrary, the divisibility or indivisibility of the object is a very important factor, probably the most important, in determining whether the prestation which constitutes the object of the obligation is susceptible of partial performance or not.258 When is a thing or object divisible or indivisible? According to Spanish commentators, a thing is indivisible when, if separated into parts, its essence is changed or its value is decreased disproportionately. On the other hand, a thing is divisible when, if separated

257 258

3 Castan, 7th Ed., p. 92. Art. 1225, Civil Code.

212

DIFFERENT KINDS OF OBLIGATIONS Divisible and Indivisible Obligations

Arts 1223-1224

into parts, its essence is not changed or its value is not decreased disproportionately, because each of the parts into which it is divided are homogenous and analogous to each other as well as to the thing itself. Hence, it is an essential condition, in order that a thing shall be considered divisible, that it must be possible to reconstruct the thing itself into its condition prior to the division by uniting the different parts into which it had been divided. There are three kinds of division. They are quantitative, qualitative and ideal or intellectual. The division is quantitative when the thing can be materially divided into parts and such parts are homogenous to each other, such as when the parts are actually separated from each other as in the case of movables, or when the limits of the parts are fixed by metes and bounds as in the case of immovables. The division is qualitative when the thing can be materially divided, but the parts are not exactly homogenous, such as in the partition of an inheritance. The division is ideal or intellectual when the thing can only be separated into ideal or undivided parts, not material parts, as in the case of co-ownership.259 Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title.260 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.261 Effect of Divisible or Indivisible Obligations. — Where there is only one creditor and only one debtor, the divisibility or indivisibility of the obligation is of little significance as implied by Art. 1223. As a general rule, the creditor cannot be compelled partially to receive the prestation in which the obligation consists;

4 Sanchez Roman 93-94. Art. 1149, Spanish Civil Code. 261 Art. 1150, Spanish Civil Code. 259 260

213

Art. 1225

OBLIGATIONS

neither may the debtor be required to make partial payments.262 There are, however, three exceptions to this rule. These are: first, when the obligation expressly stipulates the contrary, second, when the different prestations constituting the objects of the obligation are subject to different terms and conditions; and third, when the obligation is in part liquidated and in part unliquidated.263 Where there is a plurality of debtors and creditors, the effect of the divisible or indivisible character of the obligation shall depend upon whether the obligation is joint or solidary. If it is solidary, the provisions of Art. 1211 to Art. 1222 are applicable; if it is joint and at the same time divisible, the provision of Art. 1208 is applicable; and if it is joint and at the same time indivisible, the provisions of Arts. 1209 and 1224 are applicable. Idem; Breach of joint indivisible obligations. — In joint indivisible obligations, such as the delivery of a horse or an automobile, the obligation can be enforced only by proceeding against all of the debtors.264 If anyone of the debtors should fail or refuse to comply with the obligation, it is converted into one of indemnity for damages.265 However, the debtors who may have been ready to comply with what is incumbent upon them 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. The debtor who failed or refused to comply with his obligation shall bear the burden of paying all of the damages suffered by the creditor or creditors as a result of the nonfulfillment of the obligation. If the other debtors also suffered damages as a result of the transformation of the obligation into one of indemnity, they may also recover such damages from the debtor who was at fault.266 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.

Art. 1248, Civil Code. Ibid., 8 Manresa, 5th Ed., Bk. 1, pp. 363-365. 264 See Art. 1209, Civil Code. 265 Art. 1224, Civil Code. 266 8 Manresa, 5th Ed., Bk. 1, p. 469; 3 Castan, 7th Ed., p. 92. 262 263

214

DIFFERENT KINDS OF OBLIGATIONS Divisible and Indivisible Obligations

Art 1225

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.267 Determination of Divisibility or Indivisibility. — If the prestation which constitutes the object of the obligation is susceptible of partial compliance, the obligation is divisible; if it is not susceptible of partial compliance, the obligation is indivisible. Consequently, the true test of divisibility is whether the obligation is susceptible of partial compliance or not. This is clear from the provision of the first paragraph of Art. 1225. In the words of Sanchez Roman, the pivotal fact is the possibility or impossibility of partial prestation.268 This susceptibility of partial compliance should be understood, not in the sense of the possibility or impossibility of the delivery of a thing or of the performance of an act in separate parts, but in the sense of the possibility of realizing the end or purpose which the obligation seeks to attain. Hence, the purpose of the obligation is the controlling circumstance. This applies not only to obligations to give, but also to obligations to do or not to do.269 Idem; In obligations to give. — It is in obligations to give that the divisible or indivisible nature of the thing which constitutes the object of the obligation is the most important factor to be considered in determining whether the obligation is susceptible of partial compliance or not. This is clear from the provisions of the first and third paragraphs of Art. 1225. If the obligation is to give something which is definite or which by its very nature is indivisible, it is evident that it is not susceptible of partial compliance. Hence, it shall be deemed to be Art. 1151, Spanish Civil Code, in modified form. 4 Sanchez Roman 95. 269 Ibid. 267 268

215

Art. 1225

OBLIGATIONS

indivisible.270 This rule is absolute in character. While it is true that the divisibility or indivisibility of the thing which constitutes the object of the obligation is not the ultimate test which we must apply in order to determine whether the obligation is divisible or indivisible, nevertheless, it is also true that when such object is by its very nature indivisible, as in the case of a chair or a horse, the obligation is necessarily indivisible. However, if the obligation is to give something which by its nature is divisible, the general rule is that the obligation is also divisible since it is evidently susceptible of partial compliance. Thus, it has been held that an obligation to give or to do several things at several times is divisible. This rule is not absolute in character, because by express provision of the Code “even though the object may be physically divisible, the obligation is considered indivisible if it is so provided by the law or it is so intended by the parties.”271 With respect to the second exception, the intention of the parties that the obligation is indivisible in character may be either express or implied. In the latter case, it may be inferred or presumed either: (1) from the fact that, although the object of the obligation can be separated into parts, yet each part constitutes a necessary complement of the other parts; or (2) from the very purpose of the obligation itself which requires the delivery of all the parts.272 Idem; In obligations to do. — In obligations to do, if the obligation is to perform some prestation or service which by its very nature is not susceptible of partial performance, it shall be deemed indivisible.273 This rule is absolute in character. If the obligation is to perform some prestation or service which by its very nature is susceptible of partial performance, the general rule is that it is divisible. Certain qualifications, however, must be made. In the first place, in order to determine whether an obligation to do is divisible or indivisible, the object or purpose of the obligation must always be considered. This is evident from the provision of the second paragraph of Art. 1225. According to this provision — the obligation shall be considered divisible when it has for its object: (1) the execution of a certain number of days of work; or (2) the Art. 1225, par. 1, Civil Code. Art. 1225, par. 3, Civil Code. 272 8 Manresa, 5th Ed., Bk. 1, pp. 472-473. 273 Art. 1225, par. 1, Civil Code. 270 271

216

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Penal Clause

Art 1225

accomplishment of work by metrical units; or (3) the accomplishment of analogous things which by their nature are susceptible of partial performance. In the second place, although it is true that if the obligation has for its object a prestation or service which is susceptible of partial performance it is, as a rule, divisible, yet it may still be indivisible if so provided by law or intended by the parties.274 This intention of the parties may either be express or implied. Thus, where a certain contractor obligates himself to construct several apartment buildings within a certain compound, there is no doubt that the prestation is susceptible of partial performance. However, if it is the express or presumed intention of the parties to the contract that the obligation is indivisible, all of the apartment buildings must be constructed in order that the obligation can be considered as performed. Idem; In obligations not to do. — With respect to obligations not to do, whether it is divisible or indivisible shall depend upon the character of the prestation in each particular case.275 Therefore, the determination of the character of the obligation will depend upon the sound discretion of the court. Section 6. — Obligations with a Penal Clause Concept. — An obligation with a penal clause may be defined as one to which an accessory undertaking is attached for the purpose of insuring its performance by virtue of which the obligor is bound to pay a stipulated indemnity or perform a stipulated prestation in case of breach. From this definition it is clear that the penal clause or penalty is an accessory obligation attached to the principal obligation by virtue of which the obligor is bound to pay a stipulated indemnity or to perform a stipulated prestation in case of breach of the obligation.276 Purpose of Penalty. — The penal clause or penalty has a three-fold purpose. They are: (1) Función coercitiva o de garantia — to insure the performance of the obligation; Art. 1225, par. 3, Civil Code. Art. 1225, par. 4, Civil Code. 276 3 Castan, 7th Ed., p. 97; 8 Manresa, 5th Ed., Bk. 1, pp. 477-478. 274 275

217

Art. 1226

OBLIGATIONS

(2) Función liquidatoria — to liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation; and (3) Función estrictamente penal — in certain exceptional cases, to punish the obligor in case of breach of the principal obligation.277 It is evident that the second is compensatory, while the third is punitive in character; the first, on the other hand, is the general purpose regardless of whether the penalty is compensatory or punitive. Kinds of Penalty. — Penalties may be classified as follows: (1) As to origin — Legal or conventional. It is legal when it is constituted by law; it is conventional when it is constituted by agreement of the parties. (2) As to purpose — Compensatory or punitive. It is compensatory when it is established for the purpose of indemnifying the damages suffered by the obligee or creditor in case of breach of the obligation; it is punitive when it is established for the purpose of punishing the obligor or debtor in case of breach of the obligation. (3) As to effect — Subsidiary or joint. It is subsidiary when only the penalty may be demanded in case of breach of the obligation; it is joint when the injured party may demand the enforcement of both the penalty and the principal obligation. 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.278

277 278

3 Castan, 7th Ed., pp. 100-101. Art. 1152, Spanish Civil Code, in modified form.

218

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Penal Clause

Art 1226

Effect of Penalty, General Rule. — As previously stated, the penal clause may be considered either as reparation or substitute for damages or as a punishment in case of breach of the obligation. Considered as a reparation or compensation, the question of damages is resolved once and for all, since the stipulated indemnity or prestation represents a legitimate estimate made by the contracting parties of the damages caused by the nonfulfillment or breach of the obligation. Consequently, proof of actual damages is not necessary in order that the stipulated penalty may be demanded. Considered strictly as a punishment, the question of damages is not yet resolved. Consequently, the right to damages, besides the penalty, still subsists. Therefore, if the injured party desires to recover the damages actually suffered by him in addition to the penalty, he must prove such damages.279 As a general rule, the penalty is fixed by the contracting parties as a compensation or substitute for damages in case of breach of the obligation. This is evident from the provision of the first paragraph of Art. 1226. It is, therefore, clear that the penalty in its compensatory aspect is the general rule, while the penalty in its strictly penal aspect is the exception. Thus, if the parties to a contract of sale payable in several installments agree that should the vendee fail to pay the amount corresponding to each installment in due time, the vendor may rescind the contract and at the same time keep the amount already paid, it is clear that such an agreement has for its purpose not only to insure the performance of the obligation, but also to measure beforehand the damages which would result from noncompliance. At any rate the penal clause does away with the duty to prove the existence and measure of the damages caused by the breach.280 Manila Racing Club vs. Manila Jockey Club 69 Phil. 55 The records show that the parties entered into a contract of sale of a parcel of land for P1,200,000, payable in five installments. It was agreed that should the vendee fail to pay

8 Manresa, 5th Ed., Bk. 1, pp. 480-481. Manila Racing Club vs. Manila Jockey Club, 69 Phil. 55. For other cases illustrating the general rule — see Palacios vs. Mun. of Cavite, 12 Phil. 140; Navarro vs. Mallari, 45 Phil. 242; Araneta vs. Paterno, 49 Off. Gaz. 45. 279 280

219

Art. 1226

OBLIGATIONS

the amount corresponding to each installment in due time, the vendor may rescind the contract and keep the amount paid. The vendee was able to pay only the first two installments amounting to P100,000. As a result, the vendor rescinded the contract. This action now is brought by the vendee against the vendor for the purpose of recovering the forfeited amount on the ground that the agreement is contrary to law, morals and public order. Held: “The clause of the contract referring to the forfeiture of the P100,000 already paid, should the purchaser fall to pay the subsequent installments, is valid. It is in the nature of a penal clause which may be legally established by the parties (Articles 1152 and 1255 — now Arts. 1226 and 1306, Civil Code.) In its double purpose of insuring compliance with the contract and of otherwise measuring beforehand the damages which result from noncompliance, it is not contrary to law, morals or public order because it was voluntarily and knowingly agreed upon by the parties. Viewing concretely the true effects thereof in the present case, the amount forfeited constitutes only eight per cent of the stipulated price, which is not excessive if considered as the profit which would have been obtained had the contract been complied with. There is, moreover, evidence that the defendants, because of this contract, had to reject other propositions to buy the same property. At any rate, the penal clause does away with the duty to prove the existence and measure of the damages caused by the breach. Caridad Estate vs. Santero 71 Phil. 114 This action is brought by the vendor against the vendee for the recovery of the property sold because of the failure to pay the stipulated installments in due time. In the contract of sale, it was agreed that should the vendee fail to pay the installments in due time, the vendor shall have the right to rescind the contract and at the same time keep any and all sums already paid. It is now contended by the vendee that such a stipulation constitutes a pactum commissorium, which is prohibited by what is now Art. 2088 of the New Civil Code. Held: “Taking up the argument that the stipulation has resulted in pactum commissorium, we are of the opinion that the objection is without legal basis. Historically and in point of strict law, pactum commissorium, referred to in Articles 1859 and 1884 (now Arts. 2088 and 2137) of the Civil Code, presupposes the existence of mortgage or pledge or that of antichresis. (Alcantara

220

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Penal Clause

Art 1226

vs. Alinea, 8 Phil. 111.) Upon this account, it becomes hardly conceivable, although the argument has been employed here rather extravagantly, that the idea of pactum commissorium should occur in the present contract of sale, considering that, it is admitted, that the person to whom the property is forfeited is the real and equitable owner of the same because the title would not pass until payment of the last installment. At most, the provision in point, as the parties themselves have indicated in the contract, is a penal clause which carries the express waiver of the vendee to any and all sums he had paid when the vendor, upon his inability to comply with his duty, seeks to recover possession of the property, as conclusive recognition of the right of the vendor to said sums, and avoids unnecessary litigation designated to enforce fulfillment of the terms and conditions agreed upon. Said provisions are not unjust or inequitable and does not, as appellant contends, make the vendor unduly rich at his cost and expense.’’

Idem; Exceptions. — There are three exceptions to the rule that the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance with the principal obligation. They are: first, when there is a stipulation to the contrary, second, when the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud.281 In all of these cases, it is evident that the purpose of the penalty is to punish the obligor. Consequently, the obligee can recover from him not only the penalty, but also the damages or interests resulting from the breach of the principal obligation.282 Bachrach Motor Co. vs. Espiritu 52 Phil. 346 These two cases were tried together. The first case involves an action brought by the plaintiff corporation for the recovery of P10,477.82 from the defendant which is the unpaid balance of the purchase price of a two-ton White truck which the latter had bought from the former. In addition, the said plaintiff corporation also asks for 12 per cent of the said amount

Art. 1226, par. 1, Civil Code. Bachrach Motor Co. vs. Espiritu, 52 Phil. 346; Government vs. Lim, 61 Phil. 737; Luneta Motor Co. vs. Moral 73 Phil. 80; Cabarroguis vs. Vicente, 107 Phil. 340; De Venecia vs. del Rosario, 18 SCRA 792. 281 282

221

Art. 1226

OBLIGATIONS

as stipulated interest and 25 per cent thereon as stipulated penalty. The second case involves a second action brought by the plaintiff corporation for the recovery of P4,208.28 from the same defendant which is the unpaid balance of the purchase price of a one-ton truck of the same make as the first which the latter had bought from the former. In addition, the said plaintiff corporation also asks for 12 per cent of the said amount as stipulated interest and 25 per cent thereon as penalty. The basis of the action in each case is a contract of sale wherein the parties agreed that 12 per cent interest would be paid upon the unpaid portion of the price at the execution of the contracts, and in case of nonpayment of the total debt upon its maturity, 25 per cent thereon, as penalty. The lower court which tried the cases together rendered judgments in plaintiff’s favor in accordance with the contracts. From these judgments, defendant appealed to the Supreme Court. He contends that the 25 per cent penalty upon the debt, in addition to the interest of 12 per cent per annum, would make the contract usurious. Held: “Such a contention is not well founded. Article 1152 (now Art. 1226) of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil. 631), does not include the interest and as such the two are different and distinct things which may be demanded separately. According to this, it is not to be added to the interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate was only fixed for the interest. But considering that the obligation was partly performed, and making use of the power given to the court by Article 1154 (now Art. 1229) of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt.’’ Cabarroguis and Cabarroguis vs. Vicente 107 Phil. 340 Telesforo B. Vicente, owner and operator of the jeepney on which plaintiff, Antonia A. Cabarroguis, was a passenger entered into a compromise agreement with plaintiff obligating himself to pay to her the sum of P2,500 as damages for the physical injuries sustained by her when the said jeepney on which plaintiff was a passenger hit another vehicle. An additional amount of P200 was provided as liquidated damages in the agreement in case defendant fails to complete payment within 60 days. A balance of P1,000 of the amount was left unpaid and as defendant failed, and, notwithstanding repeated

222

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Penal Clause

Art 1226

demands, refused to comply with his obligation, plaintiff, assisted by her husband, brought suit in the Municipal Court which rendered, after hearing, a judgment in plaintiffs favor. On appeal the Court of First Instance sentenced defendant to pay to plaintiff the amount of P1,200 with interest at legal rate from the date of the filing of the complaint until full payment. Hence, this appeal. Is the decision correct? Held: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interest, except when the contrary is stipulated; or when the obligor refuses to pay the penalty; or when the obligor is guilty of fraud in the fulfillment of the obligation. (Art. 1226, Civil Code.) Applying the law it is evident that no interest can be awarded on the principal obligation, the penalty of P200 agreed upon having taken the place of the payment of such interest and the indemnity for damages, the case not falling under any of the exceptions. The case, however, takes a different aspect with respect to the penalty attached to the principal obligation. It has been held that in obligations for the payment of a sum of money when a penalty is stipulated for default, both the principal obligation and the penalty can be demanded by the creditor. (Government vs. Lim, et al., 61 Phil. 737; Luneta Motor Co. vs. Moral, 73 Phil. 80.) Defendant having refused to pay when demand was made by plaintiff, the latter clearly is entitled to interest on the amount of the penalty. Art. 2210 of the new Civil Code also provides that in the discretion of the court, interest may be allowed upon damages awarded for breach of contract. This interest is recoverable from the time of delay, i.e., from the date of demand, either judicial or extrajudicial. There being no showing as to when demand for payment was made, plaintiff must be considered to have made such only from the filing of the complaint. Decision modified in the sense that interest shall be allowed only on the amount of the penalty.

Idem; Enforceability of penalty. — According to the second paragraph of Art. 1226, the penalty may be enforced only when it is demandable in accordance with the provisions of the Civil Code. Consequently, upon the breach or nonfulfillment of the principal obligation by the obligor or debtor, the penalty stipulated becomes demandable, provided that it is not contrary to law, morals, good 223

Art. 1227

OBLIGATIONS

customs, public order or public policy.283 However, where both of the contracting parties are unable to comply with their respective obligations, although the breach is not willful or culpable, such as when it is due to a fortuitous event, since the law must work both ways, the penal clause cannot, as a consequence, be invoked by anyone of them to the prejudice of the other.284 Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced.285 Limitation upon Right of Debtor. — The debtor cannot exempt himself from the performance of the principal obligation by paying the stipulated penalty. There is, however, an exception to this rule and that is when the right has been expressly reserved for him.286 Limitation upon Right of Creditor. — On the other hand, the creditor cannot demand the fulfillment of the principal obligation and the satisfaction of the stipulated penalty at the same time, unless this right has been clearly granted to him.287 If the principal obligation is not complied with, the creditor can choose between demanding the fulfillment of the obligation and demanding the satisfaction of the penalty. He cannot, however, demand both at the same time. If he chooses to demand the fulfillment of the obligation, and the performance thereof should become

283 Yu Tek & Co. vs. Gonzales, 29 Phil. 384; Ibarra vs. Aveyro, 37 Phil. 273; Bachrach vs. Golingco, 39 Phil. 138; Manila Racing Club vs. Manila Jockey Club, 69 Phil. 55. 284 Reyes vs. Formoso, CA, 46 Off. Gaz. 5621. 285 Art. 1153, Spanish Civil Code, in modified form. 286 Art. 1227, Civil Code. 287 Ibid.

224

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Penal Clause

Art 1228

impossible without his fault, he may still demand the satisfaction of the penalty.288 If there was fault on the part of the debtor, he may demand not only the satisfaction of the penalty, but also the payment of damages.289 If he chooses to demand the satisfaction of the penalty, he cannot afterwards demand the fulfillment of the obligation. It will be observed that under the first sentence of the article, in order that the debtor can exempt himself from the performance of the obligation by paying the penalty, the right must be expressly reserved for him. Under the second sentence, however, in order that the creditor can demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, the right must be clearly granted to him. From this, it can be inferred that a tacit or implied grant is admissible under the second. Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded.290 Proof of Actual Damages. — The above provision is applicable only to the general rule stated in Art. 1226 and not to the exceptions. Consequently, if the penalty is fixed by the contracting parties for the purpose of compensating or substituting the indemnity for damages and the payment of interests, proof of actual damages suffered by the obligee or creditor is not necessary in order that the penalty may be demanded. Hence, in this sense, the penalty is exactly identical with what is known as “liquidated damages’’ under Art. 2226 of the Civil Code. However, if there is stipulation to the contrary, or if the obligor or debtor is sued for refusal to pay the agreed penalty, or if the obligor or debtor is guilty of fraud, then the obligee or creditor can demand not only the satisfaction of the agreed penalty, but even damages. In such case, in order to be able to recover such damages in addition to the penalty, he must prove the amount of damages which he had actually suffered.

Ibid. Art. 1226, 2nd sentence, Civil Code. 290 New provision. 288 289

225

Art. 1229

OBLIGATIONS

Lambert vs. Fox 26 Phil. 558 Plaintiff and defendant, majority stockholders of a certain corporation, entered into a contract by virtue of which it was agreed that should either party dispose of his holdings in the company to anybody within one year from the time of the signing of the contract, he shall pay P1,000 as liquidated damages. For breach of the agreement, plaintiff commenced this action in order to collect P1,000 from the defendant. The latter now contends that since plaintiff is unable to prove damages suffered by him, he cannot be compelled to pay. Held: “In this jurisdiction, there is no difference between a penalty and liquidated damages, as far as legal results are concerned. Whatever difference exists between them as a matter of language, they are treated the same legally. In either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.’’291

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.292 When Penalty May Be Reduced. — Under Art. 1229, the court may equitably reduce the stipulated penalty in the following instances: first, if the principal obligation has been partly complied with; second, if the principal obligation has been irregularly complied with; and third, if the penalty is iniquitous or unconscionable even if there has been no performance. The first contemplates a case in which some, but not all, of the prestations are complied with by the debtor, while the second contemplates a case in which all of the prestations are complied with, but not in accordance with the tenor of the agreement. Hence, 291 To the same effect: Palacios vs. Mun. of Cavite, 12 Phil. 140; Manila Racing Club vs. Manila Jockey Club, 69 Phil. 55. See Arts. 2226, et seq., for “liquidated damages.’’ 292 Art. 1154, Spanish Civil Code, in amended form.

226

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Penal Clause

Art 1229

the first refers to the quantity or quality of the performance, while the second refers to the form.293 Thus, the Supreme Court, in the case of Jison vs. CA (164 SCRA 346), it held that in obligations with a penal clause, the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. (Art. 1229; Hodges v. Javellana, G.R. No. L-17247, April 28, 1962, 4 SCRA 1228.) In this connection, the Court said: “It follows that, in any case wherein there has been a partial or irregular compliance with the provisions in a contract for special indemnification in the event of failure to comply with its terms, courts will rigidly apply the doctrine of strict construction and against the enforcement in its entirety of the indemnification, where it is clear from the terms of the contract that the amount or character of the indemnity is fixed without regard to the probable damages which might be anticipated as a result of a breach of the terms of the contract or, in other words, when the indemnity provided for is essentially a mere penalty having for its principal object the enforcement of compliance with the contract . . . (Laureano vs. Kilayco, 32 Phil. 194 [1915].) This principle was reiterated in Makati Development Corp. vs. Empire Insurance Co. (G.R. No. L-21780, June 30, 1967, 20 SCRA 557) where the Court affirmed the judgment of the Court of First Instance reducing the subdivision lot buyer’s liability from the stipulated P12,000.00 to P1,500.00 after finding that he had partially performed his obligation to complete at least fifty percent (50%) of his house within two (2) years from March 31, 1961, fifty percent (50%) of the house having been completed by the end of April 1961. The third, on the other hand, contemplates a case in which the only question raised is whether the amount of the stipulated penalty is reasonable or unconscionable. Hence, the obligor may ask for the reduction of the penalty, even if there has been no performance of the principal obligation. It must be noted that this ground was not found in the former Code. However, it has always been recognized by the Supreme Court as a separate ground for the reduction of the stipulated penalty by the courts. Thus, it has been held that while the parties are free to stipulate a particular amount which the debtor must pay by way of attorney’s fees and costs in case of non-fulfillment of the obligation, it is within the sound discretion of 293 8 Manresa, 5th Ed., Bk. 1, p. 491; see Laureano vs. Kilayco, 32 Phil. 850; Chua Gui Seng vs. Gen. Sales Supply Co., 91 Phil. 153; Ramos vs. Salcedo, CA, 48 Off. Gaz. 729.

227

Art. 1229

OBLIGATIONS

the court to determine whether the amount should be reduced or not depending upon whether it is excessive or reasonable.294 As a matter of fact, it has been held that the amount stipulated may be reduced even if it is not contrary to law, morals, good customs, public order, or public policy,295 provided it is unreasonable or unconscionable. Question — Can the Court delete the penalty clause? Answer — Yes. The stipulated penalty can be deleted in cases such as when there has been substantial performance in good faith by the obligor (Art. 1234, NCC.), when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exists as to warrant it. (Garcia vs. CA, 167 SCRA 815; Palmares vs. CA, 288 SCRA 423; Ibarra vs. Aveyro, 37 Phil. 278; Ligutan vs. CA, et al., G.R. No. 138677, Feb. 12, 2002.) Umali vs. Miclat 105 Phil. 1007 The records show that defendant Umali, president and general manager of Maharlika Pictures, Inc., had executed a contract by which he agreed to pay a certain amount to plaintiff Miclat for services rendered by the latter. In the contract, it is expressly stipulated that if defendant should fail to pay the amount after the lapse of 30 days, he shall pay a subcharge of 10% for every 30 days of default until the amount has been fully paid. Because of failure of the defendant to pay the amount within the period stipulated, plaintiff brought this action to recover the amount, plus the penalty and damages. After trial, the lower court rendered judgment ordering defendant to pay the amount, plus 10% subcharge for every 30 days of default, and 6% interest per annum from the date of the filing of the complaint as damages. Defendant now claims that the subcharge of 10% for every 30 days of default is unconscionable because it is tantamount to imposing an interest of 10% a month and, therefore, should be reduced, and that the award of 6% interest per annum by way of damages is contrary to law, since according to Art. 1226 of the Civil Code, the penalty shall be a substitute for damages or interests. 294 Manila Trading Co. vs. Tamarao Plantation Co., 47 Phil. 513; Tan Tua Sia vs. Yu Biao, 56 Phil. 707; Turner vs. Casabar, 65 Phil. 490. 295 Bachrach vs. Golingco, 39 Phil. 138.

228

DIFFERENT KINDS OF OBLIGATIONS Obligations with a Penal Clause

Art 1230

Held: “There is merit in the contention that the surcharge is unconscionable. While this subcharge partakes of the nature of a penal clause which the parties may stipulate under the law, however, one cannot deny that the same is unconscionable. Making use of the discretion that the law grants this Court on the matter (Art. 1229, Civil Code), a subcharge of 20% per annum would be reasonable. On the other hand the contention that the portion of the decision which orders the payment of 6% interest is contrary to law on the ground that defendant is already ordered to pay the penalty agreed upon is untenable. Under Art. 1226 of the new Civil Code, the penalty takes the place of interest only if there is no stipulation to the contrary, and even then damages may still be collected if the obligor refuses to pay the penalty. In this case not only is there an express stipulation to pay damages in addition to the penalty, but defendant has failed to pay his obligation as well as the penalty. The imposition of the interest is, therefore, justified.”

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.296 Nullity of Obligation or Penalty; Effect. — If the principal obligation is void, it necessarily follows that the penal clause shall also be void.297 This rule is, of course, logical considering the fact that the penalty is merely an accessory obligation. However, if the penal clause is void, the validity of the principal obligation is not affected,298 since the efficacy of such obligation is not dependent upon the efficacy of the penal clause.

Art. 1155, Spanish Civil Code. Art. 1230, Civil Code. 298 Ibid. 296 297

229

OBLIGATIONS

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.1 Modes of Extinguishing Obligations. — There are ten modes of extinguishing obligations enumerated in the above article. This enumeration, however, is not complete. There are others, such as: (1) renunciation or waiver by the obligee or creditor; (2) compromise; (3) expiration of the resolutory term or period; (4) death of one of the contracting parties in purely personal obligations; (5) the will of one of the contracting parties in certain contracts; or (6) the agreement of both contracting parties or what is sometimes known as mutual assent or dissent.2

1 2

Art. 1156, Spanish Civil Code, in modified form. 8 Manresa, 5th Ed., Bk. 1, pp. 501-503; 3 Castan, 7th Ed., pp. 235-236.

230

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 232-1235

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.3 Concept of Payment or Performance. — Historically, the term payment has three different acceptations. In its broadest sense, it consists in the fulfillment of the obligation either voluntarily or involuntarily, including its extinguishment by any means or mode whatsoever; in its limited sense, it consists in the normal and voluntary fulfillment of the obligation by the realization of the purposes for which it was constituted; in its more limited sense, it consists in the fulfillment of the obligation by the delivery of a sum of money.4 The Civil Code has adopted the second. Hence, payment, as it is understood in the Civil Code, means not only the delivery of money but also the performance, in any other manner, of an obligation.5 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.6 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.7 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.8 When Obligation Is Understood Paid or Performed. — As a consequence of the rule stated in Art. 1233, an obligation to give New provision. 3 Castan, 7th Ed., p. 236. 5 Art. 1232, Civil Code. 6 Art. 1157, Spanish Civil Code. 7 New provision. 8 New provision. 3 4

231

Art. 1236

OBLIGATIONS

shall be understood to have been paid when the debtor or obligor has completely delivered the thing which he had obligated himself to deliver; an obligation to do shall be understood to have been performed when the obligor has completely rendered the service which he had obligated himself to render; an obligation not to do shall be understood to have been complied with when the obligor has completely refrained from doing that which he had obligated himself not to do. The above rule, however, is not absolute in character. It is subject to the following exceptions: (1) When the obligation has been substantially performed in good faith.9 In this case, the obligor may recover as though there has been a strict and complete fulfillment, less damages suffered by the obligee.10 The fairness of this rule is evident. In case of substantial performance, the obligee is benefited. So the obligor should be allowed to recover as if there has been a strict and complete fulfillment, less damages suffered by the obligee. This last condition affords a just compensation for the relative breach committed by the obligor.11 (2) When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection.12 This rule is based on the principle of estoppel. There is another instance when an obligation is considered by some to have been paid and that is when the obligation to give, to do or not to do is converted into an obligation to indemnify the obligee or creditor because of breach or nonfulfillment and the indemnity is finally paid in full.13 Strictly speaking, however, this case falls under the general rule stated in Art. 1233. 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 stipulation to the contrary. Art. 1234, Civil Code. Ibid. 11 Report of the Code Commission, p. 131. 12 Art. 1235, Civil Code; Joe’s Radio & Electrical Supply vs. Alto Electronics Corp., 104 Phil. 333. 13 3 Capistrano, Civil Code, 1950 Ed., p. 167. 9

10

232

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 1237-1238

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.14 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.15 Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it.16 Persons Who May Pay Obligation. — The following may pay or perform the obligation: first, the debtor himself or his legal representative; and second, any third person. The effect in both cases when the payment is effected in accordance with the requisites prescribed by law is the extinguishment of the obligation. Idem; Payment by a third person. — It is evident from the provisions of Arts. 1236 to 1238 of the Code that a third person, whether he has an interest in the obligation or not, and whether the payment was made with the knowledge and consent of the debtor or not, may pay the obligation. Out of this act expressly recognized by the law, there are several juridical effects which necessarily follow. These effects are given in Arts. 1236 to 1237 of the Code. These rules, however, cannot be applied to the case of a third person who pays the redemption price in sales with right of repurchase (pacto de retro). This is so because the vendor a retro is not a debtor within the meaning of the law.17

Art. 1158, Spanish Civil Code, in amended form. Art. 1159, Spanish Civil Code, in modified form. 16 New provision. 17 15 Gonzaga vs. Garcia, 27 Phil. 7. 14 15

233

Arts. 1237-1238

OBLIGATIONS

Gonzaga vs. Garcia 27 Phil. 7 According to the records of this case, Francisco sold a parcel of land to Martin with right of repurchase. Subsequently, by virtue of a court judgment rendered against Francisco, the right of repurchase was purchased by Del Rosario, the judgment creditor, at an execution sale. Francisco, as judgment debtor, was unable to redeem the right thus sold. Meanwhile, he paid the redemption price to the vendee a retro, Martin, without the knowledge of Del Rosario. Later, Del Rosario sold the right to the plaintiff Gonzaga. One of the questions that had to be decided in this case is whether the provision of what is now Art. 1236 of the New Civil Code is applicable or not. The Supreme Court held: “Del Rosario was not a debtor. He was under no obligation to repurchase the land from Martin. He had a right to do so but whether he exercised this right or not depended upon his own volition. Article 1158 (now Art. 1236) is not for these reasons applicable.’’

Idem; id. — Right of creditor. — Under Art. 1158 of the Spanish Civil Code, the rule was that any person whether he has an interest in the fulfillment of the obligation or not could compel the creditor to accept payment. This rule has been changed in the New Civil Code. The creditor is not bound as a general rule to accept payment or performance by a third person. The Code Commission gives the following reasons for the change. “Under the present law (Art. 1158, Civil Code of Spain) the creditor cannot refuse payment by a third person, but the Commission believes that the creditor should have a right to insist on the liability of the debtor. Moreover, the creditor should not be compelled to accept payment from a third person whom he may dislike or distrust. The creditor may not, for personal reasons, desire to have any business dealings with a third person; or the creditor may not have confidence in the honesty of the third person who might deliver a defective thing or pay with a check which may not be honored.’’18

18

Report of the Code Commission, p. 132.

234

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 1237-1238

There are, however, two exceptions to the rule that the creditor is not bound to accept payment or performance by a third person. They are: (1) When it is made by a third person who has an interest in the fulfillment of the obligation,19 such as a joint debtor, guarantor or surety. Thus, where payment is made by a joint debtor in excess of what he should pay for the benefit of his co-debtor, such payment cannot be considered as a payment unduly made under Art. 2154 of the Civil Code, but as one made by a person interested in the fulfillment of the obligation in accordance with the provision of Art. 1236 of the said Code.20 (2) When there is a stipulation to the contrary.21 In this case, the creditor is deemed to have waived his right to refuse to deal with strangers to the obligation. Idem; id. — Rights of third person. — If a third person pays the obligation with the knowledge and consent of the debtor, there are two rights which are available to him. In the first place, he can recover from the debtor the entire amount which he has paid;22 and in the second place, he is subrogated to all of the rights of the creditor.23 However, if the payment is made without the knowledge or against the will of the debtor, there is only one right which is available to him; he can recover only insofar as the payment has been beneficial to the said debtor.24 Idem; id.; id. — Right of reimbursement. — Whether the payment is effected with the knowledge and consent of the debtor or without his knowledge or even against his will, the third person who made the payment is entitled to reimbursement. The extent or amount of recovery, however, is different in either case. If the payment was effected with the knowledge and consent of the debtor, the third person can recover from the latter the entire amount which he has paid.25 Thus, if D is indebted to C for P10,000,

Art. 1236, par. 1, Civil Code. Monte de Piedad vs. Rodrigo, 63 Phil. 312. 21 Art. 1236, par. 1, Civil Code. 22 Art. 1236, par. 2, Civil Code. 23 Art. 1302, No. 2, Civil Code. 24 Art. 1236, par. 2, Civil Code. 25 Ibid. 19 20

235

Arts. 1237-1238

OBLIGATIONS

and subsequently, when the debt became due and demandable, P, a third person, paid the entire amount with the knowledge and consent of D, P can now demand from D the reimbursement of the entire amount of P10,000.26 If the payment was effected without the knowledge or even against the will of the debtor, the third person can recover only insofar as the payment has been beneficial to the latter.27 It is, therefore, evident that the extent of recovery in this case is much more limited than when payment is made with the knowledge and consent of the debtor. The rule is both just and logical. When the third person pays the debt or obligation without the knowledge or against the will of the debtor, there is no reason why he can obligate the debtor to pay more than the amount which the said debtor would have been legally compelled to pay to the creditor. Hence, if the debt or obligation has been previously extinguished totally by any of the modes of extinguishment of obligations, such as payment, remission, compensation or prescription, the third person who pays without the knowledge or consent of the debtor would not be able to recover anything from the latter; if the debt or obligation has been previously extinguished partially, the third person would be able to recover only that part of the amount which he has paid which would correspond to the part of the obligation which has not been extinguished, because it would be only to that extent that the payment has been beneficial to the debtor. In both cases, the remedy of the third person would be to proceed, not against the debtor who has not been benefited by the payment, but against the creditor who was unduly paid applying the principle that no person can unjustly enrich himself at the expense of another.28 It must be noted that from the viewpoint of the debtor, the provision of the law that the third person or payor “can recover only insofar as the payment has been beneficial to the debtor,” when made against his express will, is a defense which may be availed of by the debtor only and not by the creditor, for it affects solely the rights of the former. At any rate, in order that the rights of the payor may be subject to said limitation, the debtor must oppose the payment before or at the time the same was made, and not subsequent thereto.29 See De Guzman vs. Santos, 68 Phil. 371. Art. 1236, Civil Code. 28 Art. 2154, Civil Code. 29 RFC vs. Court of Appeals, 50 Off. Gaz. 2467. 26 27

236

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 1237-1238

Idem; id.; id. — Right of subrogation. — If the payment was effected with the knowledge and consent of the debtor, the third person who made the payment shall be subrogated to all of the rights which the creditor could have exercised, not only against the debtor, but even against third persons. The right is expressly recognized in Art. 1302 of the Code; it can also be deduced from the provision of Art. 1237. If the payment, however, was effected without the knowledge or against the will of the debtor, the third person who made the payment cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty.30 It must be noted that the right of subrogation is not the same as the right of reimbursement, although it includes the latter. Subrogation is a right available to the third person or payor, whereby he is entitled, not only to demand reimbursement from the debtor, but also to exercise all of the rights which the creditor could have exercised against the debtor and against third persons, such as those arising from a mortgage, a guaranty, or a penalty. Reimbursement, on the other hand, is merely a simple personal action available to the third person or payor against the debtor to recover from the latter what he has paid insofar as the payment has been beneficial to the said debtor. Problem No. 1 — In 1972, D executed a promissory note promising to pay to C P10,000 within a period of four years. The payment of the debt was guaranteed by G. In 1976, P, a third person, paid the entire amount of the indebtedness with the knowledge and consent of D. What are the respective rights and obligations of the parties? Answer — P shall be subrogated to all of the rights of C, not only against D, but also against G. This is so, because the law expressly states that if a third person pays the obligation with the express or tacit approval of the debtor, he shall be legally subrogated to all of the rights of the creditor, not only against the debtor, but even against third persons, be they guarantors or possessors of mortgages.31 Consequently, P can demand reimbursement from D of the P10,000 which he had

30 31

Art. 1237, Civil Code. Arts. 1302, No. 2, 1303, 1304, Civil Code.

237

Arts. 1237-1238

OBLIGATIONS

paid to C.32 If D cannot pay because of insolvency, he can still proceed against G for the recovery of the amount.33 Problem No. 2 — If in the above problem, C had condoned one-half of the obligation in 1975, and subsequently, in 1976, P, unaware of the partial remission of the indebtedness, paid, without the knowledge and consent of D, the entire amount of P10,000 to C, who accepted it, what would be the effect of such payment upon the rights and obligations of the parties? Answer — With respect to D, the only right which P has against him is to recover P5,000, because, it is only to that extent that he had been benefited by the payment.34 With respect to G, if D cannot pay the P5,000 because of insolvency, P can no longer proceed against him, because the payment was made without the knowledge and consent of D, and consequently, he cannot be subrogated to the rights of C against G.35 With respect to C, however, undoubtedly, P can still proceed against him for the recovery of P5,000, applying the principle that no person can unjustly enrich himself at the expense of another.36

Idem; id. — Gratuitous payments. — If the payment is made by a third person who does not intend to be reimbursed by the debtor, the presumption arises that such payment is a donation. Therefore, the debtor’s consent is necessary,37 as in the case of the donee in ordinary donations.38 Once the debtor’s consent is secured, then the rules on ordinary donations will apply. If such consent, however, is not secured, the rules stated in Arts. 1236 and 1237 will still apply. As far as the creditor who has accepted the payment is concerned, the debtor’s consent is immaterial; the payment is valid in any case.39 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

Art. 1236, par. 1, Civil Code. Arts. 1302, No. 2, 1303, Civil Code. 34 Art. 1236, par. 2, Civil Code. 35 Art. 1237, Civil Code. 36 Art. 2154, Civil Code. 37 Art. 1238, Civil Code. 38 Arts. 734, 745, Civil Code. 39 Art. 1238, Civil Code. 32 33

238

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 1237-1238

to the provisions of Article 1427 under the Title on “Natural Obligations.’’40 Capacity To Make Payment. — It is, of course, essential that the person who pays the obligation should have the necessary legal capacity to effect such payment. This is especially true in obligations to give. In such case, it is essential for the validity of the payment that the payor should have the free disposal of the thing due and the capacity to alienate it. The absence of one or the other will affect the validity of the payment. Consequently, if the payment was effected by a person who does not have the free disposal of the thing due and/or the capacity to alienate it, as in the case of a minor or an insane person, such payment is not valid.41 In other words, even if the creditor has already accepted it, it may still be annulled by a proper action in court at the instance of the payor or his legal representative, unless it falls within the purview of the exception expressly provided for in Art. 1427 of the Code. However, from the viewpoint of the obligation itself, a certain qualification must be made. If an incapacitated person offers to pay the obligation and the creditor refuses to accept the payment because he is aware of the payor’s incapacity, the obligation still subsists. Such creditor cannot be compelled to accept the payment; as a result, consignation of the thing due is not possible. 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.42 To Whom Payment Must Be Made. — Payment shall be made, as a general rule, to (1) the person in whose favor the obligation has been constituted, or (2) his successor in interest, or (3) any person authorized to receive it. Under the old Code, the second was not included in the enumeration; in spite of the omission, however, the first, according to Manresa, includes not only the person who was the creditor at the time of the constitution of the obligation, but also the person who is the creditor at the time of payment. This is

Art. 1160, Spanish Civil Code, in modified form. Art. 1239, Civil Code. 42 Art. 1162, Spanish Civil Code, in modified form. 40 41

239

Arts. 1237-1238

OBLIGATIONS

so, because, although the obligation was not constituted in favor of the latter, in the last analysis, it was constituted for his benefit.43 In order to resolve all doubts with respect to this point, the Code Commission has added the second (successor-in-interest) to the original provision of the Spanish Civil Code. The third, on the other hand, refers to any person expressly or impliedly authorized by the creditor himself or by law.44 Idem; Persons authorized to receive payment. — As stated in the preceding section, the person authorized to receive the payment refers not only to a person authorized by the creditor, but also to a person authorized by law to do so. Thus, payment made to a guardian, or to the executor or administrator of the estate of a deceased person, or to the assignee or liquidator of a partnership or corporation is payment made to a person authorized by law to receive it and, consequently, is valid.45 The above interpretation of the phrase “any person authorized to receive payment is best illustrated by those cases decided by our courts after liberation involving the validity of payments made to the Bank of Taiwan during the war. It must be remembered that during the occupation, enemy properties (properties belonging to nationals of countries at war with Japan) were sequestered by order of the Commander-in-Chief of the Japanese Imperial Forces in the Philippines in accordance with the theory that a belligerent occupant has the power to take by sequestration not only public property but also private property of the enemy in an occupied territory. These properties were given to the Enemy Property Custodian for liquidation with the Bank of Taiwan as depository. The question then is — if the debtor had incurred an indebtedness from a certain enemy bank before the war and payment was made to the Bank of Taiwan as liquidator of the said bank at any time during the Japanese occupation, is the payment valid? This question was answered in the affirmative by the Supreme Court for the first time in the leading case of Haw Pia vs. China Banking Corporation.46 In said case, the Court held:

8 Manresa, 5th Ed., Bk 1, p. 536; Tuazon and San Pedro vs. Zamora & Sons, 2 Phil. 305. 44 Haw Pia vs. China Banking Corp., 80 Phil. 604. 45 8 Manresa, 5th Ed., Bk. 1, p. 537. 46 80 Phil. 604. 43

240

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 1237-1238

“It having been shown x x x that the Japanese Military Forces had power to sequestrate and impound the assets or funds of the China Banking Corporation, and for that purpose to liquidate it by collecting the debts due to said bank from its debtors, and paying its creditors, and therefore to appoint the Bank of Taiwan as liquidator with the consequent authority to make the collection, it follows evidently that the payments by the debtors to the Bank of Taiwan of their debts to the China Banking Corporation have extinguished their obligation to the latter. Said payments were made to a person, the Bank of Taiwan, authorized to receive them in the name of the bank credit or under Article 1162 (now Art. 1240) of the Civil Code, because it is evident that the words ‘a person authorized to receive it,’ as used therein, means not only a person authorized by the same creditor but also a person authorized by law to do so.’’47

Idem; id. — Payment to unauthorized persons. — If the payment is made to a person other than those enumerated in Art. 1240, it shall not be valid. Thus, where an electric plant was sold and delivered by the plaintiff to the defendant and the latter subsequently paid the purchase price, without the knowledge of the former, to a certain person who represented himself as the plaintiff’s agent, it was held that the defendant had no right to assume that such person was authorized to receive the money; consequently, said defendant made the payment at his own risk and can still be held liable for the purchase price.48 This conclusion is strengthened by the fact that in agency, an assumption of authority to act as agent for another of itself challenges inquiry.49 Similarly, where the decedent during his lifetime had assigned the right to collect a certain credit to his children by a prior marriage, and subsequently, the debtor, with knowledge of the assignment, paid the debt to the decedent’s second wife, it was held that such payment is void on the ground that it was made to a person not authorized to receive the payment.50 The same conclusion can also be applied to the act of the vendee in depositing the balance of the purchase price at the Philippine National Bank in 47 To the same effect: Everett Steamship Corp. vs. Bank of P.I., 47 Off. Gaz. 165; Hodges vs. Gay, 48 Off. Gaz. 136; Winship vs. Phil. Trust Co., 90 Phil. 744; Bay Boulevard vs. Sycip, 92 Phil. 508. 48 Keleer Electric Co. vs. Rodriguez, 44 Phil. 19. 49 Ormachea vs. Triliana, 13 Phil. 194. 50 Crisol vs. Claveron, CA, 3 Off. Gaz. 3734.

241

Art. 1241

OBLIGATIONS

the name of the vendor when he could not locate the latter because of the conditions then existing in January, 1945, when the payment became due.51 Although the payment is not valid because it is not made to a person authorized to receive it in accordance with the provision of Art. 1240 of the Code, nevertheless it is clear that the vendee had acted in good faith; he cannot, therefore, be said to have incurred in delay; consequently, the vendor cannot ask for the rescission of the contract.52 Idem; id. — Exceptions. — There are, however, two exceptions to the rule that payment made to a person other than those enumerated in Art. 1240 is not valid. They are: first, payment made to a third person, provided that it has redounded to the benefit of the creditor,53 and second, payment made to the possessor of the credit, provided that it was made in good faith.54 Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor’s rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment.55 Payment to Incapacitated Persons. — According to the above article, if payment is made to a person who is incapacitated Arcache vs. Lizares & Co., 91 Phil. 348. Ibid. 53 Art. 1241, par. 2, Civil Code. 54 Art. 1242, Civil Code. 55 Art. 1163, Spanish Civil Code, in modified form. 51 52

242

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1241

to administer his property, the payment is considered valid: (1) if he has kept the amount or thing paid or delivered, or (2) insofar as the payment has been beneficial to him. It is evident that if the incapacitated person has kept or preserved the amount or thing paid or delivered, the act is beneficial to him; hence, the first case is actually included in the second. When the law says that the payment, in order to be valid, must have been beneficial to the incapacitated person, it does not literally mean that the amount or thing paid or delivered should have been invested by such incapacitated person or used for expenses. The payment is beneficial to him when that which has been paid or delivered is applied or spent for some rational, necessary or useful purpose for his benefit. Otherwise, the payment is not valid, and as a consequence, the debtor may be made to pay again either at the instance of the incapacitated person upon recovering or acquiring capacity or at the instance of the legal representative of such person during such incapacity.56 It must be noted that the rule is applicable only to obligations to give. Payment to Third Persons. — If the payment is made to a third person, the rule is that it shall be valid insofar as it has redounded to the benefit of the creditor.57 This rule constitutes an exception to the general rule stated in Art. 1240. As in the case of the preceding rule, it is applicable only to obligations to give. It must be observed, however, that in order that the payment shall be valid, it is essential that it should have redounded to the benefit of the creditor. Consequently, the rule cannot be invoked without conclusive proof of the benefit to the creditor, especially when there is not the slightest evidence that the third person to whom payment was made had any claim to the creditor’s right.58 It cannot, therefore, be presumed except in the three cases specified in the second paragraph of Art. 1241. Thus, even granting that the payment to a third person was made through mistake and in good faith, the debtor can still be held liable. If it becomes impossible for such debtor to recover what was unduly paid, any loss resulting 8 Manresa, 5th Ed., Bk. 1, p. 540. Art. 1241, par. 2, Civil Code. 58 Panganiban vs. Cuevas, 7 Phil. 477. 56 57

243

Art. 1243

OBLIGATIONS

therefrom shall be borne by him unless there is a stipulation to the contrary, or unless the creditor himself was responsible for the wrongful payment.59 Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor.60 Payment to Possessors of Credit. — It must be noted that the possession referred to in the above article is the possession of the credit, not the possession of the document evidencing it. Thus, the article may be applied to the payment made to the original creditor by a debtor who is not aware of the fact that the credit has already been assigned to another person. It may also be applied to the payment made to an assignee, although the assignment is afterwards rescinded or annulled. It must always, of course, be indispensable that the payment should have been made in good faith. If this requisite is present, then the payment shall release the debtor. In such case, the remedy of the creditor would be to proceed against the possessor of the credit to whom payment was improperly made.61 It must be noted that the rule stated in the article under discussion is another exception to the general rule stated in Art. 1240 and that it is applicable only to obligations to give. 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.62 Payment After Judicial Order of Retention. — According to the above article, if the debtor pays the creditor after he has been judicially ordered to retain the debt, such payment shall not be valid. Consequently, after the debtor has received the notice of attachment or garnishment, payment can no longer be made to the creditor whose credit has been attached to satisfy a judgment in favor of another person. Such payment must be made to the proper Ibid. Art. 1164, Spanish Civil Code. 61 8 Manresa, 5th Ed., Bk. 1, pp. 545-546. 62 Art. 1165, Spanish Civil Code. 59 60

244

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 1244-1246

officer of the court issuing the writ of attachment or garnishment in conformity with the provisions of the Rules of Court.63 Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will.64 Art. 1245. Dation in payment, wherein property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales.65 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.66 What Must Be Paid. — The two rules stated in Art. 1244 are logical consequences of the nature of specific or determinate obligations. According to the first paragraph, if the obligation is to give and the object is a thing which is specific or determinate, the debtor cannot fulfill his obligation by delivering a thing which is different from that which is due. This is so although the thing which is delivered may be of the same value or even more valuable than that which is due. According to the second paragraph, if the obligation is to do or not to do and the object is an act or forbearance which is specific or determinate, the obligor cannot fulfill his obligation by substituting another act or forbearance. In both cases, the creditor or obligee cannot be compelled to accept the delivery of the thing or Sec. 8, Rule 57, New Rules of Court. Art. 1166, Spanish Civil Code, in modified form. 65 New provision. 66 Art. 1167, Spanish Civil Code, in modified form. 63 64

245

Arts. 1244-1246

OBLIGATIONS

the substitution of the act or forbearance. However, if he accepts the delivery or substitution, such acceptance shall give to the delivery or substitution the same effect as a fulfillment or performance of the obligation. Idem; Effect of dation in payment. — However, if the creditor and the debtor enter into an agreement by virtue of which a certain property is alienated by the debtor to the creditor as the equivalent of the performance of the obligation, the law on sales shall then govern.67 It is, therefore, evident that dación en pago or dation in payment constitutes an exception to the rule stated in Art. 1244. Dation in payment (dación en pago) is defined as the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.68 According to the modern doctrine, in dacion en pago there is in reality an objective novation of the previous obligation effected by a change of the object thereof. Our Civil Code, however, has adopted the traditional concept of dación en pago as a special form of payment which is most analogous to a contract of sales following the opinion of the Supreme Court of Spain (Sentencias, Jan. 9, 1916 and Aug. 10, 1918) and also of Spanish commentators. Hence, once there is an agreement between the debtor and the creditor with regard to the thing which must be delivered by the former to the latter as the equivalent of the performance of the obligation, the law on sales shall govern, with the credit as the price of the thing.69 Thus, if D executed a promissory note in 1966 promising to pay to C P5,000 within four years from the execution of the note, and in 1969 when the obligation became demandable the two entered into an agreement by virtue of which D shall deliver his automobile to C as the equivalent of the performance of the obligation, the effect is the transformation of the previous contract into a contract of sale with the automobile as the object and the loan of P5,000 as the purchase price. Idem; Effect if object is generic. — The rule stated in Art. 1246 is based on equity and justice. If there is no precise declaration in the obligation with regard to the quality and circumstances of the

Art. 1245, Civil Code. 8 Manresa, 5th Ed., Bk. 1, p. 610. 69 Ibid., pp. 610-611. 67 68

246

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Arts. 1247-1248

indeterminate thing which constitutes its object, the creditor cannot demand a thing of the best quality; neither can the debtor deliver a thing of the worst quality. The obligation can only be fulfilled by the delivery of a thing which is neither of superior nor inferior quality. Hence, it becomes actually a question of relative appreciation; if there is disagreement between the parties, the law steps in and declares whether the obligation has been complied with or not, depending upon the purpose of such obligation and other circumstances.70 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.71 Expenses of Payment. — To the rules specified in the above article we must add the supplementary rule stated in the fourth paragraph of Art. 1251 that if the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. 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.72 Character of Payment. — According to Castan, in order that the prestation which constitutes the object of the obligation may be considered as paid or performed, three conditions or characteristics must, as a general rule, concur. They are: identity, completeness and indivisibility. The first refers to the rule that only the prestation agreed upon and no other must be complied with;73 the second refers to the rule that the thing or service in which the obligation consists Ibid., pp. 552-553. Art. 1168, Spanish Civil Code, in modified form. 72 Art. 1169, Spanish Civil Code, in modified form. 73 Arts. 1244, 1245, 1246, 1249, Civil Code. 70 71

247

Art. 1249

OBLIGATIONS

must be completely delivered or rendered;74 and the third refers to the rule that the payment or performance must be indivisible.75 It must be noted, however, that Art. 1248 is applicable only to an obligation where there is only one debtor and one creditor; it is not applicable to one where there is plurality of debtors and creditors. The latter is governed by different rules which we have already taken up in a previous chapter.76 Neither is it applicable to one where the different prestations are subject to different terms and conditions. Hence, even when there is only one debtor and only one creditor, the rule stated in the article is only in the nature of a general rule. There are three exceptions. They are: first, when the obligation expressly stipulates the contrary; second, when the different prestations which constitute the objects of the obligation are subject to different terms and conditions; and third, when the obligation is in part liquidated and in part unliquidated.77 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.78 Rule in Monetary Obligations. — According to the first paragraph of Art. 1249, in monetary obligations, payment shall be made in the currency stipulated. If it is not possible to pay in the currency stipulated, then the payment shall be made in legal tender of the Philippines. Although the article does not expressly say so, it is evident that if there is no stipulation regarding the currency in Arts. 1233, 1234, 1235, Civil Code. Art. 1248, Civil Code. 76 Arts. 1207, et seq., Civil Code. 77 8 Manresa, 5th Ed., Bk. 1, pp. 563-564. 78 Art. 1170, Spanish Civil Code. 74 75

248

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1249

which the payment shall be made, the payment shall still be made in legal tender of the Philippines. Thus, the Supreme Court in the case of Zagala vs. Jimenez, it held that “a judgment awarding an amount in U.S. dollar may be paid with its equivalent amount in local currency in the conversion rate prevailing at the time of payment. If the parties cannot agree on the same, the trial court should determine such conversion rate. Needless to say, the judgment debtor may simply satisfy said award by paying in full the amount in U.S. dollars. Therefore, when the petitioners, in this case, filed their motion to fix the peso value of the judgment in dollars, they only intended to exercise a right granted to them by the present jurisprudence — that the trial court shall determine or fix the conversion rate prevailing at the time of payment.’’ Idem; Effect of Rep. Act Nos. 529 and 4100. — However, in order to assure the stability of the Philippine currency the Congress passed a law entitled “An Act To Assure the Uniform Value of Philippine Coins and Currency” (Rep. Act No. 529) which took effect on June 16, 1949. Under this Act, the rule in the Civil Code that payment of debts in money shall be made in the currency stipulated was completely abrogated. Thus, Sec. 1 of this Act provides: “Every provision contained in, or made with respect to, any obligation which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void and of no effect. x x x Every obligation heretofore or hereafter incurred x x x shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That, if the obligation was incurred prior to the enactment of this Act and required payment in a particular coin or currency, it shall be discharged in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail.’’79 79 See Eastboard Navigation Co. vs. Ysmael Co., 102 Phil. 1; Arrieta vs. Nat. Rice and Corn Corp., 10 SCRA 79.

249

Art. 1249

OBLIGATIONS

Later on, in order to encourage foreign investments and to cope with the requirements of international trade and banking transactions, Rep. Act No. 4100 was enacted amending the above Act. This law took effect on June 19, 1964. According to this Act, the law prohibiting stipulations in domestic monetary obligations purporting to give to the obligee the right to require payment in currency other than Philippine currency does not apply to: (a) transactions where the funds involved are the proceeds of loans and investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumen-talities, and international financial and banking institutions so long as the funds are identifiable, as having emanated from the sources enumerated above; (b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) foreign exchange transactions entered into between banks or between banks and individuals or juridical persons; and (d) import-export and international banking, financial investment and industrial transactions.80 Problem — “S,” an American resident of Manila, about to leave on a vacation, sold his car to “B” for US$2,000.00, the payment to be made ten days after delivery to ‘’X,’’ a third party depositary agreed upon, who shall deliver the car to “B’’ upon receipt of “X” of the purchase price. It was stipulated that ownership is retained by “S’’ until delivery of the car to “X.” Five days after delivery of the car to “X,” it was destroyed in a fire which gutted the house of “X,” without the fault of either “X” or “B.’’ Question No. 1 — Is buyer “B’’ still legally obligated to pay the purchase price? Explain. (1981 Bar Problem) Answer — Yes, buyer “B” is still legally obligated to pay the purchase price. It must be observed that “S” had already delivered the car to “X,” the third party depositary or bailee. It was agreed that ownership is retained by “S” until delivery to “X.” Therefore, in effect, there was already a transfer of the right of ownership over the car to “B.” Consequently, “B’’ shall assume the fortuitous loss of the car. As a matter of fact, even if it was agreed that “S’’ shall retain the ownership of the car

80

Sec. 1, Rep. Act No. 4100.

250

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1249

until the purchase price has been paid by “B,” the end result will still be the same. Since, evidently, the purpose is to secure performance by the buyer of his obligation to pay the purchase price, by express mandate of the law, the fortuitous loss of the car shall be assumed by “B.’’ (Note: The above answer is based on Art. 1504 of the Civil Code.) Question No. 2 — May seller “S’’ demand payment in U.S. dollar? Why? (1981 Bar Problem) Answer — The seller “S’’ cannot demand payment in U.S. dollars. According to the law, an agreement that payment shall be made in currency other than Philippine currency is void because it is contrary to public policy. That does not mean, however, that “S” cannot demand payment from “B.” He can demand payment, but not in American dollars. Otherwise, there would be unjust enrichment at the expense of another. Payment, therefore, should be made in Philippine currency. (Note: The above answer is based on R.A. No. 529 and on Ponce vs. Court of Appeals, 90 SCRA 533.)

Idem; Meaning of legal tender. — Legal tender, within the meaning of Art. 1249 of the Code, refers to such currency which may be used for the payment of all debts, whether public or private.81 Under our law, the legal tender of the Philippines would be all notes and coins issued by the Central Bank.82 Idem; Payments with Japanese military notes. — One of the problems which confronted our courts after liberation was the determination of the validity of payments made during the Japanese occupation of pre-war debts which were then due in depreciated Japanese military notes. Considering that some of these payments were made during the last months of the occupation when these notes had depreciated so much in value, a just solution based on the laws then in force was called for. Evidently, if the pre-war obligation contains a stipulation to the effect that payment shall be made in a certain currency, such as American or English currency, the rule is that the payment, in order to be valid, must be made in the currency stipulated; hence, 81 82

Sec. 54, Rep. Act No. 265; Sec. 1, Rep. Act No. 529. Ibid.

251

Art. 1249

OBLIGATIONS

if payment was made in Japanese military notes and the creditor refused to accept it, it would not be valid even if it was followed by consignation.83 However, if the pre-war obligation contains a stipulation to the effect that payment shall be made in the currency which is legal tender in the Philippines at the time when payment is to be made or if such obligation is silent with respect to the currency in which the payment shall be made, payment in Japanese military notes is valid and effective. In the words of the Supreme Court: “A payment made by a debtor during the enemy occupation of a pre-war debt or obligation with Japanese notes and accepted by the creditor, is valid and extinguishes the former’s obligation.’’84 The doctrine is applicable irrespective of the attitude of the creditor.85 Thus, it has been held that a payment made by a debtor and accepted by the creditor during the enemy occupation “in compliance with the orders of the military authorities to reopen banks and accept the military notes as legal tender in payment of debts, issued in the exercise of their authority as military occupants, cannot be considered as made under a collective and general duress, because an act done pursuant to the laws or orders of competent authorities can never be regarded as executed involuntarily, or under duress, or illegitimate constraint, or compulsion that invalidates the act.”86 The validity of such payments is, of course, based on the fact that such military notes were legal tender in the Philippines at the time such payments were made.87 As a matter of fact, Japanese military notes were the only money in circulation in the Philippines during the latter part of the occupation; they were not only intended to be the legal tender in the Philippines, they were intended to be circulated exclusively therein. In this sense, it is evident that they were the Philippine currency or money during such period.88 Indeed, Legarda vs. Carrascoso, 81 Phil. 450. Hillado vs. De la Costa, 46 Off. Gaz. 5472. To the same effect: Haw Pia vs. China Banking Corp., 80 Phil. 604; Del Rosario vs. Sandico, 47 Off. Gaz. 2866; Soriano vs. Abalos, 47 Off. Gaz. 2894. 85 Hernaez vs. McGrath, 48 Off. Gaz. 2868. 86 Phil. Trust Co. vs. Araneta, 46 Off. Gaz. 4254; Larraga vs. Bañez, 47 Off. Gaz. 696; Compania General de Tabacos vs. Araneta, 96 Phil. 971. 87 Haw Pia vs. China Banking Corp., 80 Phil. 604. 88 Valdeabella vs. Marquez, 48 Off. Gaz. 719. 83 84

252

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1249

judicial notice must be taken of the fact that in 1943, they had as much purchasing power, if not more, than the victory notes of 1945 — at least as regards local foodstuffs and products.89 Idem; Payments with emergency notes. — What had been stated regarding payments with Japanese military notes can also be applied to a certain extent to payments made with emergency notes which were issued either by the Commonwealth government during the invasion or by recognized guerrilla governments during the occupation. This is so because undoubtedly these emergency notes must be considered as legal tender but only in those places which were under the control of either the Commonwealth or of the guerrilla government issuing the notes.90 Consequently, where the defendant borrowed P3,130 in emergency notes from the plaintiff in 1942, he cannot now contend that the sum of money delivered to him consisted of valueless notes which were not legal tender. These emergency notes which the officers of the Commonwealth were authorized by President Quezon to issue before he left the Philippines were then valid and legal tender.91 Idem; Payments with negotiable paper. — Since negotiable papers or mercantile documents, such as promissory notes payable to order or bills of exchange, are not legal tender, it is logical that the delivery of such papers or documents by the debtor to the creditor shall not produce the effect of payment. Consequently, if the debtor tenders a check to the creditor as payment of an obligation, the latter has a perfectly valid right to refuse it, even if the check may be good. In such case, the tender shall not produce the effect of payment.92 This is true even if the refusal of the creditor is followed by consignation whether the check is an ordinary check or a manager’s check.93

Aurreocoecha vs. Kabankalan Sugar Co., 81 Phil. 476. Rep. Act Nos. 22 and 368, applied in Donasco vs. Serra, CA, G.R. No. 7046-R, Sept. 30, 1953. 91 Phil. National Bank vs. Teves, 100 Phil. 491. 92 Belisario vs. Natividad, 60 Phil. 156; Phil. National Bank vs. Relativo, 92 Phil. 203. 93 Villanueva vs. Santos, 67 Phil. 648; Cuaycong vs. Ruiz, 47 Off. Gaz. 6125; CFI of Tarlac vs. Court of Appeals, 91 Phil. 912; Hidalgo vs. Heirs of Tuason, 104 Phil. 336. 89 90

253

Art. 1249

OBLIGATIONS

Hidalgo vs. Heirs of Tuazon, Inc. 104 Phil. 336 On August 31, 1943, plaintiffs obtained a loan of P100,000 from the defendant and to guarantee the payment of said loan, plaintiffs constituted a mortgage on four parcels of land belonging to them. It was agreed that the debtors may pay their indebtedness at any time before the expiration of the term of the contract subject, however, to the following conditions: (1) if payment is made before the termination of the hostilities between America and Japan, the indebtedness should be paid with an increase of 100%; and (2) if payment is made thereafter, 30 day-notice in advance should be given to defendant corporation. On Dec. 6, 1944, plaintiff Eduardo B. Hidalgo sent a check to defendant for the sum of P101,673.50, representing payment of his share in the obligation, but the same was rejected by defendant for the reason that such mode of payment was contrary to their agreement. On Dec. 29, 1944, plaintiff Felipe R. Hidalgo sent another check for the same amount to the defendant. The check was received by Nicasio A. Tuason. From this date no further action was taken, and when liberation came, plaintiffs brought this action in the Court of First Instance of Manila praying that the defendant be ordered to execute a document releasing them from their obligation and cancelling the mortgage executed by them. The defendant answered that notwithstanding the express provisions of the mortgage, said loan shall not be paid except in genuine Philippine currency after the war. After trial, the court rendered judgment in favor of the plaintiffs. Hence, the defendant appealed. The question now is whether the obligation has already been paid or not. The Supreme Court held: “With regard to the draft tendered by plaintiff Eduardo Hidalgo to defendant which was rejected by the latter, the same did not ripen into payment because of such rejection. The remedy of Hidalgo was to make a consignation thereof as required by law and give notice thereof to defendant. Such was not done and so the tender of payment became ineffective. With regard to the draft which plaintiff Felipe Hidalgo tendered to defendant, it is true that the same was accepted by Nicasio Tuason, but such tender cannot also have the effect of payment for under the law payment made in check or draft has the effect of payment only when actually cashed. There is no showing that the draft has been cashed. Nor is there a showing that it was impaired through the fault of defendant. Therefore, plaintiffs are still indebted to defendant and unless they pay the same they cannot

254

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1249

ask for the cancellation of their mortgage. Considering however that the indebtedness may be wholly or partially discharged even before the termination of hostilities between America and Japan, plaintiffs can only be made to pay the same subject to conversion under the Ballantyne scale of values pursuant to a long line of decisions of this court.”

Attention, however, must be called to the effect of Section 63 of the Central Bank Act. This is very well illustrated in the following case: New Pacific Timber & Supply Co. vs. Seneris 101 SCRA 686 A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of First Instance of Zamboanga City (Branch II) dated August 28, 1975 denying petitioner’s Ex-Parte Motion for Issuance of Certificate of Satisfaction of Judgment. Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private respondent. On July 19, 1974, a compromise judgment was rendered by the respondent Judge in accordance with an amicable settlement entered into by the parties the terms and conditions of which, are as follows: “(1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned from August 25, 1972; “(2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos (P6,000.00) as attorney’s fees for which P5,000.00 had been acknowledged received by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022 amounting to P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00); “(3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorney’s fees will be paid by defendant to the plaintiff within five months from today, July 19, 1974; and “(4) Failure on the part of the defendant to comply with any of the above conditions, a writ of execution may be issued by this Court for the satisfaction of the obligation.”

255

Art. 1249

OBLIGATIONS

For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon motion of the private respondent, issued an order for the issuance of a writ of execution on December 21, 1974. Accordingly, writ of execution was issued for the amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the petitioner, to wit: (1)

Unit American Lathe 24”

(1)

Unit American Lathe 18” Cracker Wheeler

(1)

Unit Rockford Shaper 24’’

and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner deposited with the Clerk of Court, Court of First Instance, Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00 for the payment of the judgment obligation, consisting of the following: 1. P50,000.00 in Cashier’s Check No. S-314361 dated January 3, 1975 of the Equitable Banking Corporation; and 2.

P13,130.00 in cash.

In a letter dated January 14, 1975, to the Ex-Officio Sheriff, private respondent through counsel, refused to accept the check as well as the cash deposit. In the same letter, private respondent requested the scheduled auction sale on January 15, 1975 to proceed if the petitioner cannot produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was postponed to 3:00 o‘clock p.m. of the same day due to further attempts to settle the case. Again, the scheduled auction sale that afternoon did not push through because of a last ditch attempt to convince the private respondent to accept the check. The auction sale was then postponed to the following day, January 16, 1975 at 10:00 o’clock a.m. At about 9:15 a.m. on January 16, 1975, a certain Mr. Tañedo representing the petitioner appeared in the office of the Ex-Officio Sheriff and the latter reminded Mr. Tañedo that the auction sale would proceed at 10:00 o’clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado, both representing the petitioner requested the Ex-Officio Sheriff to give them fifteen minutes within which to contact their lawyer which request was granted. After Mr. Tañedo and Mr. Librado failed to return, counsel for private respondent insisted that the sale must proceed and the Ex-Officio Sheriff proceeded with the auction sale. In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private

256

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1249

respondent as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a “Sheriff’s Certificate of Sale” in favor of the private respondent, Ricardo Tong, married to Pascuala Tong for the total amount of P50,000.00 only. Subsequently, on January 17, 1975, petitioner filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by the respondent Judge in his order dated August 28, 1975. In view thereof, petitioner now questions said order by way of the present petition alleging in the main that said respondent Judge capriciously and whimsically abused his discretion in not granting the motion for issuance of certificate of satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the judgment before the auction sale was conducted with the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of P50,000.00 in Cashier’s Check and P13,130.00 in cash; and (2) that the auction sale was invalid for lack of proper notice to the petitioner and its counsel when the Ex-Officio Sheriff postponed the sale from January 15, 1975 to January 16, 1975 contrary to Section 24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary restraining order enjoining the respondent ExOfficio Sheriff from delivering the personal properties subject of the petition to Ricardo A. Tong in view of the issuance of the “Sheriffs Certificate of Sale.” We find the petition to be impressed with merit. The main issue to be resolved in this instance is as to whether or not the private respondent can validly refuse acceptance of the payment of the judgment obligation made by the petitioner consisting of P50,000.00 in Cashier’s Check and P13,130.00 in cash which it deposited with the Ex-Officio Sheriff before the date of the scheduled auction sale. In upholding private respondent’s claim that he has the right to refuse payment by means of a check, the respondent Judge cited the following: Section 63 of the Central Bank Act: “Sec. 63. Legal Character. — Checks representing deposit money do not have legal tender power and their acceptance in payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the

257

Art. 1249

OBLIGATIONS

creditor in cash in an amount equal to the amount credited to his account.” Article 1249 of the New Civil Code: “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.’’ Likewise, the respondent Judge sustained the contention of the private respondent that he has the right to refuse payment of the amount of P13,130.00 in cash because the said amount is less than the judgment obligation, citing the following Article of the New Civil Code: “Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the presentations in which the obligation consists. Neither may the debtor be required to make partial payment. 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.” It is to be emphasized in this connection that the check deposited by the petitioner in the amount of P50,000.00 is not an ordinary check but a Cashier’s Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check. It is a well-known and accepted practice in the business sector that a Cashier’s Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. Where a check is certified by the bank on which it is drawn, the certification

258

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1249

is equivalent to acceptance. Said certification “implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue to be good, and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money.’’ When the holder procures the check to be certified, “the check operates as an assignment of a part of the funds to the creditors.” Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect “that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account” shall apply in this case. Considering that the whole amount deposited by the petitioner consisting of Cashier’s Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of execution, then, We see no valid reason for the private respondent to have refused acceptance of the payment of the obligation in his favor. The auction sale, therefore, was uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier’s Check was even withdrawn by the petitioner and replaced with cash in the corresponding amount of P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the parties at the instance of the respondent Judge. However, the private respondent still refused to receive the same. Obviously, the private respondent is more interested in the levied properties than in the mere satisfaction of the judgment obligation. Thus, petitioner’s motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious and the respondent Judge gravely abused his discretion in not granting the same under the circumstances. In view of the conclusion reached in this instance, We find no more need to discuss the ground relied in the petition. It is also contended by the private respondent that appeal and not a special civil action for certiorari is the proper remedy in this case, and that since the period to appeal from the decision of the respondent Judge has already expired, then, the present petition has been filed out of time. The contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long become final and executory and so, the

259

Art. 1249

OBLIGATIONS

same is not being questioned herein. The subject of the petition at bar as having been issued in grave abuse of discretion is the order dated August 28, 1975 of the respondent Judge which was merely issued in execution of the said decision. Thus, even granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for the respondent Judge had already issued a writ of execution. WHEREFORE, in view of all the foregoing, judgment is hereby rendered: 1. Declaring as null and void the order of the respondent Judge dated August 28, 1975; 2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of sale issued pursuant thereto; 3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the judgment obligation in his favor; 4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties to the herein petitioner. The temporary restraining order issued is hereby made permanent. Costs against the private respondent. SO ORDERED.

Idem; id. — Exceptions. — It must be noted, however, that under the law there are two cases when the delivery produces the effect of a valid payment. They are: (1) When the document has been cashed. This case is applicable to a negotiable paper or document executed by either a third person or the debtor himself and delivered by said debtor to the creditor.94 Thus, where the debtor deposited a manager’s check with the Clerk of Court in payment of a certain indebtedness pursuant to a court order, and the latter indorsed the check to the Provincial Treasurer, who deposited it with the Philippine National Bank and the Bank honored the check and placed the amount thereof to the

94

Compania General vs. Molina, 5 Phil. 142.

260

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1250

credit of the Provincial Treasurer, it was held that the effect of these facts, in contemplation of law, was the same as if the aforementioned amount had been deposited in cash with the Clerk of Court, for said sum thereby became available to him in cash.95 (2) When it had been impaired through the fault of the creditor. This is applicable only to a paper or document executed by a third person and delivered by the debtor to the creditor.96 Thus, where a bill of exchange was delivered to the plaintiff by the defendant, and subsequently, upon maturity it was dishonored by the drawee because the signature thereto was a forgery, the negligence of the plaintiff in not protesting the nonpayment resulted in the impairment of the value of the bill of exchange because of the loss of the right to proceed against other parties who might be held liable; consequently, the defendant can no longer be held liable.97 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.98 Effect of Extraordinary Inflation or Deflation. — According to Dean Capistrano, the above article was formulated by the Code Commission in view of the lessons learned in the last war, when inflation of currency in the Philippines was such that the price of a cavan of rice rose to P12,000. The Commission felt that in the event of another war resulting in extraordinary inflation, the juridical relations of creditor and debtor should be equitably adjusted.99 Consequently, the basis of payment, according to the Code, would be the value of the currency at the time of the establishment of the obligation.100 Extraordinary inflation or deflation may be said to be that which is unusual or beyond the common fluctuation in the value Golez vs. Camara, 101 Phil. 363. Compania General vs. Molina, 5 Phil. 142. 97 Quiros vs. Tan Guinlay, 5 Phil. 675. 98 New provision. 99 3 Capistrano, Civil Code, 1950 Ed., p. 189; Report of the Code Commission, pp. 132-133. 100 Art. 1250, Civil Code. 95 96

261

Art. 1250

OBLIGATIONS

of the currency, which the parties could not have reasonably foreseen or which was manifestly beyond their contemplation at the time when the obligation was established. (4 Tolentino 284.) By extraordinary inflation or deflation of the currency is understood to be any uncommon decrease or increase in the purchasing power of the currency which could not have been reasonably foreseen. (3 Capistrano 189.) Analyzing the above definitions, it is clear that in order that there will be an extraordinary inflation or deflation of the currency within the meaning of Art. 1250 of the Code, it is essential that the following requisites must be present: (1) there must be a decrease or increase in the purchasing power of the currency which is unusual or beyond the common fluctuation in the value of said currency; and (2) 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. The following is a good example: In 1955, A leased a house and lot to B at a monthly rental of P500 for a period of 25 years. An option to buy the property was given to B for the same period with the rentals already paid constituting a part of the purchase price which the parties fixed at an amount equivalent to the aggregate rentals for 25 years. May A now demand for an adjustment of the rent and the purchase price on the ground that there is an extraordinary inflation supervening? It is submitted that he may. We believe that both of the requisites mentioned above are present in the instant case. We can very well take notice of the fact that the purchasing power of the Philippine peso now is much less than its purchasing power in 1955. As a matter of fact, in 1955, the official rate of exchange between the Philippine peso and the American dollar was still two to one (2:1), while today, it is twenty point five to one (20.5:1). Certainly, this development could not have been foreseen by the contracting parties in 1955. It would have been different had the above contract been perfected in, let us say, 1965. The decline in the purchasing power of the Philippine peso in such case cannot be considered very great or extraordinary. In 1965, the official rate of exchange between the peso and the dollar was already four to one (4:1), although the black market quotation was about five point seventy-five is to one (5.75:1). Today, the rate of exchange is twenty point five to one (20.5:1). 262

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1250

Besides, the tendency of the gradual decline of the purchasing power of the peso was not only foreseeable but even evident in 1965. Even then, economists were speaking of the possibility of devaluation. A, in the example given, would not have any basis for demanding for an adjustment of the rent and the purchase price. It must be noted that the rule enunciated in Art. 1250 is applicable only to contractual obligations; consequently, it can not be applied to obligations arising from torts. Thus, in Velasco vs. Manila Electric Co. (42 SCRA 556), the Supreme Court held that the employment of the words “extraordinary inflation or deflation of the currency stipulated” clearly shows that the legal rule envisages contractual obligations where a specific currency is selected by the parties as the medium of payment. Furthermore, note that the law does not say that the value of the currency at the time of the establishment of the obligation shall be the amount to be paid; it merely says that it shall be the basis of payment. Hence, the courts will be given some latitude in fixing the amount to be paid by the debtor to the creditor with the value of the currency at the time when the obligation was established or constituted as basis, unless of course there is an agreement to the contrary. Idem; War-time obligations. — Because of the lack of statutory provisions under the old law which would regulate the basis of payment in case of extraordinary inflation or deflation of the currency, one of the most vexing problems which confronted our courts after the liberation of the Philippines was the question of payment of obligations incurred during the Japanese occupation. It was not a question of validity of payment because the obligation was not yet paid, nor a question of the currency in which the payment was to be made because the law was quite definite with respect to that point. It is evident that if the war-time obligation contained a stipulation to the effect that payment shall be made in a definite currency other than Philippine currency or Japanese military notes, the payment shall have to be made in the currency stipulated in accordance with the provisions of the first paragraph of Art. 1170 of the old Civil Code (now Art. 1249 of the new) which was the law then in force. It is also evident that if the war-time obligation did not contain any stipulation with regard to the currency in which payment shall be made, or if it did, it was to the effect that payment 263

Art. 1250

OBLIGATIONS

shall be made in either Philippine currency or Japanese military notes, payment shall have to be made in currency which is legal tender in the Philippines in accordance again with the provision of the first paragraph of Art. 1170 of the old Code (now Art. 1249 of the new). The question was with respect to the amount that had to be paid by the obligor or debtor considering the fact that Japanese military notes were no longer legal tender after the liberation of the Philippines, and consequently, the obligation had to be paid in “genuine” or ordinary Philippine currency. Shall the amount be computed in accordance with the rate of one Philippine peso for each peso due in Japanese military notes or shall the amount be adjusted in accordance with the Ballantyne Scale of Values? Idem; id. — The Ballantyne Schedule. — The Ballantyne Scale of Values was submitted by Dr. D.L. Ballantyne to the President of the Philippines in his capacity as economic adviser of the Commonwealth Government. It contained a recommendation for the adoption of measures which were greatly needed to solve the problem created by transactions made during the Japanese occupation and to hasten the economic recovery of the country. The Supreme Court, the Court of Appeals, and the different Courts of First Instance in the country have repeatedly applied its provisions in numerous cases. It is, therefore, an official document whose publication constituted a leading event of general interest and whose provisions are widely known and have played an important part in the contemporary political history of the country, of which courts of justice could take judicial cognizance.101 The report of Dr. Ballantyne which contains the Scale of Values is as follows: “Our own preliminary studies of this question which have taken into account the cost of living index for the occupation period, real estate values, black market quotations for the Commonwealth peso and income payments expressed in Japanese currency, indicate that a generally equitable scale of values for the Commonwealth peso in terms of the Japanese peso, is as follows:

101

Estrada vs. Noble, CA, 49 Off. Gaz. 139.

264

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

1941 December 1942 1943 January February March April May June July August September October November December

Art. 1250

1944 P1.00 P1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.40 1.50 1.60 1.70 1.80 2.50

January February March April May June July August September October November December

P4.00 5.00 6.00 9.00 12.00 15.00 20.00 25.00 30.00 40.00 60.00 90.00 1945

January February

120.00 None

Submitted by D.C. BALLANTYNE Special Bank Adviser to the President.’’

It must, however, be noted that except when sheer necessity demands it, because of the absence of other evidence, there is every reason for not applying the Ballantyne schedule. The said schedule assumes that there was only one rate of equivalence throughout the islands, when it is a well-known fact that the conversion rate changed from place to place. Thus, in cities where supply was scarce, the purchasing power of the military notes was lower than in the rural areas where food was more easily obtainable. Such schedule, therefore, must yield to proof of actual transactions.102 Idem; id.; id. — Application. — From an analysis of court decisions it is evident that in order that the Ballantyne Scale of Values shall be applicable, it is essential that the following requisites must concur; first, the obligation should have been contracted during the Japanese occupation; second, it could have been paid during the Japanese occupation; and third, it could have

102

Barcelon vs. Arambulo, CA, 48 Off. Gaz. 3976.

265

Art. 1250

OBLIGATIONS

been paid with Japanese military notes.103 Consequently, where the debtor borrowed, let us say, P90,000 in Japanese military notes in December, 1944, from the creditor and executed a promissory note promising to pay the amount “within a period of one year therefrom,” the Ballantyne Schedule is applicable; hence, he can be compelled to pay only P1,000 in accordance with the Ballantyne Conversion Table.104 But where the debtor executed a promissory note promising to pay the amount “one year after Oct. 5, 1944,” or “within 30 days after the expiration of one year from June 24,1944,” or “four years after date,” or within “five years from Jan. 1, 1946,” or within “one year from Aug. 7, 1944,” the Ballantyne Schedule is not applicable; hence, the debtor can be compelled to pay in Philippine currency, peso for peso.105 Fernandez, et al. vs. Nat. Insurance Co. of the Phil. 105 Phil. 59 Juan Fernandez’ life was insured by the defendant company for P10,000 on July 15, 1944, with his mother and sisters as beneficiaries. He died on Nov. 2, 1944. In 1952, the beneficiaries claimed the value of the policy. Proof of death was approved by the company on July 9, 1954. The question now is — when did the obligation of the company to pay the proceeds of the value of the policy accrue — did it accrue upon the death of the insured or upon receipt and approval of proof of death of the insured? The Supreme Court held: “In life insurance contracts, the policy matures either upon expiration of the term set forth therein, in which case, its proceeds are immediately payable to the insured himself, or upon his death occurring at any time prior to the expiration of the term, in which case, its proceeds are payable to the beneficiaries, within 60 days after filing of proof of death.

See Jimenez vs. Bucoy, 103 Phil. 40; Valero vs. Sycip, 103 Phil. 1150; Fernandez, et al. vs. Nat. Ins. Co. of the Phil., 105 Phil. 59. 104 Ang Lam vs. Peregrina, 92 Phil. 506. To the same effect: Hilado vs. De la Costa, 46 Off. Gaz. 5472; Soriano vs. Abalos, 47 Off. Gaz. 168; De Asis vs. Agdamag, 90 Phil. 249; Samson vs. Andal, 94 Phil. 402; Aguilar vs. Miranda, 113 Phil. 515; Server vs. Car, 18 SCRA 728. 105 Roño vs. Gomez, 46 Off. Gaz. 339; Gomez vs. Tabia, 47 Off. Gaz. 339; Garcia vs. De los Santos, 49 Off. Gaz. 4830; Yay vs. Boltron, 100 Phil. 47; Stemberg vs. Solomon, 102 Phil. 995; Dizon vs. Arrastia, 113 Phil. 476; Quiogue vs. Bautista, Generosa vs. Court of Appeals, 12 SCRA 619; Server vs. Car, 18 SCRA 728. 103

266

EXTINGUISHMENT OF OBLIGATIONS Payment or Performance

Art. 1251

(Sec. 91-A, Insurance Law.) Here, the policy matured upon the death of the insured in 1944, and the obligation of the insurer to pay arose as of that date. The sixty-day period fixed by law within which to pay is merely procedural in nature. It is the happening of the suspensive condition of death that matures a life insurance policy and not the filing of the proof of death. Since the insured died during the Japanese occupation, the proceeds of his policy should, therefore, be adjusted accordingly, for ‘the rule is already settled that where the debtor could have paid his obligation at any time during the Japanese occupation, payment after liberation must be adjusted in accordance with the Ballantyne Schedule.’ ’’

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.106 Place of Payment. — If there is no express designation or stipulation in the obligation with respect to the place where payment shall be made, the following rules are applicable: (1) If the obligation is to deliver a determinate thing, the payment shall be made at the place where the thing might be at the time the obligation was constituted.107 (2) In any other case, the payment shall be made at the domicile of the debtor. This rule is intended to govern unilateral obligations. Reciprocal obligations are governed by special rules. As 106 107

Art. 1171, Spanish Civil Code, in modified form. Art. 1251, Civil Code.

267

Art. 1252

OBLIGATIONS

a corollary, if the debtor changes his domicile in bad faith or after he has incurred in delay, it is logical that additional expenses shall be borne by him.108 Subsection 1. — Application of Payment Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract.109 Concept. — Application of payment110 may be defined as the designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor.111 Requisites. — In order that there will be an application of payment, it is essential that the following requisites must concur: first, there must be only one debtor and only one creditor; second, there must be two or more debts of the same kind; third, all of the debts must be due; and fourth, the amount paid by the debtor must not be sufficient to cover the total amount of all the debts. Idem; First requisite. — The requirement that there must be only one debtor does not militate against the possibility of extending the rules on application of payment to solidary obligations, because

Ibid. Art. 1172, Spanish Civil Code, in modified form. 110 Under the Civil Code, there are actually four special forms of payment. They are: (1) application of payment (Arts. 1252-1254); (2) dation in payment (Art. 1245); (3) payment by cession (Art. 1255); and (4) tender of payment and consignation (Arts. 1256-1261). Strictly speaking, however, application of payment, by its very nature, is not a special form of payment. 111 8 Manresa, 6th Ed., Bk. 1, p. 598. 108 109

268

EXTINGUISHMENT OF OBLIGATIONS Application of Payment

Art. 1252

the solidary debtor who paid may have obligations other than the solidary obligation in favor of the creditor to whom payment is made. Neither does the requirement that there must be only one creditor militate against extending the rules on application of payment to a case in which a person is indebted at the same time in separate and demandable sums to a partnership and to the managing partner of the partnership. As a matter of fact, Art. 1792 provides: “If a partner authorized to manage collects a demandable sum, which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit the amount shall be fully applied to the latter. “The provisions of this article are understood to be without prejudice to the right granted to the debtor by Article 1252, but only if the personal credit of the partner should be more onerous to him.”

It is, therefore, apparent that the rule stated in the second paragraph of the above article constitutes an exception to the rule that in applications of payment it is essential that there must be only one creditor, since it is a well-known principle that a partnership has a juridical personality which is separate and distinct from that of each of the partners. Idem; Second requisite. — In applications of payment it is not only essential that there must be only one debtor and only one creditor, but that the debtor must have two or more debts in favor of the same creditor. Hence, the rules on application of payment cannot apply to a guarantor or surety whose liability is extended or confined only to a particular obligation. Therefore, when such guarantor or surety is made to pay in default of or solidarily with the principal debtor, whatever payments may be made cannot be applied to those obligations for which he is not responsible either subsidiarily or solidarily.112

112

Socony Vacuum Corp. vs. Miraflores, 67 Phil. 304.

269

Art. 1252

OBLIGATIONS

It is also essential that each of the debt must be of identical or homogenous specie. Thus, if the debtor has several monetary obligations in favor of one and the same creditor and he pays a certain sum to the latter which is not sufficient to satisfy the aggregate sum of all the obligations, the rules on application of payment can be applied, but where some of the obligations consist in the payment of money and the rest in the delivery of things other than money, such rules can no longer be applied. There is, however, a case in which even if some of the obligations are not of identical specie at the time of their constitution, yet application of payment is possible if, at the time the designation or application is made, such obligations had already been converted into obligations to indemnify with damages by reason of breach or nonfulfillment.113 Idem; Third requisite. — As a general rule, application of payment is possible only when all of the debts are due. There are two exceptions to this rule. They are: (1) when there is a stipulation to the contrary; and (2) the application of payment is made by the party for whose benefit the term or period has been constituted.114 The second exception must always be understood in relation to the provision of Art. 1196. Thus, if from the tenor of the obligation which is not yet due or from other circumstances, it should appear that the term or period is for the benefit of the debtor (or the creditor in a proper case) and there are other obligations of the said debtor in favor of the same creditor which are already due, the payment made may be applied by the said debtor to the obligation which is not yet due. The exception is logical because if the term or period is for his benefit, if he so desires, he may renounce the benefit of such term or period by performing his obligation in advance. Idem; Fourth requisite. — The requirement that the amount paid by the debtor must not be sufficient to cover the total amount of all the debts is indispensable, because, otherwise, there would be no necessity of designating the debt or debts to which the payment shall be applied. Right of Debtor To Make Application. — It is apparent from the provisions of the first paragraph of Art. 1252 that the right to designate the debt to which the payment shall be applied belongs 113 114

8 Manresa, 5th Ed., Bk. 1, pp. 598-599. Art. 1252, par. 1, Civil Code.

270

EXTINGUISHMENT OF OBLIGATIONS Application of Payment

Art. 1252

primarily to the debtor. It must be noted, however, that the right is available to him only at the time when payment is made. If he does not exercise such right, the same is extinguished and the application would then be governed by the provisions of Art. 1254, unless the creditor, in the meantime, makes the application by giving to the debtor, who accepts it, a receipt in which application of the payment is made.115 Idem; Exception. — If the debtor does not avail himself of the right to designate the debt to which the payment shall be applied, and subsequently, he accepts from the creditor a receipt in which an application of payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract.116 Application of payment by the debtor is, therefore, the general rule, while application of payment by the creditor is the exception. However, to say that the application is made by the creditor is not exactly accurate, because what such creditor merely does is to propose the application by giving to the debtor a receipt in which the application of payment is made subject to the express or tacit approval of the said debtor. Consequently, the debtor may either accept or reject the application. Once the receipt is accepted, the application of payment made in such receipt can no longer be impugned,117 unless there is a cause, such as mistake, force, intimidation, undue influence or fraud, which will invalidate the application. It is clear that the word “contract” used in the law can only refer to the act whereby the debtor accepts the receipt in which the application is made from the creditor, and not to the contract from which the obligation to which the payment is applied arises. Idem; Time when right is exercised. — From what had been stated, it is clear that as far as the debtor is concerned, the right to make an application of payment must be exercised at the time payment is made.118 If he fails to exercise the right, the initiative is taken away from him and such application may then be made by the creditor who may exercise the right even after the delivery of the receipt acknowledging payment, provided, of course, that such

8 Manresa, 5th Ed., Bk. 1, pp. 599-600. Art. 1252, par. 2, Civil Code. 117 Garcia vs. Enriguez, 71 Phil. 423. 118 Bachrach vs. Golingco, 39 Phil. 912; Powell vs. Phil. National Bank, 54 Phil. 115 116

34.

271

Arts. 1253-1254

OBLIGATIONS

application is approved by the debtor. In the words of Manresa, “the clear basis of this difference is that while the debtor decides for himself, the creditor only proposes to the debtor who may or may not agree.’’119 Art. 1253. If the debt produces interests, payment of the principal shall not be deemed to have been made until the interests have been covered.120 Limitation upon Right To Apply Payment. — There has been some doubt as to whether the rule stated in the above article is suppletory or obligatory to the debtor. Manresa believes that the better view seems to be in favor of the latter because it is more in consonance with justice. Consequently, the creditor may impugn any application of payment which is contrary to the above rule.121 Our Supreme Court, however, sustains the contrary view. Thus, in two recent cases, the Court held that the above provision applies only in the absence of a verbal or written agreement to the contrary; in other words, it is merely directory, and not mandatory.122 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.123 Legal Application of Payment. — It must be noted in the first place that the rules stated in Art. 1254 are applicable only when payment cannot be applied in accordance with the rules previously stated, or if the application cannot be inferred from other circumstances. Thus, according to Dean Capistrano, if payment of 8 Manresa, 5th Ed., Bk. 1, p. 600. Art. 1173, Spanish Civil Code. 121 8 Manresa, 5th Ed., Bk. 1, p. 601. 122 Baltazar vs. Lingayen Gulf Elec. Power Co.; Rose vs. Lingayen Elec. Power Co., Baltazar vs. Acena, 14 SCRA 522; Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967. 123 Art. 1174, Spanish Civil Code, in modified form. 119 120

272

EXTINGUISHMENT OF OBLIGATIONS Application of Payment

Arts. 1253-1254

one of the debts has been demanded or if different places for payment have been designated in the contract and payment has been made in one of those places, it is evident that an application can be deduced or inferred, in which case, the article is not applicable.124 Idem; When debts are not of same burden. — When the debts due are not of the same burden, the rule is that the debt which is most onerous to the debtor shall be deemed to have been satisfied.125 From judicial decisions and works of commentators, the following rules may, therefore, be stated: (1) Where there are various debts which are due and they were incurred at different dates, the oldest are more onerous to the debtor than the more recent ones.126 (2) Where one debt bears interest and the other does not, even if the latter was incurred at an earlier date, the first is more onerous to the debtor.127 As between two debts which bear interest, the debt with a higher rate of interest is more onerous to the debtor. (3) Where one debt is secured and the other is not, the first is more onerous to the debtor.128 However, “where in a bond the debtor and surety have bound themselves solidarily, but limiting the liability of the surety to a lesser amount than that due the principal debtor, any such payment as the latter may have made on account of such obligation must be applied first to the unsecured portion of the debt, for, as regards the principal debtor, the obligation is more onerous as to the amount not secured.’’129 (4) Where the debtor is bound as principal in one obligation and as guarantor or surety in another, the former is more onerous to him. (5) When the debtor is bound as a solidary debtor in one obligation and as the sole debtor in another, the former is more onerous to him.

3 Capistrano, Civil Code, 1950 Ed., p. 193. Art. 1254, par. 1, Civil Code. 126 Philippine National Bank vs. Veraguth, 50 Phil. 353. 127 Menzi & Co. vs. Quing Chuan, 69 Phil. 46. 128 Sanz vs. Lavin, 6 Phil. 299; Traders Insurance & Surety Co. vs. Dy Eng Giok, 104 Phil. 806. 129 Hongkong & Shanghai Bank vs. Aldanese, 48 Phil. 390. 124 125

273

Arts. 1253-1254

OBLIGATIONS

(6) Within a solidary obligation, the share which corresponds to a solidary debtor would be most onerous to him. (7) Where one obligation is for indemnity and the other is by way of penalty, the former is more onerous to the debtor. (8) Where one debt is liquidated and the other is not, the former is more onerous to the debtor.130 Problem — The debtor owes his creditor several debts, all of them due, to wit: (1) an unsecured debt; (2) a debt secured with a mortgage of the debtor’s property; (3) a debt bearing interest; (4) a debt in which the debtor is solidarily liable with another. Partial payment was made by the debtor. Assuming that the debtor had not specified the debts to which the payment should be applied and, on the other hand, the creditor had not specified in the receipt he issued the application of payment, state the order in which the payment should be applied and your reasons therefore. (1982 Bar Problem) Answer — In this case, according to the Civil Code, the debt, which is most onerous to the debtor, among those due, shall be deemed satisfied. Analyzing the four debts stated in the problem, the most onerous is No. 4, the second most onerous is No. 2, the third most onerous is No. 3, and the least onerous is No. 1. Consequently, the payment should be applied in that order. (Note: The above answer is based on Art. 1254 of the Civil Code, and on decided cases and commentaries of recognized commentators.)

Idem; When debts are of same burden. — If the debts which are due are of the same nature and burden, the rule is that the payment shall be applied to all of them pro rata or proportionately.131 It is evident that this rule can also be applied to a case in which it is fairly impossible to determine which of the debts which are due is the most onerous or burdensome to the debtor by applying any of the rules stated in the first paragraph of the article. 130 8 Manresa, 5th Ed., Bk. 1, pp. 602-604; 4 Tolentino, Civil Code, 1956 Ed., pp. 293-294. 131 Art. 1254; par. 2, Civil Code.

274

EXTINGUISHMENT OF OBLIGATIONS Payment by Cession

Art. 1255

Subsection 2. — Payment by Cession Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws.132 Concept. — Cession or assignment may be defined as a special form of payment whereby the debtor abandons all of his property for the benefit of his creditors in order that from the proceeds thereof the latter may obtain payment of their credits.133 Requisites. — In order that the debtor can avail of this form of payment, it is essential that the following requisites must concur: first, plurality of debts; second, partial or relative insolvency of the debtor; and third, acceptance of the cession by the creditors.134 In case the creditors do not accept the cession or assignment, a similar result may be obtained by proceeding in accordance with the Insolvency Law.135 Kinds. — Payment by cession may be either contractual or judicial. The cession referred to in Art. 1255 of the Code is contractual, while the cession which is regulated by the Insolvency Law, and which may be voluntary or involuntary, is judicial. Distinguished from Dation in Payment. — Payment by cession must not be confused with dation in payment (dación en pago). The two may be distinguished from each other as follows: (1) As to number of parties: While in dacion en pago there may be only one creditor, in payment by cession plurality of creditors is essential. (2) As to financial condition of parties: While in dación en pago the debtor is not necessarily in a state of financial difficulty,

Art. 1175, Spanish Civil Code, in modified form. 8 Manresa, 5th Ed., Bk. 1, p. 606. 134 Ibid., pp. 605-606. 135 Act No. 1956, as amended. 132 133

275

Art. 1256

OBLIGATIONS

in payment by cession the debtor is in a state of partial or relative insolvency. (3) As to object: While in dación en pago what is delivered by the debtor is merely a thing to be considered as the equivalent of the performance of the obligation, in payment by cession what is ceded by the debtor is the universality of all of his property. (4) As to effect: While in dación en pago the payment extinguishes the obligation to the extent of the value of the thing delivered either as agreed upon or as may be proved, unless the silence of the parties signifies that they consider the delivery of the thing as the equivalent of the performance of the obligation, in payment by cession the effect is merely to release the debtor for the net proceeds of the things ceded or assigned, unless there is a contrary intention.136 Effect. — It is apparent from the provision of Art. 1255, that, in the absence of a contrary stipulation, the assignment or abandonment by the debtor of all his property to the creditors shall only release him from responsibility for the net proceeds of the property assigned. Consequently, the extinguishment of his obligations will only be partial. It must also be noted that the assignment does not transfer the ownership of the things or objects to the creditors. What is transmitted to the latter is only the possession of such things or objects including their administration so that they can proceed with the sale and from the proceeds thereof their respective credits are then paid.137 Subsection 3. — 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:

136 137

8 Manresa, 5th Ed., Bk. 1, pp. 611-612; 3 Castan, 7th Ed., p. 257. 3 Castan, 7th Ed., p. 255.

276

EXTINGUISHMENT OF OBLIGATIONS Tender of Payment and Consignation

Arts. 1257-1258

(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) collect; (5)

When two or more persons claims the same right to When the title of the obligation has been lost.138

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.139 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.140 Concept. — Tender of payment consists in the manifestation made by the debtor to the creditor of his decision to comply immediately with his obligation. Consignation, on the other hand, refers to the deposit of the object of the obligation in a competent court in accordance with the rules prescribed by law after refusal or inability of the creditor to accept the tender of payment.141 Distinctions. — Tender of payment and consignation may be distinguished from each other as follows: (1) Tender of payment is the antecedent of consignation; in other words, while the first is the preparatory act, the second is Art. 1176, Spanish Civil Code, in modified form. Art. 1177, Spanish Civil Code. 140 Art. 1178, Spanish Civil Code. 141 3 Castan, 7th Ed., p. 252. 138 139

277

Arts. 1257-1258

OBLIGATIONS

the principal act which will produce the effects of payment of the obligation.142 Thus, according to the Supreme Court: “Tender of payment, even if valid, does not by itself produce legal payment, unless it is completed by consignation. “Tender of payment alone Is not a mode of extinguishing obligations. Tender of payment in the Civil Code is treated as subtitle in the section on Payment as a mode of extinguishing obligations. But the subtitle is ‘Tender of Payment and Consignation.’ And Article 1176 (now Art. 1258) provides that after a valid tender of payment ‘the debtor shall be released from responsibility by the consignation of the thing due.’ As a complement Article 1180 (now Art. 1260) says ‘after the consignation has been duly made, the debtor may petition the judge to order the cancellation of the obligation.’ All of which patently indicate that consignation must follow, supplement or complete the tender of payment if discharge of the obligation is to be obtained. “ ‘Ofrecimiento de pago y consignación. — Consiste el primero en una declaracion de voluntad dirigida al acreedor, por la que el deudor manifiesta su firme decisión de cumplir immediatamente la obligación; y la segunda en el depósito que en forma legal hace el deudor de la cosa objecto de la obligación, cuando el acreedor no quiere y no puede recibirla. Solo la consignación es forma de pago. La oferta unicamente nos interesa aqui en cuanto es un acto preparatorio de la consignatión.’ (Castan, Derecho Civil, Vol. 2, 521.)’’143

(2) Tender of payment is by its very nature extrajudicial in character, while consignation is judicial.144 General Requisites of Consignation. — According to Manresa, we must distinguish between the general requisites of a valid consignation, or those relative to payment, and the special requisites, or those arising from the very nature of consignation.145 The first refers to those requisites which we have already taken up in connection with payment in general (Arts. 1232-1251), such as the

8 Manresa, 5th Ed., Bk. 1, p. 620. Phil. National Bank vs. Relativo, 92 Phil. 203. 144 8 Manresa, 5th Ed., Bk. 1, p. 620. 145 Ibid., pp. 628-630. 142 143

278

EXTINGUISHMENT OF OBLIGATIONS Tender of Payment and Consignation

Arts. 1257-1258

person who pays, the person to whom payment is made, the object of the obligation which must be paid or performed, and the time when payment or performance becomes demandable; the second, on the other hand, refers to the five requirements which are prescribed by Art. 1256 to Art. 1258 of the Civil Code. Since consignation is a special form of payment, it is but logical, in order that it will produce all the effects of payment, that it must conform not only with all of the special requirements prescribed by law, but also with all of the requisites of a valid payment. Hence, according to the second paragraph of Art. 1258: “The consignation shall be ineffectual if it is not made in consonance with the provisions which regulate payment.” Thus, where the amount remitted to the Clerk of Court is in the form of a cashier’s check, the consignation must be deemed invalid, since the law requires that in order that consignation shall produce the effect of a valid payment, it must conform to the rules regulating payment, and one such rule is that payment should be made in legal tender.146 Special Requisites of Consignation. — In order that consignation shall produce the effects of payment, it is essential that certain special requirements prescribed by law must be complied with. The debtor must show: (1)

That there is a debt due;

(2) That the consignation has been made either because the creditor to whom tender of payment was made refused to accept the payment without just cause, or because any of the causes stated by law for effective consignation without previous tender of payment exists;147 (3) That previous notice of the consignation had been given to the persons interested in the fulfillment of the obligation;148 (4) That the thing or amount due had been placed at the disposal of judicial authority;149

146

Villanueva vs. Santos, 67 Phil. 648; Arambulo vs. Court of Appeals, 97 Phil.

965. Art. 1256, Civil Code. Art. 1257, Civil Code. 149 Art. 1258, par. 1, Civil Code. 147 148

279

Arts. 1257-1258

OBLIGATIONS

(5) That after the consignation had been made, the persons interested in the fulfillment of the obligation had been notified thereof.150 Idem; First requisite. — Before consignation can produce the effect of payment, it is essential that there must be a debt which is due.151 Thus, where the plaintiff and defendant entered into a contract whereby the latter was given the right to cancel the contract upon payment of a certain sum, and subsequently, the latter tried to avail himself of such right by making a formal tender of the amount, it was held that it was not necessary for him to deposit the amount with the Clerk of Court, since there is no debt which is due. Consequently, the tender made by the defendant in good faith was sufficient to cancel the contract.152 Idem; Second requisite. — In order that the consignation will be effective, the general rule is that there must have been a tender of payment made by the debtor to the creditor. It is, however, required: (1) that the tender of payment must have been made prior to the consignation; (2) that it must have been unconditional; and (3) that the creditor must have refused to accept the payment without just cause.153 The first requirement is self-explanatory; the second and third, however, require some explanation. It is a rule that the tender of payment, in order to constitute a valid tender, must be unconditional in character. Thus, where the debtor tendered a check for P5,000 to the creditor as payment of a debt of P600, but the payee of said check was a third person who accompanied him, it was held that the tender did not constitute a valid tender of payment because it was conditional in the sense that, in offering the check, the defendant-debtor practically told the plaintiff-creditor — “Here is P600, but you must pay the remainder of P4,400 to the payee.”154 Similarly, where the debtor tendered a check for P3,250 to the creditor as payment of a debt conditioned upon the signing by the latter of a motion to dismiss a complaint for legal separation, it was also held that such tender of payment is not valid.155 However,

Art. 1258, par. 2, Civil Code. Ponce de Leon vs. Syjuco, 90 Phil. 311. 152 Asturias Sugar Central vs. Pure Cane Molasses Co., 60 Phil. 255. 153 8 Manresa, 5th Ed., Bk. 1, pp. 620-621. 154 Phil. National Bank vs. Relativo, 92 Phil. 203. 155 Sy vs. Eufemio, 104 Phil. 1056. 150 151

280

EXTINGUISHMENT OF OBLIGATIONS Tender of Payment and Consignation

Arts. 1257-1258

where the check is sent to the debtor on condition that it is in full satisfaction of a disputed claim of indebtedness and the creditor retains the same and converts it into money, he is presumed to have assented to the condition and to have accepted the compromise offer, and a mere expression of dissatisfaction by the creditor with the proposal cannot qualify the effects of actual use of the check.156 With respect to the third requirement, Manresa is of the opinion that when the consignation is made, it is not necessary for the court where the thing or the amount is deposited to determine whether the refusal of the creditor to accept the same was with or without a just cause. The reason is that the question will be resolved anyway in a subsequent proceeding. Hence, the mere refusal of the creditor to accept the tender of payment will be sufficient.157 Sy vs. Eufemio 104 Phil. 1056 (unrep.) The records show that defendant and plaintiff, husband and wife, had entered into a compromise agreement by virtue of which the former undertook to pay to the latter P10,000 in cash and P25,000 by installments within ten years, and the latter on her part promised to move for the dismissal of a civil case for support and a criminal case for bigamy which she had instituted against the former. It was also agreed that both parties shall waive whatever right of action, civil and criminal, they might have against each other. This compromise agreement was approved by the lower court. In spite of this agreement, plaintiff subsequently brought an action for legal separation against the defendant. In the course of the proceedings, defendant tendered payment of P3,250 to the plaintiff. The latter refused to accept the tender. The former then deposited the amount in the court, filing a manifestation averring that because of plaintiff’s unjustifiable refusal to accept the tender of payment which was made in compliance with the compromise agreement, he is depositing the amount pursuant to Arts. 1256 and 1258 of the Civil Code. Plaintiff filed a reply, contending that she refused to accept the tender because, in the first place, what was tendered was a check, and in the second place, the tender was conditioned upon the dismissal of the complaint for legal separation. In answer, defendant alleged that for the past four years plaintiff had been

156 157

Araneta vs. Uy Tek, CA, 40 Off. Gaz. 28. 8 Manresa, 5th Ed., Bk. 1, pp. 620-621.

281

Arts. 1257-1258

OBLIGATIONS

receiving similar payments in check without any objection; hence, she is now in estoppel. Consequently, the question to be resolved in this appeal is whether or not the tender of payment is valid for purposes of consignation. The Supreme Court held: “A check intended to pay a debt, if refused by the creditor, is not a valid tender of payment. The fact that in previous years payment in check by the debtor was accepted by the creditor does not place the latter in estoppel to prevent him from requiring the former to pay his obligation in cash. And as the tender of the check by the debtor was conditioned upon the signing by the creditor of a motion to dismiss the complaint for legal separation, the tender of the check for payment of the debt was not, as it should be, unconditional. Consequently, its consignation in court does not render it legal, valid and effective. Whether the appellee under the terms of the compromise agreement is bound to file such motion, and whether the waiver of whatever action the parties might have against each other is lawful and enforceable, are questions to be determined in the case for legal separation and for that reason they cannot be taken up in this appeal because the trial court has not passed upon them.”

Idem; id. — Exceptions. — There are five exceptions to the rule that in order that the consignation shall produce the effects of payment, it is essential that there must be a previous tender of payment.158 They are: (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 right to collect; and (5) when the title of the obligation has been lost.159 Idem; id. — Effect of valid tender of payment. — When a valid tender of payment is made, the obligation is not extinguished, unless it is completed by consignation. However, it has the effect of exempting the debtor from payment of interest and/or damages.160 The suspension of the running of interest is governed by principles which regard reality rather than technicality, substance rather than

158 For application of these exceptions — see Panganiban vs. Cuevas, 7 Phil. 477; Banahaw vs. Dejarme, 55 Phil. 338; Salvante vs. Ubi Cruz, 88 Phil. 236. 159 Art. 1256, par. 2, Civil Code. 160 Phil. Nat. Bank vs. Relativo, 92 Phil. 203.

282

EXTINGUISHMENT OF OBLIGATIONS Tender of Payment and Consignation

Arts. 1257-1258

form. Good faith of the debtor should in simple justice excuse him from paying interest after the offer was rejected.161 Idem; Third requisite. — It is also essential in order that the consignation shall be effective that previous notice thereof had been given to the persons interested in the fulfillment of the obligation.162 This requirement is separate and distinct from tender of payment which precedes it. Tender of payment is a friendly and private act manifested only to the creditor which by itself does not suggest consignation which follows in case of unjust refusal of the creditor to accept the payment; previous notice, on the other hand, is a formal act manifested not only to the creditor, but also to other persons interested in the fulfillment of the obligation directly announcing the consignation which will be made as a result of the unjust refusal of the creditor to accept the payment. Although separate and distinct from each other, the procedure, as far as the debtor is concerned, can be simplified by combining the two in a single act, which would include principally the tender of payment and subsidiarily the notice of consignation, unless the creditor accepts the payment.163 Even in this case it is necessary that notice shall be made to the other parties interested in the fulfillment of the obligation, such as a surety or guarantor or a solidary co-debtor. Idem; Fourth requisite. — It is, of course, essential that the thing or amount due must be placed at the disposal of judicial authority.164 This requirement is complied with if the debtor deposits the thing or amount, which the creditor had refused or had been unable to accept, with the Clerk of Court. Normally, this requirement is accompanied by the filing of the complaint itself which is sometimes denominated as an action for consignation, but which is in reality an action for specific performance of the obligation or an action for cancellation of the obligation. Idem; Fifth requisite. — After the consignation had been made, the persons interested in the fulfillment of the obligation must be notified thereof.165 This notification is separate and distinct from 161 Araneta vs. Tuason de Paterno, 49 Off. Gaz. 45. But see Llamas vs. Abaya, 60 Phil. 502. 162 Art. 1256, par. 1, Civil Code; Bellis vs. Imperial, 52 Phil. 530. 163 8 Manresa, 5th Ed., Bk. 1, pp. 627-628. 164 Art. 1258, par. 1, Civil Code. 165 Art. 1258, par. 2, Civil Code.

283

Arts. 1257-1258

OBLIGATIONS

the notification which is made prior to the consignation. As declared by the Supreme Court in the case of Cabanos vs. Calo,166 “there should be notice to the creditor prior and after consignation as required by the Civil Code. The reason for this is obvious, namely, to enable the creditor to withdraw the goods or money deposited. Indeed, it would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation.” Of course, if the consignation was accompanied by the corresponding complaint for specific performance or for cancellation of the obligation, automatically, the requirement is complied with, provided that the other parties interested in the fulfillment of the obligation are furnished copies thereof. It must be observed, however, that there is nothing in the Civil Code or in the Rules of Court which would prohibit compliance with all of the requisites of a valid and effective consignation before the filing of the complaint for consignation. Consequently, upon compliance with all of the requisites, either of two possible situations may arise. There is the possibility that the creditor may finally accept the thing or amount deposited. In such case, the question of payment is settled altogether. There is also the possibility that he refuses to accept the thing or amount deposited or that he is not interested or that he is not known or that he is absent. In such case, a litigation will arise. The debtor will then be compelled to bring an action against the creditor for the extinguishment or cancellation of the obligation on the ground of a valid and effective consignation.167 Ponce de Leon vs. Syjuco, Inc. 90 Phil. 311 Plaintiff contracted two loans from the defendant in 1941 during the Japanese occupation amounting to P216,000 in Japanese military notes. These loans are evidenced by two promissory notes wherein plaintiff promised to pay “within one year from May 5, 1948” in the legal tender of the Philippines. On November 5, 1944, he offered to the defendant the principal including interests up to the dates of maturity of the two notes. The defendant refused to accept the tender of payment. Subsequently, plaintiff deposited the money with the clerk of

166 167

G.R. No. L-10927, Oct. 30, 1958. 3 Castan, 7th Ed., pp. 253-254; 8 Manresa, 5th Ed., Bk. 1, pp. 635-636.

284

EXTINGUISHMENT OF OBLIGATIONS Tender of Payment and Consignation

Arts. 1257-1258

court. After liberation, he brought this action to compel the defendant to accept the amount deposited. The issue, therefore, is — is the consignation valid? The Supreme Court held: “In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by law. The debtor must show: (1) that there was a debt due; (2) that the consignation of the obligation has been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176 — now Art. 1256, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the performance of the obligation (Art. 1177 — now Art. 1257, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178 — now Art. 1258, Civil Code); (5) that after the consignation had been made the person interested was notified thereof (Art. 1178 — now Art. 1258, Civil Code). In the instant case, while it is admitted that a debt existed, that the consignation was made because of the refusal of the creditor to accept it, and that the filing of the complaint to compel its acceptance on the part of the creditor can be considered sufficient notice of the consignation to the creditor, nevertheless; it appears that at least two of the above requirements have not been complied with. Thus, it appears that plaintiff, before making the consignation with the clerk of court, failed to give previous notice thereof to the person interested in the performance of the obligation. It also appears that the obligation was not yet due and demandable when the money was consigned, because, as already stated, by the very express provisions of the document evidencing the same, the obligation was to be paid within one year after May 5, 1948, and the consignation was made before this period matured. The failure of these two requirements is enough ground to render the consignation ineffective. And it cannot be contended that plaintiff is justified in accelerating the payment of the obligation because he was willing to pay the interest due up to the date of its maturity because, under the law, in a monetary obligation contracted with a period, the presumption is that the same is deemed constituted in favor of both the creditor and the debtor unless from its tenor or from other circumstances it appears that the period has been established for the benefit of either one of them (Art. 1127 — now Art. 1196, Civil Code). Here no such exception or circumstance exists.’’168 168

See also Limkako vs. Teodoro, 74 Phil. 313.

285

Arts. 1259-1261

OBLIGATIONS

Subject Matter of Consignation. — Although Art. 1258 seems to give the impression that only movables may be the subject matter of consignation, Spanish commentators advance the opinion that not only movables, but even immovables may be the subject matter thereof. They believe that consignation of immovable property should be allowed because it would be unjust to charge the debtor indefinitely with the task of preserving the immovable property which constitutes the object of the obligation.169 Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor.170 Expenses of Consignation. — Before the creditor can be charged with the expenses of consignation, it is essential that such consignation must have been properly made. From what had already been stated, consignation is considered properly made in the following cases: first, when the creditor accepts the thing or amount deposited as payment of the obligation without contesting the efficacy or validity of the consignation; and second when the creditor contests the efficacy or validity of the consignation and the court finally decides that it has been properly made or cancels the obligation at the instance of the debtor in accordance with the provision of the first paragraph of Art. 1260. 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.171 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

3 Castan, 7th Ed., p. 252; see Arts. 538, 2005, et seq., Civil Code. Art. 1179, Spanish Civil Code. 171 Art. 1180, Spanish Civil Code. 169 170

286

EXTINGUISHMENT OF OBLIGATIONS Loss of the Thing Due

Arts. 1259-1261

thing. The co-debtors, guarantors and sureties shall be released.172 Effects of Consignation. — The effects of consignation may be summarized as follows: (1) If the creditor accepts the thing or amount deposited without contesting the validity or efficacy of the consignation, it is logical that the obligation is cancelled or extinguished. (2) If the creditor contests the validity or efficacy of the consignation, the result is a litigation. The same is true if the creditor is not interested or is not known or is absent. The result is also a litigation. If during the trial on the merits of the case, the plaintiffdebtor is able to establish that all of the requisities of a valid and effective consignation had been complied with, the obligation is extinguished or cancelled. Idem; Effect of withdrawal. — We must distinguish between the effect of a withdrawal by the debtor of the object or amount deposited when made before the creditor has accepted the consignation or before a judicial declaration that the consignation has been properly made,173 and a withdrawal made with the consent of the creditor.174 In the first, the obligation remains in force;175 in the second, the creditor loses every preference which he may have over the thing. Solidary co-debtors, guarantors and sureties, however, shall be released.176 Section 2. — Loss of the Thing Due Concept. — In its strict sense, “loss of the thing due” means that the thing which constitutes the object of the obligation perishes, or goes out of the commerce of man, or disappears in such a way that its existence is unknown or it cannot be recovered.177 In its broad sense, it means impossibility of compliance with the obligation

Art. 1181, Spanish Civil Code, in modified form. Art. 1260, par. 2, Civil Code. 174 Art. 1261, Civil Code. 175 Art. 1260, par. 2, Civil Code. 176 Art. 1261, Civil Code. 177 Art. 1189, No. 2, Civil Code. 172 173

287

Art. 1262

OBLIGATIONS

through any cause.178 In other words, it is synonymous with what other codes term “impossibility of performance.’’179 This is the sense in which it is understood in this section of the Civil Code. 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.180 Effect of Loss in Determinate Obligations To Give. — According to the first paragraph of the above article, an obligation to give a determinate thing will be extinguished if the thing should be lost or destroyed without the fault of the debtor and before he has incurred in delay.181 It is evident from this rule that before the loss of the thing due will result in the extinguishment of the obligation, it is necessary that the following requisites must concur: (1)

The thing which is lost must be determinate.182

(2) The thing is lost without any fault of the debtor. If the thing is lost through the fault of the debtor, the obligation is not extinguished; it is simply converted into an obligation to indemnify the creditor for damages.183 (3) The thing is lost before the debtor has incurred in delay. If the thing is lost after the debtor has already incurred in delay,

4 Sanchez Roman 442. Ibid. For extended discussion — see 8 Manresa, 5th Ed., Bk. 1, pp. 650-652. 180 Art. 1182, Spanish Civil Code, in modified form. 181 For illustrative cases — see Crame vs. Gonzaga, 10 Phil. 646; Insular Government vs. Bingham, 13 Phil. 558; Bishop of Jaro vs. De la Peña, 26 Phil. 144; Lizares vs. Hernaez, 40 Phil. 98; Obejera vs. Iga Sy, CA, 43 Off. Gaz. 121; Cruz vs. Valero, 89 Phil. 260; Bachrach Motor Co. vs. Lee Tay and Lee Chay, 90 Phil. 540; Ramcar vs. Dizon, CA, 51 Off. Gaz. 3507. 182 See Lawyers Coop. Pub. Co. vs. Tabora, 13 SCRA 762; Rep. of the Phil. vs. Grijaldo, 15 SCRA 681. 183 Art. 1170, Civil Code. 178 179

288

EXTINGUISHMENT OF OBLIGATIONS Loss of the Thing Due

Art. 1262

the rule is that such debtor can still be held liable for indemnity for damages.184 Idem; Effect of fortuitous event. — The rule declared in the first paragraph of Art. 1262 must always be read in relation to the rule declared in Art. 1174 regarding the effect of the failure of the debtor to comply with his obligation through a fortuitous event. If the thing which constitutes the object of the obligation is lost or destroyed through a fortuitous event, the debtor cannot be held responsible.185 In other words, the obligation is extinguished.186 Thus, where some of the goods deposited in the defendant’s warehouse were looted and the rest was taken by the Japanese forces during the war, there would be no legal way of holding the defendant responsible, because it is evident that the loss was due to a fortuitous event.187 Similarly, where the launch or casco which the defendant was supposed to deliver to the plaintiff was lost due to a defect of the casco which could not have been foreseen, he cannot be held liable.188 But where the defendant purchased a truck from the plaintiff before the outbreak of the last war, payable in monthly installments, and was commandeered by the USAFFE during the war, the defendant’s obligation is not extinguished, because in the first place, the truck became the property of the defendant when it was delivered to him, and consequently, he must bear the loss; in the second place, he could have filed a war damage claim with the United States government and he would have been paid. His negligent omission cannot, therefore, be imputed to the plaintiff who was no longer the owner of the vehicle.189 Idem; id. — Exceptions. — There are, however, certain exceptions to the rule that the debtor cannot be held liable if the thing which constitutes the object of the obligation is lost or destroyed through a fortuitous event. They are: (1) When by law, the debtor is liable even for fortuitous events;190

Arts. 1170, 1165, par. 3, Civil Code. Art. 1174, Civil Code. 186 Art. 1262, Civil Code. 187 Cruz vs. Valero, 89 Phil. 260. 188 Ramcar vs. Dizon, CA, 51 Off. Gaz. 3507. 189 Bachrach Motor Co. vs. Lee Tay and Lee Chay, 90 Phil. 540. 190 Arts. 1174, 1262, par. 2, Civil Code. 184 185

289

Art. 1263

OBLIGATIONS

(2) When by stipulation of the parties, the debtor is liable even for fortuitous events;191 (3) When the nature of the obligation requires the assumption of risk;192 (4) When the loss of the thing is due partly to the fault of the debtor;193 (5) When the loss of the thing occurs after the debtor has incurred in delay;194 (6) When the debtor promised to deliver the same thing to two or more persons who do not have the same interest;195 (7) When the obligation to deliver arises from a criminal offense;196 and (8)

When the obligation is generic.197

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.198 Effect of Loss in Generic Obligations To Give. — If the obligation is generic in the sense that the object thereof is designated merely by its class or genus without any particular designation or physical segregation from all others of the same class, the loss or destruction of anything of the same kind even without the debtor’s fault and before he has incurred in delay will not have the effect of extinguishing the obligation.199 This rule which is stated in Art. 1263 is based upon the principle that the genus of a thing can never perish (genus nunquam peruit). Consequently, the debtor can still be compelled to deliver a thing which must be neither of

Ibid. Art. 1262, par. 1, Civil Code. 193 Ibid. See Tan Chiong Sian vs. Inchauti & Co., 22 Phil. 152; Limpangco vs. Yangco Steamship Co., 34 Phil. 597. 194 Arts. 1262, par. 1, 1165, par. 3, Civil Code. 195 Art. 1165, par. 3, Civil Code. 196 Art. 1268, Civil Code. 197 Art. 1263, Civil Code. 198 New provision. 199 Art 1263; see discussion under Arts. 1163, et seq., Civil Code. 191 192

290

EXTINGUISHMENT OF OBLIGATIONS Loss of the Thing Due

Arts. 1264-1265

superior nor inferior quality.200 Thus, where the obligation consists in the payment of money201 or in the delivery of any other generic or indeterminate thing such as several cavans of rice202 or several piculs of sugar203 or several tons of copra,204 the failure of the debtor to make the payment or to effect the delivery even by reason of a fortuitous event shall not relieve him of his liability. There is, however, a sort of exception to the rule in the case of a generic obligation whose object is a particular class or group with specific or determinate qualities, such as the cattle or horses of a certain ranch or the sugar in a certain warehouse. Thus, if A obligated himself to deliver before the end of 1979 fifty heads of cattle to B with the understanding that such fifty heads of cattle shall be taken from a certain ranch and all of the cattle in that ranch are wiped out by an epidemic, the obligation is extinguished. In reality, such obligation is determinate in character.205 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.206 Effect of Partial Loss. — The rule stated in the above article is self-explanatory. Whether or not the partial loss or destruction of the thing is of such importance that it would be tantamount to a complete loss or destruction, shall depend upon the sound discretion of the court. Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of Article 1165. This presumption does not apply in case of earthquake, flood, storm or other natural calamity.207 Art. 1246, Civil Code. Reyes vs. Caltex, 47 Off. Gaz 1193; Phil. Long Distance Co. vs. Jeturian, 97 Phil. 781. 202 Soriano vs. De Leon, 48 Off. Gaz. 2245. 203 Yu Tek Co. vs. Gonzalez, 29 Phil. 384; Lacson vs. Diaz, 47 Off. Gaz. 337. 204 Bunje Corp. vs. Elena Camenforte & Co., 48 Off. Gaz. 3377. 205 8 Manresa, 5th Ed., Bk. 1, p. 653. 206 New provision. 207 Art. 1183, Spanish Civil Code, in modified form. 200 201

291

Art. 1266

OBLIGATIONS

Rule If Thing Is in Debtor’s Possession. — According to the above article, if the thing which constitutes the object of a determinate obligation is lost in the possession of the debtor, there arises a disputable presumption that the loss was due to his fault. In such case, the obligation is not extinguished; in other words, the debtor is still liable to the creditor for damages. Therefore, the burden of proof of absence of fault corresponds to the debtor. This must be without prejudice to the rule stated in the third paragraph of Art. 1165 to the effect that 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 any fortuitous event until he has effected the delivery. Hence, in such cases, even if the debtor or obligor can prove that the loss or destruction of the thing in his possession was not through his fault or that it was through a fortuitous event, he shall still be liable to the creditor or obligee for damages. The presumption, however, does not apply in case of earthquake, flood, storm or other natural calamity. This qualification was added by the Code Commission to the original rule stated in Art. 1183 of the Spanish Civil Code, because “in case of a natural calamity, lack of fault is more likely.’’ 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.208 Effect of Impossibility of Performance in Obligations To Do. — The above article is applicable only to obligations to do, as distinguished from Art. 1262, which is applicable only to obligations to give. However, in order that the impossibility of compliance with the obligation shall result in its extinguishment, practically the same requisites prescribed by Art. 1262 are also prescribed in this article. Consequently, the prestation constituting the object of the obligation must have become legally or physically impossible of compliance without the fault of the obligor and before he has incurred in delay, otherwise, the obligation shall be converted into one of indemnity for damages. In addition, the impossibility must have occurred after the constitution of the obligation; otherwise, if 208

Art. 1184, Spanish Civil Code, in modified form.

292

EXTINGUISHMENT OF OBLIGATIONS Loss of the Thing Due

Art. 1266

it was present before the obligation was constituted, there would be an obligation which would be ineffective from its inception. The article distinguishes between two causes of impossibility of the prestation by considering the source of such impossibility. It may arise from the law, although physically it may be possible of performance, or it may arise from a fact which renders performance impossible, although no law is violated. In both cases, the obligor is released from his obligation.209 The first (legal impossibility) may be direct, when the law prohibits the performance or execution of the work agreed upon, as where it is immoral or dangerous; or it may be indirect, as where the law imposes duties of a superior character upon the obligor which are incompatible with the work agreed upon, although the latter may be perfectly licit, as where the obligor is drafted for military service or for a civil function. The second (physical impossibility), on the other hand, arises principally from the death of the obligor, when the act to be performed requires his personal qualifications, or from the death of the obligee, when the act can be of possible benefit only to him. In one and the other case, both the obligation and the right, respectively, are intransmissible, and consequently, are extinguished by the mere fact of death. Aside from these absolute forms of extinction, physical impossibility may also arise from mere accident, or from the acts of the debtor himself in which there is no fault, or from the acts of third persons affecting the debtor’s capacity to execute the work agreed upon.210 Idem; Effect. — When the prestation which constitutes the object of the obligation becomes legally or physically impossible without the fault of the obligor, according to Art. 1266, such obligor is released from the obligation. Thus, where a contract is entered into between the creditor and the principal debtor without the knowledge and consent of the surety which made it impossible for such surety to comply with his promise, it is clear that under Art. 1266 the surety can no longer be held liable, considering the fact that the compliance with the obligation has become impossible without any fault on his part.211 Similarly, where the obligor was unable

8 Manresa, 5th Ed., Bk. 1, p. 661. Ibid., pp. 661-663. 211 House vs. De la Costa, 63 Phil. 74. 209 210

293

Art. 1266

OBLIGATIONS

to comply with his obligation to reconstruct certain apartments including a movie house because of the refusal of the City Engineer to issue the necessary building permit due to the plan of the Urban Planning Commission to widen the street adjoining the lots where such buildings were to be constructed, he cannot be held liable for breach considering the fact that it was legally impossible for him to comply with the obligation.212 The same is true where compliance with the prestation which constitutes the object of the obligation will prove dangerous to life or property.213 The application of this rule is even more evident in those obligations where the prestation had to be performed during the Japanese occupation because of the certain conditions of peace and order then prevailing in the country.214 Labayen vs. Talisay-Silay Milling Co. 52 Phil. 440 Plaintiff and defendant entered into a contract whereby it was agreed among other things that the latter shall extend its railroad from its sugar central to a certain hacienda. Defendant, however, failed to comply with the obligation because the extension of the railroad would be very costly and dangerous to life and property by reason of the contour of the land through which the said railroad would be constructed. The question now is — is there a breach of contract which would render the defendant liable for damages? The Supreme Court held: “It is elemental that the law requires the parties to do what they have agreed to do. If a party charges himself with an obligation possible to be performed, he must abide by it unless performance is rendered impossible by the act of God, the law, or the party. A showing of mere inconvenience, unexpected impediments, or increased expenses is not enough. Equity cannot relieve from bad bargains simply because they are such. So one must answer in damages where the impossibility is only so in fact. “The foregoing are familiar principles found in the American and English law of contracts. The civil law on the

Tabora vs. Lazatin, G.R. No. L-5245, May 29, 1953. To the same effect: Theatres Supply Corp. vs. Malolos, CA, 48 Off. Gaz. 1803. 213 Labayen vs. Talisay-Silay Milling Co., 52 Phil. 440. 214 Castro vs. Longa, 89 Phil. 581. To the same effect: Santos vs. Sec. of Agriculture, 48 Off. Gaz. 3368. 212

294

EXTINGUISHMENT OF OBLIGATIONS Loss of the Thing Due

Art. 1267

subject of obligations is not essentially different. Article 1272 (now Art. 1348) of the Civil Code provides: ‘impossible things or services cannot be the subject matter of contracts.’ And Article 1184 (now Art. 1266) of the same Code provides: “The debtor shall also be relieved from obligations which consist in the performance of an act if fulfillment of the undertaking becomes legally or physically impossible.’’ “May one obligate himself to do something which, when accomplished, will prove to be dangerous to life and property? We doubt it. Take the contract in question as an example. It was a general contract of the form used by the central and various proprietors of sugarcane field. It was intended to be limited in particular application to haciendas not impeded by physical impossibility. The contract was qualified by an implied condition which, if given practical effect, results in absolving the central from its promise. Not to sanction an exception to the general rule would run counter to public policy and the law by forcing the performance of a contract undesirable and harmful.’’ (8 Manresa’s Codigo Civil Español, p. 355.)

Idem; Effect in obligations not to do. — The Code only speaks of legal and physical impossibility with respect to obligations to do because it is very seldom that impossibility of performance may arise in obligations not to do. There may, however, be rare or exceptional cases in which legal or physical impossibility will occur as when the obligor is compelled to do that which he had obligated himself to refrain from performing. In such cases, his obligation is extinguished applying the same principle invoked in Art. 1266.215 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.216 Effect of Relative Impossibility. — The general rule is that impossibility of performance of an obligation to do shall release the obligor. However, when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns 215 216

8 Manresa, 5th Ed., Bk. 1, p. 664. New provision.

295

Art. 1268

OBLIGATIONS

out to be so difficult as to have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible.217 Art. 1267 contemplates of “service’’ which has become so difficult. Taking into consideration the rationale for this provision, the word “service’’ should be understood as referring to the “performance’’ of the obligation. “Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the contract be for future service with future unusual change. According to Sen. Arturo M. Tolentino, Art. 1267 states in our law the doctrine of unforeseen events. This is said to be based on the discredited theory of “rebus sic stantibus’’ in public international law. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. Considering practical needs and the demands of equity and good faith, the disappearance of the basis of the contract gives rise to a right to relief in favor of the party prejudiced.’’ (Naga Telephone Co., et al. vs. Court of Appeals, et al., Feb. 24, 1994, 48 SCAD 539.) 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.218 Rule If Obligation Arises from Criminal Offense. — The rule stated in Art. 1268 is applicable not only to the case where there is an obligation of restitution of a certain and determinate thing on the part of the person criminally liable as provided for in the Penal Code, but also to the case where such obligation arises by virtue of reparation or indemnification. In all of these cases, there is no question that the debt proceeds from a criminal offense. Report of the Code Commission, p. 133. It seems that the doctrine enunciated by the Supreme Court in the cases of Labayen vs. Talisay-Silay Milling Co., 52 Phil. 440, and Castro vs. Longa, 89 Phil. 581 (supra), can be justified by an application of the principle now enunciated in this article. 218 Art. 1185, Spanish Civil Code. 217

296

EXTINGUISHMENT OF OBLIGATIONS Loss of the Thing Due

Art. 1269

Furthermore, the rule is applicable not only to the persons who are principally liable, but also to those who are subsidiarily liable. In all of these cases, if the thing is lost, the debtor shall not be exempted from the payment of the price of the thing, whatever may be the cause for the loss. The only case where he is relieved of the severity of the precept is when he had offered the thing to the obligee and the latter had refused to accept it without justification.219 The offer referred to in this article should not be confused with consignation inasmuch as the latter refers only to the payment of the obligation, while the former refers to the extinguishment of the obligation through loss by a fortuitous event. In consignation, the offer is but a step to the payment; in this article, it is essential that the creditor should refuse to accept the thing without justification in order that the debtor may be released from liability in case of loss through a fortuitous event.220 When the offer is made by the debtor and the creditor refuses to accept it without justification, he may choose either of two courses: (1) he may make a consignation of the thing and thereby completely relieve himself of further liability, or (2) he may keep the thing in his possession, in which case, the obligation shall still subsist but with this difference — that if the thing is lost through a fortuitous event, Arts. 1262 and 1265, and not Art. 1268, shall govern. It must, of course, be noted that this Article (1268) can have no application to those cases where an offer is not possible, since such offer by the debtor is an essential requisite.221 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 the third persons by reason of the loss.222 Effect of Extinguishment of Obligation. — According to the above article, if the obligation is extinguished by the loss of the thing, all of the rights of action which the debtor may have against third persons by reason of the loss are transmitted by operation of 8 Manresa, 5th Ed., Bk. 1, pp. 666-668. Ibid. 221 Ibid. 222 Art. 1186, Spanish Civil Code. 219 220

297

Art. 1269

OBLIGATIONS

law to the creditor. Such transmission is made from the moment of the extinguishment of the obligation. The application of the precept is illustrated in a case where the object which is due is insured and by reason of some cause is lost or destroyed. In such case, the creditor can collect the indemnity from the insurer. It is also illustrated by a case where the object is expropriated. In such case, the creditor can collect the compensation which is due by reason of the expropriation.223 Section 3. — Condonation or Remission of the Debt Concept. — Remission is an act of liberality by virtue of which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result of which it is extinguished in its entirety or in that part or aspect of the same to which the remission refers.224 In the terse language of Sanchez Roman, it is the gratuitous abandonment by the creditor of his right.225 Requisites. — In order that there will be a remission or condonation which will result in the total or partial extinguishment of the obligation, it is essential that the following requisites must concur: first, it must be gratuitous; second, it must be accepted by the obligor; and third, the obligation must be demandable. Kinds. — Remission or condonation may be classified as follows: (1) As to form, remission may be express or implied. It is express when it is made in accordance with the formalities prescribed by law for donations; it is implied when, although it is not made in accordance with the formalities prescribed by law for donations, it can be deduced from the acts of the obligee or creditor.226 (2) As to extent, remission may be total or partial. It is total when the entire obligation is extinguished; it is partial when it refers only to the principal or to the accessory obligation or to an aspect thereof which affects the debtor as for instance solidarity.

8 Manresa, 5th Ed., Bk. 1, pp. 670-672. 8 Manresa, 5th Ed., Bk. 1, p. 673. 225 4 Sanchez Roman 422. 226 8 Manresa, 5th Ed., Bk. 1, pp. 675-676. 223 224

298

EXTINGUISHMENT OF OBLIGATIONS Condonation or Remission of the Debt

Art. 1270

(3) As to constitution, remission may be inter vivos or mortis causa. The first refers to that which is constituted by agreement of the obligee and the obligor in which case it partakes of the nature of a donation inter vivos;227 the second, on the other hand, refers to that which is constituted by last will and testament in which case it partakes of the nature of a donation mortis causa.228 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 kinds shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donations.229 Gratuitous Character of Remission. — The most essential characteristic of remission is that it is gratuitous.230 Consequently, before it can be said that an obligation has been condoned by the creditor, it is essential that it must be an act of pure liberality of the creditor for the benefit of the debtor; in other words, the creditor should not have received any price or equivalent from the debtor as a result of his act in renouncing the enforcement of the obligation. Necessity of Acceptance by Debtor. — Because in reality the remission or condonation of an obligation is by its very nature a donation, the Code requires that it must be accepted by the debtor.231 This requisite is expressly declared in the first paragraph of Art. 1270; it can also be clearly inferred from the provision of the second paragraph of the said article which states that it shall be subject to the rules which govern inofficious donations.232 The question arises as to whether remission is a unilateral or a bilateral act. Planiol and Valverde believe that it is by its very nature a bilateral act, and this is rightly so, because our Code requires its acceptance by the debtor, and besides, this view is in conformity with the rule which subjects express remission to the See Arts. 734, 745, 746, Civil Code. See Arts. 935, 936, 937, Civil Code. 229 Art. 1270, par. 1, Civil Code. 230 Ibid. 231 Ibid. 232 3 Castan, 7th Ed., p. 265. 227 228

299

Art. 1270

OBLIGATIONS

forms of donations.233 Thus, where a proffer was made by the plaintiff to the defendant that in the event the latter loses a pending case with his wife and, after the adjudication of the conjugal property, what is left will not be sufficient for his livelihood, he (the plaintiff) will be pleased to write off as a bad debt the balance of a certain indebtedness, and the proffer was accepted, it is clear that such proffer constitutes a binding obligation.234 Applicability of Rules on Donations. — It is not only with regard to the necessity of acceptance by the debtor that the rules on ordinary donations are applicable.235 There are other rules which are equally applicable, such as those governing the forms of donations if the remission is express,236 those governing the extent or amount of the donation,237 and those governing the revocation of donations.238 This is not only deducible from the very nature of remission as an act of pure liberality, it is also expressly declared by the second paragraph of Art. 1270. Idem; Extent of remission. — Whether express or implied, the extent of the remission or condonation shall be governed by the rules regarding inofficious donations.239 Hence, the following rules are applicable: “Art. 750, C.C. The donation may comprehend all the present property of the donor, or part thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the support of himself, and of all relatives who, at the time of the acceptance of the donation, are by law entitled to be supported by the donor. Without such reservation, the donation shall be reduced on petition of any person affected.” “Art. 751, C.C. Donations cannot comprehend future property. “By future property is understood anything which the donor cannot dispose of at the time of the donation.’’

Ibid., pp. 265-266. Dalupan vs. Harden, 90 Phil. 417. 235 Arts. 734, 745, 746, Civil Code. 236 Arts. 748, 749, Civil Code. 237 Arts. 750, 751, 752, Civil Code. 238 Arts. 760-773, Civil Code. 239 Art. 1270, par. 2, Civil Code. 233 234

300

EXTINGUISHMENT OF OBLIGATIONS Condonation or Remission of the Debt

Art. 1270

“Art. 752, C.C. The provision of Article 750 notwithstanding, no person may give or receive, by way of donation, more than he may give or receive by will. “The donation shall be inofficious in all that it may exceed this limitation.” “Art. 771, C.C. Donations which in accordance with the provisions of Article 752, are inofficious, bearing in mind the estimated net value of the donor’s property at the time of his death, shall be reduced with regard to the excess, but this reduction shall not prevent the donations from taking effect during the life of the donor, nor shall it bar the donee from appropriating the fruits. “For the reduction of donations the provisions of this Chapter and of Articles 911 and 912 of this Code shall govern.’’

Consequently, if the estate of the creditor consists of credits, and there is a remission or condonation of all of such credits, it is evident that there would be a violation of the rule stated in Art. 750 of the Code, in which case the remedy provided for in the said article would be available. If the remission comprehends future debts, it is also evident that it shall be void, not only because it lacks the requisite of demandability, but also because it is contrary to the precept contained in Art. 751 that donations cannot comprehend future property. And finally, if the remission is inofficious in accordance with the general precept contained in Art. 752, the remedy provided for in Art. 771 by virtue of which the compulsory heirs of the creditor-donor can proceed against the debtor-donee for the reduction or even suppression of the remission, would also be available.240 Idem; Form of express remission. — According to the second paragraph of Art. 1270, express remission or condonation must comply with the forms of donations. This rule is, of course, logical considering the fact that the remission or condonation of a debt is in reality a donation. Hence, the following provisions are applicable: “Art. 748, C.C. The donation of a movable may be made orally or in writing.’’

240

8 Manresa, 6th Ed., Bk 1, pp. 679-680.

301

Art. 1270

OBLIGATIONS

“An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated.’’ “If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in writing. Otherwise, the donation shall be void.” “Art. 749, C.C. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy.’’ “The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor.’’ “If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments.”

Consequently, if the obligation to give which is expressly condoned involves personal property, the provision of Art. 748 shall apply with the qualification that the delivery of personal property, if the remission is verbal, shall not be required since there is no transfer of property but merely a remission or condonation of an obligation to give personal property. On the contrary, in acts of liberality of this sort the debtor is relieved from making a conveyance of the property.241 It must also be noted that with respect to express remission of an obligation to give personal property, acceptance by the debtor maybe implied or tacit, provided that the value of the debt which is condoned is not more than five thousand pesos. If the obligation to give which is expressly condoned involves immovable property, the provision of Art. 749 shall apply. In obligations to do or not to do, the form of the express remission must be in accordance with the less solemn formalities established in Art. 748 with, of course, the necessary qualification regarding delivery.242 It must also be noted that the fact that the obligation which is condoned appears in a public document does not necessarily mean

241 242

Ibid. Ibid.

302

EXTINGUISHMENT OF OBLIGATIONS Condonation or Remission of the Debt

Arts. 1271-1272

that the remission must also be embodied in a document of the same character.243 Idem; Form of implied remission. — It will be observed that the Code is silent with respect to the form of implied remission. Nevertheless, there is no question that it may be deduced from any act or acts of the creditor which clearly show the intent to condone the obligation. As in the case of express remission, there must be acceptance by the obligor or debtor. Such acceptance may be express or implied in any case.244 Examples of implied remission are those regulated by Arts. 1271 to 1274 of the Code. There is, however, an interesting question that arises in connection with implied remission. Let us assume that the remission is expressly made, but because it fails to comply with the forms prescribed by Art. 748 or Art. 749, it cannot properly take effect as an express remission. Can it be enforced as a tacit remission? The question must be resolved in the negative. Otherwise, the purpose of the last sentence of Art. 1270 would be defeated. Hence, an express remission which is formally defective cannot affect the obligee or creditor, unless new or other acts from which remission may be deduced should confirm the purpose expressed in the former.245 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.246 Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it

Ibid. Ibid. 245 Ibid. As a matter of fact because of the provision of the last sentence of Art. 1270, we believe that the only possible cases implied would be those contemplated in Arts. 1271, 1272 and 1274 of the Civil Code. 246 Art. 1188, Spanish Civil Code. 243 244

303

Arts. 1271-1272

OBLIGATIONS

shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved.247 Effect of Delivery of Evidence of Credit to Debtor. — Art. 1271 enunciates the rule that if the creditor voluntarily delivers the private document evidencing the credit to the debtor, there is a presumption that he renounces his right of action against the latter for the collection of the said credit, From an examination of the provision, it is clear that the following requisites must concur in order that the presumption will arise: first, that the document evidencing the credit must have been delivered by the creditor to the debtor; second, that the document must be a private document; and third, that the delivery must be voluntary. The second requisite is, of course, logical because if the document is public the presumption does not arise considering the fact that the public character of the document would always protect the interest of the creditor.248 With regard to the third requisite, it must be observed that, according to Art. 1272, whenever the private document evidencing the credit is found in the possession of the debtor, there arises a presumption that the creditor delivered it to him voluntarily, unless the contrary is proved. Thus, where the promissory note evidencing the credit is already in the possession of the debtor, there arises a disputable presumption to the effect that the creditor must have delivered it voluntarily to him; consequently, in the absence of proof to the contrary, an implied or tacit renunciation of the debt may be presumed.249 Subsequently, however, the heirs of the creditor may try to impugn or nullify the renunciation or condonation by establishing that it is inofficious in conformity with the remedy which is available to them under Art. 771 of the Code. In such case, according to the second paragraph of Art. 1271, the debtor or his heirs may uphold it by proving that the delivery of the private document was made because the debt had already been paid. This is, of course, ridiculous, because under this rule, we would witness the absurd spectacle of a debtor or his heirs trying to uphold a presumption of remission,

Art. 1189, Spanish Civil Code. 8 Manresa, 5th Ed., Bk. 1, p. 684. 249 Veloso vs. Masa, 10 Phil. 279; Lopez vs. Tambunting, 33 Phil. 236. 247 248

304

EXTINGUISHMENT OF OBLIGATIONS Condonation or Remission of the Debt

Arts. 1273-1274

when it is claimed that such remission is inofficious, by proving that the debt had already been paid when as a matter of fact it is not.250 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.251 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.252 Effect of Remission in General. — The effect of remission is to extinguish the obligation in its entirety or in the part or aspect thereof to which the remission refers. If the obligation is joint, the remission can only affect the share of the creditor who makes the remission and the corresponding share of the debtor in whose favor the remission is made, since the peculiar feature of this type of obligation is the division of the credit or of the debt into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another.253 If the obligation is solidary, the provisions of Arts. 1215, 1219 and 1220 of the Code shall govern. Idem; Effect upon accessory obligations. — Under Art. 1273, if the remission refers to the principal obligation, all the accessory obligations are extinguished, since the latter depend upon the former for their existence or efficacy. However, if the remission refers to the accessory obligations, the principal obligation continues to subsist. Idem; id. — Rule in pledge. — According to 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

250 3 Castan, 7th Ed., p. 268. Under Sec. 5(h) and (k), Rule 131 of the New Rules of Court, the rule is that if the private document evidencing the credit is in the possession of the debtor, there arises a disputable presumption to the effect that the debt has already been paid. 251 Art. 1190, Spanish Civil Code. 252 Art. 1191, Spanish Civil Code, in amended form. 253 Art. 1208, Civil Code.

305

Art. 1275

OBLIGATIONS

in the possession of the debtor or of a third person who owns the thing.254 Like the presumptions established in Arts. 1271 and 1272, the presumption established in this article, according to the opinion of a majority of commentators, Manresa among them, is disputable.255 The principal obligation for which the pledge is a security is, of course, not affected.256 Thus, if A pledged his watch to B as security for an indebtedness of P100, and subsequently, the watch is found in his possession, there arises a presumption of remission of the accessory obligation of pledge. The debt of P100, however, is not affected. B may disprove the remission by proving that he gave the watch temporarily to the debtor to be repaired or that A was able to take possession thereof without his consent or authority. 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.257 Concept of Confusion. — With the provision of Art. 1275 as basis, confusion maybe defined as the merger of the characters of creditor and debtor in one and the same person by virtue of which the obligation is extinguished. The classic definition, however, is that of Sanchez Roman. According to the eminent commentator, confusion may be defined as the meeting in one and the same person of the qualities of creditor and debtor with respect to one and the same obligation.258 By its very nature, confusion or merger of rights will necessarily result in the extinguishment of the obligation because of the impossibility of enforcing it since it would certainly be absurd for a person to enforce a claim against himself. Besides, the purpose or end for which the obligation is constituted is realized when the qualities of creditor and debtor are merged in one and the same person.259 See Art. 2110, Civil Code. Manresa, 5th Ed., Bk. 1, p. 697. Sanchez Roman, however, maintains that it is conclusive (Vol. 4, p. 462). 256 Art. 1273, Civil Code. 257 Art. 1192, Spanish Civil Code, in modified form. 258 Art. 1192, Spanish Civil Code, in modified form. 259 4 Sanchez Roman 461. 254 255

306

EXTINGUISHMENT OF OBLIGATIONS Confusion or Merger of Rights

Art. 1276

Requisites. — In order that there will be a confusion of rights which will result in the extinguishment of the obligation, it is essential that the following requisites must concur: (1) that the merger of the characters of creditor and debtor must be in the same person;260 (2) that it must take place in the person of either the principal creditor or the principal debtor;261 and (3) that it must be complete and definite.262 The requisite that the merger of rights of creditor and debtor must be complete and definite does not mean that the extinguishment of the obligation should be complete or total in character; it merely means that whether the merger refers to the entire obligation or only a part thereof, it must be of such a character that there will be a complete and definite meeting of all of the qualities of creditor and debtor in the obligation or in the part or aspect thereof which is affected by the merger.263 Kinds. — Confusion or merger of rights may be classified as follows: (1) As to cause or constitutions: Inter vivos or mortis causa — inter vivos, when it is constituted by agreement of the parties, mortis causa, when it is constituted by succession. (2) As to extent or effect: Total or partial — total, if it results in the extinguishment of the entire obligation, partial if it results in the extinguishment of only a part of the obligation. There are two cases where the extinguishment is merely partial — first, when the confusion or merger refers only to a part of the obligation; and second, when the obligation is joint.264 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.265

Art. 1278, Civil Code. Art. 1276, Civil Code. 262 Testate Estate of Mota vs. Serra, 40 Phil. 464. 263 For illustrative cases of partial confusion or merger — see Sochayseng vs. Trujillo, 31 Phil. 153; Yek Ton Lin Fire & Marine Insurance Co. vs. Yusingco, 46 Phil. 473. 264 3 Castan, 7th Ed., p. 269. 265 Art. 1193, Spanish Civil Code. 260 261

307

Art. 1277

OBLIGATIONS

Effect upon Accessory Obligations. — Under Art. 1276 in relation to Art. 1275, if the confusion or merger of rights will take place in the person of either the principal creditor or the principal debtor, the effect is the extinguishment, not only of the principal obligation, but even of the accessory obligation. This is, of course, logical because of the principle that the accessory obligation cannot exist without the principal obligation.266 Consequently, guarantors shall be benefited by the confusion of rights.267 If, on the other hand, the confusion or merger will take place in the person of a subsidiary creditor or a subsidiary debtor, such as a guarantor, it is evident that there is no extinguishment of the principal obligation;268 there will be only a substitution of creditor or debtor. If there are several guarantors and the characters of creditor and guarantor are merged in the person of any of the guarantors, such guarantor-creditor can demand the performance of the obligation from the debtor, and in case of default, even from his former co-guarantors. If the characters of debtor and guarantor are merged, the creditor can demand the performance of the obligation directly from the guarantor.269 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.270 Effect upon Collective Obligations. — The rule stated in the above article necessarily follows from the nature and character of a joint obligation. Under Art. 1208 of the Code, which we have already taken up in a previous chapter, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors. This presumption of division is the most essential characteristic of joint obligations. It is but logical that the confusion which takes place, let us say, in one of the debtors shall only refer to the share which corresponds to him. Consequently, there is merely a partial extinguishment of the debt. The creditor can still proceed against the other debtors.271

3 Castan, 7th Ed., p. 269. Art. 2176, Civil Code. 268 Ibid. 269 8 Manresa, 5th Ed., Bk. 1, p. 707. 270 Art. 1194, Spanish Civil Code. 271 8 Manresa, 5th Ed., Bk. 1, pp. 709-710. 266 267

308

EXTINGUISHMENT OF OBLIGATIONS Compensation

Art. 1278

With regard to solidary obligations, however, the provision of Art. 1215 shall apply. In other words, the entire obligation is extinguished, without prejudice to the rights and obligations of the solidary creditors and solidary debtors among themselves. Effect of Revocation of Confusion. — If the confusion or merger is constituted by agreement, it is evident that it may be revoked by the presence of any of the causes for the rescission, annulment, nullity or inexistence of contracts or by some special cause such as redemption. If it is constituted by inheritance, it may be revoked by the nullity of the will, or by the subsequent appearance of an heir with a better right, or by any other cause which will nullify the merger. In all of these cases, the original obligation, as a general rule, is recreated in the same form and under the same condition in which it was found before the merger took place. Furthermore, the period which has elapsed from the moment the merger took place until its revocation cannot be computed in the determination of the period of prescription, because during such period the creditor could not possibly have made a demand for the fulfillment of the obligation.272 Section 5. — Compensation Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.273 Concept of Compensation. — According to Castan, compensation may be defined as a mode of extinguishing in their concurrent amount those obligations of persons who in their own right are creditors and debtors of each other.274 According to Manresa, it may be defined as a figurative operation of weighing two obligations simultaneously in order to extinguish them to the extent in which the amount of one is covered by the amount of the other.275 Compensation is very similar to payment, both from the theoretical and the practical point of view. In both cases, the obliga-

Ibid., pp. 700-701. Art. 1195, Spanish Civil Code. 274 3 Castan, 7th Ed., p. 270. 275 8 Manresa, 5th Ed., Bk. 1, p. 713. 272 273

309

Art. 1278

OBLIGATIONS

tions are extinguished because their economic object or purpose is realized. Compensation, however, presents a more convenient and less expensive method of effecting the payments of two obligations. Consequently, it deserves the name of simplified payment (pago abreviado).276 It has a double advantage over payment: first, facility of payment because it takes effect by operation of law; and second, guaranty for the effectivity of the credit, because, otherwise, if the parties will still have to comply with the formalities of ordinary payment, one can easily be prejudiced by fraud or insolvency of the other.277 Idem; Distinguished from payment. — Compensation may be distinguished from payment as follows: (1) The requisites prescribed by law for compensation are different from those prescribed by law for payment. (2) Compensation takes effect by operation of law, while payment takes effect by act of the parties. (3) Capacity to give and to acquire is not necessary in compensation, but it is essential in payment. (4) Compensation is, as a rule, partial, while payment is, as a rule, complete and indivisible.278 Idem; Distinguished from confusion. — Compensation may be distinguished from confusion as follows: (1) As to number of persons, in compensation there must be two persons, who, in their own right, are creditors and debtors of each other; in confusion there is only one person in whom is merged the qualities of creditor and debtor. (2) As to number of obligations, in compensation there must be at least two; in confusion there is only one.279

Ibid., pp. 713-714. 3 Castan, 7th Ed., p. 271. 278 2 Giorgi, Teoria de las Obligaciones, pp. 24-25. 279 Bocobo, Outlines of the Law on Obligations, p. 34. 276 277

310

EXTINGUISHMENT OF OBLIGATIONS Compensation

Art. 1278

Idem; Distinguished from counterclaim. — Compensation may be distinguished from set-off or counterclaim,280 as follows: (1) Compensation requires that the two debts must consist in money, or if the things due are fungibles, they must be of the same kind and quality, but in counterclaim, this is not necessary.281 (2) Compensation, as a general rule, requires that the debts must be liquidated but counterclaim does not.282 (3) Compensation need not be pleaded, while a counterclaim must be pleaded to be effectual.283 Kinds of Compensation. — As to cause, compensation may be: (1) Legal — when it takes effect by operation of law from the moment all of the requisites are present. This is the fixed type which is regulated by Arts. 1278 and 1279 of the Civil Code. (2) Voluntary — when the parties who are mutually creditors and debtors agree to compensate their respective obligations, even though all of the requisites for compensation may not then be present. Giorgi includes under this class the so-called facultative compensation which is effected by a party who is entitled to oppose the compensation because he would be prejudiced thereby. This occurs, for instance, when the obligation of one is with a term, while that of the other is pure, and the former renounces the benefit of the term, consequently making the compensation possible.284

“A counterclaim is any claim for money or other relief which a defending party may have against an opposing party. A counterclaim need not diminish or defeat the recovery sought by the opposing party, but many claim relief exceeding in amount or different in kind from that sought by the opposing party’s claim.’’ (Sec. 6, Rule 6, New Rules of Court) “A counter-claim not set up shall be barred if it arises out of or is necessarily connected with the transaction or occurrence that is the subject matter of the opposing party’s claim.’’ (Sec. 6, Rule 6, New Rules of Court) “A counter-claim not set up shall be barred if it arises out of or is necessarily connected with the transaction or occurrence that is the subject matter of the opposing party’s claim and does not require for its adjudication the presence of third parties of whom the court can not acquire jurisdiction.’’ (Sec. 4, Rule 9, New Rules of Court) 281 Art. 1179, No. 1, Civil Code; Sec. 6, Rule 6, New Rules of Court. 282 Art. 1179, No. 4, Civil Code; Yap Unki vs. Chua Japco, 14 Phil. 602. 283 Yap Unki vs. Chua Japco, 14 Phil. 602. 284 3 Castan, 7th Ed., pp. 272-273; Art. 1282, Civil Code. 280

311

Art. 1279

OBLIGATIONS

(3) Judicial — when it takes effect by judicial decree. This occurs, for instance, where one of the parties to a suit over an obligation has a claim for damages against the other and the former sets it off by proving his right to said damage and the amount thereof.285 As to effect, compensation may be: (1) Total — when the debts to be compensated are equal in amount.286 (2) Partial — when the debts to be compensated are not equal in amount.287 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.288 Requisites of Compensation. — The essential requisites of compensation are: (1) There must be two parties, who, in their own right, are principal creditors and principal debtors of each other;289 (2) Both debts must consist in money, or if the things due are fungibles (consumables), they must be of the same kind and quality;290 Art. 1283, Civil Code. Art. 1281, Civil Code. 287 Ibid. 288 Art. 1196, Spanish Civil Code. 289 Arts. 1278, 1279, No. 1, Civil Code. 290 Art. 1279, No. 2, Civil Code. 285 286

312

EXTINGUISHMENT OF OBLIGATIONS Compensation

(3)

Both debts must be due;291

(4)

Both debts must be liquidated and demandable;292

Art. 1279

(5) There must be no retention or controversy commenced by third persons over either of the debts and communicated in due time to the debtor;293 and (6)

The compensation must not be prohibited by law.294

Idem; As to parties. — The first requisite in order that legal compensation shall take place is that there must be two parties who, in their own right, are principal creditors and principal debtors of each other. In other words, it is necessary: (1) that the parties be mutually creditors and debtors in their own right; and (2) that they must be bound as principals. By virtue of the provision of Art. 1278, it is necessary that the parties must be mutually creditors and debtors in their own right. Consequently, there can be no compensation between the obligations of a legal representative, guardian or administrator incurred in his personal capacity and the obligations of third persons to the person represented, ward or estate under administration, although such obligations may have been incurred by such third persons with the said representative, guardian or administrator acting in his legal capacity. The same can be said with regard to the obligations incurred by the partnership as a juridical person and the individual credits of any one of the partners.295 Thus, where the members of a certain society had secured a judgment against a co-member for a certain amount, the latter cannot interpose the defense that such judgment must be compensated by her claim against the society, because it is clear that the first requisite for legal compensation to take place is not present.296

Art. 1279, No. 3, Civil Code. Art. 1279, No. 4, Civil Code. 293 Art. 1279, No. 5, Civil Code. 294 Arts. 1287, 1288, Civil Code; 3 Castan, 7th Ed., pp. 274-275. 295 8 Manresa, 5th Ed., Bk. 1, pp. 717-718. 296 Escano vs. Heirs of Escano, 28 Phil. 73. 291 292

313

Art. 1279

OBLIGATIONS

Garcia vs. Lim Chiu Sing 59 Phil. 562 The defendant, who is indebted to the Mercantile Bank of China for P9,105.17, contends in this action brought by the Bank against him for payment of the debt that such debt must be compensated by his shares of stock with the Bank. The Supreme Court, however, held: “According to the weight of authority, a share of stock or the certificate thereof is not an indebtedness and, therefore, it is not a credit. Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of American courts, repeatedly asserted in the broadest terms, that the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. (4 Corpus Juris, p. 383, Sec. 505.) Therefore, the defendant-appellant Lim Chiu Sing, not being a creditor of the Mercantile Bank of China, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation. (Art. 1195 — now Art. 1278, Civil Code.)’’ Problem — “B’’ borrowed from “C’’ P1,000.00 payable in one year. When “C’’ was in the province, “C’s’’ 17-year-old son borrowed P500.00 from “B’’ for his school tuition. However, the son spent it instead nightclubing. When the debt to “C’’ fell due, “B’’ tendered only P500.00, claiming compensation on the P500.00 borrowed by “C’s’’ son. Question No. 1 — Is there legal compensation? Why? (1981 Bar Problem) Answer — There is no legal compensation. Under the Civil Code, in order that there will be a valid and effective compensation, it is essential that there must be two parties, who in their own right, are principal creditors and principal debtors of each other. In the instant case, “C’’ cannot be considered as a party to the act of his 17-year-old son in borrowing P500.00 from “B.’’ Consequently, he did not become a principal debtor of “B’’; neither did “B’’ become a principal creditor of “C.’’ Therefore, there can be no partial compensation of the P1,000.00 borrowed by “B’’ from “C.’’ (Note: The above answer is based on Arts. 1278 and 1279, No. 1, of the Civil Code and on decided cases.)

314

EXTINGUISHMENT OF OBLIGATIONS Compensation

Art. 1279

Question No. 2 — Suppose the minor son actually used the money for school tuition, would the answer be different? Reasons. (1981 Bar Problem) Answer — There would be no difference in my answer. There will still be no legal compensation. The fact that “C’s’’ son actually used the P500.00 for his school tuition did not make “C’’ a party to the contract between his son and “B.’’ Therefore, “C’’ is not the principal debtor of “B’’ with respect to said amount. (Note: The above answer is based on Arts. 1278 and 1279, 1, Civil Code.)

Idem; id. — Bound as principals. — By virtue of the provision of Art. 1279, No. 1, it is also necessary that the parties must be bound as principals. In other words, the relation between the parties must be that of principal creditor and principal debtor. Consequently, compensation cannot take place when one party is a debtor in one obligation and a creditor of the other party’s creditor in another obligation or a creditor in one obligation and a guarantor of the other party’s debtor in another obligation.297 Notwithstanding this rule, however, the guarantor may set up compensation as regards what the creditor may owe the principal debtor.298 When both parties are not only mutually creditors and debtors in their own right, but are also principally bound as creditors and debtors, compensation shall then take place, provided, of course, that all of the other requisites are present. Thus, where the defendant is indebted to the estate of the decedent for a certain amount and the decedent, in turn, had, during his lifetime, contracted an indebtedness from the defendant, the plaintiff-administrator of the decedent’s estate cannot contend that compensation in this case is not proper considering the fact that the decedent’s indebtedness is chargeable against his estate.299 Similarly, where a corporation is indebted to a stockholder for a certain amount and the stockholder, on the other hand, is also indebted to the corporation for a certain amount, it is evident that in such case compensation is proper.300 The same is also true where the estate of a deceased person has a claim

8 Manresa, 5th Ed., Bk. 1, p. 718. Art. 1280, Civil Code. 299 De la Peña vs. Hidalgo, 20 Phil. 323. 300 Brimo vs. Goldemberg, 69 Phil. 502. 297 298

315

Art. 1279

OBLIGATIONS

against the government and such claim has already been recognized by the enactment of a corresponding law appropriating funds for that purpose. Under the circumstances, since both the claim of the intestate against the government and the claim of the government for taxes against the estate of said intestate have already become overdue and demandable as well as fully liquidated, compensation has already taken place by operation of law in accordance with the provisions of Arts. 1279 and 1290 of the Civil Code, and both debts are therefore extinguished to the extent that the amount of one is covered by the amount of the other.301 Gullas vs. Phil. National Bank 62 Phil. 519 It appears that a United States treasury warrant was issued payable to Francisco Bacoa. This warrant was cashed by the Philippine National Bank with plaintiff as one of the indorsers, and subsequently, it was dishonored by the Insular Treasury. Defendant bank then applied the deposit of plaintiff to the payment of the amount paid by the bank for the warrant. The question is: can there be a compensation in this case? The Supreme Court held: “The general rule is adopted for this jurisdiction that a bank has a right of set-off of the deposit in its hands for the payment of any indebtedness to it on the part of the depositor. “As a general rule, a bank has a right of set-off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a bank has no right, without an order from or a special assent of the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the theory of confidential contracts arising from irregular deposits, e.g., the deposit of money with a banker. With freedom of selection and after full consideration, we have decided to adopt the general rule in preference to the minority rule as more in harmony with modern banking practice.’’

Idem; As to objects. — The second requisite in order that legal compensation shall take place is that both debts must consist 301

Domingo vs. Carlitos, 8 SCRA 443.

316

EXTINGUISHMENT OF OBLIGATIONS Compensation

Art. 1279

in a sum of money, or if the things due are fungibles, they must be of the same kind and also of the same quality if the latter has been stated. It is evident that this requisite contemplates only obligations to give. The reason is that compensation is as a general rule not possible in obligations to do because of the differences in the respective capacities of the obligors.302 It must be observed that the Code uses the word “consumable,” although what is actually contemplated is the word “fungible.” This is evident because of the fact that “consumables” are those movables which cannot be used in a manner appropriate to their nature without being consumed, while “fungibles’’ are those which may be exchanged or compensated by another of the same kind and quality. Idem; As to maturity. — The third requisite is that both debts must be due. Consequently, natural obligations, conditional obligations before the fulfillment of the event which constitutes the condition, and obligations with a period before the expiration of the period, cannot be compensated.303 Idem; As to liquidation and demandability. — The fourth requisite is that the debts to be compensated must be liquidated and demandable. Liquidated debts are those the amount of which may be determined by a simple arithmetical operation.304 Hence, if one of the debts or both of them are still unliquidated, there can be no compensation. If both are partially liquidated compensation may take place with respect to the parts which are liquidated, but not with respect to those which are unliquidated, applying by analogy the rule stated in Art. 1248, since compensation is merely a sort of simplified payment.305 Thus, the Supreme Court, in the case of Silahis Mktg. Corp. vs. IAC (180 SCRA 217), held that compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated: compensation cannot extend to unliquidated, disputed claim existing from breach of contract. Reading No. 4 of Art. 1279 with No. 3, it is evident that in order that the debts to be compensated may be considered demandable, 8 Manresa, 5th Ed., Bk. 1, p. 723. 3 Castan, 7th Ed., p. 275; 8 Manresa, 5th Ed., Bk. 1, pp. 724-725. 304 8 Manresa, 5th Ed., Bk. 1, p. 725. 305 Ibid., pp. 725-726. 302 303

317

Art. 1280

OBLIGATIONS

it is necessary that such debts must be due and, at the same time, liquidated.306 Idem; As to claims of third persons. — The fifth requisite is that there must be no retention or controversy, commenced by third persons and communicated in due time to the debtor, over either of the debts. Retention consists in the application of the credit of one of the parties to the satisfaction of the claims of a third person. It is evident that in such a case there can be no compensation. However, if there is an excess or balance remaining after the application of the credit, compensation will still take place, but only to the extent that the credit is not affected by the retention. Controversy refers to a case in which a third person claims to be the creditor. In other words, the party interested in the compensation and the third person each claims that he is the real creditor. The effect of such case is a provisional suspension of the compensation. If the credit is adjudicated to the former, compensation takes place; if it is adjudicated to the latter, compensation cannot take place.307 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.308 Right of Guarantor To Set Up Compensation. — The above article constitutes an exception to the rule stated in Art. 1279, No. 1, in relation to Art. 1278. Under Arts. 1278 and 1279, No. 1, the principal debtor can only set up compensation against the creditor for what the latter owes him. He cannot set up what such creditor owes the guarantor because then that would violate the rule that the parties must be principally bound. The guarantor, on the other hand, in case the payment of the debt is demanded from him, may set up compensation, not only for what such creditor owes him, but also for what such creditor owes the principal debtor. This rule is based on the fact that the bond of the guarantor cannot be resorted to so long as the debtor can pay although it may be in the abbreviated form of compensation and also on the fact that if the principal 306 Luengco vs. Herrero, 17 Phil. 29; Compania General de Tobacos vs. French and Unson, 39 Phil. 34. 307 8 Manresa, 5th Ed., Bk. 1, pp. 720-722. 308 Art. 1197, Spanish Civil Code.

318

EXTINGUISHMENT OF OBLIGATIONS Compensation

Arts. 1281-1283

obligation is extinguished, the accessory obligation of the guarantor is also extinguished since it is subordinated thereto.309 Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation.310 Art. 1282. The parties may agree upon the compensation of debts which are not yet due.311 Voluntary Compensation. — Actually, Art. 1282 is an example of what is known as voluntary compensation. Thus, if the obligation of A is pure, while the obligation of B is with a term or period which has not yet expired, the general rule is that there can be no compensation because B’s obligation is not yet due. However, the parties may nevertheless agree upon the compensation of the two obligations. 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.312 Judicial Compensation. — In reality, what is set off against the other party is a counterclaim. It will be remembered that “a counterclaim must be pleaded to be effectual; whereas, a compensation takes place by mere operation of law.’’313 Hence, the counterclaim defined by the Rules of Court314 is not the legal compensation contemplated by the Code. This is so, because by its very nature a set off or counterclaim can have no effect unless it is pleaded. In addition, the claim is not liquidated; consequently, compensation cannot take place. However, when the defendant who has an unliquidated claim for damages against the plaintiff sets it off by proving his right to said damages and the amount thereof, it is converted

8 Manresa, 5th Ed., Bk. 1, pp. 719-720. New provision. 311 New provision. 312 New provision. 313 Yap Unki vs. Cha Japco, 14 Phil. 602. 314 Sec. 6, Rule 6, New Rules of Court. 309 310

319

Arts. 1284-1285

OBLIGATIONS

into a liquidated claim by court decree, in which case compensation shall take effect from the moment the judgment liquidating the claim has become final. 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.315 Rules in Case of Rescissible or Voidable Debts. — It is evident that the above rule is an exception to the general rule of demandability in order that compensation shall take place. This exception is justified by the fact that rescissible or voidable obligations are considered demandable while the vices with which they are tainted are not yet judicially declared. Consequently, if the action for rescission or annulment is not exercised, or is renounced, or if the debt or debts are ratified the obligation or obligations are susceptible of compensation.316 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.317 Effect of Assignment of Rights. — If a creditor assigns his credit to a third person, what is the effect of such assignment upon the debtor’s right to set up the defense of compensation in case the New provision. 8 Manresa, 5th Ed., Bk. 1, p. 725. 317 Art. 1198, Spanish Civil Code, in modified form. 315 316

320

EXTINGUISHMENT OF OBLIGATIONS Compensation

Arts. 1284-1285

assignee tries to enforce the credit against him? Before answering this question, attention must be called to the fact that at the time the assignment of rights is made by a creditor to a third person compensation may have already taken place. Hence, a distinction must always be made between the effects of the assignment when compensation has already taken place and the effects when compensation has not yet taken place. Idem; When compensation has taken place. — Inasmuch as compensation takes place ipso jure without any intervention on the part of the interested parties and, as a consequence, one or the other obligation is extinguished, it follows that the subsequent assignment of rights by a creditor to a third person cannot in any way affect the debtor with respect to the compensation which has already taken place. The assignee, on the other hand, can only demand indemnity for damages from the assignor on the ground of fraud. The only exception to this rule is when the debtor had consented to the assignment, in which case the assignee can still demand for the payment of the credit.318 This exception is based on the fact that the law cannot protect a person who has acted fraudulently in giving his consent. Besides, such consent is deemed to be a waiver or a renunciation of the compensation that had already taken place.319 Idem; When compensation has not taken place. — When compensation has not yet taken place because of the absence of any or some of those requisites which are necessary, such as when the debts are not yet due or when they are not yet liquidated, and the creditor assigns his right to a third person, the effects of such assignment once all of the requisites for compensation are present shall depend upon whether it was made with the consent, or with the knowledge but without the consent, or without the knowledge of the debtor. Idem; id. — With consent of debtor. — If the creditor assigned his right or credit to a third person with the consent of the debtor, the latter cannot set up against the assignee the compensation which would have pertained to him against the assignor. However, if the debtor notified the assignor, at the time he gave his consent, that he is reserving his right to the compensation, he can still set up

318 319

Art. 1285, par. 1, Civil Code. 8 Manresa, 5th Ed., Bk. 1, p. 736.

321

Arts. 1284-1285

OBLIGATIONS

the defense of compensation against the assignee in case the latter demands the payment of the assigned credit.320 Idem; id. — With knowledge, but without consent, of debtor. — Under the second paragraph of Art. 1285, if the creditor notified the debtor of the assignment but the latter did not consent thereto, and subsequently, the assignee demands the payment of the assigned credit from the debtor, the latter may set up the defense of compensation of debts prior to the assignment, but not of subsequent ones.321 Evidently, the purpose of this rule is to prevent fraud. It is clear that the assignment cannot take effect as far as the debtor is concerned unless he is properly notified thereof. Hence, the different rules may be restated as follows: (1) If the notification preceded the assignment, the effects of the assignment are produced from the time it is made and not from the time the notification is given; consequently, the debtor can set up the defense of compensation of debts contracted prior to the assignment. (2) If the notification and the assignment are made simultaneously, then there can be no question about the time when the effects of the assignment are produced. In such case, the debtor can set up the defense of compensation of debts contracted prior to the assignment. (3) If the notification is given after the assignment had already been made, it is evident that the assignment must have been effected without the knowledge and consent of the debtor, in which case the provision of the last paragraph of Art. 1285 is applicable. Idem; id. — Without knowledge of debtor. — If the assignment is made without the knowledge of the debtor, and subsequently, the assignee demands the payment of the credit which was assigned, the debtor may set up the defense of compensation of all credits which he may have against the assignor and which may have become demandable, before he was notified of the assignment.322 In other words, if the debtor is not aware of the assignment and the asArt. 1285, par. 1, Civil Code. Art. 1285, par. 2, Civil Code. 322 Art. 1285, par. 3, Civil Code. 320 321

322

EXTINGUISHMENT OF OBLIGATIONS Compensation

Arts. 1286-1288

signor subsequently contracts new debts from him, such obligations which become due and demandable before he was notified of the assignment can be set off by way of compensation against the credit which was assigned. In such case, the only remedy of the assignee is a personal action for indemnification against the assignor.323 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.324 Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301.325 Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.326 Debts Which Cannot Be Compensated. — There are five kinds of debts or obligations which are not susceptible of legal compensation. They are: (1) debts arising from contracts of depositum;327 (2) debts arising from contracts of commodatum;328 (3) claims for support due by gratuitous title;329 (4) obligations arising from criminal offenses;330 and (5) certain obligations in favor of the government, such as taxes, fees, duties and others of a similar nature.331 With respect to the first, it will be observed that the Code uses the word “depositum” instead of the word “deposit.” Obviously, 8 Manresa, 5th Ed., Bk. 1, p. 738. Art. 1199, Spanish Civil Code, in modified form. 325 Art. 1200, Spanish Civil Code. 326 New provision. 327 Art. 1287, Civil Code. 328 Ibid. 329 Ibid. 330 Art. 1288, Civil Code. 331 4 Tolentino, Civil Code 1956. Ed., p. 349. 323 324

323

Arts. 1289-1290

OBLIGATIONS

the purpose is to prevent confusion with a bank deposit in which a relationship of creditor and debtor is created between the depositor and the bank.332 With respect to the third, although the rule is that the right to receive support cannot be compensated with what the recipient owes the obligor, yet this rule cannot be applied to support in arrears.333 Evidently, all of these prohibitions are based on justice. Some of these obligations are based on trust and confidence; others on self-preservation. Justice and humanity demand that they must be performed. 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.334 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.335 Effect of Compensation. — The most fundamental effect of compensation is that it extinguishes both debts to the extent that the amount of one is covered by the amount of the other.336 If the compensation is total because the amounts of both debts are equal, it is evident that both debts would be totally extinguished, since the amount of one is entirely covered by the amount of the other; however, if the compensation is partial because the amounts are different, it is equally evident that the extinguishment would be total with respect to one and partial with respect to the other.337 How about accessory obligations? Since the principal obligations to which they are subordinated are extinguished, it follows that such accessory obligations are also extinguished. Such extinguishment Gullas vs. Phil. Nat. Bank, 62 Phil. 519. Arts. 1287, 301, Civil Code. 334 Art. 1201, Spanish Civil Code. 335 Art. 1202, Spanish Civil Code, in modified form. 336 Art. 1290, Civil Code; Acuna vs. Dievas, 12 Phil. 250. 337 8 Manresa, 5th Ed., Bk. 1, p. 747. 332 333

324

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1291

may be total or partial depending upon whether the compensation is total or partial.338 Idem; When compensation takes effect. — Since compensation takes effect by operation of law, it is clear that it will take effect from the moment all of the essential requisites prescribed by law are present, even though the creditor and debtor are not aware thereof.339 Legal compensation operates even against the will of the interested parties even without their consent. Since this compensation takes place ipso jure, its effects arise on the very day on which all its requisites concur. When used as a defense, it retroacts to the duty when its requisites are fulfilled. (BPI vs. CA, et al., 255 SCRA 571.) This rule, however, is applicable only to legal compensation. Nevertheless, it is equally clear that voluntary compensation will take effect from the moment agreed upon by the parties, while judicial compensation will take effect from the moment that the judgment becomes final and executory.340 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.341 Concept of Novation. — Novation is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor.342 It is one of the modes of

Ibid. Art. 1290, Civil Code. Legal compensation operates even against the will of the interested parties even without their consent. Since this compensation takes place ipso jure, its effects arise on the very day on which all its requisites concur. When used as a defense, it retroacts to the date when its requisites are fulfilled. (BPI vs. CA, et al., 255 SCRA 571.) 340 See 4 Tolentino, Civil Code, 1956 Ed., p. 351. 341 Art. 1203, Spanish Civil Code. 342 8 Manresa, 5th Ed., Bk. 1, p. 751. 338 339

325

Art. 1291

OBLIGATIONS

extinguishing obligations through the creation of a new one effected by the change or substitution of an obligatory relation by another with the intention of substantially extinguishing or modifying the same.343 The distinctive feature or characteristic of novation is that although it extinguishes the obligation, it also gives birth to another obligation. It has, therefore, a two-fold purpose — that of extinguishing the old obligation, and that of giving birth to a new obligation to take the place of the old.344 However, unlike the others, as a mode of extinguishment, it is relative in character, not absolute.345 Requisites. — In every novation there are four essential requisites: first, a previous valid obligation; second, agreement of the parties to the new obligation; third, extinguishment of the old obligation; and fourth, validity of the new obligation.346 Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by 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 objection; (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. (Quinto vs. People, April 14, 1999, 305 SCRA 708.) Problem — Suppose that under the judgment obligation, the liability of the judgment debtor is for the amount of P6,000, but both judgment debtor and judgment creditor subsequently entered into a contract reducing the liability of the former to

4 Sanchez Roman 242; quoted by Court of Appeals in Government vs. Bautista, CA, 37 Off. Gaz. 1880. 344 Tiu Siuco vs. Habana, 45 Phil. 707. 345 8 Manresa, 5th Ed., Bk. 1, p. 751. 346 Tiu Siuco vs. Habana, 45 Phil. 707. 343

326

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1291

only P4,000, is there an implied novation which will have the effect of extinguishing the judgment obligation and creating a modified obligatory relation? Reasons. Answer — There is no implied novation in this case. We see no valid objection to the judgment debtor and the judgment creditor in entering into an agreement regarding the monetary obligation of the former under the judgment referred to. The payment by the judgment debtor of the lesser amount of P4,000, accepted by the creditor without any protest or objection and acknowledged by the latter as in full satisfaction of the money judgment, completely extinguished the judgment debt and released the debtor from his pecuniary liability. Novation results in two stipulations — one to extinguish an existing obligation, the other to substitute a new one in its place. Fundamentally, it is that novation effects a substitution or modification of an obligation by another or an extinguishment of one obligation by the creation of another. In the case at hand, we fail to see what new or modified obligation arose out of the payment by the judgment debtor of the reduced amount of P4,000 to the creditor. Additionally, to sustain novation necessitates that the same be so declared in unequivocal terms clearly and unmistakably shown by the express agreement of the parties or by acts of equivalent import — or that there is complete and substantial incompatibility between the two obligations. (Sandico vs. Piguing, 42 SCRA 322.)

Kinds. — Novation may be classified as follows: (1) As to its essence, novation may be (a) objective or real, (b) subjective or personal, or (c) mixed.347 Objective or real novation refers to the change either in the cause, object or principal conditions of the obligations.348 Subjective or personal novation, on the other hand, refers to the substitution of the person of the debtor or to the subrogation of a third person in the rights of the creditor.349 When there is a substitution of the person of the debtor, it is called passive; when there is a subrogation in the rights of the creditor, it is called active. Mixed novation refers to a combination of objective and subjective novation.350 3 Castan, 7th Ed., p. 284. Art. 1291, No. 1, Civil Code. 349 Art. 1291, Nos. 2 and 3, Civil Code. 350 3 Castan, 7th Ed., p. 284. 347 348

327

Art. 1291

OBLIGATIONS

(2) As to its form or constitution, novation may be express or tacit, one and the other are recognized by the Code.351 When it is declared in unequivocal terms that the old obligation is extinguished by a new one which substitutes the same, the novation is express; when the old and the new obligations are incompatible with each other on every point, the novation is tacit or implied.352 (3) As to its extent or effect, novation may be total or partial depending upon whether there is an absolute extinguishment of the old obligation or merely a modification.353 Idem; Objective novation. — According to Castan, objective or real novation, which is the novation referred to in No. 1 of Art. 1291, may be effected by: (1) changing the cause of the obligation; or (2) changing the object of the obligation; or (3) changing the principal or essential conditions of the obligation.354 Idem; id. — Change of cause. — Although the Code does not speak of a change in the cause of the obligation as one of the methods whereby novation may be effected, it is evident that such a change or modification will result in the extinguishment of the obligation. Manresa gives the example of a contract of sale or a contract of lease in which the price has not yet been paid to the vendor or lessor. If the parties to the contract subsequently enter into a new agreement whereby the obligation to pay is converted into a loan made to the vendee or lessee, the result is a real or objective novation.355 Castan, on the other hand, gives the example of a contract of loan converted into a contract of deposit.356 Idem; id. — Change of object. — It is also evident that when there is a change or modification of the object of a previous obligation there is a novation of such obligation. Thus, in those cases where a certain amount is due to the obligee or creditor, any modification in the amount due or any change whereby the obligation to pay is converted into an obligation to render a personal service would constitute a novation. The same is true in case of dation in payment.357 Ibid., p. 285. Art. 1292, Civil Code. 353 3 Castan, 7th Ed., p. 285. 354 Ibid., pp. 289-920. 355 8 Manresa, 5th Ed., Bk. 1, p. 772. 356 3 Castan, 7th Ed., p. 289. 357 Ibid., p. 290. 351 352

328

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1291

Idem; id. — Change of principal conditions. — It is also evident that when there is a change or modification of the conditions of a previous obligation there is also a novation. However, the change or modification must refer to a principal, not incidental, condition resulting in the alteration or modification of the essence of the obligation. In other words, only those changes of an essential, not accidental, character can effect a novation of the previous or original obligation.358 Consequently, where the debtor merely executes another instrument reiterating or ratifying his obligation to the creditor,359 without changing its object or principal conditions, although there might be minor changes with regard to the form of payment,360 or with regard to additional facilities361 or benefits362 afforded to him, there is no novation of the obligation. Even granting that there were some changes and alterations made after the perfection of a contract, such as where both contracting parties agree that certain additions shall be made to a building under construction, such changes shall not result in the novation thereof, provided that they are not so great that it will be impossible to follow the original contract; hence, the contractor cannot say that the original contract has been entirely abandoned in such a way that he can now recover from the other party on the basis of quantum meruit.363 This conclusion gains added force where it is established that the original contract was used as the basis for the construction of the building, and those alterations which were subsequently made were founded upon the original contract with the understanding that the owner shall pay the reasonable value of all such alterations.364 Similarly, where the change or alteration consists in providing for another method of payment365 or for additional security,366 it is clear that such change or modification cannot constitute a novation of the previous obligation, considering the fact that the change is not with regard to an

Ibid., p. 291. Ramos vs. Gibbon, 67 Phil. 371; Padilla vs. Levy Hermanos, Inc., 69 Phil. 681; Asiatic Petroleum Co. vs. Sim Poo, CA, 49 Off. Gaz. 44. 360 Ramos vs. Gibbon, 67 Phil. 371. 361 Asiatic Petroleum Co. vs. Sim Poo, CA, 40 Off. Gaz. 44; Yellow Ball Freight Lines, Inc. vs. Western Export Co., CA, G.R. No. 10422-R, Sept. 3, 1954. 362 Padilla vs. Levy Hermanos, Inc., 69 Phil. 681. 363 Tiu Siuco vs. Habana, 45 Phil. 707. 364 Ibid. 365 Zapanta vs. De Rotaeche, 21 Phil. 154. 366 Bank of the P.I. vs. Herridge, 47 Phil. 57. 358 359

329

Art. 1292

OBLIGATIONS

essential condition of the previous obligation and that there can be no incompatibility between the old and the new obligation. 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.367 Form of Extinguishment. — One of the essential requisites of novation is the extinguishment of the previous obligation by the new one.368 What is the form of this extinguishment? The Code does not provide for any specific form. However, under Art. 1292, it may be either express or implied. It is express when there is a declaration in unequivocal terms that the old obligation is extinguished by the new which substitutes it; it is tacit or implied when the old and the new obligations are incompatible on every point.369 Novation as one of the modes of extinguishing an obligation, requires the concurrrence of the following: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract. (Cruz vs. Court of Appeals, July 27, 1998, 293 SCRA 239.) The rule is settled that novation by presumption has never been favored. To be sustained it must be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import;370 in other words, the animus novandi or the intent to substitute a new obligation for the old one must be clearly established before we can say that there is a novation resulting in the extinguishment of the old obligation and in the creation of a new one.371 Novation is never presumed, and the animus novandi,

Art. 1204, Spanish Civil Code. Tiu Siuco vs. Habana, 45 Phil. 707. 369 Art. 1292, Civil Code. 370 Dungo vs. Lopena, 116 Phil. 1305; Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967. 371 Martinez vs. Cavives, 25 Phil. 581; Tiu Siuco vs. Habana, 45 Phil. 707; Young vs. Villa, 49 Off. Gaz. 1818; Joe’s Radio & Electrical Supply vs. Alto Electronics Corp., 104 Phil. 333. 367 368

330

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1292

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. (Quinto vs. People, April 14, 1999, 305 SCRA 708.) In the words of the Supreme Court: “Novation of contracts cannot be presumed in any case unless it is a necessary result of the express will of the parties, or that the old and the new obligations are incompatible in all points. It is not proper to consider an obligation novated by unimportant modifications which do not alter its essence and when it is not extinguished by another which takes its place or substitutes the person of the debtor. Novation is a contract, the object of which is: either to extinguish an existing obligation and to substitute a new one in its place; or to discharge an old debtor and substitute a new one for him; or to substitute a new creditor for an old creditor with regard to whom the debtor is discharged. It is never presumed. The intention must clearly result from the terms of the agreement or by a full discharge of the original debt. Novation by the substitution of a new debtor can take place without the consent of the debtor but the delegation does not ooiperate a novation, unless the creditor has expressly declared that he intends to discharge with delegating debtor, and the delegating debtor was not in open failure or insolvency at the time. The mere indication by a debtor of a person who is to pay in his place does not operate a novation. Delegatus debitor est odiosus in lege.’’372

In People’s Bank and Trust Co. vs. Syvel’s, Inc. (164 SCRA 247), Syvel’s had a loan with People’s Bank and Trust Co. in the amount of P900,000.00 secured by a chattel mortgage. Syvel’s failed to pay the loan and People’s Bank and Trust Co. foreclosed the chattel mortgage. Syvel’s opposed the foreclosure of the chattel mortgage on the ground that the obligation secured by the chattel mortgage sought to be foreclosed was novated by the subsequent execution of a real estate mortgage as additional collateral to the obligation secured by said chattel mortgage. The Supreme Court held: “Novation takes place when the object or principal condition of

372

Martinez vs. Cavives, 25 Phil. 581.

331

Art. 1292

OBLIGATIONS

an obligation is changed or altered. It is elementary that novation is never presumed, it must be explicitly stated or there must be manifest incompatibility between the old and the new obligation in every aspect. In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants’ submission. The contract on its face does not show the existence of an explicit novation nor incompatibility on every point between the old and the new agreements as the second contract evidently indicates that the same was executed as new additional security to the chattel mortgage previously entered into by the parties.’’ In the case of Sps. Francisco and Ruby Reyes vs. BPI Family Savings Bank, Inc., et al., G.R. Nos. 149840-41, March 31, 2006, Petitioner spouses executed a Real Estate Mortgage on their property in favor of respondent BPI FSB to secure a P15,000,000 loan of Transbuilders Resources & Development Corporation. When the latter failed to pay within the stipulated period of one year, the loan was restructured providing that the loan shall be paid in quarterly installments at interest of 18% per annum. Petitioners averred that they were not informed about the restructuring of the loan. Hence, they wrote BPI FSB requesting cancellation of their mortgage and the return of their title. They claimed that the new loan novated the loan agreement and that because the novation was without their consent, they were allegedly released from their obligation under the mortgage.BPI FSB refused to cancel the mortgage and instituted extrajudicial foreclosure proceedings against the petitioners. The latter filed the instant petition. Question —Was there a novation of the mortgage loan contract? Answer — No. Well-settled is the rule that with respect to obligations to pay a sum of money, the obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones, or the new contract merely supplements the old one. BPI FSB and Transbuilders only extended the repayment term of the loan from one year to 20 quarterly installments at 18% per annum. There was absolutely no intention by the parties to supersede or abrogate the old loan contract secured by the REM executed by the petitioners in favor of BPI FSB. In

332

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1292

fact, the intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.

Idem; Express novation. — In order that an obligation may be expressly extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms. Express novation can therefore take place only when the intention to effect a novation clearly results from the terms of the agreement or is shown by a full discharge of the original debt; in other words, it can only take place when the contracting parties disclose that the object in making the new contract is to extinguish the old one; otherwise, the old contract remains in force and the new one is added to it. Consequently, the mere fact that the debtor had signed a second promissory note for the balance of his indebtedness, does not mean the extinguishment of the first promissory note, wherein the terms of payment were expressly stipulated. Those terms, therefore, shall still govern the manner of liquidation of the said balance.373 Idem; Implied novation. — In order that an obligation may be impliedly extinguished by another which substitutes the same, it is imperative that the old and the new obligations must be incompatible with each other on every point. The test of incompatibility between the old and the new obligations is to determine whether or not both of them can stand together, each having its own independent existence. If they can stand together, there is no incompatibility; consequently, there is no novation. If they cannot stand together, there is incompatibility; consequently, there is a novation.374 Thus, where the new contract is merely a reiteration or acknowledgment or ratification of the old contract with slight modifications or alterations with respect to the cause or object or principal conditions, it is clear that the two contracts can stand together, and consequently, there can be no incompatibility between them. There-

373 374

Phil. Nat. Bank vs. Granada, CA, 51 Off. Gaz. 62. Borja vs. Mariano, 66 Phil. 93.

333

Art. 1292

OBLIGATIONS

fore, there can be no novation.375 This is so even where the second contract provides for another method of payment,376 or for additional security,377 or for the postponement of the date of payment.378 As a matter of fact, even where the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, so long as there is no agreement that the first debtor shall be released from responsibility, there is no novation, and the creditor can still enforce the obligation against the original debtor. This is so even where a surety bond is filed, for the simple reason that such bond is not a new and separate contract but is merely an accessory of the original contract.379 In such a case, the third person who has assumed the obligation merely becomes a co-debtor or surety. If there is no agreement as to solidarity, the first and second debtors are considered obligated jointly.380 In all of these cases, since there is no clear case of incompatibility and since the change does not refer to an essential or principal condition of the previous contract, there can be no novation. Problem — ABC Trading Co., a domestic corporation engaged in the sale of automobile spare parts, opened with “X’’ Bank a letter of credit up to the extent of $450,000.00 for a period of one year. To secure payment thereof, it executed a chattel mortgage over its stock-in-trade valued at P500,000.00. On May 15 and June 15, 1981, “Y,” president and general manager of ABC Trading, drew against this letter of credit by means of promissory notes in the total amount of P430,000.00, payable within 30 days from the respective dates of the promissory notes with interest of 10%. Upon maturity of said notes, ABC Trading failed to pay, but was able to negotiate for an extension of six (6) months within which to pay said amount, in return for the additional security posted by Mr. “Y’’ consisting of a real estate mortgage over his land in Manila. At the end of 6 months, ABC

375 Tiu Siuco vs. Habana, 45 Phil. 707; Ramos vs. Gibbon, 67 Phil. 371; Padilla vs. Levy Hermanos, Inc., 69 Phil. 681; Pablo vs. Sapungan, 71 Phil. 145; Asiatic Petroleum Co. vs. Sim Poo, CA, 40 Off. Gaz. 44; Yellow Ball, Inc. vs. Western Export Co., CAG.R. No. 10422-R, Sept. 3, 1954; Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967. 376 Zapanta vs. De Rotaeche, 21 Phil. 154. 377 Bank of the P.I. vs. Herridge, 47 Phil. 57. 378 Ynchausti & Co. vs. Yulo, 34 Phil. 978; Pascual vs. Lacsamana, 100 Phil. 381; La Tondeña, Inc. vs. Alto Surety & Ins. Co., 101 Phil. 879. 379 Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967. 380 Dungo vs. Lopena, 116 Phil. 1305; Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967.

334

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1292

Trading Co. failed to pay the amount due despite repeated demands by “X’’ Bank. “Y’’ Bank filed an action for foreclosure of the chattel mortgage executed by ABC. Trading ABC Trading opposed said action contending that the chattel mortgage has been novated by the real estate mortgage executed by “X’’ Bank. Is the contention of ABC Trading Co. tenable? Reasons. Answer — The contention of ABC Trading Co. that the chattel mortgage has been novated by the real estate mortgage executed by Mr. “R” in favor of “X’’ Bank is untenable. Wellsettled is the rule that in order that there will be a novation there must be complete incompatibility between the two obligations. And the test of incompatibility is simple. The test is whether the two obligations can stand together. If they can stand together, then there is no incompatibility. If there is incompatibility, then there is novation. Applying the test to the instant case, it is clear that the two obligations can stand together. Therefore, there is no novation. (Note: The above answer is based on Arts. 1291[1], and 1292 of the Civil Code and on decided cases, such as Bank of P.I. vs. Herridge, 47 Phil. 57; Ynchausti and Co. vs. Yulo, 34 Phil. 978; Pascual vs. Lacsamana, 100 Phil. 391; La Tondeña vs. Alto Surety & Ins. Co., 101 Phil. 879.) Problem — A obtained a favorable judgment against B from the Court of First Instance of Manila for the sum of P2,000. Subsequently, a writ of execution was issued and a jeep belonging to the latter was seized by the sheriff. However, the two (A and B) arrived at an arrangement by virtue of which B executed a chattel mortgage on the jeep stipulating, inter alia that B shall satisfy the judgment in two equal installments payable at designated periods. B failed to pay the first installment, and as a result, A obtained an alias writ of execution and levied upon certain personal properties of B. The latter filed an urgent motion for suspension of the execution sale on the ground of payment of the judgment obligation. He maintains that the execution of the deed of chattel mortgage has extinguished the judgment debt because of implied novation. Is this correct? Reasons. Answer — The contention of B that the mortgage obligation has extinguished the judgment obligation because of implied novation is not correct. The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The law requires no specific form for an effective novation by implication. The test is whether the two obligations

335

Art. 1292

OBLIGATIONS

can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place. Applying this test, we see no substantial incompatibility between the mortgage obligation and the judgment obligation sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its extinguishment — payment in two equal installments. The chattel mortgage simply gave the judgment debtor a method and more time to enable him to fully satisfy the judgment indebtedness. (Millar vs. Court of Appeals, 38 SCRA 642.)

But where there is a clear case of incompatibility between the two contracts in the sense that they cannot stand together, such as where there is a change, not only of the parties but also of the amount due as well as of the date of maturity, it is clear that there is a novation.381 Consequently, only the second contract can be the basis of an action between the parties.382 Thus, where a third person proposed to the creditor that he is assuming the entire obligation of the debtor, and such proposal was categorically accepted, it cannot be argued later on that there is no novation which will have the effect of wiping out the old obligation on the ground that since novation cannot be presumed, consequently, the act of the creditor in accepting the offer of the third person merely implies that he is accepting such third person as an additional debtor. It must be remembered that novation of a contract may be effected not only by expressly declaring that the parties intended such a change, but also where the new obligation is in all respect incompatible and cannot stand side by side with the former one. Hence, the substitution of the third person as debtor by virtue of his agreement with the creditor essentially and entirely wiped out the original obligation.383 In the case of obligations with a term or period, a distinction must be made with regard to the effect of any subsequent change of

381 Macondray & Co. vs. Ruiz, 66 Phil. 562. To the same effect: Paterson vs. Azada, 8 Phil. 432; Fua vs. Yap, 74 Phil. 287. 382 Borja vs. Mariano, 66 Phil. 393. 383 Phil. Nat. Bank vs. Mallari, 104 Phil. 437.

336

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1292

the term or period. If there is an increase of the term or period, such as when there is a postponement of the date of payment,384 or an extension of the period of payment,385 there is certainly no novation because in such cases there is no clear case of incompatibility between the two obligations; neither is there a change in the obligatory relation between the parties which will alter the essence of the obligation.386 But if there is a reduction or decrease of the duration of the term or period, there is certainly a novation, not only because there is a clear case of incompatibility between the two obligations, but there is also a change or alteration of the principal condition of the old obligation.387 Thus, where the two contracting parties entered into a second contract reducing the duration of the term or period of a right of way from twenty to seven years, “there can be no doubt that the two contracts, in so far as the duration of the right of way is concerned, are incompatible with each other, for the second contract reduces the period agreed upon in the first contract, and so both contracts cannot subsist at the same time. The term stipulated in the second contract cannot be added to that of the first, because the period would then be twenty-seven years instead of twenty years.’’388 In the case of Cruz vs. Court of Appeals (July 27, 1998, 293 SCRA 239), the Court ruled that the Memorandum of Agreement falls short of producing a novation because it does not express a clear intent to dissolve the old obligation as a consideration for the emergence of the new one. Likewise, petitioner failed to show that the two contracts were materially and substantially incompatible with each other. Further, in the case of Quinto vs. People (April 14, 1999, 305 SCRA 708), the Court stated that “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

Pascual vs. Lacsamana, 100 Phil. 381. Ynchausti & Co. vs. Yulo, 34 Phil. 978; La Tondeña, Inc. vs. Alto Surety & Ins. Co., 101 Phil. 879. 386 3 Castan, 7th Ed., p. 291. 387 Ibid., pp. 291-292. 388 Kabankalan Sugar Co. vs. Pacheco, 55 Phil. 555. 384 385

337

Art. 1293

OBLIGATIONS

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.’’ Moreover, the Court significantly stated in the said case of Quinto vs. People that “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 breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements 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. The Court also ruled that the subsequent novation of contract does not affect the criminal liability for estafa already committed, for it is a public offense which must be prosecuted and punished by the state.’’ 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 of the new debtor gives him the rights mentioned in Articles 1236 and 1237.389 Novation By Substitution of Debtor. — This type of subjective or personal novation consists in the substitution of a new debtor in the place of the original debtor, which must be effected with the consent of the creditor at the instance of either the new debtor or 389

Art. 1205, Spanish Civil Code, in modified form.

338

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1293

the old debtor. It has two forms — substitution by expromisión and substitution by delegación.390 If the substitution of debtors is effected with the consent of the creditor at the instance of the new debtor even without the knowledge or against the will of the old debtor, it is called expromisión. Consequently, the following requisites must concur: first, the initiative for the substitution must emanate from the new debtor; and second, consent of the creditor to the substitution. It is, therefore, evident that there are two kinds of substitution by expromisión. They are: (1) substitution with the knowledge and consent of the old debtor; and (2) substitution without the knowledge or against the will of the old debtor. If the substitution of debtors is effected with the consent of the creditor at the instance of the old debtor with the concurrence of the new debtor, it is called delegación. In other words, delegación refers to the substitution of debtors effected when the original debtor offers and the creditor accepts a third person who consents to the substitution.391 Consequently, the following requisites must concur: first, the initiative for the substitution must emanate from the old debtor; second, consent of the new debtor; and third, acceptance by the creditor. Manresa explains the concepts of expromisión and delegación as follows: “The two forms of this novation, impliedly recognized by article 1206 (now Art. 1295) which employs the word ‘delegante,’ as applied to the debt, are the expromisión and delegación. Between these there is a marked difference of meaning and, as a consequence, a logical difference of requisites and another clear difference as to their effects, of which we shall speak later. “In expromision, the initiative for the change does not emanate from the debtor and may be made even without his consent, since it consists in a third person assuming his obligation. “In delegacion, the debtor offers and the creditor accepts a third person who consents to the substitution so that the intervention and the consent of these three persons are necessary

390 391

8 Manresa, 5th Ed., Bk. 1, p. 777; 3 Castan, 7th Ed., p. 292. 8 Manresa, 5th Ed., Bk. 1, p. 777.

339

Art. 1293

OBLIGATIONS

and they are respectively known as delegante, delegatorio, and delegado. It must be noted that the consent need not be given simultaneously and that it may be given afterwards, as for example, that of the creditor delegatorio to the proposition of the debtor by the delegado. “Delegacion notably differs from the mere indication made by the debtor that a third person shall pay the debt; in this case, there is no novation and the former is not acquitted of his obligation and his relations with the third person are regulated by the rules of agency. The French Code in Article 1276 expressly provides for this case, as well as the inverse one where the debtor points out somebody else to answer for the payment, declaring that there is no novation in either case. The same sound criterion is impliedly accepted by our code.’’392

The case of Quinto vs. People, (April 14, 1999, 305 SCRA 709) explain the concepts of expromisión and delegación as follows: There are two forms of novation by substituting the person of the debtor, depending on whose initiative it comes from, to wit: expromisión and delegación. In the former, the initiative for the change does not come from the debtor and may even be made without his knowledge. Since a third person would substitute for the original debtor and assume the obligation, his consent and that of the creditor would be required. In the latter, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation, thereby releasing the original debtor from the obligation; here, the intervention and the consent of all parties thereto would perforce be necessary. In either of these two modes of substitution, the consent of the creditor, such as can be seen, is an indispensable requirement. Problem No. 1 — “A’’ owed “B’’ a certain sum of money. “C’’ wrote “B’’ a letter stating that he would be the one to take care of “A’s’’ debt as soon as “A’’ had made a shipment of logs to Japan. “A’’ never made such shipment. “C’’ did not pay “B.’’ Is “C’’ liable to “B’’? Explain. (1975 Bar Problem) Answer — “C’’ is not liable to “B.’’ In the first place, in order that “C’’ may be held liable to “B,’’ there should have been a 392 8 Manresa, 5th Ed., Bk. 1, pp. 777-778, quoted in Testate Estate of Mota vs. Serra, 47 Phil. 464.

340

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1293

substitution of debtor through expromision within the meaning of Art. 1291, No. 2, and Art. 1293 of the Civil Code resulting in novation of the obligation. Here, there was none. “C’’ merely wrote a letter to the creditor “B” stating that he would take care of “A’s” debt. The problem does not even say that “B” gave his assent or consent to “C’s’’ statement. In the second place, even assuming that there was a substitution of debtor, “C’s’’ liability depends upon a suspensive condition, that he would take care of “A’s’’ debt as soon as “A’’ had made a shipment of logs to Japan. “A” never made such shipment. Therefore, “C’s’’ liability never became effective. (Villanueva vs. Girged, 110 Phil. 478.) Problem No. 2 — “A’’ borrowed from “B” the sum of P3,000.00. Three days after, “A’’ in a letter authorized the Philippine National Bank to pay his debt to “B” out of whatever crop loan might be granted to him by said Bank. On the same day, the Bank agreed but the Bank paid “B’’ only P2,000.00. On the date of maturity, “B’’ sued the Bank and “A’’ for the remaining P1,000.00. Is the Bank liable to “B’’? (1975 Bar Problem.) Answer — The Bank is not liable to “B’’ for the remaining P1,000.00. Even assuming that “B’’ gave his consent to “A’s’’ proposal that the Bank shall pay his indebtedness of P3,000.00, in reality, there was no substitution of debtor by delegacion within the meaning of Arts. 1291, No. 2, and 1293 of the Civil Code resulting in a novation of the obligation. The Bank never assumed payment of the obligation. There was merely an authorization, which was accepted by the Bank, that the latter shall pay “A’s’’ debt out of whatever crop loan would be granted to him by the Bank. As it turned out, the Bank agreed to lend “A’’ only P2,000.00, and said amount was paid directly to “B’’ in accordance with the Bank’s promise. Beyond that amount, the Bank cannot be held liable. (Hodges vs. Rey, 111 Phil. 219.)

Idem; Necessity of creditor’s consent. — Whether the substitution is effected through expromision or delegacion the consent of the creditor must always be secured.393 The reason for this requirement is obvious. Substitution of one debtor for another may delay or prevent the fulfillment or performance of the obligation by the temporary inability or insolvency of the new debtor.394 Art. 1293, Civil Code. Rio Grande Oil Co. vs. CA, 39 Off. Gaz. 986; Santissimo Rosario de Molo vs. Gemperle, CA, 39 Off. Gaz. 1410. 393 394

341

Art. 1293

OBLIGATIONS

The law does not prescribe when such consent may be given; neither does it require any specific form. Consequently, it may be given simultaneously with the substitution or even afterwards. And since consent may as well be expressed by deeds as by words, it may be express or implied.395 Thus, where a stockholder in a certain corporation sold his shares of stock to another subject to the condition that his indebtedness to the corporation shall be assumed by the latter and the corporation was duly notified regarding the sale including all of the terms and conditions thereof, the act of the Board of Directors of the corporation in electing the vendee as president of the corporation as well as member of the Board of Directors as a substitute of the vendor clearly constitutes an implied acceptance of the substitution of debtors. There is, therefore, a novation by the substitution of debtors, which is perfectly valid and lawful placing the new debtor under obligation to pay the debt which he has assumed.396 It must be observed, however, that the mere act of the creditor in accepting payments by a third party for the benefit of a debtor whose accounts the third party has assumed, without further facts, does not constitute an implied acceptance of the substitution of the debtor.397 Thus, where the mortgagor transferred the mortgaged property to a third person subject to the condition that the latter shall assume the payment of the obligation, the mere fact that the creditor accepted payments from the transferee does not relieve the mortgagor from his obligation to pay the unpaid balance of the debt, since the substitution of debtors was made without the consent of the creditor — a requirement which is indispensable in order to effect a novation of the obligation.398 In such case, it is evident that Arts. 1236 and 1237 of the Civil Code, and not Art. 1293, shall govern. Idem; Effect of payment by new debtor. — With regard to the relation between the original debtor and the new debtor, since donation cannot be presumed in such case, justice demands that the original debtor shall reimburse to the new debtor whatever benefits

395 Asia Banking Corp. vs. Elser, 54 Phil. 994; Elmac, Inc. vs. Gustilo, CA, 37 Off. Gaz. 189; Rio Grande Oil Co. vs. Coleman, CA, 39 Off. Gaz. 986. 396 Asia Banking Corp. vs. Elser, 54 Phil. 994. 397 Pacific Commercial Co. vs. Sotto, 34 Phil. 237; McCullough vs. Veloso, 46 Phil. 1; Gov’t. of the Philippine Islands vs. Bautista, CA, 37 Off. Gaz. 1880; Rio Grande Oil Co. vs. Coleman, CA, 39 Off. Gaz. 986. 398 McCullough vs. Veloso, 46 Phil. 1.

342

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1293

he may have derived therefrom. If the substitution was effected by expromisión, and the debtor pays the debt or obligation, since such payment is a real benefit to the original debtor, the relationship shall be regulated by the rules regarding payment of a debt by a third person — the specific rules applicable thereto depending upon whether the substitution was made without the knowledge or against the will of the original debtor or with the knowledge and consent of such debtor. On the other hand, if the substitution was effected by delegación, since ordinarily there would be a special agreement of all the parties in such case, the relationship among such parties shall be regulated by such agreement; however, in the absence of an agreement, the relationship shall be regulated by the rules regarding payment of a debt by a third person with the debtor’s consent, since in delegación the original debtor himself is the one who initiates the substitution.399 Consequently, in expromision — (1) If the substitution was effected with the knowledge and consent of the original debtor, and subsequently payment is made by the new debtor with or without the knowledge and consent of such original debtor, the new debtor can demand reimbursement from the original debtor of the entire amount which he has paid,400 and, at the same time, be subrogated in all of the rights of the creditor.401 (2) If the substitution was effected without the knowledge and consent of the original debtor, and subsequently, payment is made by the new debtor again without the knowledge and consent of the original debtor, the new debtor can demand reimbursement from the original debtor only insofar as the payment has been beneficial to such debtor,402 but he cannot be subrogated in the rights of the creditor.403 However, if payment is made with the knowledge and consent of the original debtor, although the substitution had been effected without his knowledge and consent, the new debtor can still demand reimbursement from the original debtor of the entire

Manresa, 5th Ed., Bk. 1, pp. 778-779. Art. 1236, Civil Code. 401 Arts. 1300, 1302, 1303, Civil Code. 402 Art. 1237, Civil Code. 403 Ibid. 399 400

343

Arts. 1294-1295

OBLIGATIONS

amount which he has paid,404 and, at the same time, be subrogated in all of the rights of the creditor.405 In delegación — since the substitution was effected with the consent of all the parties, the new debtor (delegado) can demand reimbursement from the original debtor (delegante) of the entire amount which he has paid406 as well as compel the creditor (delegatorio) to subrogate him in all of his rights.407 Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or nonfulfillment of the obligation shall not give rise to any liability on the part of the original debtor.408 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.409 Effect of Nonpayment By New Debtor. — As a general rule, novation by substitution of the person of the debtor whether by expromisión or by delegación has the effect of releasing the original debtor from his obligation to the creditor and, at the same time, of substituting the new debtor thereto.410 A problem, however, arises if the new debtor becomes insolvent or is unable to fulfill the obligation. What would be the effect upon the relationship between the creditor and the original debtor? Is the liability of the latter revived? This question is answered by Arts. 1294 and 1295 of the Code. It must be observed that the first is applicable only to expromisión, while the second is applicable only to delegación.

Art. 1236, Civil Code. Arts. 1300, 1302, 1303, Civil Code. 406 Art. 1236, Civil Code. 407 Arts. 1300, 1302, 1303, Civil Code. 408 New provision. 409 Art. 1206, Spanish Civil Code, in modified form. 410 8 Manresa, 5th Ed., Bk. 1, p. 779. 404 405

344

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1296

Idem; If substitution is by expromision. — Before the promulgation of the New Civil Code, it was universally admitted, following the weight of Spanish authority, that if the substitution was effected by expromisión, the new debtor’s insolvency or nonfulfillment of the obligation can never result in the revival of the original debtor’s liability to the creditor. This doctrine is, of course, based on the fact that in expromisión, the substitution can be made without the knowledge of the original debtor or even against his will.411 With the promulgation of the New Civil Code, however, this doctrine has been modified. According to Art. 1294, a provision which is not found in the old Code, if the substitution was effected without the knowledge or against the will of the original debtor, the new debtor’s insolvency or nonfulfillment of the obligation shall not revive the original debtor’s liability to the creditor. From this it can be inferred that if the substitution was effected with the knowledge and consent of the original debtor, the new debtor’s insolvency or nonfulfillment of the obligation shall revive the original debtor’s liability to the creditor. Idem; If substitution is by delegacion. — On the other hand, if the substitution was effected by delegación, according to Art. 1295, the right of action of the creditor can no longer be revived except in the following cases: first, when the insolvency of the new debtor (delegado) was already existing and of public knowledge at the time when the original debtor (delegante) delegated his debt; and second, when such insolvency was already existing and known to the original debtor (delegante) when he delegated his debt. It is evident that the purpose of these two exceptions is to prevent the commission of fraud. With regard to the first exception, it is, of course, necessary that the condition that the insolvency of the delegado was of public knowledge should exist at the time the delegación was made, because if it were otherwise, the delegante cannot then be held responsible since he himself was not aware of it.412 Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may

411 412

Ibid., pp. 779-780. Ibid., p. 780.

345

Arts. 1297-1298

OBLIGATIONS

subsist only insofar as they may benefit third persons who did not give their consent.413 Effect Upon Accessory Obligations. — The rule stated in the above article is a necessary consequence of the principle that an accessory obligation is dependent upon the principal obligation to which it is subordinated. According to Manresa, the precept applies to objective novations as well as to those novations effected by substituting the person of the debtor. It cannot, however, apply to novations effected by subrogating a third person in the rights of the creditor because the effects of such novations are regulated by Arts. 1303 and 1304 of the New Civil Code.414 The exception refers to a case in which there is a stipulation constituted in favor of a third person, which may be demanded separately from the principal obligation, although subordinated to the latter.415 A good example of this would be the stipulation pour autrui416 referred to in the second paragraph of Art. 1311 of the New Civil Code.417 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.418 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.419 Effect If New and/or Old Obligations Are Void. — Among the essential requisites of novation, whether objective or subjective, are the validity of the new obligation and the existence of a previous valid obligation.420 The first is deducible from the provision of Art.

Art. 1207, Spanish Civil Code. 8 Manresa, 5th Ed., Bk. 1, p. 792. 415 Ibid., p. 793. 416 New provision. 417 Art. 1208, Spanish Civil Code, in modified form. 418 New Provision; Tiu Siuco vs. Habana, 45 Phil. 707. 419 3 Castan, 7th Ed., p. 289. 420 8 Manresa, 5th Ed., Bk. 1, pp. 796-797. 413 414

346

EXTINGUISHMENT OF OBLIGATIONS Novation

Arts. 1297-1298

1297, while the second is expressly stated by the provision of Art. 1298. These requisites are logical because the purpose of novation is the substitution of the new obligation for the old. In order to effect the novation, it is, therefore, essential that both the old and the new obligation must be valid.421 If the old obligation is void, then there is nothing to novate. The new obligation, therefore, cannot produce any effect. The same is true if the old obligation has already been extinguished.422 On the other hand, if the new obligation is void, then there is no new obligation which is supposed to be the substitute for the old obligation. Consequently, such old obligation shall still subsist, unless the parties intended that the former relation should be extinguished in any event.423 Idem; Rule if old obligation is voidable. — With respect to voidable obligations, the rule is different. According to Art. 1298, when the annulment of the obligation may be claimed only by the debtor, or when there is a ratification of the obligation, the rule that the novation is void is not applicable. This is logical because a voidable obligation is binding until it is annulled by a competent court, and therefore, susceptible of ratification.424 It must, however, be observed that if the debtor concurs in the novation, he impliedly renounces his right to ask for annulment, and therefore, validates the obligation. But this concurrence is not always indispensable because it may be lacking such as in the case of expromisión. Therefore, if he does not concur in the substitution of debtors, and the new debtor, who has assumed the obligation, eventually pays such obligation, he (the old debtor) can still avail himself of the right to invoke the voidable character of the obligation against any claim of the second debtor. The second debtor, on the other hand, if he was aware of the vice or defect of the obligation at the time when he assumed its payment, cannot avail himself of the right to invoke its voidable character against any claim of the creditor.425

Art. 1297, Civil Code. Art. 1390, Civil Code. 423 8 Manresa, 5th Ed., Bk. 1, p. 798. These so-called exceptions found in Art. 1298 of the Code are not really exceptions because they refer to voidable contracts (Art. 1390), while the general rule refers to void contracts (Art. 1409). 424 New provision. 425 3 Castan, 7th Ed., p. 289, quoted in Gov’t. of the Phil. vs. Bautista, CA, 37 Off. Gaz. 1880. 421 422

347

Art. 1299

OBLIGATIONS

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.426 Effect If Old Obligation Is Conditional. — According to the above article, if the original obligation was subject to a suspensive or a resolutory condition, the new obligation shall be subjected to the same condition, unless it is otherwise stipulated. This rule is based on the same principle enunciated in the previous article, since the fulfillment of the event which constitutes the condition has the effect of either rendering an obligation effective or extinguishing it depending upon whether the condition is suspensive or resolutory. In other words, if the original obligation is conditional, the novation must also be conditional, and its efficacy shall, therefore, depend upon whether the condition which affects the first is complied with or not.427 According to Manresa, if the previous obligation is conditional, the fulfillment or non-fulfillment of the condition affects the subsequent obligation. This is true whether the condition is suspensive or resolutory in character. The reason is that the subsequent obligation was contracted on the basis of the efficacy of the previous obligation as its equivalent. In other words, if the previous obligation does not arise because of the non-fulfillment of the suspensive condition, or if it ceases to be effective because of the fulfillment of the resolutory condition, then the previous obligation is placed in the same category as a void obligation or an obligation which has already been extinguished. Hence, if the suspensive condition is not fulfilled, the novation is valid; otherwise, it is not.428 Cases may, however, arise in which the new, as well as the previous, obligation is subject to different conditions. If the conditions affecting both obligations can stand together, and they are all fulfilled, the effect is that the new obligation becomes demandable; if only the condition affecting the first obligation is fulfilled, the previous obligation is revived, while the new obligation loses its force; if only the condition affecting the second obligation is fulfilled, the effect is that there is no novation since the requisite of a previous valid

8 Manresa, 5th Ed., Bk. 1, pp. 797-798. Ibid., p. 798. 428 Art. 1209, Spanish Civil Code, in modified form. 426 427

348

EXTINGUISHMENT OF OBLIGATIONS Novation

Arts. 1300-1301

and effective obligation would be lacking. If the conditions affecting both obligations are incompatible with each other, it is evident that the effect of such incompatibility is the extinguishment of the first obligation so that only one obligation remains — the new obligation whose demandability or effectivity shall depend upon the fulfillment or non-fulfillment of the condition affecting it.429 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.430 Novation By Subrogation. — The second method whereby personal novation may be effected is by subrogating a third person in the rights of the creditor. There are two forms of this kind of novation — conventional subrogation and legal subrogation.431 Conventional subrogation is that which takes place by the agreement of the original creditor, the third person substituting the original creditor, and the debtor, while legal subrogation is that which takes place by operation of law. Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person.432 Conventional Subrogation. — Conventional subrogation must be clearly established in order that it may take effect.433 This necessarily follows from the fact that in conventional subrogation it is essential that there must be an agreement of all the parties with respect to the subrogation. As a matter of fact, according to Art. 1301, which gives the requisites of conventional subrogation, the consent of the original creditor, of the third person who is subrogated to the rights of the original creditor, and of the debtor is required.

Art. 1300, Civil Code. New provision. 431 Art. 1300, Civil Code. 432 See Art. 1624, et seq., Civil Code. 433 8 Manresa, 5th Ed., Bk. 1, p. 890. 429 430

349

Art. 1302

OBLIGATIONS

There is, however, a case in which the creditor may transmit his rights to a third person even without the consent of the debtor, but in this case, there would be no novation of the obligation by conventional subrogation, but an assignment of rights.434 The two may be distinguished from each other in the following ways: (1) As to rules which govern: Conventional subrogation is governed by Art. 1300 to Art. 1304 of the Civil Code, while assignment of rights is governed by Art. 1624 to Art 1627 of the same Code. (2) As to necessity of debtor’s consent: In conventional subrogation the debtor’s consent is required, while in assignment of rights it is not. (3) As to effect upon obligation: Conventional subrogation has the effect of extinguishing the obligation and giving rise to a new one, while assignment of rights has the effect of transmitting the rights of the creditor to another person without modifying or extinguishing the obligation. (4) As to effect upon vices: In conventional subrogation defects or vices in the original obligation are cured, while in assignment of rights they are not. (5) As to time of effectivity: In conventional subrogation the effect arises from the moment of novation or subrogation, while in assignment of rights the effect, as far as the debtor is concerned, arises from the moment of notification.435 Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, 434 435

Art. 1210, Spanish Civil Code, in modified form. Art. 1300, Civil Code.

350

EXTINGUISHMENT OF OBLIGATIONS Novation

Art. 1302

without prejudice to the effects of confusion as to the latter’s share.436 Legal Subrogation. — Legal subrogation is that which takes place without agreement of the parties but by operation of law because of certain acts. Instances of legal subrogation are those provided in this Art. 1302 of the NCC (Eduardo G. Ricarze vs. CA, et al., G.R. No.160451, Feb. 9, 2007). As a general rule, legal subrogation is not presumed.437 There are, however, three exceptions to this rule. These exceptions are enumerated in this same Art. 1302. The word “preferred’’ under the first exception should be understood in its broad sense and in connection with the rules on preference of credits.438 It will be observed that in this type of legal subrogation, the subrogation may be effected even without the debtor’s knowledge. Thus, if A has a credit of P20,000 against D which is secured by a real estate mortgage, while B has also a credit of P10,000 against D which is not secured, and subsequently, B pays A the entire indebtedness of D without the knowledge and consent of the latter, it is clear that B shall then be subrogated in all of the rights of A, not only against the debtor, but even against third persons. D, however, can still avail himself as against B of all defenses available to him against A, such as compensation, payments already made, or even any vice or defect of the former obligation.439 With respect to the second exception, it is evident that the provisions of Arts. 1236 and 1237 are applicable. Consequently, when a person, not interested in the obligation, pays such obligation with the express or tacit approval of the debtor, he is entitled not only to demand reimbursement for what he has paid, but also to be subrogated in all of the rights of the creditor.440 However, if he pays without the knowledge or against the will of the debtor, although he is entitled to demand reimbursement to the extent that the latter

8 Manresa, 5th Ed., Bk. 1, pp. 804-805. Ibid., pp. 805-806. 438 Arts. 1236, 1302, No. 2, Civil Code. 439 Art. 1236, Civil Code. 440 Art. 1237, Civil Code. 436 437

351

Arts. 1303-1304

OBLIGATIONS

has been benefited by the payment,441 he is not subrogated in the rights of the creditor.442 With respect to the third exception, it is also evident that a “person interested in the fulfillment of the obligation’’ can only refer to a co-debtor, a guarantor, the owner of the thing which is given as security, or one who has a real right over the thing which is the object of the obligation. As in the case of the first exception, the debtor retains all of the defenses available to him against the former.443 It must be observed, however, that if it is a solidary debtor who pays, there can be no subrogation because then the obligation is extinguished, although such solidary debt or who paid can demand reimbursement from his co-debtors of the shares which correspond to them in the obligation. In other words, the co-debtor who made the payment does not step into the shoes of the creditor because he cannot enforce against his co-debtors the payment of the original obligation.444 Art. 1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.445 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.446 Effect of Total Subrogation. — It must be remembered that the effects of the other forms of novation are governed by the provisions of Art. 1296. The effects of novation by subrogating a third person in the rights of the creditor, on the other hand, are governed by the provisions of Arts. 1303 and 1304.

8 Manresa, 5th Ed., Bk. 1, pp. 806-807. Wilson vs. Berkenkotter, 49 Off. Gaz. 1401; 8 Manresa, 5th Ed., Bk. 1, p. 807. 443 Art. 1212, Spanish Civil Code, in modified form. 444 Art. 1213, Spanish Civil Code. 445 8 Manresa, 5th Ed., Bk. 1, pp. 814-815. For illustrative case, see Somes vs. Molina, 15 Phil. 133. 446 8 Manresa, 5th Ed., Bk. 1, p. 815. 441 442

352

EXTINGUISHMENT OF OBLIGATIONS Novation

Arts. 1303-1304

Subrogation transfers to the third person who is subrogated the credit with all of the rights which the original creditor had against the debtor or against third persons. Hence, unlike the other forms of novation, accessory obligations are not extinguished because in such obligations the person subrogated also acquires all of the rights which the original creditor had against third persons. The application of this rule is absolute with respect to legal subrogations; however, with respect to conventional subrogations, such accessory obligations may be increased or reduced depending upon the agreement of the parties. Effect of Partial Subrogation. — The effect of partial subrogation is given in Art. 1304. Thus, if P, a third person, pays two-thirds of the indebtedness of D to C, such payment shall result in the partial subrogation of P in the rights of the creditor, C. C’s rights with respect to the remainder are not affected by the subrogation. In other words, both rights shall co-exist. In case of a conflict between the two, however, the right of C shall be preferred.

353

CONTRACTS

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.1 Concept of Contracts. — In its derivative sense, the word “contract’’ (cum traho) simply means an agreement or convention. It must be noted, however, that a contract is not exactly synonymous with a convention. While the latter is broad enough to include any kind of agreement which may create, modify or extinguish patrimonial and even family relations, the former, on the other hand, is limited exclusively to those agreements which produce patrimonial obligations. It is, therefore, clear that “convention” is the genus, while “contract’’ is the specie.2 Hence, a contract may be defined as a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do or not to do.3 This restricted concept of contracts is adopted in Art. 1254 of the Spanish Civil Code — a concept which we have retained in Art. 1305 of our Code. Idem; Distinguished from other terms. — Contracts must not be confused with other juridical conventions such as marriage, adoption and succession. There are some essential differences. In the first place, the principal source of the rights and obligations of the parties in contracts is their agreement, while in the other juridical conventions, it is the law itself. In the second place, rights

Art. 1254, Spanish Civil Code, in modified form. 3 Castan, 7th Ed., pp. 298-300. 3 4 Sanchez Roman 146. 1 2

354

GENERAL PROVISIONS

Art. 1305

and obligations arising from contracts are concrete, limited and transitory, while those arising from the other juridical conventions are more or less elastic, absolute and permanent.4 As a matter of fact, as far as an ordinary contract and a contract of marriage are concerned, we can very well enumerate the following distinctions between the two: (1) In an ordinary contract, the parties may be two or more persons of the same or of different sexes, while in a marriage contract, it is necessary that the parties must be one man and one woman. (2) In the first, the nature, consequences and incidents of the contract are governed primarily by the agreement of the parties, while in the second, the nature, consequences and incidents of the marriage are governed by law. (3) In the first, once the contract is executed, the result is a contract, while in the second, once the marriage is celebrated, the result is a status. (4) The first can be terminated or dissolved by the mere agreement of the parties, while the second cannot. (5) In the first, in case of breach, the usual remedy is for the injured party to institute an action against the other party for damages, while in the second, in case of breach, the usual remedy is for the injured party to institute a civil action against the other party for legal separation or a criminal action for adultery or concubinage. Neither must contracts be confused with perfected or imperfect promises. A perfected promise merely tends to insure and pave the way for the celebration of a future contract. An imperfect promise (policitación), on the other hand, is a mere unaccepted offer.5 Nor must contracts be confused with either pacts or stipulations. A pact is an incidental part of a contract which can be separated from the principal agreement, while a stipulation is an essential and dispositive part which cannot be separated from such principal agreement.6

8 Manresa, 5th Ed., Bk. 2, pp. 268-270. Ibid., p. 277. 6 Ibid., pp. 277-278. 4 5

355

Art. 1305

CONTRACTS

The Basic Duties of Persons when entering into Contracts. —All men are presumed to be sane and normal and subject to be moved by substantially the same motives. When of age and sane, they must take care of themselves. In their relations with others in the business of life, wits, sense, intelligence, training, ability and judgment meet and clash and contest, sometimes with gain and advantage to all, sometimes to a few only, with loss and injury to others. In these contests, men must depend upon themselves –– upon their own abilities, talents, training, senses, acumen, judgment. The fact that one may be worsted by another, of itself, furnishes no cause of complaint. One man cannot complain because another is more able, or better trained, or has better sense or judgment than he has; and when the two meet on a fair field, the inferior cannot murmur if the battle goes against him. The law furnished no protection to the inferior simply because he is inferior, any more than it protects the strong because he is strong. The law furnishes protection to both alike –– to one no more or less than the other. It makes no distinction between the wise and the foolish, the great and the small, the strong and the weak. The foolish may lose all they have to the wise but that does not mean that the law will give it back to them again. Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally competent. Courts operate not because one person has been defeated or overcome by another, but because he has been defeated or overcome illegally. Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by then –– indeed, all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it. (Valles vs. Villa, 35 Phil. 769; Sps. Pascual vs. Ramos, G.R. No. 144712, July 4, 2002.) The duty of the Courts in interpreting Contracts. - It is not the province of the court to alter a contract by construction or to make a new contract for the parties. Its duty is confined to the interpretation of the one which they have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain. (Cuizon vs. CA, 260 SCRA 645.) 356

GENERAL PROVISIONS

Art. 1305

Elements of Contracts. — The elements of a contract may be classified as follows: (1) Essential — The essential elements are those without which there can be no contract. These elements, in turn are subdivided into common (comunes), special (especiales) and extraordinary or peculiar (especialisimos). The common elements are those which are present in all contracts, such as consent of the contracting parties; object certain which is the subject of the contract; and cause of the obligation which is established. The special elements are present only in certain contracts, such as delivery in real contracts or form in solemn ones. The extraordinary elements are those which are peculiar to a specific contract, such as the price in a contract of sale.7 (2) Natural — The natural elements are those which are derived from the nature of the contract and ordinarily accompany the same. They are presumed by the law, although they can be excluded by the contracting parties if they so desire.8 Thus, warranty against eviction is implied in a contract of sale, although the contracting parties may increase, diminish or even suppress it.9 (3) Accidental — The accidental elements are those which exist only when the parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract. Examples of these are conditions, terms and modes.10 Idem; Parties to a contract. — From the very definition of a contract as enunciated in Art. 1305, it is evident that the existence of two parties is also another essential element which is common to all contracts and must, therefore, be added to the requirements of consent, object certain and cause. Consequently, a person cannot enter into a contract with himself. There are, however, certain cases where a juridical relation, known as an auto-contract, may be created wherein, apparently, there is only one party involved, but in reality, said party merely acts in the name and for the account of two distinct contracting parties. This may take place (1) when a

3 Castan, 7th Ed., pp. 322-324. Ibid., p. 324. 9 Arts. 1547, 1548, Civil Code. 10 3 Castan, 7th Ed., p. 324. 7 8

357

Art. 1305

CONTRACTS

person, in his capacity as representative of another, contracts with himself, or (2) when as a representative of two different persons, he brings about a contract between his principals by contracting with himself, unless there is a conflict of interests or when the law expressly prohibits it in specific cases.11 Characteristics of Contracts. — The four most fundamental characteristics of contracts are: first, the obligatory force or character of contracts (obligatoriedad del contrato); second, the autonomy of contracts; third, the mutuality of contracts, or what amounts to the same thing, the essential equality of the contracting parties; and fourth, the relativity of contracts (relatividad del contrato). The principle of the obligatory force of contracts is explicitly recognized in Arts. 1159, 1308, 1315 and 1356 of the Civil Code. It refers to the rule so fundamental in all contracts, that once the contract is perfected, it shall be of obligatory force upon both of the contracting parties. Consequently, such contracting parties are bound, not only to the fulfillment of what has been expressly stipulated, but also to all of the consequences thereof.12 The principle of the mutuality of contracts, on the other hand, can be deduced, not only from the very nature of contracts, but also from Art. 1308. This principle refers to the position of essential equality that is occupied by both contracting parties in relation to the contract. The contract must be binding upon both of the parties. Consequently, its validity or compliance cannot be left to the will of one of them.13 The principle of the autonomy of contracts is expressly declared in Art. 1306. The contracting parties may establish such agreements as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. As a matter of fact, this principle is guaranteed by Sec. 1, Art. 3 of the Philippine Constitution itself. The principle of relativity of contracts is expressly declared in the first paragraph of Art. 1311. Contracts take effect only between 11

Tolentino, 1956 Ed., Civil Code, pp. 376-378; but see No. 2 of Art. 1491, Civil

Code. 12 13

See Arts. 1159, 1308, 1315, 1356, Civil Code. See Art. 1308, Civil Code.

358

GENERAL PROVISIONS

Art. 1305

the parties, their assigns and heirs. Consequently, they cannot, as a general rule, produce any effect upon third persons, in conformity with the principle of res inter alios acta aliis negue nocet prodest.14 Breach of Contract defined. — Breach of contract is defined as the failure ,without legal reason, to comply with the terms of the contract. It is also defined as the failure, without legal excuse, to perform any promise which forms the whole or part of the contract (Sps. Edgar and Dinah Omengan vs. Philippine National Bank. et. al., G.R. No. 161319, January 23, 2007). Life of Contracts. — The life of a contract has three phases or stages — generation, perfection and consummation. The first stage comprehends the preliminary or preparation, conception or generation, which is the period of negotiation and bargaining, ending at the moment of agreement of the parties; the second stage comprehends the perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and the third stage comprehends the consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract. (ABS-CBN Broadcasting Corporation vs. Court of Appeals, G.R. No. 128690, January 21, 1999.)15 Classification of Contracts. — Contracts may be classified as follows: (1)

According to their relation to other contracts:

(a) Preparatory — or those which have for their object the establishment of a condition in law which is necessary as a preliminary step towards the celebration of another subsequent contract. Examples — partnership, agency. (b) Principal — or those which can subsist independently from other contracts and whose purpose can be fulfilled by themselves. Examples — sale, lease. (c) Accessory — or those which can exist only as a consequence of, or in relation with, another prior contract. Examples — pledge, mortgage.

14 15

3 Castan, 7th Ed., p. 399. Ibid., pp. 279-280.

359

Art. 1305

CONTRACTS

(2)

According to their perfection:

(a) Consensual — or those which are perfected by the mere agreement of the parties. Examples — sale, lease. (b) Real — or those which require not only the consent of the parties for their perfection, but also the delivery of the object by one party to the other. Examples — commodatum, deposit, pledge. (3)

According to their form:

(a) Common or informal — or those which require no particular form. Example — loan. (b) Special or formal — or those which require some particular form. Examples — donations, chattel mortgage. (4)

(5)

According to their purpose: (a)

Transfer of ownership. Example — sale.

(b)

Conveyance of use. Example — commodatum.

(c)

Rendition of services. Example — agency.

According to their subject matter: (a)

Things. Examples — sale, deposit, pledge.

(b)

Services. Examples — agency, lease of services.

(6) According to the nature of the vinculum which they produce: (a) Unilateral — or those which give rise to an obligation for only one of the parties. Examples — commodatum, gratuitous deposit. (b) Bilateral — or those which give rise to reciprocal obligations for both parties. Examples — sale, lease. (7)

According to their cause:

(a) Onerous — or those in which each of the parties aspires to procure for himself a benefit through the giving of an equivalent or compensation. Example — sale. (b) Gratuitous — or those in which one of the parties proposes to give to the other a benefit without any equivalent or compensation. Example — commodatum. 360

GENERAL PROVISIONS

(8)

Art. 1306

According to the risks involved:

(a) Commutative — or those where each of the parties acquires an equivalent of his prestation and such equivalent is pecuniarily appreciable and already determined from the moment of the celebration of the contract. Example — lease. (b) Aleatory — or those where each of the parties has to his account the acquisition of an equivalent of his prestation, but such equivalent, although pecuniarily appreciable, is not yet determined at the moment of the celebration of the contract, since it depends upon the happening of an uncertain event, thus charging the parties with the risk of loss or gain. Example — insurance. (9)

According to their names or norms regulating them:

(a) Nominate — or those which have their own individuality and are regulated by special provisions of law. Examples — sale, lease. (b) Innominate — or those which lack individuality and are not regulated by special provisions of law.16 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.17 Right To Contract. — Art. 1306 of the Civil Code enunciates one of the most fundamental principles of the law on contracts — the right of the contracting parties to establish any stipulation, clause, term or condition as they may deem convenient. As a matter of fact, this right is one of those guaranteed in the Constitution.18 Hence, the freedom to contract is both a constitutional and a statutory right; therefore, to uphold this right, courts should move with all the necessary caution and prudence in holding contracts void.19

4 Sanchez Roman 381-387; 3 Castan, 7th Ed., pp. 310-314. Art. 1255, Spanish Civil Code, in modified form. 18 Art. IV, Sec. 11, Constitution of the Philippines. 19 Gabriel vs. Monte de Piedad, 71 Phil. 497. To the same effect: Ferrazzini vs. Gsell, 34 Phil. 697; People vs. Pomar, 46 Phil. 440. 16 17

361

Art. 1306

CONTRACTS

Idem; Limitations. — The right, however, is not absolute in character. It is subject to several limitations. According to Art. 1306, the stipulation, clause, term or condition established by the contracting parties must not be contrary to (1) law, (2) morals, (3) good customs, (4) public order, or (5) public policy. Under the Spanish Civil Code (Art. 1255), good customs and public policy are not included, although Spanish jurisprudence has always considered good customs as included within the sphere of morals, and public policy as synonymous with public order.20 Idem; id. — First limitation. — The most important of these limitations is the first — that the agreement of the contracting parties must not be contrary to law. The laws referred to are: first, those which are mandatory or prohibitive in character; second, those which, without being mandatory or prohibitive, nevertheless, are expressive of fundamental principles of justice, and, therefore, cannot be overlooked by the contracting parties; and third, those which impose essential requisites without which the contract cannot exist.21 Thus, where the parties stipulated in their contract that all judicial and extrajudicial acts necessary under the terms thereof should take place in a certain municipality, it is clear that such a stipulation is contrary to law since right to fix the jurisdiction of courts can only be exercised by the legislative branch of the government and not by private individuals.22 Similarly, where the parties stipulated that in case the debtor cannot pay his obligation at maturity, the creditor may appropriate for himself the thing which is given as security, such stipulation is null and void since it is contrary to the provision of Art. 2088 of the Civil Code, which prohibits pactum commissorium.23 Likewise, in the case of Bustamante vs. Rosel (November 29, 1999, 319 SCRA 413), the Court ruled that where the respondents

Ferrazzini vs. Gsell, 34 Phil. 697; 8 Manresa, 5th Ed., Bk. 12, p. 288; 20 Scaevola 505. 21 8 Manresa, 5th Ed., Bk. 2, pp. 287-288. 22 Molina vs. De la Riva, 6 Phil. 12. 23 Puig vs. Sellner, 45 Phil. 286; Reyes vs. Nebrija, G.R. No. L-8720, March 21, 1956. To the same effect: Warner, Barnes & Co. vs. Jaucian, 13 Phil. 4; Aguilar vs. Rubiato, 40 Phil. 570; Pamintuan vs. Tiglao, 53 Phil. 1; Hodges vs. Regalado, 69 Phil. 588. There are other pacts, besides pactum commissorium which are prohibited by law, such as pactum leonina under Art. 1799 of the Civil Code and pactum de non alienado under Art. 2130 of the same Code. 20

362

GENERAL PROVISIONS

Art. 1306

Rosel argue that contracts have the force of law between the contracting parties and must be complied with in good faith, there are, however, certain exceptions to the rule, specifically Article 1306 of the Civil Code, which provides: “Article 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.’’ A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as security for the loan. This is embraced in the concept of pactum commissorium where the elements are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.’’ Said concept of pactum commissorium is proscribed by law. Idem; id. — Second limitation. — The second limitation is the most difficult to ascertain, because in subjecting obligations to moral precepts we must be careful not to erase the distinction between the moral and the juridical order. It is evident, however, that the morals referred to are those principles which are incontrovertible and are universally admitted and which have received social and practical recognition.24 Thus, where the parties stipulated in their contract that the defendant shall be obliged to render services to the plaintiff as a domestic servant without any remuneration whatsoever because of a certain loan obtained by the former from the latter, it is evident that such agreement is void on the ground that it is contrary to morals, unless it be admitted that slavery may be established in this country through a covenant entered into between the interested parties.25 Similarly, where the debtors executed a promissory note in favor of the plaintiff for P465, promising to pay a penalty of P5.00 a day in case of non-payment of the debt at maturity, it is clear that such a promise is immoral and, therefore, cannot be enforced.26 Idem; id. — Third limitation. — The third limitation to the right of the contracting parties to establish such stipulations, clauses, terms, and conditions as they may deem convenient is good customs. 8 Manresa, 5th Ed., Bk. 2, p. 288. De los Reyes vs. Alojado, 16 Phil. 499. 26 Ibarra vs. Aveyro, 37 Phil. 273. 24 25

363

Art. 1306

CONTRACTS

The spheres of morals and good customs frequently overlap each other but sometimes they do not.27 It must be admitted, however, that if a moral precept or custom is not recognized universally, but is sanctioned by the practice of a certain community, then it shall be included within the scope or sphere of good customs.28 Idem; id. — Fourth limitation. — The fourth limitation to the right of the contracting parties to establish such stipulations, clauses, terms and conditions as they may deem convenient is public order. As it is understood in the present Civil Code, it would seem that public order can only refer to the safety, as well as to the peace and order, of the country or of any particular community. This can be implied from the report of the Code Commission which states that “public order x x x is not as broad as public policy, as the latter may refer not only to public safety but also to considerations which are moved by the common good.”29 Under the Spanish Civil Code, however, public order was considered synonymous with public policy.30 Idem; id. — Fifth limitation. — The fifth limitation to the right of the contracting parties to establish such stipulations, clauses, terms and conditions as they may deem convenient is public policy. The expression “public policy” is quite elastic, and consequently, is difficult to define. American and English courts, however, define it as a principle of law which holds that no person can lawfully do that which has a tendency to be injurious to the public or against the public good. It is the principle under which freedom of contract is restricted by law for the public good.31 According to Justice Laurel: “A contract is to be judged by its character, and courts will look to the substance and not to the mere form of the transaction. The freedom of contract is both a constitutional and statutory right and to uphold this right, courts should move with the necessary caution and prudence in holding contracts void. (People vs. Pomar, 46 Phil. 440; Ferrazzini vs. Gsell, 34 Phil. 697.) At any rate, courts should not rashly extend the rule

Report of the Code Commission, p. 134. 8 Manresa, 5th Ed., Bk. 2, p. 288. 29 Report of the Code Commission, p. 134. 30 Ferrazzini vs. Gsell, 34 Phil. 697; 8 Manresa, 5th Ed., Bk. 2, p. 288; 20 Scaevola 27 28

505. 31

Ferrazzini vs. Gsell, 34 Phil. 697.

364

GENERAL PROVISIONS

Art. 1306

which holds that a contract is void as against public policy. The term ‘public policy’ is vague and uncertain in meaning, floating and changeable in connotation. It may be said, however, that, in general, a contract which is neither prohibited by law, nor condemned by judicial decision, nor contrary to public morals, contravenes no public policy. In the absence of express legislation or constitutional prohibition, a court, in order to declare a contract void as against public policy, must find that the contract as to the consideration or thing to be done, has a tendency to injure the public, is against the public good, or contravenes some established interests of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of private property.32

Thus, where the owner of stolen goods and the person responsible for the theft entered into an agreement by which the former agreed to stifle the criminal prosecution of the latter for a pecuniary consideration, it is clear that such an agreement is manifestly contrary to public policy and the due administration of justice; consequently, it is void.33 The same can also be said with regard to an agreement where a carrier is exempted from any liability for loss or damage caused by its own negligence,34 or where an employee, after the termination of his employment, shall neither engage or interest himself in any business enterprise similar to or in competition with that operated by the employer, nor enter into the employment of any enterprise in the Philippines, except by obtaining the written permission of such employer,35 or where an applicant for dollar allocations shall pay ten or fifteen or twenty per cent of the amount to be approved by the Central Bank as fee for the services of the “influence peddler” or “ten percenter” in securing the approval of the foreign exchange application.36 It must be observed that in stipulations exempting a common carrier from liability, three kinds of stipulations are ordinarily made in a bill of lading. The first is one exempting the carrier from any and

Gabriel vs. Mateo, 71 Phil. 497. Arroyo vs. Berwin, 36 Phil. 386; Velez vs. Ramas, 40 Phil. 787; Monterey vs. Gomez, 104 Phil. 1059. 34 Heacock vs. Macondray & Co., 42 Phil. 205. See Arts. 1745, et seq., Civil Code. 35 Ferrazzini vs. Gsell, 34 Phil. 697. 36 Tee vs. Tacloban Electric and Ice Plant Co., 105 Phil. 168. 32 33

365

Art. 1306

CONTRACTS

all liability for loss or damage occasioned by its own negligence; the second is one providing for an unqualified limitation of such liability to an agreed valuation; and the third is one limiting the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight. According to Art. 1745 of the Civil Code, the first is contrary to public policy, and therefore, void. As a rule, the second is also contrary to public policy, and therefore, also void.37 However, according to Art. 1750 of the Civil Code, if it can be shown to be reasonable under the circumstances, and had been fairly and freely agreed upon, then it is perfectly valid and binding. The third, on the other hand, is perfectly valid and binding according to Art. 1749 of the Civil Code. With regard to contracts which tend to restrain business trade, the rule is now well established that a contract in restraint of trade is valid provided that there is a limitation upon either time or place. A contract, however, which restrains a man from entering into a business or trade without either a limitation as to time or place is invalid. The public welfare, of course, must always be considered. Hence, in addition to the requirement that there must be a limitation as to time or place, it is also required that the restraint must be reasonably necessary for the protection of the contracting parties.38 Ysmael & Co. vs. Barretto 51 Phil. 90 The records show that the defendant received 164 cases of silk from the plaintiff to be shipped to Surigao. It was stipulated in the bill of lading that the carrier shall not be liable for loss or damage from any cause beyond an amount exceeding P300 for any single package of the cargo, unless the value and contents of the packages constituting the cargo are correctly declared in the bill of lading at the time of shipment. Four cases of silk, each of which is valued at P2,500, were, however, lost. This action was commenced to recover their value from the defendant. The defendant contends that his liability shall extend only to the amount agreed upon in the bill of lading. The question, therefore, is whether or not the agreement is valid and binding upon the plaintiff. 37 Heacock vs. Macondray & Co., 42 Phil. 205; Ysmael & Co. vs. Barretto, 51 Phil. 90. See Arts. 1745 to 1754, Civil Code. 38 Del Castillo vs. Richmond, 45 Phil. 679. To the same effect: Ollendorf vs. Abrahamson, 88 Phil. 585.

366

GENERAL PROVISIONS

Art. 1306

Held: “The agreement above quoted places a limit of P300 ‘for any single package of silk.’ The evidence shows that 164 ‘cases’ were shipped, and that the value of each case was very near P2,500. In this stipulation, the limit of defendant’s liability for each case of silk ‘for loss or damage from any cause or for any reason’ would put it in the power of the defendant to have taken the whole cargo of 164 cases of silk at a valuation of P300 for each case or less than one-eighth of its actual value. If this rule of law should be sustained, no silk would be shipped from one island to another in the Philippines. Such a limitation of value is unconscionable and void as against public policy. “By the weight of modern authority, a carrier cannot limit its liability, for injury or loss of goods shipped, where such injury or loss was caused by its own negligence. The rule rests on consideration of public policy, as the contract of the carrier is to carry and deliver the goods, and a contract that undertakes to relieve the carrier from any liability for loss or damage accruing or arising from its own negligence would in legal effect nullify the contract.’’ Ferrazzini vs. Gsell 34 Phil. 697 In the contract entered into between plaintiff and defendant the former agreed to pay P10,000 to the latter as liquidated damages for each and every breach of a clause of the contract which provides that during the period of employment and for a period of five years after the termination thereof for any cause or reason whatsoever, the plaintiff should neither engage or interest himself in any business enterprise similar to or incompetition with those operated by the defendant, nor enter into the employment of any enterprise in the Philippines except after obtaining the written permission of the defendant. The question now arises as to whether the stipulation above set forth is valid and binding upon the plaintiff. Held: “The contract under consideration is clearly one in undue or unreasonable restraint of trade and therefore against public policy. It is limited as to time and space but not as to trade. It is not necessary for the protection of the defendant, as this is provided for in another part of the clause. It would force the plaintiff to leave the Philippine Islands in order to obtain a livelihood in case the defendant declined to give him the written permission to work elsewhere in this country.”

367

Art. 1306

CONTRACTS

Del Castillo vs. Richmond 45 Phil. 679 The records show that in the contract entered into between plaintiff and defendant, the former agreed that he shall not open or own, nor have any interest directly or indirectly in any other drugstore either in his own name or in the name of another; nor have any connection with or be employed by any other drugstore either as pharmacist or in any capacity in any drugstore within a radius of four miles from the municipality of Legaspi, province of Albay, so long as the defendant or his heirs may own or have an interest in a drugstore in the said municipality. The question that is raised is whether or not such an agreement is valid and binding upon the plaintiff. Held: “The law concerning contracts which tend to restrain business trade has gone through a long series of changes from time to time within the changing conditions of trade and commerce. With trifling exceptions, said changes have been a continuous development of a general rule. The early cases show plainly a disposition to avoid and annul all contracts which prohibited or restrained any one from using a lawful trade ‘at any time or at any place’ as being against the benefit of the state. Later, however, the rule became well established that if the restraint was limited to ‘a certain time’ and within ‘a certain place’ such contracts were valid and not against the benefit of the state. Later cases, and we think the rule is now well established, have held that a contract in restraint of trade is valid provided there is a limitation upon either time or place. A contract, however, which restrains a man from entering into a business or trade without either a limitation as to time or place, will be held invalid. “The public welfare, of course, must always be considered, and if it be not involved and the restraint upon one party is not greater than protection to the other requires, contracts like the one we are discussing will be sustained. The general tendency, we believe, of modern authority, is to make the test whether the restraint is reasonably necessary for the protection of the contracting parties. If the contract is reasonably necessary to protect the interest of the parties, it will be upheld. In all cases like the present, the question is whether, under the particular circumstances of the case and the nature of the particular contract involved in it, the contract is reasonable. Of course, in establishing whether the contract is reasonable or unreasonable, the nature of the business must also be considered.

368

GENERAL PROVISIONS

Art. 1306

“Considering the nature of the business in which the defendant is engaged, in relation with the limitation placed upon the plaintiff both as to time and place, we are of the opinion, and so decide, that such limitation is legal and reasonable and not contrary to public policy.” Sy Suan vs. Regala 105 Phil. 1024 Sy Suan, president and general manager of Price, Inc., executed in favor of plaintiff Regala a special power of attorney authorizing the latter to prosecute an application for a license with the Import Control Office for the importation of industrial starch for candy manufacture. It was agreed verbally that as compensation for plaintiff’s service, he would be paid 10% of the total value of the amount that would be approved by the Import Control Office. As it turned out, plaintiff was able to prosecute the approval of the application successfully. Subsequently, because of the refusal of the defendant to pay the balance of the 10% commission agreed upon, plaintiff brought this action against him to recover the amount. The latter, however, contends that the agreement is contrary to public policy, and therefore, void ab initio. The former, on the other hand, maintains that there is no evidence showing that the contract in question has violated any public policy. Held: “The contract is contrary to good customs, public order and public policy. Judicial notice may be taken of the fact that this kind of contract sprouted as a result of the controls imposed by the government on imports and dollars allocations, despite the enunciated government policy that applications for imports and foreign exchange should be considered and acted upon strictly on the basis of merit, without intervention of intermediaries, which policy is revealed by Secs. 15 and 18 of Rep. Act 650. If the granting of import licenses depends solely upon the merits of each application, certainly the intervention of intermediaries, such as herein respondent, would be unwarranted and uncalled for, as such intervention would serve no other purpose than to influence, or possibly corrupt the judgment of the public officials performing an act or service connected with the issuance of import licenses. Respondent, however, claims that there is no evidence showing that the contract in question has violated any public policy. But the question whether a contract is against public policy depends upon its purpose and tendency, and not upon the fact that no harm results from it. In other words, all agreements the purpose

369

Art. 1306

CONTRACTS

of which is to create a situation which tends to operate to the detriment of the public interest are against public policy and, therefore, void, whether the purpose of the agreement is or is not effectuated. For a particular undertaking to be against public policy actual injury need not be shown; it is enough if the potentialities for harm are present.” Cui vs. Arellano University 2 SCRA 205 Plaintiff took up law at the Arellano University. He left the University and enrolled for the last semester of his fourth year at the Abad Santos Law School. Subsequently, he passed the bar examinations. During his stay at the Arellano University, he was a constant recipient of scholarship grants. However, he was made to sign a waiver of his right to transfer to another school unless he refunds to the University the equivalent of his scholarship grants. Since, in taking the bar examinations, he had to secure his transcript of records from the University, he was required to make the refund, which he did, but under protest. Subsequently, he brought this action to recover the amount which he had paid. Will the action prosper? Held: The action will prosper. The waiver signed by plaintiff is contrary to public policy and, therefore, null and void. Scholarship grants as pointed out by the Director of the Bureau of Private Schools in Memorandum No. 38, are awarded in recognition of merit and not to attract and keep brilliant students in school for their propaganda value. To look at such grants as a business scheme designed to increase the business potential of an educational institution is not only inconsistent with sound public policy but also good morals.

Compromise; Compromise Agreements; Effects — In the case of Santos Ventura Hocorma Foundation, Inc. vs. Santos, G.R. No. 123004, Nov. 4, 2004, the Court held that: (a) Compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. It is an agreement between 2 or more persons, who, for preventing or putting an end to a law suit, adjust their difficulties by mutual consent in the manner which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of losing. 370

GENERAL PROVISIONS

Art. 1307

Under Art. 1306 of the New Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient in a compromise agreement, provided they are not contrary to law, morals, good customs, public order, or public policy. Thus, a compromise agreement whereby the parties make reciprocal concesions to resolve their differences to thereby put an end to litigation is binding on the contracting parties and is expressly acknowledged as a juridical agreement between them. (National Commercial Bank of Saudi Arabia vs. Court of Appeals, G.R. No. 124267, January 17, 2005.) (b) The general rule is that a compromise has upon the parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or which by implication from its terms should be deemed to have been included therein. This holds true even if the agreement has not been judicially approved. (c) Applying existing jurisprudence, the compromise agreement as a consensual contract became binding between the parties upon its execution and not upon its court approval. From the time a compromise is validly entered into, it becomes the source of the rights and obligations of the parties thereto. The purpose of the compromise is precisely to replace and terminate controverted claims. However, in the case of National Commercial Bank of Saudi Arabia vs. Court of Appeals, supra, the Court held that to have the force of res judicata, however, the compromise agreement must be approved by final order of the court. To be valid, the compromise agreement must be based on real claims and actually agreed upon in good faith. In the case at bar, each of the parties have manifested their desire, by forging the Compromise Agreement, to abbreviate the legal battle and settle the case amicably to both their satisfaction. As the Agreement is not contrary to law, public order, public policy, morals or good customs, is approved. 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.39

39

New provision.

371

Art. 1307

CONTRACTS

Nominate Contracts. — As we have already seen, nominate contracts are those which have their own distinctive individuality and are regulated by special provisions of law. The nominate contracts which are defined and regulated by the Civil Code are sales (Arts. 1458-1637), barter or exchange (Arts. 1638-1641), lease (Arts. 1642-1766), partnership (Arts. 1767-1867), agency (Arts. 1868-1932), loan (Arts. 1933-1961), deposit (Arts. 1962-2009), aleatory contracts, such as insurance, gambling and life annuity (Arts. 2010-2027), compromise and arbitration (Arts. 2028-2046), guaranty (Arts. 2047-2084), and pledge, mortgage and antichresis (Arts. 2085-2141). Innominate Contracts. — Innominate contracts, on the other hand, are those which lack individuality and are not regulated by special provisions of law. Following the Roman law classification, there are four kinds of innominate contracts. They are: (a)

Do ut des — I give that you give.

(b)

Do ut facias — I give that you do.

(c)

Facio ut des — I do that you give.

(d)

Facio ut facias — I do that you do.40

What law governs innominate contracts? Resolving all doubts under the old law, Art. 1307 of the Civil Code, which is a new provision, states that such contracts shall be regulated by the stipulations of the parties, by the general provisions or principles of obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of the place. This provision is based on a doctrine enunciated in certain cases dealing with lease of services decided under the old law — notably, the cases of Perez vs. Pomar, 682, Arroyo vs. Azur, 76 Phil. 493, and Intestate Estate of Reguera vs. Tandra, 46 Off. Gaz. 186.41

8 Manresa, 5th Ed., Bk. 2, pp. 297-298; 3 Castan, 7th Ed., pp. 313-314. For a more recent case stating the same doctrine — see Dizon vs. Gaborro, 83 SCRA 688. 40 41

372

GENERAL PROVISIONS

Art. 1308

Perez vs. Pomar 2 Phil. 682 The evidence shows that the plaintiff rendered services to the defendant as interpreter during a certain period. Although it is proven that such services were accepted by the said defendant, it does not appear that any express contract, written or verbal, was ever entered into. The question now is whether there is a binding contract which will justify a court of law in fixing a just compensation for the plaintiff. Held: “Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services as interpreter. As it does not appear that he did this gratuitously the duty is imposed upon the defendant, he having accepted the benefit of the services, to pay a just compensation, by virtue of the innominate contract of facio ut des implicitly established. “The obligations arising from this contract are reciprocal, and, apart from the general provisions with respect to contracts and obligations, the special provisions concerning contracts for lease of service are applicable by analogy. “In this special contract, as determined by Article 1544 (now Art. 1644) of the Civil Code, one of the parties undertakes to render to the other services for a period certain. The tacit agreement and consent of both parties with respect to the services rendered by the plaintiff and the reciprocal benefits accruing to each are the best evidence of the fact that there was an implied contract sufficient to create a legal bond, from which arose enforceable rights and obligations of a bilateral character. “In contracts, the will of the contracting parties is law. If it is a fact sufficiently proven that the defendant Pomar, on various occasions, consented to accept an interpreter’s services, rendered in his behalf and not gratuitously, it is but just that he should pay a reasonable remuneration therefore, because it is a well-known principle of law that no one should be permitted to enrich himself to the damage of another.”

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.42

42

Art. 1256, Spanish Civil Code, in modified form.

373

Arts. 1309-1310

CONTRACTS

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.43 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.44 Mutuality of Contracts. — One of the most fundamental characteristics of contracts is the essential equality of the contracting parties or what is sometimes called the mutuality of contracts. This is deducible not only from the very nature of contracts, but also from Art. 1308. From this principle, the law expressly or impliedly recognizes the following consequences: (1) The validity or fulfillment of a contract cannot be left to the will of one of the contracting parties. This rule is expressly declared by Art. 1308. It must be observed, however, that what is prohibited by the law from being delegated to one of the contracting parties are: first, the power to determine whether or not the contract shall be valid; and second, the power to determine whether or not the contract shall be fulfilled. (2) The validity or fulfillment may be left to the will of a third person. This rule is now expressly recognized in Art. 1309 which states that the determination of the performance of a contract may be left to the will of a third person whose decision shall not be binding until it has been made known to each of the contracting parties. It is, however, an indispensable requisite that the determination made by the third person should not be evidently inequitable. If it is evidently inequitable, it shall not have any obligatory effect upon the contracting parties.45 (3) The validity or fulfillment can be left to chance. This can be deduced a sensu contrario from the text of Art. 1308.46 Applying the prohibition stated in Art. 1308, if A and B, for instance, will enter into a contract and it is expressly stipulated

New provision. New provision. 45 Arts. 1309, 1310, Civil Code. See also Arts. 1182, 1720, and 1798, Civil Code, for similar provisions. 46 8 Manresa, 5th Ed., Bk. 2, p. 304. 43 44

374

GENERAL PROVISIONS

Arts. 1309-1310

that whether or not such contract shall be valid (or shall be fulfilled) shall depend exclusively upon the will of B, it is clear that such a stipulation would be a direct violation of the prohibition stated in the article; consequently, it is void. Thus, where it is expressly stipulated in a contract of lease that the defendants can continue occupying the house which is the object of the contract indefinitely so long as they should faithfully fulfill their obligation to pay the rentals, it is clear that the continuance and fulfillment of the contract would then depend solely and exclusively upon their uncontrolled choice between continuing paying the rentals or not, completely depriving the owner of all say on the matter. Consequently, such a stipulation cannot be set up by the defendants as a defense in an action for ejectment instituted by the plaintiff. If this defense is allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals. This, of course, is prohibited by Art. 1308 of the Civil Code.47 It must be noted, however, that there are certain agreements which will in effect render the mutuality of contracts illusory because one of the contracting parties is placed in a position of superiority with regard to the determination of the validity or fulfillment of the contract over that occupied by the other party, but which do not fall within the purview of the prohibition stated in Art. 1308. In the first place, we have those agreements where the obligor promises to pay a certain amount which is not determined, but the contract itself specifies the manner by which the amount may be determined, such as by the exercise of the judgment and discretion of the obligor. Undoubtedly, a promise of this character creates a legal obligation binding upon the promisor, although in its actual results it may not infrequently prove to be illusory.48 In the second place, we have those agreements where the fulfillment of the contract is left to the will of one of the contracting parties in the negative form

47 Encarnacion vs. Baldemar, 77 Phil. 470. See also General Enterprises, Inc. vs. Lianga Bay Logging Co., 11 SCRA 733; Garcia vs. Rita Legarda, Inc., 21 SCRA 555. 48 Liebenow vs. Phil. Vegetable Oil Co., 39 Phil. 60.

375

Arts. 1309-1310

CONTRACTS

of rescission.49 Thus, according to Manresa, considering the text of Art. 1308, it is perfectly licit to leave the fulfillment of a contract to the will of one of the contracting parties in the negative form of rescission, a case which is frequent in certain contracts (especially in contracts involving lease of service), because in such, case neither is the prohibition in the article violated nor is there inequality between the parties since they remain with the same faculties with respect to fulfillment.50 Liebenow vs. Phil. Vegetable Oil Co. 39 Phil. 60 This is an action to recover a sum of money to which the plaintiff considered himself entitled by way of bonus in addition to his salary while employed by the defendant. The basis of his claim was a letter of the president of the defendant company promising to pay him in addition to his salary “such further amount as the Board of Directors may see fit to grant.” It was established that the plaintiff had in fact received P4,500 by installments from the defendant after the termination of his services. The defendant contends that this amount is the bonus which the Board of Directors had seen fit to grant, but the plaintiff maintains that it is merely an addition to his salary, and since the bonus has not yet been paid, its amount must therefore be fixed by the court because otherwise there would be a violation of the prohibitions imposed in Arts. 1115 and 1256 (now Arts. 1182 and 1308) of the Civil Code. Holding that the bonus had already been paid since the contract itself specifies that the amount thereof should depend upon the discretion of the Board of Directors of the defendant company, the Supreme Court, considering the nature and legal effect of the contract, declared: “We see no reason to doubt that a promise of this character creates a legal obligation binding upon the promisor, 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 (now Art. 1182) of the Civil Code, as embodying a condition dependent exclusively upon the will of the obligor. Nor can it be held invalid under Article 1256 (now Art. 1308) of the same Code,

49 Taylor vs. Uy Tieng Piao, 43 Phil. 873; Melencio vs. Dy Liao Lay, 55 Phil. 99; Phil. Banking Corp. vs. Lui She, 21 SCRA 52. 50 8 Manresa, 5th Ed., Bk. 2, p. 304. See Phil. Banking Corp. vs. Lui She, 21 SCRA 52.

376

GENERAL PROVISIONS

Arts. 1309-1310

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 (Article 1273 — now Art. 1349, 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.” Taylor vs. Uy Tieng Piao 43 Phil. 873 The records show that plaintiff was employed by the defendant as superintendent of an oil factory which the latter contemplated establishing in Manila. Among the stipulations inserted in the contract of employment was the following clause: “It is understood and agreed that should the machinery to be installed in the said factory fail, for any reason, to arrive in the City of Manila within a period of six months from date hereof, this contract may be cancelled by the party of the second part at its option, such cancellation, however, not to occur before the expiration of such six months.” Because of the failure of the machinery to arrive within the period stated, the defendant cancelled the contract. Subsequently, the plaintiff filed this action for breach of contract, relying on the provision of Art. 1256 (now Art. 1308),which says that the validity and fulfillment of a contract cannot be left to the will of one of the contracting parties, and Art. 1119 (now Art. 1186), which says that a condition shall be deemed fulfilled if the obligor intentionally prevents its fulfillment. Held: “Article 1256 (now Art. 1308) of the Civil Code in our opinion creates no impediment to the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in fulfillment of the contract as any other act which may have been the subject of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed upon beforehand is fulfillment. “In this connection, we note that the commentator Manresa has the following observation with respect to Article 1256 (now Art. 1308) of the Civil Code. Says he: ‘It is entirely licit to leave

377

Art. 1311

CONTRACTS

fulfillment to the will of either of the parties in the negative form of rescission, a case frequent in certain contracts (the letting of service for hire, the supplying of electrical energy, etc.), for in such supposed case neither is the article infringed, nor is there any lack of equality between the persons contracting, since they remain with the same faculties in respect to fulfillment.’ “Undoubtedly, one of the consequences of this stipulation was that the employers were left in a position where they could dominate the contingency, and the result was about the same as if they had been given an unqualified option to dispense with the services of the plaintiff at the end of six months. But this circumstance does not make the stipulation illegal. “The view already expressed with regard to the legality and interpretation of the clause under consideration disposes of in a great measure the argument of the appellant in so far as the same is based on Article 1119 (now Art. 1186) of the Civil Code. This provision supposes a case where the obligor intentionally impedes the fulfillment of a condition which would entitle the obligee to exact performance from the obligor; and an assumption underlying the provision is that the obligor prevents the obligee from performing some act which the obligee is entitled to perform as a condition precedent to the exacting of what is due to him. Such an act must be considered unwarranted and unlawful involving per se a breach of the implied terms of the contract. The article can have no application to an external contingency which, like that involved in this case, is lawfully within the control of the obligor.’’

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.51 51

Art. 1257, Spanish Civil Code, in modified form.

378

GENERAL PROVISIONS

Art. 1311

Relativity of Contracts. — It is a general principle of the civil law that a contract can only bind the parties who had entered into it or their successors who have assumed their personality or their juridical position, and that, as a consequence, such contract can neither favor nor prejudice a third person (in conformity with the axiom res inter alios acta aliis neque nocet prodest). Our Code has chosen this doctrine of the relative and personal character of contracts as evidenced by the provision of the first paragraph of Art. 1311.52 Idem; Persons bound by contract. — As a general rule, contracts can take effect only between the parties, their assigns and heirs. Thus, it has been held that even though the contract may have been executed ostensibly in the name of another person or entity, it shall produce effect only insofar as the real contracting party is concerned, provided, of course, that such fact was known to the other party.53 It has also been held that an assignment or transfer by a contracting party has the effect of subrogating the assignee to all of the rights and obligations of the assignor.54 To a certain extent the same rule is also applicable to a transmission of property, rights and obligations through either testate or intestate succession. Thus, in the case of Mojica vs. Fernandez,55 the Supreme Court enunciated the following doctrine: “Article 27 of the Mortgage Law defines a ‘third person’ as anyone who has not taken part in the act or contract recorded. Under the Civil Code, the heirs, by virtue of the right of succession, are subrogated to all the rights and obligations of the deceased and can not be regarded as third parties with respect to a deceased. (Barios vs. Dolor, 2 Phil. 44.) The doctrine was enunciated by the Supreme Court of Spain in its decision of January 27, 1881, wherein it held that ‘both judicial and extrajudicial acts, formally accepted by one who was a lawful party thereto, are effective as to the heirs and successors of such persons, who are not to be regarded as third persons for this purpose.’

52

3 Castan, 7th Ed., p. 399; see also Salonga vs. Warner, Barnes & Co., 88 Phil.

125. 53 Tuazon & San Pedro vs. Zamora, 2 Phil. 305; Blossom & Co. vs. Manila Gas Corp., 48 Phil. 848. 54 De la Riva vs. Escobar, 51 Phil. 243. 55 9 Phil. 403.

379

Art. 1311

CONTRACTS

“The principle on which these decisions rest is not affected by the provisions of the new Code of Civil Procedure (now Rules of Court), and, in accordance with that principle, the heirs of a deceased person cannot be held to be ‘third persons’ in relation to any contract touching the real estate of their decedent which comes into their hands by right of inheritance; they take the property subject to all the obligations resting thereon in the hand of him from whom they derive their rights.’’56

It must be noted, however, that the monetary obligations that the decedent might have incur during his lifetime cannot be transmitted to his heirs through succession. In other words, the heirs cannot be charged directly with the payment of such obligations. This is so, because according to the Rules of Court, such obligations must be liquidated in the testate or intestate proceeding for the settlement of the estate of the decedent.57 As held in a long line of decisions, the constant doctrine in this jurisdiction is that it is the estate or the mass of property left by the decedent, instead of the heirs directly, that becomes vested and charged with his rights and obligations which survive after his death.58 For this purpose, it has been held that it is the estate, rather than the heir, which must be considered as the continuation of the decedent’s personality. Consequently, the estate, represented by the executor or administrator, is a juridical person.59 This does not mean that the heirs can no longer be bound by contracts entered into by the decedent during his lifetime. There are other obligations which are not monetary in character and which will, therefore, constitute a part of the inheritance.60 Such obligations are still chargeable against the heirs, but only to the extent of the value of the property which they may have received from the decedent.61 Idem; id. — Exceptions. — The rule that an assignee or a heir shall be bound by the terms of a contract is not, however, absolute in character. According to the first paragraph of Art. 1311, 56 To the same effect: De Guzman vs. Salak, 91 Phil. 265; Galasinao vs. Austria, 97 Phil. 82. 57 Sec. 5, Rule 86, New Rules of Court. 58 Suiliong & Co. vs. Chio-Taysan, 12 Phil. 13; Limjoco vs. Intestate Estate of Pedro Fragante, 80 Phil. 776. See also Pavia vs. De la Rosa, 8 Phil. 70; Ledesma vs. McLaughlin, 66 Phil. 547; Tranez vs. Vail, CA, 37 Off. Gaz. 1253. 59 Limjoco vs. Intestate Estate of Pedro Fragante, 80 Phil. 776. 60 Mojica vs. Fernandez, 9 Phil. 403; De Guzman vs. Salak, 91 Phil. 265. 61 Art. 1311, par. 1, Civil Code.

380

GENERAL PROVISIONS

Art. 1311

the rule is not applicable if the rights and obligations arising from the contract are not transmissible: (1) By their nature, as when the special or personal qualification of the obligor constitutes one of the principal motives for the establishment of the contract;62 or (2) By stipulation of the parties, as when the contract expressly provides that the obligor shall perform an act by himself and not through another; or (3) By provision of law, as in the case of those arising from a contract of partnership or of agency.63 Idem; Effect of contract on third persons. — Since a contract can take effect only between the contracting parties, as well as their assigns and heirs, it follows, as a general rule, that it cannot produce any effect whatsoever as far as third persons are concerned.64 Consequently, he who is not a party to a contract, or an assignee thereunder, has no legal capacity to challenge its validity, hence, even if it is admitted that a contract is voidable, nevertheless, its voidable character cannot be asserted by one who is not a party to the transaction or his representative.65 Thus, according to the Supreme Court: “From these legal provisions (now Arts. 1390 and 1397 in relation to Art. 1311) it is deduced that it is the interest had in a given contract, that is the determining reason of the right which lies in favor of the party obligated principally or subsidiarily to enable him to bring an action for the nullity of the contract in which he intervened, and, therefore, he who has no right in a contract is not entitled to prosecute an action for nullity, for, according to the precedents established by the courts, the person who is not a party to a contract, nor has any cause of action or representation from those who intervened therein, is manifestly without right of action and personality such as to enable him to assail the validity of the contract.’’66

62 Art. 1726, Civil Code. For illustrative case, see Javier Security Special Watchman Agency vs. Shell-Craft & Button Corp., 117 Phil. 218. 63 Arts. 1830, No. 5, 1919, No. 3, Civil Code. 64 Wolfson vs. Estate of Martinez vs. Ramos, 28 Phil. 589; Ayson vs. Court of Appeals, 97 Phil. 965. 65 Wolfson vs. Estate of Martinez, 20 Phil. 340. 66 Ibañez vs. Hongkong and Shanghai Bank, 22 Phil. 572.

381

Art. 1311

CONTRACTS

There are, however, four exceptional instances under the Civil Code where a contract may produce effect either directly or indirectly on third persons. They are: (1) Where the contract contains a stipulation in favor of a third person;67 (2) Where the third person comes into possession of the object of a contract creating a real right;68 (3) Where the contract is entered into in order to defraud a third person;69 and (4) Where the third person induces a contracting party to violate his contract.70 Idem; Stipulations in favor of third persons. — The general rule is that a contract affects only the parties and the privies thereto. But there are exceptions to this rule and the most evident of them is that which is declared in the second paragraph of Art. 1311.71 According to this exception, 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. Manresa says that this exception corresponds almost always to the juridical conception of a gift or donation, it being necessary in such case to apply the rules relating to donations in so far as the form of acceptance is concerned. This is true where the stipulation is for the sole benefit of the third person. But where, for instance, a transfer of property is coupled with the purchaser’s promise to pay a debt owing from the seller to a third person, it can scarcely be said that the stipulation is in favor of a third person.72 A beneficial stipulation, or what is generally known as a stipulation pour autrui, may, therefore, be defined as a stipulation in a contract, clearly and deliberately conferred by the contracting parties as a favor upon a third person, who must have accepted it before it could be revoked. In Florentino vs. Encarnacion (79 Art. 1311, par. 2, Civil Code. Art. 1312, Civil Code. 69 Art. 1313, Civil Code. 70 Art. 1314, Civil Code. 71 Kauffman vs. Phil. National Bank, 42 Phil. 182; Bank of the P.I. vs. Concepcion, 53 Phil. 806. 72 Uy Tam vs. Leonard, 30 Phil. 471. 67 68

382

GENERAL PROVISIONS

Art. 1311

SCRA 192), it was defined as a stipulation in favor of a third person conferring a clear and deliberate favor upon him, and which stipulation is merely a part of a contract entered into by the parties, neither of whom acted as agent of the third person, and such third person may demand its fulfillment provided that he communicates his acceptance to the obligor before it could be revoked. Idem; id. — Kinds. — Beneficial stipulations in favor of a third person may be divided into the following: first, those where the stipulation is intended for the sole benefit of the third person; and second, those where an obligation is due from the promisee to the third person which the former seeks to discharge by means of such stipulation.73 Idem; id. — Requisites. — Before such stipulation can be enforced, however, it is essential: (1) that there must be a stipulation in favor of a third person; (2) the stipulation must be a part, not the whole of the contract; (3) the contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest; (4) the third person must have communicated his acceptance to the obligor before its revocation;74 and (5) neither of the contracting parties bears the legal representative or authorization of the third party.75 The acceptance by the third person or beneficiary does not have to be done in any particular form. It may be done expressly or impliedly. (Florentino vs. Encarnacion, supra; see also Cristobal vs. Gomez, 50 Phil. 810; 4 Tolentino Civil Code, p. 410.) The following hypothetical problem is illustrative: Problem — A and B entered into a contract of compromise. In the contract, there is a stipulation wherein the parties ceded a house and lot to X. Upon the signing of the contract, X entered into the possession of the property. Ten years later, after the death of both A and B, their heirs revoked the beneficial stipulation. Subsequently, they brought an action against X for the recovery of the property. Will the action prosper? Answer — The action will not prosper. The stipulation in the instant case is a stipulation pour autrui. All of the requisites Ibid. Art. 1311, par. 2, Civil Code. 75 Young vs. CA, G.R. No. 79518, Jan. 13, 1989. 73 74

383

Art. 1311

CONTRACTS

of a valid and enforceable stipulation pour autrui are present. It is a part, not the whole, of a contract; it is not conditioned or compensated by any kind of obligation whatever, and neither A nor B bears the legal representation or authorization of X. Additionally, there was an implied acceptance by X when he entered into the possession of the property. That implied acceptance is recognized by the law is now well-settled. Therefore, the act of the heirs of A and B in revoking the stipulation is an absolute nullity. Since the stipulation was accepted by X, it is crystal clear that there was a perfected agreement, with A and B as stipulators or benefactors and X as beneficiary, although still constituting a part of the main contract. Consequently, the cardinal rules of contracts, such as the obligatory force of contracts and the mutuality of contracts based on the essential equality of the parties are directly applicable to the beneficial stipulation itself. It can no longer be revoked. (Note: The above answer is based upon Florentino vs. Encarnacion, supra, and other cases.)

Idem; id. — Test of beneficial stipulation. — The fairest test whereby we can determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. If a third person claims an enforceable interest in the contract, that question must be settled by determining whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and interpretation of writings must be observed.76 Kauffman vs. Phil. National Bank 42 Phil. 182 The defendant bank, for a valuable consideration paid by the Philippine Fiber and Produce Co., agreed to cause a certain sum of money to be paid to the plaintiff in New York City. Subsequently, however, the bank cabled its representative in New York to withhold payment of the amount to the plaintiff. 76 Uy Tam vs. Leonard, 30 Phil. 471. To the same effect: Kauffman vs. Phil. Nat. Bank, 42 Phil. 182; Bank of the P.I. vs. Concepcion, 53 Phil. 806; Mendoza vs. Phil. Air Lines, 90 Phil. 836.

384

GENERAL PROVISIONS

Art. 1311

Because of this development, plaintiff filed this action to recover the amount. The question now is whether or not the lack of privity with the contract on the part of the plaintiff is fatal to the maintenance of this action. Held: “The only express provision of law that has been cited as bearing directly on this question is the second paragraph of Article 1257 (now Art. 1311) of the Civil Code; and unless the present action can be maintained under that provision, the plaintiff admittedly has no case. “In the case of Uy Tam vs. Leonard (30 Phil. 471), Justice Trent, speaking for the Court, sums up its conclusions in the following words: “So, we believe the fairest test in this jurisdiction whereby to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. “If a third person claims an enforcible interest in the contract, that question must be settled by determining whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and interpretation of writings must be observed.’ “Further on in the same opinion he adds: ‘In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to the third person. That no such obligation exists may in some degree assist in determining whether the parties intended to benefit a third person.’ “In the light of the conclusions thus stated, the right of the plaintiff to maintain the present action is clear enough, for it is undeniable that the bank’s promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which the promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have that money upon demand in New York City. The recognition of this unqualified right

385

Art. 1311

CONTRACTS

in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it; and indeed if the provision in question were not applicable to the facts now before us, it would be difficult to conceive of a case under it. “It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance to the bank by demanding payment; and although the Philippine National Bank has already directed its New York agency to withhold payment when this demand was made, the right of the plaintiff cannot be considered to have been prejudiced by that fact. The ‘revoked,’ as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing the exchange.” Coquia vs. Fieldmen’s Insurance Co. 26 SCRA 178 On Dec. 1, 1961, the Fieldmen’s Insurance Co. issued in favor of the Manila Yellow Taxicab Co. a common carrier accident insurance policy, covering the period from Dec. 1, 1961 to Dec. 1, 1962. It was stipulated in said policy that “the Company will indemnify the Insured in the event of accident against all sums which the Insured will become legally liable to pay for death or bodily injury to any fare-paying passenger including the driver, conductor and/or inspector who is riding in the motor vehicle insured at the time of accident or injury.” On Feb. 10, 1962, as a result of a vehicular accident, Carlito Coquia, driver of one of the vehicles covered by said policy, was killed. Because of the failure of the Company and the Insured to agree with respect to the amount to be paid to the heirs of the driver, the Insured and the parents of Carlito, the Coquias, finally brought this action against the Company to collect the proceeds of the aforementioned policy. The latter now contends, among others, that the Coquias have no cause of action because they have no contractual relation with the Company. Held: “Although in general, only parties to a contract may bring an action based thereon, this rule is subject to exceptions, one of which is found in the second paragraph of Art. 1311 of the Civil Code of the Philippines. This is but a restatement of a well-known principle concerning contracts pour autrui, the enforcement of which may be demanded by a third party for whose benefit it was made, although not a party to the contract,

386

GENERAL PROVISIONS

Art. 1311

before the stipulation in his favor has been revoked by the contracting parties. Does the policy in question belong to such class of contracts pour autrui? “The policy provides, inter alia, that the Company ‘will indemnify any authorized driver who is driving the motor vehicle’ of the Insured and, in the event of death of said driver, the Company shall, likewise, ‘indemnify his personal representatives.’ “Thus, the policy is typical of contracts pour autrui, this character being made more manifest by the fact that the deceased driver, paid fifty percent of the premiums, which were deducted from his weekly commissions. Under these conditions, the Coquias — who, admittedly are the sole heirs of the deceased — have a direct cause of action against the Company, and, since they could have maintained this action by themselves, without the assistance of the Insured, it goes without saying that they could and did properly join the latter in filing the complaint hereon.” Constantino vs. Espiritu 39 SCRA 206 A, married to B, executed a fictitious deed of sale of a twostorey house and four subdivision lots in favor of his mistress, M, who at that time was pregnant, with the understanding that the latter shall hold the properties in trust for their unborn illegitimate child. After securing a new transfer certificate of title in her name, M mortgaged the properties twice to a bank, and subsequently, she tried to sell them. A then brought an action against her praying for the issuance of a writ of preliminary injunction restraining her from further alienating or disposing of the properties and for judgment ordering her to convey the properties to their illegitimate child, X, who by that time was already five years old. A motion to dismiss was filed on the ground that the illegitimate child, who is the beneficiary of the alleged trust, is not included as a party-plaintiff, and that the action in question is unenforceable under the Statute of Frauds. Subsequently, A amended his complaint so as to include X as party-plaintiff. The lower court, however, dismissed the case. A raised the case by direct appeal to the Supreme Court on the following questions of law: (a) (b) Frauds?

Is there a valid cause of action in the instant case? Is the action unenforceable under the Statute of

387

Art. 1312

CONTRACTS

Held: (a) There is a valid cause of action in the instant case. Upon the facts alleged in the complaint, the contract between appellant and appellee was a contract pour autrui, although couched in the form of an absolute deed of sale, and that appellant’s action was, in effect, one for specific performance. That one of the parties to a contract is entitled to bring an action for its enforcement or to prevent its breach is too clear to need any extensive discussion. Upon the other hand, that the contract involved contained a stipulation pour autrui amplifies this settled rule only in the sense that the third person for whose benefit the contract was entered into may also demand its fulfillment provided he had communicated his acceptance thereof to the obligor before the stipulation in his favor is revoked. It appearing that the amended complaint submitted by appellant to the lower court impleaded the beneficiary under the contract as a party co-plaintiff, it seems clear that the three parties concerned therewith would, as a result, be before the court and the latter’s adjudication would be complete and binding upon them. (b) On the other hand, the contention that the contract in question is not enforceable by action by reason of provisions of the Statute of Frauds does not appear to be indubitable, it being clear upon the facts alleged in the amended complaint that the contract between the parties had already been partially performed by the execution of the deed of sale, the action brought below being only for the enforcement of another phase thereof, namely, the execution by appellee of a deed of conveyance in favor of the beneficiary thereunder.

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.77 Contracts Creating Real Rights. — A real right is a right belonging to a person over a specific thing, without a passive subject individually determined, against whom such right may be personally enforced.78 Such a right, therefore, is enforceable against the whole world. Consequently, a third person who might come into the 77 78

New provision. 3 Sanchez Roman 6-8.

388

GENERAL PROVISIONS

Arts. 1313-1314

possession of the object of a contract creating a real right will have to be bound by such right, subject, of course, to the provisions of the Mortgage Law and the Land Registration laws.79 Thus, if A mortgages his house and lot to the PNB in order to secure an obligation of P20,000, and such mortgage is registered in the Registry of Property, the effect of such registration is to create a real right which will be binding against the whole world.80 Hence, if the property is subsequently sold to B, the contract of mortgage between A and the PNB will be binding upon him. Similarly, if a third person comes into possession by whatever title of a certain property which had been leased by the previous owner to another person, and such lease was recorded in the Registry of Property, such third person shall be bound thereby.81 Art. 1313. Creditors are protected in cases of contracts intended to defraud them.82 Contracts In Fraud of Creditors. — Although a third person cannot ask for the annulment of a contract, nevertheless, if he is a creditor of one of the contracting parties, and it can be established that the contract was entered into with the intention of defrauding him, he may ask for its rescission. This is what is meant by the Code when it says that creditors are protected in cases of contracts intended to defraud him.83 This rule must, therefore, be read always in relation to the provisions of Arts. 1380, et seq., of the Civil Code, as well as Art. 1177. Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.84 Interferences with Contractual Relations. — Art. 1314 enunciates the doctrine that any third person who induces another to violate his contract shall be liable for damages to the other

Art. 1312, Civil Code. Art. 2125, Civil Code. 81 Art. 1676, Civil Code. 82 New provision. 83 Art. 1313, Civil Code. 84 New provision. 79 80

389

Arts. 1313-1314

CONTRACTS

contracting party. The theory of this doctrine is that the right to perform a contract and to reap the profits resulting from such performance, and also the right to performance by the other party, are property rights which entitle each party to protection, and to seek compensation by an action in tort for any interference therewith.85 Idem; Requisites. — Before the third person who induces another to violate his contract can be held liable for damages, it is essential, however, that the following requisites must concur: (1) the existence of a valid contract; (2) knowledge on the part of the third person of the existence of the contract; and (3) interference by the third person without legal justification or excuse.86 As far as the third requisite is concerned, “malice, in some form, is generally implied from the act of interference with contractual relations, and is declared to be an essential ingredient in such cases. The lack of scientifically accurate terminology, however, has militated against clearness upon this point, both in conception and discussion. Thus, the word ‘malice’ which, in its technical legal sense, is the intentional doing of a harmful act without legal justification or excuse, is sometimes used in the sense of ill-will, or even as denoting a desire to harm irrespective of the presence or absence of ill-will. The malice, however, which makes one liable for procuring a breach of contract is malice in its legal sense, and whether a wrongdoer’s motive in interfering is to benefit himself or to gratify his spite by working mischief to another is immaterial; malice in the sense of ill-will or spite is not essential.”87 Thus, if a party enters into a contract to go for another upon a journey to a remote and unhealthful climate, and a third person, with a bona fide purpose of benefiting the one who is under contract to go, dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuasion is used for “the indirect purpose of benefiting the defendant at the expense of the plaintiff,” the intermeddler is liable if his advice is taken and the contract broken.88 Problem — “O,” a very popular movie star, was under contract with “P’’ Movie Productions to star exclusively in the latter’s films for two years. “O’’ was prohibited by the contract

30 Am. Jur., Sec. 19, pp. 71-72. Ibid., Secs. 21-23, pp. 73-75. 87 Ibid., Sec. 23, pp. 75-76. 88 Daywalt vs. Agustinos Recoletos, 39 Phil. 587. 85 86

390

GENERAL PROVISIONS

Arts. 1313-1314

to star in any film produced by another producer. “X’’ Film Co. induced “O’’ to break her contract with “P’’ Movie Productions by giving her twice her salary. “P’’ Movie Productions sued “X’’ Film Co. for damages. “X’’ Film Co. contended that it had a right to compete for the services of “O” and that her contract with “P” Movie Productions was in restraint of trade and a restriction on her freedom of contract. Whose contention would you sustain? (1980 Bar Problem) Answer — The contention of “P’’ Movie Productions should be sustained. According to the Civil Code, any third person who induces another to violate his contract shall be liable for damages to the other contracting party. In the law of torts, we call this “interference with contractual relation.’’ However, in order that it will be actionable, it is necessary that the following requisites must concur: (a) the existence of a valid contract; (b) knowledge on the part of the third person of the existence of such contract; and (c) interference by the third person without legal justification or excuse. All of these requisites are present in the case at bar. The contention of “X’’ Film Co. that “O’s’’ contract with “P’’ Movie Productions was in restraint of trade and a restriction of her freedom to contract, on the other hand, cannot be sustained. Well-established is the rule that in order to determine whether or not an agreement of this nature constitutes an undue restraint of trade, and therefore, is contrary to public policy, two tests are always applied. They are first, is there a limitation as to time or place? And second, is the prohibition or restraint reasonably necessary for the protection of the contracting parties? If the answer to both of these questions is in the affirmative, then the prohibition or restraint is not contrary to public policy. It is crystal clear that the agreement between “O’’ and “P” Movie Productions passes both tests. (Note: The first paragraph of the above answer is based on Art. 1314 of the Civil Code and on Daywalt vs. Agustinos Recoletos, 39 Phil. 587. The second paragraph, on the other hand, is based on Art. 1306 of the Civil Code and on several cases, the most notable of which is Del Castillo vs. Richmond, 46 Phil. 697.)

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 391

Art. 1316

CONTRACTS

all the consequences which, according to their nature, may be in keeping with good faith, usage and law.89 Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation.90 Perfection of Contracts. — The perfection of a contract refers to that moment in the life of a contract when there is finally a concurrence of the wills of the contracting parties with respect to the object and the cause of the contract. In the words of Manresa, “it signifies the birth or appearance of the contract as an obligatory tie, resulting from the concurrence of the wills of the contracting parties.’’91 As a general rule, the perfection of a contract is produced by mere consent.92 There are, however, certain contracts, such as deposit, pledge and commodatum, which cannot be perfected until after the delivery of the object by one contracting party to the other.93 It must be noted that under Arts. 1315 and 1316 of the Civil Code, from the point of view of how they may be perfected, contracts are classified as either consensual or real. Does not this classification omit the so-called formal contracts where the form prescribed by law is essential for validity, such as those dictated by Arts. 748, 749, 1771, 1773, 1874, 1956, 2134 and 2140 of the Civil Code? It is submitted that it does not. The contracts referred to in the aforementioned articles are actually consensual contracts. Take the accessory contract of chattel mortgage under Art. 2140 as an example. According to the Code, by a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. Suppose then that A bought a Colt Lancer from X Motor Co. paying a down payment of P18,000 thus leaving a balance of P40,000 which he agreed to pay within a period of two years. As security, the parties agreed that A shall mortgage the Colt Lancer which he bought in favor of the motor

Art. 1258, Spanish Civil Code. New provision. 91 8 Manresa, 5th Ed., Bk. 2, p. 321. 92 Art. 1315, Civil Code. 93 Art. 1316, Civil Code. The four traditional real contracts, in the Roman jus civile are commodatum, mutuum, depositum and pledge. 89 90

392

GENERAL PROVISIONS

Art. 1317

company. That was on June 15, 1980. On June 20, 1980, the deed of chattel mortgage was signed by both parties. On June 25, 1980, the deed was recorded in the Chattel Mortgage Register. When was the contract perfected? Reading Art. 1319 of the Civil Code in relation to Art. 1315, it is clear that the contract was perfected only on June 25, 1980. It was only then that there was a complete manifestation of the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person in whose behalf it has been executed, before it is revoked by the other contracting party.94 Contracts in Name of Another. — The principle enunciated in Art. 1317 of the Code is a logical corollary to the principles of the obligatory force and the relativity of contracts. It is also the basis of the contract of agency (Arts. 1868-1932). Under this article, no person may enter into a contract in the name of another unless he has been duly authorized by the latter, or unless he has by law a right to represent him. If a person, therefore, enters into a contract with another in the name of another person, although he has no authority or legal representation, or even if he has such authority or representation, if he has acted beyond the scope of his powers, the contract is unenforceable.95 What is meant by an unenforceable contract? According to the Code Commission: “From various sources in Philippine laws and from decisions of the Supreme Court of the Philippines, a new class of defective contract is to a certain extent created. The term ‘unenforceable’ is used, as distinguished from ‘voidable.’ The latter are binding, unless annulled by proper action in court, while the

94 95

Art. 1317, Spanish Civil Code, in modified form. See Arts. 1403, et seq., Civil Code.

393

Art. 1317

CONTRACTS

former cannot be sued upon or enforced, unless they are ratified. As regards the degree of defectiveness, voidable contracts are farther away from absolute nullity than unenforceable contracts. In other words, an unenforceable contract occupies an intermediate ground between a voidable and void contract.’’96

Although the contract is unenforceable, it is, however, susceptible of either express or implied ratification by the person in whose behalf it has been executed before it is revoked by the other contracting party.97 Badillo vs. Ferrer 152 SCRA 407, 409 Facts: Macario died intestate in 1966, leaving a widow, Clavita and five minor children. He left a parcel of land. In 1967, Clarita, in her own behalf and as natural guardian of the minor plaintiff executed a deed of extra-judicial partition and sale of the property through which she sold the property to Gregorio. Modesta, a sister of Macario, was able to obtain guardianship over the property and persons of the minor children on 1968. In 1970, Modesta caused the minor children to file a complaint to annul the sale of their participation in the property and asked that as co-owner they be allowed to execute the right of legal redemption with respect to Clarita’s participation therein. The trial court annulled the sale to Gregorio of the minor children’s participation in the property and allowed them to redeem the participation of their mother therein. Held: This contention is untenable. The Deed of Extrajudicial Partition and Sale is not a voidable or an annullable contract under Article 1390 of the New Civil Code. Article 1390 renders a contract voidable if one of the parties is incapable of giving consent to the contract or if the contracting party’s consent is vitiated by mistake, violence, intimidation, undue influence or fraud. In this case, however, the appellee minors are not even parties to the contract involved. Their names were merely dragged into the contract by their mother who claimed a right to represent them, purportedly in accordance with Article 320 of the New Civil Code.

96 97

Report of the Code Commission, p. 139. Art. 1317, Civil Code; see also Art. 1910, Civil Code.

394

GENERAL PROVISIONS

Art. 1317

“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.’’ Clearly, Clarita Ferrer Badillo has no authority or has acted beyond her powers in conveying to the appellants that 5/12 undivided share of her minor children in the property involved in this case. The powers given to her by the laws as the natural guardian covers only matters of administration and cannot include the power of disposition. She should have first secured the permission of the court before she alienated that portion of the property in question belonging to her minor children. The appellee minors never ratified this Deed of Extrajudicial Partition and Sale. In fact, they question its validity as to them. Hence, the contract remained unenforceable or unauthorized. No restitution may be ordered from the appellee minors either as to that portion of the purchase price which pertains to their share in the property or at least as to that portion which benefited them because the law does not sanction any.

395

CONTRACTS

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;

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

Cause of the obligation which is established.1

Requisites of Contracts in General. — As we have already seen, the elements of a contract may be either essential, natural or accidental. The essential elements are those without which there can be no contract; the natural elements are those which are derived from the very nature of the contract, and as a consequence, ordinarily accompany the same, although they can be excluded by the contracting parties if they so desire; the accidental elements are those which exist only when the contracting parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract. The essential elements, on the other hand, may be either common (comunes), special (especiales) or extraordinary (especialisimos). The common elements are those which are present in all contracts, such as consent, object and cause; the special are present only in certain contracts, such as delivery in real contracts or form in solemn ones; the extraordinary are those which are peculiar to a specific contract, such as the price in a contract of sale.2

1 2

Art. 1261, Spanish Civil Code. 3 Castan, 7th Ed., pp. 322-324; 8 Manresa, 5th Ed., Bk. 2, pp. 350-351.

396

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1319

The above classification can be understood better and with more precision when considered from the viewpoint of the influence which the two great bases of contracts — the law and the will of the contracting parties — have over each group of elements. Thus, in the descending order, the law imposes the essential elements, presumes the natural and authorizes the accidental; conversely, the will of the contracting parties conforms to the first, accepts or repudiates the second and establishes the third.3 Section 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.4 Concept of Consent. — The most important element, which constitutes the very heart and soul of contracts, is, unquestionably, the consent of the contracting parties. In its derivative sense, the word “consent” (cum sentire) merely means the agreement of wills. Consequently, as applied to contracts, it may be defined as the concurrence of the wills of the contracting parties with respect to the object and the cause which shall constitute the contract.5 Requisites of Consent. — Under the Civil Code, in order that there is consent, the following requisites must concur: first, the consent must be manifested by the concurrence of the offer and the acceptance (Arts. 1319-1326); second, the contracting parties must possess the necessary legal capacity (Arts. 1327-1327); and third, the consent must be intelligent, free, spontaneous, and real (Arts.

8 Manresa, 5th Ed., Bk. 2, 351. Art. 1262, Spanish Civil Code, in modified form. 5 3 Castan, 7th Ed., pp. 326-327; 8 Manresa, 5th Ed., Bk. 2, p. 365; 4 Sanchez Roman 191. 3 4

397

Art. 1319

CONTRACTS

1330-1346).6 The first is expressly stated in the Code, the second and the third are implied. When Contracts are Perfected — In general, contracts are perfected from the moment that there is a manifestation of the concurrence between the offer and the acceptance with respect to the object and the cause which shall constitute the contract. (Art. 1319, par. 1, New Civil Code.) However, if the acceptance is made by letter or telegram, we must distinguish. According to Art. 1319, par. 2, of the New Civil Code, the contract is perfected from the moment that the offeror has knowledge of such acceptance, while according to Art. 54 of the Code of Commerce, the contract is perfected from the moment an answer is made accepting the offer. Because of the repealing clause found in Art. 2270 of the New Civil Code, it is submitted that Art. 54 of the Code of Commerce can now be applied only to purely commercial contracts, such as joint accounts, maritime contracts, etc. We can, therefore, say that the rule found in the second paragraph of Art. 1319 of the New Civil Code is the general rule, while that found in Art. 54 of the Code of Commerce is the exception. Manifestation of Consent. — Before there is consent, it is essential that it must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.7 Once there is such a manifestation of the concurrence of the wills of the contracting parties, the period or stage of negotiation is terminated. The contract, if consensual, is finally perfected.8 Thus, it was held, that even if the draft renewal contract had not been signed by the lessor, the parties may be deemed to have agreed to review their lease contract considering the exchanges of letters between, and the implementing acts of the parties. (Ramon Magsaysay Award Foundation vs. CA, G.R. No. 55998, Jan. 17, 1985.)

6 According to Castan, consent presupposes the following elements or conditions: (1) plurality of subjects; (2) legal capacity; (3) intelligent and voluntary; (4) express or implied manifestation; and (5) concurrence of the internal and the declared will. (3 Castan, 7th Ed., p. 327) 7 Art. 1318, par. 1, Civil Code. 8 8 Manresa, 5th Ed., Bk. 2, p. 368.

398

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1319

De Lim vs. Sun Life Assurance Co. 41 Phil. 263 On July 6, 1917, Luis Lim applied to the defendant company for a policy of insurance of his life in the sum of P5,000. In his application, he designated his wife, Pilar C. de Lim, plaintiff herein, as beneficiary. The first premium of P33 was paid, and upon payment, the company issued a “provisional policy’’ accepting the application “provided that the Company shall confirm this agreement by issuing a policy on said application when the same shall be submitted to the Head Office in Montreal.’’ Should the Company not issue such a policy, “then this agreement shall be null and void ab initio x x x .’’ A period of four months from the date of the application was also stated as the period within which the Company shall issue the policy. Luis Lim, however, died on August 24, 1917, after the issuance of the provisional policy but before approval of the application by the head office of the insurance company. The instant action is brought by the beneficiary to recover from the insurance company the sum of P5,000, the amount stated in the provisional policy. The question now is whether or not the contract has been perfected. Held: “Our duty in this case is to ascertain the correct meaning of the document above quoted. Certainly, language could hardly be used which would more clearly stipulate that the agreement should not go into effect until the home office of the company should confirm by issuing a policy. As we read and understand the so-called provisional policy it amounts to nothing but an acknowledgment on behalf of the company, that it had received from the person named therein the sum of money agreed upon as the first year’s premium upon a policy to be issued upon the application, if the application is accepted by the company. “It is of course a primary rule that a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding from the date of the application, must have been a completed contract, one that leaves nothing to be done, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement. Our view is, that a contract of insurance was not here consummated by the parties.”

399

Art. 1319

CONTRACTS

Idem; Character of offer and acceptance. — As an element of a contract, an offer may be defined as a proposal to make a contract.9 In order to constitute a binding proposal, the first paragraph of Art. 1319 declares that the offer must be certain or definite. Thus, where the defendant wrote a letter to the plaintiff stating that he is “in a position” and is “willing to entertain” the purchase of a yacht belonging to the plaintiff under certain terms, and the plaintiff accepted all of such terms, it was held that there was no perfected contract, since the word “entertain” applied to an act does not mean the resolution to perform said act, but simply a position to deliberate whether to perform or not to perform said act; consequently, the letter of the defendant cannot be interpreted as a definite offer to purchase the yacht but simply to deliberate whether or not he would purchase the yacht.10 As far as the acceptance is concerned, although the law does not expressly say so, it is clear that in order that there will be a perfected contract, the acceptance must also be certain or definite. Thus, where the plaintiff offered to the defendant certain machineries in exchange for tractors and the latter answered stating “we are willing to accept the proposition,’’ it was held that there was no perfected contract of barter, since the phrase “willing to accept’’ does not mean acceptance, but simply a disposition to accept the offer in principle.11 Furthermore, the acceptance must be absolute in character.12 In other words, it must be plain and unconditional; consequently, if it involves any new proposal or if it is qualified, it constitutes a counter-offer — in which case it is essential before there can be a perfected contract that there must be a definite and absolute acceptance by the original offeror of such counter-offer.13 Thus, where the defendant offered to the plaintiff an option for three months to buy a certain land for the price of its assessed government valuation and the latter answered by accepting the offer, but subject to certain modifications with regard to the terms of payment specified in the proposal, it is clear that there is no perfected contract be-

3 Bouvier’s Law Dictionary, 2399. Rosenstock vs. Burke, 46 Phil. 217. 11 Meads vs. Lasedeco, 52 Off. Gaz. 208. 12 Art. 1319, par. 1, Civil Code. 13 Ibid. See Beaumont vs. Prieto, 41 Phil. 670; Zayco vs. Serra, 44 Phil. 326; Batangan vs. Cojuangco, 78 Phil. 481. See also Logan vs. Philippine Acetylene Co., 33 Phil. 782; Datoc vs. Mendoza, CA, 47 Off. Gaz. 2427. 9

10

400

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1319

cause there is no concurrence between the offer and the acceptance.14 The same can also be said with regard to a case where the defendant gave an option to the plaintiff to buy a certain sugar central for P1,000,000, payable within three years and properly secured, and the latter accepted the offer, placing at the defendant’s disposal the sum of P100,000 as part payment, and at the same time, notifying him that the Philippine National Bank had agreed to transfer the defendant’s long term loan of P600,000 to the account of the plaintiff who will thus assume the defendant’s liability to the said Bank for the said amount.15 Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there is concurrence between the offer and the acceptance upon the subject matter, consideration and terms of payment a contract is produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional and without variance of any sort from the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer.’’ (ABS-CBN Broadcasting Corp. vs. Court of Appeals, G.R. No. 128690, January 21, 1999.) Idem; id. — Acceptance of complex offers. — To a certain extent the rules regarding acceptance are modified in case of complex offers. Thus, if the offeror proposes to lease one part and to sell another part, acceptance of one by the offeree would ordinarily result in a perfected contract, unless, of course, the offeror should have made one offer dependent upon the other. However, the prospective contracts which are comprised in a single offer may be so interrelated in such a way that the acceptance of one would not at all result in a perfected contract. Thus, in an offer involving a prospective contract of loan and the mortgage which will secure it, acceptance by the future debtor of the proposed loan alone would not give rise to a perfected contract.16 Beaumont vs. Prieto, 41 Phil. 670, 249 U.S. 554. Zayco vs. Serra, 44 Phil. 326. 16 8 Manresa, 5th Ed., Bk. 2, pp. 372-373. 14 15

401

Art. 1319

CONTRACTS

Idem; id. — Acceptance by letter or telegram. — If the acceptance is made by letter or telegram, an interesting question arises. When or at what precise moment would there be a meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract? As applied to consensual contracts, when would there be a perfected contract? There are actually four different theories which have been advanced in order to pin-point the exact moment of perfection.17 They are: (1) The manifestation theory (manifestación) — According to this theory, the contract is perfected from the moment the acceptance is declared or made. This is the theory which is followed by the Code of Commerce.18 (2) The expedition theory (expedición) — According to this theory, the contract is perfected from the moment the offeree transmits the notification of acceptance to the offeror, as when the letter is placed in the mailbox. This is the theory which is followed by the majority of American courts. (3) The reception theory (recepción) — According to this theory, the contract is perfected from the moment that the notification of acceptance is in the hand of the offeror in such a manner that he can, under ordinary conditions, procure the knowledge of its contents, even if he is not able actually to acquire such knowledge by reason of absence, sickness or some other cause. This is the theory which is followed by the German Civil Code. (4) The cognition theory (cognición) — According to this theory, the contract is perfected from the moment the acceptance comes to the knowledge of the offeror. This is the theory which is followed by the Spanish Civil Code. Evidently, we have retained the cognition theory as embodied in the Spanish Civil Code. According to the second paragraph of Art. 1319 of the new Code, 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 in the place where the offer was made. According to the Code 17 18

3 Castan, 7th Ed., pp. 385-386; 2 De Diego 102-103. Art. 54, Code of Commerce.

402

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1319

Commissioners in their report, the Commission deliberated at some length on the question of whether acceptance by letter should take effect upon the mailing of the same, as followed in American law, or when the same comes to the knowledge of the offeror. It was, however, finally decided to retain the old in order to avoid confusion and litigation.19 Although the Code seems to limit the rule to acceptance by letter or telegram only, the weight of authority is to the effect that such rule is applicable to all cases in which the acceptance is made by a person who is not in the presence of the offeror, (contratación entre ausentes.)20 This is, of course, premised upon the fact that he is not acting through an agent.21 It must be noted, however, that Art. 54 of the Code of Commerce declares that “contracts entered into by correspondence shall be perfected from the moment an answer is made accepting the offer or the condition by which the latter may be modified.’’ Is this rule still applicable? In view of the repealing clause found in Art. 2270 of the New Civil Code, it is submitted that it can be applied only to purely commercial contracts which are still governed by the Code of Commerce, such as joint accounts and maritime contracts. Hence, we can very well say that the rule found in the second paragraph of Art. 1319 of the Civil Code is the general rule, while that found in Art. 54 of the Code of Commerce is the exception. The cognition theory, as embodied in the second paragraph of Art. 1319 of the Code, is very well illustrated in the case of Enriquez vs. Sun Life Assurance Co.22 The facts of this case are as follows: The records show that on September 24, 1917, Joaquin Herrer applied to the defendant company through its local office in Manila for a life annuity. He paid the sum of P6,000 and was issued a provisional receipt. The application was immediately forwarded to the head office of the company in Montreal, Canada. On November 26, 1917, the head office gave notice of acceptance by cable to Manila. Whether notice of this acceptance was sent to Herrer by the Manila office is a disputed question. On December 4, 1917, the policy was issued Report of the Code Commission, p. 135. 3 Castan, 7th Ed., p. 385; 8 Manresa, 5th Ed., Bk. 2, p. 373. 21 Art. 1322, Civil Code. 22 41 Phil. 269. 19 20

403

Art. 1319

CONTRACTS

at Montreal. On December 18, 1917, the lawyer of Herrer wrote to the Manila office that Herrer desired to withdraw his application. The following day the local office replied to the lawyer stating that the policy had been issued, and called attention to the notification of November 26, 1917. This letter was received by the lawyer on December 21, 1917. Herrer, however, died on December 20, 1917. This action was subsequently commenced by the administrator of the estate of Herrer to recover the sum of P6,000 from the defendant company. The defendant company, however, contended that the plaintiff cannot recover the amount on the ground that the contract of life annuity had already been perfected. Holding that it is the provision of the second paragraph of Art. 1262 (now Art. 1319) of the Civil Code and not Art. 54 of the Code of Commerce that will apply, and that the letter of November 26, 1917, was never actually mailed, and thus, was never received by the applicant, the Supreme Court, speaking through Justice Malcolm, ruled that the contract was not perfected because it has not been proved satisfactorily that the acceptance of the application ever came to the knowledge of the applicant. The theory is also illustrated in the case of Francisco vs. GSIS.23 In this case, the plaintiff’s offer of compromise with respect to the settlement of an obligation which had already matured was accepted by the Government Service Insurance System by means of a telegram signed by the Board Secretary. For a year, the System receipted payments made pursuant to the compromise agreement. Is there a perfected contract in this case inspite of the fact that the General Manager of the System denied that he authorized the Board Secretary to send the telegram? According to the Supreme Court there is already a perfected contract of compromise applying the provision of the second paragraph of Art. 1319 of the New Civil Code. It is of course a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possessing the power to do those acts, the corporation will, as against anyone who has in good faith dealt with the corporation through such agent, be estopped from denying his authority. Hence, even if it were the Board Secretary who sent the telegram, the corporation could not evade the binding effect which it produced. 23

117 Phil. 586.

404

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1319

Idem; id. — Effect of constructive knowledge. — Since the Code says that the acceptance by letter or telegram does not bind the offeror except from the time it came to his knowledge, there is a clear implication that such offeror must have read the contents of the letter or telegram accepting his offer. In other words, as a general rule, what is required by the law is actual knowledge of the acceptance. Consequently, mere receipt of the letter or telegram is not sufficient. Of course, ordinarily, once it is established that the offeror has received the letter or telegram, there arises a presumption that he has read the contents thereof. But it is possible that he might not have been able to do so, such as when he was absent or incapacitated at the time of the receipt of the letter or telegram. In such cases, it is quite clear that he cannot be bound by the acceptance. It is, however, different if, being able to do so, he refused to open the letter or telegram because for some reason or other he has already changed his mind or he has already decided to revoke his offer or proposal. In such case, it would be unjust to apply the cognition theory as embodied in the Civil Code literally. The better rule would be to say that since the offeror has already a constructive knowledge of the contents of the letter or telegram, it is but logical that he shall be bound by the acceptance made by the offeree.24 Idem; id. — Withdrawal of offer. — An interesting problem arising from the principle enunciated in the second paragraph of Art. 1319 is whether the offeror after the offer has been made can still withdraw it or not. Undoubtedly, the rule in this jurisdiction is that he may still withdraw his offer or proposal so long as he still has no knowledge of the acceptance by the offeree.25 This can be implied from the rule that he is not bound by the acceptance except from the time it comes to his knowledge; it is confirmed to a certain extent by the new provision enunciated in Art. 1324. This principle is illustrated in the case of Laudico vs. Arias.26 The facts of this case are as follows: On February 6, 1919, defendant wrote a letter to the plaintiff, giving him an option to lease a certain building to a third person, and transmitting to him for that purpose a tentative contract in writing containing the conditions upon which

3 Castan, 7th Ed., p. 387. 8 Manresa, 5th Ed., Bk. 2, p. 373. 26 43 Phil. 270. 24 25

405

Art. 1319

CONTRACTS

the proposed lease should be made. After certain negotiations, the plaintiff finally wrote a letter to the defendant on March 6, 1919, advising him that all his propositions were accepted. This letter was received by the defendant by special delivery at 2:53 p.m. of that day. On that same day, at 11:25 a.m., the defendant had, in turn, written a letter to the plaintiff withdrawing the offer. This letter was sent through a messenger and should have been received that same morning, or at least, before the defendant had received the letter of acceptance. Because of the refusal of the defendant to recognize the existence of a perfected contract, plaintiff brought this action to compel him to execute the contract of lease of the building in question. Holding that no contract was perfected, the Supreme Court, speaking through Justice Avanceña ruled: “Under Article 1262, paragraph 2 (now Art. 1319, par. 2) of the Civil Code, an acceptance by the latter does not have any effect until it comes to the knowledge of the offeror. Therefore, before he learns of the acceptance, the latter is not yet bound by it and can still withdraw the offer. Consequently, when Mr. Arias wrote Mr. Laudico, withdrawing the offer, he had the right to do so, inasmuch as he had not yet received notice of the acceptance. And when the notice of the acceptance was received by Mr. Arias, it no longer had any effect, as the offer was not then in existence, the same having already been withdrawn. There was no meeting of the minds through offer and acceptance, which is the essence of the contract. While there was an offer, there was no acceptance, and when the latter was made and could have binding effect, the offer was then lacking. Though both the offer and the acceptance existed, they did not meet to give birth to a contract.’’ Problem — Gigi offered to construct the house of Chito for a very reasonable price of P1 Million, giving the latter 10 days within which to accept or reject the offer. On the fifth day, before Chito could make up his mind, Gigi withdrew the offer. What is the effect of the withdrawal of Gigi’s offer? (2005 Bar Problem) Answer — The withdrawal of Gigi’s offer will cause the offer to cease in law. Hence, even if subsequently accepted, there could be no concurrence of the offer and the acceptance . In the absence of concurrence of offer and acceptance, there can be no consent. (Laudico vs. Arias Rodriguez, G.R. No.16530, March 31, 1922). Without the consent, there is no perfected contract for the construction of the house of Chito. (Salonga vs. Farrales,

406

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1319

G.R. No. L-47088, July 10, 1981). Article 1318 of the Civil Code provides that there can be no contract unless the following requisites concur : (1) consent of the parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation. Gigi will not be liable to pay Chito any damages for withdrawing the offer before the lapse of the period granted. In this case, no consideration was given by Chito for the option given. Thus, there is no perfected contract of option for lack of cause of obligation. Gigi cannot be held to have breached the contract. Thus, he cannot be held liable for damages (Suggested Answers to the 2005 Bar Examination Questions, Philippine Association of Law Schools).

Idem— Withdrawal of acceptance. — As far as the offeree is concerned, however, the rule is different. The problem may be stated by means of an example. A, who is residing in Manila, has offered to lease a certain parcel of land for a certain price to B, who is residing in Baguio. B finally decides to accept the offer. So he writes a letter to A accepting all of the terms and conditions of the offer. The letter is mailed. Can he revoke it by using a more rapid means of communication, let us say a telegram, in order to counteract the acceptance? Answering the above question in the negative, Manresa says: “It is to be observed that although the offeror is not bound until he learns of the acceptance, the same thing can not be said of the offeree who, from the moment that he accepts, loses the power to retract such acceptance since the right to withdraw between the time of the acceptance and its communication is a right which is expressly limited by law to the offeror. Undoubtedly, under this rule there would exist a certain inequality between the contracting parties during such interval; but this is explained by the fact that since the offeree is the first person who knows of the concurrence of wills of the parties, as a consequence, the obligation, as far as he is concerned, must also commence earlier.’’27

Dr. Tolentino, however, maintains that the acceptance may be revoked before it comes to the knowledge of the offeror because in 27

8 Manresa, 5th Ed., Bk. 2, p. 373.

407

Art. 1320

CONTRACTS

such case there is still no meeting of the minds, since the revocation has cancelled or nullified the acceptance which thereby ceased to have any legal effect.28 We believe that this opinion is more logical. After all, as far as the law is concerned, there is only one decisive moment to consider and that is the moment when the offeror has knowledge of the acceptance made by the offeree. At any time before that moment, the offeror is not bound by his offer; neither should the offeree be bound by his acceptance. Otherwise, it would then be possible to say that there are two moments when a consensual contract is perfected — first, when the offeree transmits his acceptance to the offeror, and second, when the offeror has knowledge of the acceptance. Legally, this is not possible. Problem — In an offer to sell, parties failed to agree on the size of the land to be sold. Is there a meeting of the minds of the parties that would perfect a contract? Answer — There is no consent that would perfect a contract as there is no agreement on the exact area to be sold. Contracts that are consensual in nature are perfected upon mere meeting of the minds. A contract is produced once there is concurrence between the offer and the acceptance upon the subject matter, consideration, and terms of payment. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer. It must be plain, unequivocal, unconditional, and without variance of any sort from the proposal, constitutes a counter-offer and is a rejection of the original offer. Hence, when something is required is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer.

Art. 1320. An acceptance may be express or implied.29 Form of Acceptance. — According to the above article, the acceptance may be express or implied. Thus, in the case of Perez vs. Pomar,30 where the defendant contended that there was no perfected contract entered into between him and the plaintiff, because there

4 Tolentino, Civil Code, 1956 Ed., p. 418. New provision. 30 2 Phil. 682. 28 29

408

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1320

was no proof that he had accepted the services of the latter as interpreter, the Supreme Court held: “Not only is there an express and tacit consent which produces true contracts, but there is also a presumptive consent which is the basis of quasi-contracts, thus giving rise to the multiple juridical relations which result in obligations for the delivery of a thing or the rendition of a service. Notwithstanding the denial of the defendant, it is unquestionable that it was with his consent that the plaintiff rendered him services as interpreter, thus aiding him at a time when, owing to the existence of an insurrection in the province, the most disturbed conditions prevailed. It follows, hence, that there was consent on the part of both in the rendition of such service as interpreter. Such services not being contrary to law or to good customs, it was a perfectly licit object of a contract and such a contract must necessarily have existed between the parties, as alleged by the plaintiff.’’ Problem — A gasoline manufacturing company (TPMC) obatined a loan from PNB and executed a real estate mortgage over its parcel of land in Paranque City to secure its loan. When the loan matured, PNB sent collection letters to TPMC. In reply, TPMC proposed to pay its obligations by way of a dacion en pago conveying its TCT No. 122533.Instead of accepting the offer, PNB filed a petition for extrajudicial foreclosure of the REM. TPMC filed a complaint for annulment of extrajudicial foreclosure sale alleging that its debt has already been extinguished by its offer of dacion en pago. PNB contended that the proposal of TPMC to pay by way of dacion en pago did not extinguish its obligation as it was not accepted by PNB. Hence, the extrajudicial foreclosure sale was proper.Was PNB correct? Answer — Yes, TPMC has no clear right to an injunctive relief because its proposal to pay by way of dacion en pago did not extinguish its obligation. Undeniably, TPMC’s proposal to pay by way of dacion en pago was not accepted by PNB. Dacion en pago is a special mode of payment whereby the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding obligation. The undertaking is really one of sale, that is, the creditor is really buying the thing or property of the debtor , payment for which is to be charged against the debtor’s debt. As such, the essential elements of a contract of sale, namely, consent, object certain and cause or consideration must be present. It is only when the

409

Arts. 1321-1323

CONTRACTS

thing offered as an equivalent is accepted by the creditor that novation takes place, thereby, totally extinguishing the debt. Thus, the unaccepted proposal neither novates the parties’ mortgage contract nor suspends its execution as there was no meeting of the minds between the parties on whether the loan will be extinguished by way of dacion en pago (Technogas Philippines Mfg. Corp. vs. Philippine National Bank, G. R. No. 161004, April 14, 2008).

Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.31 Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him.32 Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.33 Effect of Death, Civil Interdiction, Insanity, or Insolvency. — According to the above article, an offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. The word “conveyed” refers to that moment when the offeror has knowledge of the acceptance by the offeree. Hence, the article merely means that an offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before the offeror has knowledge of the acceptance by the offeree. Problem No. 1 — A, who resides in Manila, wrote to his friend B, who is residing in Cotabato City, stating in the letter that he (A) is donating to him (B) one new car worth P25,000. Upon receipt of the letter, B, called A by long distance telephone telling A that he is accepting the donation. The same day B wrote and mailed a letter to A accepting the donation. Immediately after mailing the letter, B died of a heart failure. Who is entitled to the car now, A or the heirs of B? Reasons. (1962 Bar Problem)

New provision. New provision. 33 New provision. 31 32

410

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1321-1323

Answer — A is entitled to the car. The reason is that the donation in the instant case cannot produce any effect whatsoever. According to Art. 748 of the Civil Code, if the value of the personal property donated exceeds P5,000, the donation and the acceptance shall be in writing; otherwise, the donation is void. True, the acceptance by B was actually written and mailed. But immediately after mailing the letter of acceptance, B died. The effect is to bring into play the provision of Art. 1323 of the Civil Code which is certainly applicable here, considering the provision of Art. 732. According to Art. 1323, an offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. Analyzing the provision, it is clear that the offer of A has become ineffective and that the contract of donation, as a consequence, has never been perfected. Problem No. 2 — A donated a piece of land to B in a donation inter vivos. B accepted the donation in a separate instrument but A suddenly died in an accident before the acceptance could be communicated to him. Is the donation valid? Reasons. (1971 Bar Problem) Answer — Even assuming that both the donation and the acceptance are contained in a public instrument, which the law requires (Art. 749, CC), the donation is not valid for the following reasons: (1) Under Art. 749 of the Civil Code which enunciates the different formalities required in the execution of donations inter vivos, the law declares that if the acceptance is made in a separate public instrument, the donor shall be notified thereof in authentic form, and this step shall be noted in both instruments. It is obvious that in the instant case the requirement of notification of the donor in authentic form (constancia autentica) has not been complied with. It is of course axiomatic under the law on donations that all of the formalities prescribed in Art. 749 of the Code are essential for validity. (2) Art. 734 of the Civil Code declares that a donation is perfected from the moment the donor knows of the acceptance by the donee. It is also obvious that in the instant case A never came to know of the acceptance by B because he suddenly died in an accident before such acceptance could be communicated to him. Consequently, the contract of donation was never perfected. (3) And finally, Art. 1323 of the Civil Code is decisive. This article (which is certainly applicable here considering

411

Art. 1324

CONTRACTS

the provision of Art. 732 of the Code) declares that an offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed.

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.34 Period for Acceptance: Options. — It is clear from the above article that there is a very great difference between the effect of an option which is without a consideration and the effect of one which is founded upon a consideration as far as the right of the offeror to withdraw his offer or proposal is concerned. If the option is without any consideration, the offeror may withdraw his offer by communicating such withdrawal to the offeree at anytime before acceptance; if it is founded upon a consideration, the offeror cannot withdraw his offer. In the case of Beaumont vs. Prieto,35 Justice Araullo explained the nature of an option founded upon a consideration in the following words: “In his Law Dictionary, Bouvier defines an option as a contract in the following language: ‘A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the privilege of buying from, or selling to B, certain securities or properties within a limited time at a specified price.’ “From Vol. 6, page 5001, of the work ‘Words and Phrases,’ citing the case of Ide vs. Leiser (24 Pac., 695, 10 Mont., 5; 24 Am. St. Rep. 17), the following quotation has been taken: ‘An agreement in writing to give a person the ‘option’ to purchase lands within a given time at a named price is neither a sale nor an agreement to sell. 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; he does not then agree to sell it; but he does sell something; that is, the right or privilege to buy at the election or option of the other party. The second party gets 34 35

New provision. 41 Phil. 670.

412

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1324

in praesenti, not lands, nor agreement that he shall have lands, but he does get something of value; that is, the right to call for and receive lands if he elects. The owner parts with his right to sell his lands, except to the second party for a limited period. The second party receives this right, or rather, from his point of view, he receives the right to elect to buy.’ “But the two definitions above cited refer to a contract of option, or, what amounts to the same thing, to a case where there is cause or consideration for the obligation.’’

Art. 1324 standing alone, or in relation to the other articles under this chapter of the Civil Code, is clear. However, the second paragraph of Art. 1479 of the Civil Code under the law on sales declares that “an accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a consideration distinct from the price.” Interpreting this provision in relation to Art. 1324, in two cases,36 the Supreme Court sustained the view that this provision constitutes an exception to the general rule stated in Art. 1324. If the option is not supported by a consideration which is distinct from the purchase price, the offer may still be withdrawn even if the offeree has already accepted it. The above interpretation, however, was finally abandoned in Sanchez vs. Rigos (G.R. No. L-25494, June 14, 1972, 45 SCRA 368). In this case, the Supreme Court ruled that in unilateral offers to buy or to sell, since there may be no valid contract without a cause or consideration, the promisor is not bound by his promise and may, accordingly withdraw it. Pending notice of his withdrawal, his promise partakes of the nature of an offer to sell which, if accepted, results in a perfected contract of sale. Stated in another way, if the option is without a consideration, it is a mere offer to sell which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale. There is already a concurrence of both offer and acceptance. Under Art. 1319 of the Civil Code, the contract is perfected. Problem — “A’’ agreed to sell to “B’’ a parcel of land for P5,000.00. “B’’ was given up to May 6, 1975 within which to

36 Southwestern Sugar and Molasses Co. vs. Atlantic Gulf & Pacific Co., 51 Off. Gaz. 3447; Navarro vs. Sugar Producers, Inc., 1 SCRA 1180.

413

Art. 1324

CONTRACTS

raise the necessary funds. It was further agreed that if “B’’ could not produce the money on or before said date, no liability would attach to him. Before May 6, 1975, “A’’ backed out of the agreement. Is “A’’ obliged to sell the property to “B’’? Explain. (1975 Bar Problem) Answer — Assuming that the offer of “A’’ to sell the land to “B’’ is merely a unilateral offer to sell, and that there is still no bilateral agreement in the sense that “B’’ had already agreed to buy the land, “A’’ is not obliged to sell the property to “B.’’ In such case, it is clear that the general rule stated in Art. 1324 and the particular rule stated in Art. 1479, par. 2, of the Civil Code are applicable. As a matter of fact, even if “B’’ has formally accepted the option given to him by “A,’’ such acceptance would be of no moment since the option is not supported by any consideration distinct from the purchase price. “A’’ can always change his mind at any time. The option does not bind him for lack of a cause or consideration. It would have been different if “B’’ had accepted the offer to sell within the period of the option before said offer was withdrawn by “A.’’ In such a case, a contract of sale would have been generated right then and there. As it turned out, “A’’ withdrew his offer in time. (See Sanchez vs. Rigor, 45 SCRA 368) (Note: In Sanchez vs. Rigos, supra, the Supreme Court finally resolved a question which arose out of the use of the word “accepted’’ in modifying the phrase “unilateral promise to buy or to sell’’ in Art. 1479, par. 2, of the Civil Code. “Accepted’’ refers to the option, not to the offer, to buy or to sell; in other words, it refers to the acceptance by either prospective vendee or vendor of the option of, let us say, ninety days within which he shall decide whether or not he shall buy or sell the thing. Thus, if “A’’ offers to sell a lot to “B’’ for P200,000, and gives the latter an option of ninety days within which to decide whether or not he shall buy the property, and the latter accepts the option, two possible situations may arise: (1) In accepting the option, “B’’ pays to “A’’ an “option money’’ of, let us say, P5,000 which is distinct from the purchase price. In such case, there is already a perfected preparatory contract of option. “A’’ is bound by his offer. “B’’ shall now decide within the period of the option whether or not he shall buy the property. If he decides to buy, he shall then pay to “B’’ the price of P200,000; if he decides otherwise, no contract of sale will ever be perfected. (2) In accepting the option, “B’’ does not pay any “option money’’ to “A’’. In such case, there is no perfected preparatory

414

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1324

contract of option for lack of a consideration. The result is a mere offer to sell, acceptance or which will be suffcient to generate a perfected contract of sale. But suppose that meanwhile, “A’’ has changed his mind? The lot is no longer for sale. “B’’, on the other hand, has decided to buy the property. What will now happen? Under this situation, the one who is first to notify the other of his decision emerges the victor. If “A’’ is the first to notify “B’’ of his change of mind, no contract of sale will ever be perfected; if “B’’ is the first to notify “A’’ of his acceptance of the offer, a contract of sale has already been perfected.) Problem — “Q,’’ the owner of a house and lot in Quezon City, gave an option to “R’’ to purchase said property for P100,000.00 within ninety days from May 1, 1979. “R’’ gave “Q’’ one (P1.00) peso as option money. Before the expiration of the ninety-day period, “R’’ went to “Q’’ to exercise his option to pay the purchase price but “Q’’ refused because somebody wanted to buy his property for P150,000.00 and because there was no sufficient consideration for the option. “R’’ sued “Q’’ to compel him to accept payment and execute a deed of sale in his favor. Decide the case. (1980 Bar Problem) Answer — “Q’’ should be compelled to accept the purchase price of P100,000.00 and to execute a deed of sale of the subject property in favor of “R.’’ The reason is that there is already a perfected contract of sale. Undoubtedly, in the instant case, there is a unilateral offer of “Q’’ to sell the subject property to “R.’’ For that purpose, the latter is given an option of ninety days from May 1, 1979 within which to exercise the option. The consideration for the option is P1.00. According to the Civil Code, since there is a consideration for the option, “Q’’ is now bound by his promise to sell the property to “R’’ so long as the latter will exercise the option within the agreed period of ninety days. “R’’ exercised his option. Therefore, there is already a perfected contract of sale. True, “Q’’ will suffer some sort of lesion or prejudice if what he says about another desiring to buy the property for P150,000.00 is established. True also, the consideration of P1.00 for the option is grossly inadequate. The Civil Code, however, declares that 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. Here, there is no fraud, mistake or undue influence which would be a possible basis for invalidating either the preparatory contract of option or the principal contract of sale.

415

Arts. 1325-1326

CONTRACTS

As a matter of fact, even assuming that there is no consideration for the option, the end result would still be the same. Since “R’’ accepted the offer before it could be withdrawn or revoked by “Q,’’ there is already a perfected contract of sale. (Note: The second paragraph of the above answer, which gives the raison d’etre for what is stated in the first paragraph, is based on Arts. 1324 and 1479, par. 2, of the Civil Code. The third paragraph, which disposes of the contentions or defenses of the defendant, is based on Art. 1355 of the Civil Code. The fourth paragraph, which is a sort of obiter, is based on Sanchez vs. Rigos, 45 SCRA 368.)

Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer.37 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.38 Article Applied. — The above article may be illustrated by the following problem: Problem — “K’’ and Co. published in the newspaper an “Invitation to Bid’’ inviting proposals to supply labor and materials for a construction project described in the invitation. “L,’’ “M’’ and “N’’ submitted bids. When the bids were opened, it appeared that “L’’ submitted the lowest bid. However, “K’’ and Co. awarded the contract to “N,’’ the highest bidder, on the ground that he was the most experienced and responsible bidder. “L’’ brought an action against “K’’ and Co. to compel the award of the contract to him and to recover damages. Is “L’s’’ position meritorious? (1980 Bar Problem) Answer — “L’s’’ position is not meritorious. According to the 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

37 38

New provision. New provision.

416

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1327

contrary appears. It is clear that the general rule applies in the instant case. In its advertisement, “K’’ and Co. did not state that it will award the contract to the lowest bidder. Therefore, in awarding the contract to “N,’’ the defendant company acted in accordance with its rights.

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.39 Legal Capacity of Contracting Parties. — The capacity of the contracting parties is, in effect, an essential element of a contract, or to be more exact, it is an indispensable requisite of consent. Since it is so intimately interwoven with the latter as an antecedent is to a consequent, and since it is impossible in law to speak of an effective consent without presupposing the capacity to give it, it is perfectly understandable why the Code does not expressly mention capacity as one of the essential elements.40 The Code in Art. 1327, however, speaks of those who are incapacitated to give their consent to a contract. Idem; Incapacitated persons. — According to Art. 1327, the following cannot give their consent to a contract: (1) Unemancipated minors; (2) insane or demented persons; and (3) deaf-mutes who do not know how to write. The second is broad enough to cover all cases where one or both of the contracting parties are unable to understand the nature and consequences of the contract at the time of its execution, such as those in a state of drunkenness or under a hypnotic spell or who are suffering from any kind of mental incapacity whatsoever. Because the law incapacitates them to give their consent to a contract, the only way by which any one of those enumerated above can enter into a contract is to act through a parent or guardian. If this requirement is not complied with, the result is a defective contract. If only one of the contracting parties is incapacitated 39 40

Art. 1263, Spanish Civil Code, in modified form. 8 Manresa, 5th Ed., Bk. 2, p. 352.

417

Art. 1327

CONTRACTS

to give his consent, the contract is voidable.41 If both of them are incapacitated to give their consent, the contract is unenforceable.42 Idem; id. — Unemancipated minors. — Under No. 1 of Art. 1327, unemancipated minors cannot give their consent to a contract.43 However, if a minor is emancipated by marriage or by voluntary concession, according to Art. 399 of the Civil Code, he shall have the power to administer his property, but he cannot borrow money or alienate or encumber real property without the consent of his father or mother, or guardian. Nevertheless, there are five exceptional cases where a contract entered into by an unemancipated minor may have all of the effects of a valid contract. They are: first, when it is entered into by a minor who misrepresents his age;44 second, when it involves the sale and delivery of necessaries to the minor;45 third, when it involves a natural obligation and such obligation is fulfilled voluntarily by the minor, provided that such minor is between eighteen and twenty-one years of age;46 fourth, when it is a marriage settlement or donation propter nuptias, provided that the minor is between twenty and twenty-one years of age, if male, or between eighteen and twentyone years of age, if female;47 and fifth, when it is a life, health or accident insurance taken on the life of the minor, provided that the minor is eighteen years old or more and the beneficiary appointed is the minor’s estate, or the minor’s father, mother, husband wife, child, brother, or sister.48 Idem; id. — Effect of misrepresentation. — The first exception is based on the principle of estoppel. Thus, in the case of Mercado and Mercado vs. Espiritu,49 the Supreme Court held that where the minors who entered into the contract have already passed

Art. 1390, No. 1, Civil Code. Art. 1403, No. 3, Civil Code. 43 For legal effect of contracts entered into by unemancipated minors, see Gan Tingco vs. Pabanguit, 35 Phil. 31; Ibañez vs. Rodriguez, 47 Phil. 554; Velayo vs. Alcantara, 47 Off. Gaz. 44 Mercado and Mercado vs. Espiritu, 37 Phil. 215; Sia Suan vs. Alcantara, 47 Off. Gaz. 4561. 45 Art. 1489, Civil Code. 46 Arts. 1425, 1426, 1427, Civil Code. 47 Arts. 120, 128, Civil Code. 48 Act No. 3424, as amended, Insurance Law. 49 37 Phil. 215. 41 42

418

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1327

the age of puberty and adolescence in such a way that they could misrepresent and actually did misrepresent themselves as having reached the age of majority, they cannot, upon reaching the age of majority, annul the contract on the ground of minority inasmuch as they are already in estoppel. This doctrine was reiterated in the cases of Sia Suan vs. Alcantara50 and Hermosa vs. Zobel.51 In his concurring and dissenting opinion in the Alcantara case, however, Justice Padilla declared: “The contract of sale involved in the case of Mercado vs. Espiritu was executed by the minors on May 17, 1890. The law in force on this last mentioned date was not Las Siete Partidas, which was the law in force at the time the causes of action accrued in the cases decided by the Supreme Court of Spain referred to, but the Civil Code which took effect in the Philippines on December 8, 1889. As already stated, the Civil Code requires the consent of both parties for the valid execution of a contract (Art. 1261 — now Art. 1318, of the Civil Code). As a minor cannot give his consent, the contract made or executed by him has no validity and legal effect. There is no provision in the Civil Code similar to that of Law 6, Title 19 of the 6th Partida which is equivalent to the common law principle of estoppel.52 If there be an express provision in the Civil Code similar to Law 6, Title 19 of the 6th Partida, I would agree to the reasoning of the majority. The absence of such provision in the Civil Code is fatal to the validity of the contract executed by a minor. It would be illogical to uphold the validity of a contract on the ground of estoppel, because if the contract executed by a minor is null and void for lack of consent and produces no legal effect, how could such a minor be bound by misrepresentation about his age? If he could not be bound by a direct act, such as the execution of a deed of sale, how could he be bound by an indirect act, such as his misrepresentation as to his age? The rule laid down in Young vs. Tecson, 39 Off. Gaz. 953, in my opinion, is the correct one.’’53 47 Off. Gaz. 4561. 104 Phil. 769. 52 This was true under the Spanish Civil Code. However, the New Civil Code (Art. 1431) now provides that through estoppel, an admission or representation is rendered conclusive upon the person making it and it cannot be denied or disproved as against the person relying thereon. 53 The case of Young vs. Tecson was a case decided by the Court of Appeals holding that: “The theory advanced by the appellants that misrepresentation made by the defendant as to his age estops him from denying that he was of age, or from assert50 51

419

Art. 1327

CONTRACTS

Be that as it may, it is now well settled that misrepresentation by unemancipated minors with regard to their age when entering into a contract shall bind them in the sense that they are estopped subsequently from impugning the validity of the contract on the ground of minority. It is, however, necessary that the misrepresentation must be active, not merely constructive.54 Braganza vs. Villa Abrille 105 Phil. 456 On Oct. 20, 1944, Rosario de Braganza and her two minor sons, Rodolfo and Guillermo, who were then 18 and 16 years old respectively, borrowed from Villa Abrille P70,000 in Japanese military notes, promising to pay the latter solidarily P10,000 “in legal currency of the Philippines, two years after the cessation of present hostilities or as soon as International Exchange has been established in the Philippines,’’ plus 2% interest per annum. For failure to pay, Villa Abrille sued them in March, 1949. Defendants, however, have interposed the minority of Rodolfo and Guillermo de Braganza at the time when they signed the note as a defense. Consequently, the principal questions to be decided are: first, whether or not the minority of her co-signers has any effect upon the liability of Mrs. Braganza; and second, whether or not such co-signers can be held liable. The Supreme Court held: “Mrs. Braganza is liable because the minority of her cosigners does not release her from liability, since it is a personal defense of the minors. However, she can avail herself of the defense but such defense will benefit her only as regards that part of the debt for which the minors are responsible. (Art. 1148, now Art. 1222, Civil Code.) Therefore, she shall pay 1/3 of P10,000 or P3,333.33, plus 2% interest from October, 1944. “On the other hand, the Court of Appeals found the minors liable because they did not state in the promissory note that they are not yet of legal age and ‘when minors pretended to be

ing that he was under age, at the time he entered into the contract, for the breach of which this action is brought is untenable, because under the principle of estoppel the liability resulting from the misrepresentation has its juridical source in the capacity of the person making the misrepresentation to bind himself. If the person making the misrepresentation cannot bind himself by a contract, he cannot also be bound by any misrepresentation he may have made in connection therewith.’’ 54 Braganza vs. Villa Abrille, 106 Phil. 456.

420

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1327

of legal age, when in fact they were not, they will not later on be permitted to excuse themselves from the fulfillment of the obligation contracted by them, or to have it annulled.’ (Mercado, et al. vs. Espiritu, 37 Phil. 15.) However, the Mercado case is different because the document signed therein by the minors specifically stated that they were of age, here, the promissory note contained no such statement. In other words, in the Mercado case, the minors were guilty of active misrepresentation; whereas in this case, the minors are guilty of passive or constructive misrepresentation. From the minor’s failure to disclose their minority, it does not follow, as a legal proposition, that they will not be permitted there after to assert it. According to Corpus Juris Secundum (43, p. 206), ‘mere silence when making a contract as to his age does not constitute a fraud which can be made the basis of an action for deceit. In order to hold the infant liable, the fraud must be actual and not constructive.’ Therefore, the minors in the case at bar cannot be legally bound by their signatures in the promissory note. “They cannot, however, be absolved entirely from monetary responsibility. Under the Civil Code, even if their written contract is voidable because of non-age, they shall make restitution to the extent that they may have profited by the money they received. (Art. 1304, now Art. 1399, Civil Code.) There is testimony that the funds were used for their support during the Japanese occupation. Such being the case, it is but fair to hold that they had profited to the extent of the value of such money, which value has been established in the Ballantyne Schedule. In October, 1944, P40 Japanese military notes were equivalent to P1.00 of current Philippine money. Hence, they shall pay jointly P1,666.67, plus 6% interest beginning March 7, 1949, when the complaint was filed.”

Idem; id. — Insane or demented persons. — Under No. 2 of Art. 1327, insane or demented persons cannot give their consent to a contract. It is, of course, well established that “insane or demented persons” include any person, who, at the time of the celebration of the contract, cannot understand the nature and consequences of the act or transaction by reason of any cause affecting his intellectual or sensitive faculties, whether permanent or temporary. Art. 1328, however, provides that a contract entered into during a lucid interval is valid. Thus, according to the Supreme Court: “Even in the execution of contracts, in the absence of a statute to the contrary, the presumption of insanity and

421

Art. 1327

CONTRACTS

mental incapacity in a person under guardianship for mental derangement, is only prima facie and may be rebutted by evidence. A person under guardianship for insanity may still enter into a valid contract and even convey property, provided it is proven that at the time of entering into said contract, he was not insane or that his mental defect, if mentally deranged, did not interfere with or affect his capacity to appreciate the meaning and significance of the transaction entered into by him. There are many cases of persons mentally deranged who, although they have been having obsessions and delusions for many years regarding certain subjects and situations, still are mentally sound in other respects. There are others who, though insane, have their lucid intervals when in all respect they are perfectly sane and mentally sound.55

What is the nature and extent of the mental incapacity which will incapacitate a person from giving his consent to a contract? In our present knowledge of the state of mental alienation such certainty has not yet been reached in which we can determine with precision who are those who are suffering from mental capacity and who are those who are not. As a matter of fact, the Code considers as a demented person, or at least, places in the same category as a demented person anyone who is in a state of drunkenness or under a hypnotic spell, when it declares in Art. 1328 that a contract entered into by such person is voidable. It is, however, a well-established rule in contractual law that in order to avoid a contract because of mental incapacity, it is necessary to show that at the time of the celebration of the contract one of the contracting parties was not capable of understanding with reasonable clearness the nature and effect of the transaction in which he was engaged. Hence, such circumstances as age, sickness, or any other condition as such will not necessarily justify a court of justice to interfere in order to set aside a contract voluntarily entered into.56 Thus, where it was established that one of the contracting parties was suffering from monomania or delusion of wealth at the time of the execution of the contract believing himself to be very wealthy when as a matter of fact he is not, it was held that such fact alone will not be sufficient to invalidate the contract so long as it was not proved that at the

55 56

Dumaguin vs. Reynolds, 48 Off. Gaz. 3887. Cui vs. Cui, 100 Phil. 913, citing Page on Contracts, Vol. 3, Sec. 2810.

422

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1327

moment of the execution of the contract he was incapable, crazy, insane, or out of his mind.57 Consequently, mental incapacity to enter into a contract is a question of fact which must be decided by the courts. There is, however, a presumption that every person of legal age possesses the necessary capacity to execute a contract,58 but the presumption is prima facie and may be rebutted by proper evidence. Thus, in the case of Carillo vs. Jaoco,59 where it was established that the vendor of several parcels of land was declared insane by a competent court nine days after the execution of the contract of sale, the Supreme Court still ruled: “The fact that nine days after the execution of the contract, Adriana Carillo was declared mentally incapacitated by the trial court does not prove that she was so when she executed the contract. After all this can perfectly be explained by saying that her disease became aggravated subsequently. “Our conclusion is that prior to the execution of the document in question the usual state of Adriana Carillo was that of being mentally capable, and consequently, the burden of proof that she was mentally incapacitated at a specified time is upon her who affirms said incapacity. If no sufficient proof to this effect is presented, her capacity must be presumed.’’

Idem; id. — Deaf-mutes. — With regard to deaf-mutes, we must distinguish between the effect of a contract entered into by a deaf-mute who knows how to write and that of a contract entered into by a deaf-mute who does not know how to write. The first is perfectly valid, while the second is either voidable or unenforceable, depending upon whether one or both of the parties are incapacitated. This can be inferred from No. 2 of Art. 1327 which states that deafmutes who do not know how to write cannot give their consent to a contract. Idem; id. — Other incapacitated persons. — Besides the persons enumerated in Art. 1327, there are others who are also incapacitated to give their consent to a contract, such as married 57 58

Standard Oil Co. vs. Arenas, 19 Phil. 363. Standard Oil Co. vs. Arenas, 19 Phil. 363; Dumaguin vs. Reynolds, 48 Off. Gaz.

3887. 59

Standard Oil Co. vs. Arenas, 19 Phil. 363.

423

Art. 1327

CONTRACTS

women of age in cases specified by law, persons suffering from civil interdiction,60 and incompetents who are under guardianship.61 It must be noted that under Art 1263 of the Spanish Civil Code, among the persons incapacitated to give their consent to a contract are “married women in the cases specified by law,” whereas under the present Civil Code, they are not included. This is, of course, in conformity with the rule that a married woman, twenty-one years of age or over, is qualified for all acts of civil life except in cases specified by law.62 In spite of its elimination from the list, it cannot be denied that there are still cases, although much more limited in extent than under the old Code, where married women cannot give their consent to a contract without first securing their husband’s consent. The most evident example of this is that contemplated by Art. 114 of the Code regarding acquisition by a wife of property by gratuitous title. According to this article, the husband’s consent is necessary, unless the property is acquired from her ascendants, descendants, parentsin-law and relatives within the fourth degree.63 With regard to incompetents under guardianship, it must be noted that the mere fact that a person is classified as an “incompetent” in accordance with the New Rules of Court does not necessarily mean that he cannot give his consent to a contract, nor does the mere fact that he is not under guardianship necessarily mean that he can give his consent to a contract. Under Sec. 2 of Rule 92 of the New Rules of Court, the word “incompetent’’ includes: (1) persons suffering from civil interdiction; (2) hospitalized lepers; (3) prodigals; (4) deaf and dumb who are unable to read and write; (5) those who are of unsound mind, even though they have lucid intervals; and (6) those who by reason of age, weak mind, and other similar causes, cannot, without outside aid, take care of themselves and manage their property becoming thereby an easy prey for deceit and exploitation. It is evident from what had already been stated that insane or demented persons as well as deaf-mutes who cannot write cannot give their consent to a contract, whether or not they

Art. 34, Revised Penal Code. Rules 92-93, New Rules of Court. 62 Art. 39, par. 2, Civil Code. 63 With regard to contracts involving paraphernal property, see Art. 140, and with regard to those involving conjugal property, see Art. 172, Civil Code. 60 61

424

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1328-1329

are under guardianship.64 The same is also true with regard to those suffering from civil interdiction.65 On the other hand, prodigals and those who by reason of age, weak mind, and other similar causes, cannot take care of themselves and manage their property, before they are placed under judicial guardianship, are disputably presumed to possess contractual capacity. Consequently, whether or not they can give their consent to a contract becomes a matter of proof. Hospitalized lepers, before they are placed under guardianship, are, of course, not incapacitated. But once an incompetent is placed upon guardianship, such incompetent can enter into a contract only through his guardian; otherwise, the contract is voidable. Problem — Is a person of advanced years or age or by reason of physical infirmities incapacitated to enter into a contract? Answer — A person is not incapacitated to enter into a contract merely because of advanced years or by reason of physical infirmities, unless such age and infirmities impair his mental faculties to the extent that he is unable to properly, intelligently and fairly understand the provisions of said contract (Dr. Jose and Aida Yason and Faustino Arciaga, et. al., G.R. No. 145017, Jan. 28, 2005).

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.66 Art. 1329. The incapacity declared in Article 1327 is subject to the modification determined by law, and is understood to be without prejudice to special disqualifications established in the laws.67 Disqualifications to Contract. — It is apparent that the persons specially disqualified mentioned in Art. 1329 refer to those who are prohibited from entering into a contract with certain persons with regard to certain property under certain circumstances and not to those who are incapacitated to give their consent to a contract. Art. 1327, Civil Code. Art. 34, Revised Penal Code. 66 New provision. 67 Art. 1264, Spanish Civil Code. 64 65

425

Arts. 1328-1329

CONTRACTS

Thus, Sec. 145 of the Administrative Code declares that no contract relating to real property shall be made with any non-Christian inhabitant of Mindanao and Sulu, unless such contract shall bear the approval of the provincial governor of the province wherein the contract was executed or his representative duly authorized for such purpose in writing endorsed upon it.68 This rule is still intact under Rep. Act No. 3872, although the sale is subject to the approval of the Chairman of the Commission on National Integration. Any contract executed in violation of this rule is void.69 Similarly, under the Insolvency Law, a person who is declared insolvent before he is discharged is prohibited from entering into a contract.70 Attention must also be called to the following provisions of the Civil Code: “Art. 133. Every donation between the spouses during the marriage shall be void. This prohibition does not apply when the donation takes effect after the death of the donor. “Neither does this prohibition apply to moderate gifts which the spouses may give each other on the occasion of any family rejoicing.’’ “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.’’ “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

68 Act No. 2798 has extended the application of this rule to the non-Christians of Mountain Province and Nueva Vizcaya. 69 Rep. Act No. 3872. See Porkan vs. Yatco, 70 Phil. 161; Porkan vs. Navarro, 73 Phil. 698; Madale vs. Raya, 49 Off. Gaz. 536; Miguel vs. Catalino, 26 SCRA 234; Heirs of Lacamen vs. Heirs of Laruan, 65 SCRA 605. 70 Act No. 1956.

426

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1328-1329

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 rights which may be the object of any litigation in which they may take part by virtue of their profession; “(6)

Any others specially disqualified by law.”

“Art. 1782. Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership.’’

Idem; Distinguished from incapacity to contract. — Disqualification to contract or prohibition to contract, referred to in the previous section, must not be confused with incapacity to give consent to a contract. The two may be distinguished from each other as follows: (1) Incapacity restrains the exercise of the right to contract, while prohibition to contract restrains the very right itself; in other words, a person who is incapacitated can still enter into a contract, but he must do so through his parent or guardian, while one who is prohibited from entering into a particular contract is absolutely disqualified from entering into that contract; (2) Incapacity is based upon subjective circumstances of certain persons which compel the law to suspend for a definite or indefinite period their right to contract, while prohibition to contract, 427

Art. 1330

CONTRACTS

which has been improperly called special incapacity by certain authors, is based upon public policy and morality; and (3) A contract entered into by an incapacitated person is merely voidable in accordance with Art. 1390 of the Civil Code, while that entered into by one against whom a prohibition is directed is void in accordance with Arts. 5 and 1409, No. 7, of the Civil Code.71 Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable.72 Vices of Consent. — Art. 1330 enumerates the different vices which may vitiate consent. In addition to the five stated in this article, we can also include simulation of contracts.73 According to Castan, the vices of consent may be divided into two distinct groups — vices of the will (vicios de la formacion de la voluntad) and vices of declaration (vicios de la declaracion). The first comprehends mistake, violence, intimidation, undue influence, and fraud; the second comprehends all forms of simulated contracts.74 Actually, Art. 1330, according to Manresa, enumerates in a negative way the different requisites of consent objectively considered. These requisites are that the consent must be intelligent, that it must be free, and that it must be spontaneous. Intelligent consent is vitiated by mistake or error; free consent by violence, intimidation and undue influence; spontaneous consent by fraud.75 Because of the inclusion of simulation of contracts as one of the vices which vitiate consent, we might add a fourth requisite — that the consent must be real. In the absence of any of the first three requisites because consent is given through either mistake, or violence, or intimidation, or undue influence, or fraud, the contract is voidable; in the absence of the fourth requisite because the contract is simulated, it may be

3 Castan, 7th Ed., p. 525. Art. 1265, Spanish Civil Code. 73 Arts. 1345-1346, Civil Code. See also 3 Castan, 7th Ed., p. 330; 8 Manresa, 5th Ed., Bk. 2, p. 393. 74 3 Castan, 7th Ed., p. 330. 75 8 Manresa, 5th Ed., Bk. 2, pp. 392-393. 71 72

428

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1331

either void ab initio or valid as far as the real agreement is concerned depending upon whether the simulation is absolute or relative.76 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.77 Mistake. — The Code does not distinguish between mistake as such and ignorance. Consequently, as it is understood in the Civil Code, mistake may be defined not only as the wrong conception of a thing, but also as the lack of knowledge with respect to a thing.78 Idem; Mistakes which vitiate consent. — There are two general kinds of mistakes — mistake of fact and mistake of law. There is, of course, a mistake of fact when one or both of the contracting parties believe that a fact exists when in reality it does not, or that such fact does not exist when in reality it does. On the other hand, there is a mistake of law when one or both of the contracting parties arrive at an erroneous conclusion regarding the interpretation of a question of law or the legal effects of a certain act or transaction. As a general rule, it is only a mistake of fact which will vitiate consent thus rendering the contract voidable; a mistake of law, on the otherhand, does not render the contract voidable because of the wellknown principle that ignorance of the law does not excuse anyone from compliance therewith.79

Arts. 1330, 1345, Civil Code. Art. 1266, Spanish Civil Code, in modified form. 78 8 Manresa, 5th Ed., Bk. 2, p. 395. 79 Luna vs. Linatoc, 74 Phil. 15, citing Art. 3, Civil Code, 3 Castan, 7th Ed., pp. 330-331. 76 77

429

Art. 1331

CONTRACTS

Idem; id. — Mistake of fact. — For purposes of clarity, we shall divide the different mistakes of fact which vitiate consent into the following classes:80 (1) Mistake as to object (error in re): This is the mistake which is referred to in the first paragraph of Art. 1331 of the Code. It may be subdivided into the following: (a) Mistake as to the identity of the thing (error in corpore), as when the thing which constitutes the object of the contract is confused with another thing; (b) mistake as to the substance of the thing (error in substantia); (c) mistake as to the conditions of the thing, provided such conditions have principally moved one or both parties to enter into the contract; and (d) mistake as to the quantity of the thing (error in quantitate), provided that the extent or dimension of the thing was one of the principal reasons of one or both of the parties for entering into the contract.81 In order that a contract is rendered voidable because of mistake regarding the quantity of the thing which constitutes the object thereof, it is necessary that such mistake should refer not only to the material out of which the thing is made, but also to the nature which distinguishes it, generically or specifically, from all others, such as when a person purchases a thing made of silver believing that it is made of gold. Consequently, if the mistake refers only to accidental or secondary qualities (error in qualitate), the contract is not rendered voidable.82 In case of mistake regarding the quantity of the thing (error in quantitate), it is important that this class of mistake should be distinguished from a mistake of account or calculation. In the first, there is a real mistake as to the extent of the object of the contract; in the second, there is only an apparent mistake, a mere mistake in mathematical computation. As a consequence, in the first, the contract is voidable; in the second, it is not. Thus, if the parties enter into a contract with respect to a parcel of land which they believe has an area of 100 hectares, when in reality it has an area of only 50 hectares, there is mistake as to the quantity of the thing; the contract in this case is voidable. If, on the other hand, they enter into a contract in which it is agreed that a parcel of land consisting

3 Castan, 7th Ed., pp. 331-335; 8 Manresa, 5th Ed., Bk. 2, pp. 397-405. 3 Castan, 7th Ed., pp. 331-332. 82 3 Castan, 7th Ed., pp. 332-333; 8 Manresa, 5th Ed., Bk. 2, pp. 397-398. 80 81

430

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1331

of 10 hectares shall be sold for P1,000 per hectare, and they thought that the total price is only P5,000, there is a mistake of account; the mistake in this case can only be corrected.83 Asiain vs. Jalandoni 45 Phil. 296 The records show that the plaintiff offered to sell to the defendant a certain hacienda for P55,000. During the negotiation, he told the defendant that it contained between 25 and 30 hectares and that the cane then planted would produce 2,000 piculs of sugar. Although doubtful of the extent of the land, the defendant finally accepted the offer, paid P30,000 of the purchase price and took possession of the land. While thus in possession, he discovered that the land was only about 18 hectares and the cane only about 800 piculs of sugar. Because of this discovery, he refused to pay the balance of the purchase price. As a consequence, plaintiff commenced this action to recover the said balance. To the complaint, defendant filed an answer and a counter complaint, asking that the contract be annulled. Held: “Coordinating more closely the law and the facts in the instant case, we reach the following conclusions: This was not a contract of hazard. It was a sale in gross in which there was a mutual mistake as to the quantity of land sold and as to the amount of the standing crop. The mistake of fact as disclosed not alone by the terms of the contract but by the attendant circumstances, which it is proper to consider in order to throw light upon the intention of the parties, is, as it is sometimes expressed, the efficient cause of the concoction. The mistake with reference to the subject matter of the contract is such that, at the option of the purchaser, the contract is rescissible (voidable). Without such mistake the agreement would not have made and since this is true, the agreement is inoperative. It is not deception but is more nearly akin to bilateral mistake for which relief should be granted. Specific performance of the contract can therefore not be allowed at the instance of the vendor.

83 8 Manresa, 5th Ed., Bk. 2, pp. 403-404. For cases illustrating mistakes account, see Pastor vs. Nicasio, 6 Phil. 152; Aldecoa & Co. vs. Warner, Barnes & Co., 16 Phil. 23; Gutierrez Hermanos vs. Oria Hermanos,30 Phil. 491; Oquinena & Co. vs. Muertegui, 32 Phil. 261.

431

Art. 1332

CONTRACTS

“The ultimate result is to put the parties back in exactly their respective positions before they became involved in the negotiation and before accomplishment of the agreement. This was the decision of the trial judge and we think that decision conforms to the facts and the principles of equity.’’

(2) Mistake as to person (error in persona): This kind of mistake or error may refer either to the name or to the identity or to the qualification of a person. It is evident from the provision of the second paragraph of Art. 1331 that the only mistake with regard to persons which will vitiate consent are mistakes with regard to the identity or the qualifications of one of the contracting parties. Hence, mistake with regard to the name of one or both of the contracting parties will not invalidate the contract. In order that mistake as to persons shall vitiate consent, the following requisites must, however, concur: first, the mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties; and second, such identity or qualification must have been the principal consideration for the celebration of the contract. Generally, this kind of mistake occurs in obligations to do which require special qualifications of the parties or which are based on confidence. Examples of these obligations are those arising from remuneratory contracts, partnership, agency, deposit, commodatum, and lease of services.84 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.85 Rule Where a Party Is Illiterate. — The rule stated in the above article was declared by the codifiers as “especially necessary in the Philippines where unfortunately there is still a fairly large number of illiterates and where documents are usually drawn up in English and Spanish.”86 Thus, where the plaintiff, who cannot

3 Castan, 7th Ed., pp. 334-335; 8 Manresa, 5th Ed., Bk. 2, p. 402. New provision. 86 Report of the Code Commission, p. 136, cited in Ayola vs. Valderama Lumber Co., CA, 49 Off. Gaz. 980. 84 85

432

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1332

read and write, signed with a cross a document which she thought was merely a promise to pay certain expenses which defendant had advanced to her in a certain law suit, but which turned out to be an absolute deed of sale of two parcels of land and a carabao, said document is voidable, for had she truly understood the contents thereof, she would neither have accepted nor authenticated it by her mark.87 Similarly, where the plaintiffs, both of whom are blind, affixed their thumbmarks to a deed which they thought was a deed of mortgage, but which turned out to be a deed of sale of certain properties in favor of the defendant who is a son-in-law of one of them, although the deed is a public document and the notary public testified as to their due execution, since courts are given a wide latitude in weighing the facts or circumstances in a given case and since there exists a fiduciary relationship between the parties to the contract, it was held that such contract is voidable.88 The same is also true where the plaintiff had testified that he had signed a voucher without knowing or understanding its contents. Since under Art. 1332, the burden of proving that the plaintiff had understood the contents of the document was shifted to the defendant and he had failed to do so, the presumption of mistake still stands unrebutted and controlling.89 Article 1332 was intended for the protection of a party to a contract who is at a disadvantage due to his illiteracy, ignorance, mental weakness or other handicap. This article contemplates a situation wherein a contract has been entered into, but the consent of one of the parties is vitiated by mistake or fraud committed by the other contracting party. This is apparent from the ordering of the provisions under Book IV, Title II, Chapter 2, Section 1 of the Civil Code, from which Article 1332 is taken. Article 1330 states that “A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable.’’ (Hemedes vs. Court of Appeals, 316 SCRA 348.) 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. Fraud, on the other hand, is present when, Dumasug vs. Modelo, 34 Phil. 252. Trasporte vs. Beltran, CA, 51 Off. Gaz. 1434. 89 Ayola vs. Valderama Lumber Co., CA, 49 Off. Gaz. 980. 87 88

433

Arts. 1333-1334

CONTRACTS

through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. Clearly, Article 1332 assumes that the consent of the contracting party imputing the mistake or fraud was given, although vitiated, and does not cover a situation where there is a complete absence of consent. (Hemedes vs. Court of Appeals, supra.) Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract.90 Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.91 Mistake of Law. — Mistake of law as a rule will not vitiate consent. There is, however, an exception to this rule. According to Art. 1334 (a new provision), mutual error as to the effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.92 Three requisites are, therefore, necessary in order that such mistake will vitiate consent. In the first place, the mistake must be with respect to the legal effect of an agreement; in the second place, the mistake must be mutual; and in the third place, the real purpose of the parties must have been frustrated. Explaining the reason for the insertion of Art. 1334 in the Civil Code, the Code Commissioners stated in their report: “Mistake of law does not generally vitiate consent. But when there is mistake on a doubtful question of law, or on the construction or application of law, this is analogous to a mistake of fact, and the maxim of ignorantia legis neminem excusat should have no proper application. When even the highest courts are sometimes divided upon difficult legal questions, and when one-half of the lawyers in all

New provision. New provision. 92 The mistake referred to in this article seems to be the equivalent of what Castan terms a mistake as to the nature of the contract (error in negocio) giving as an example a contract in which one of the parties believes that he is selling the thing, while the other thinks that he is merely leasing it. (3 Castan, 7th Ed., 335.) 90 91

434

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1335-1336

controversies on a legal question are wrong, why should a layman be held accountable for his honest mistake on a doubtful legal issue?’’93 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 the intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent.94 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.95 Violence and Intimidation. — The first paragraph of Art. 1335 gives the definition of violence, while the second paragraph of the same article gives the definition of intimidation. Because of the similarity between violence and intimidation, especially with regard to their effects both upon the will of the person upon whom they are exercised and upon the contract which is produced thereby, the two are sometimes known as duress. One, however, must be distinguished from the other. While violence is external, intimidation is internal; while the first prevents the expression of the will substituting it with a material act dictated by another, the second influences the operation of the will, inhibiting it in such a way that the expression thereof is apparently that of a person who has freely given his consent.96 In the terse language of Castan, violence is physical compulsion, while intimidation is moral compulsion.97 Report of the Code Commission, p. 136. Art. 1267, Spanish Civil Code, in modified form. 95 Art. 1268, Spanish Civil Code. 96 8 Manresa, 5th Ed., Bk. 2, p. 408. 97 3 Castan, 7th Ed., p. 336. 93 94

435

Arts. 1335-1336

CONTRACTS

Idem; Requisites of violence. — In order that consent is vitiated through violence, it is essential that the following requisites must concur: first, the force employed to wrest consent must be serious or irresistible; and second, it must be the determining cause for the party upon whom it is employed in entering into the contract.98 Idem; Requisites of intimidation. — Intimidation, on the other hand, requires the concurrence of the following requisites: first, one of the contracting parties is compelled to give his consent by a reasonable and well-grounded fear of an evil; second, the evil must be imminent and grave; third, the evil must be unjust; and fourth, the evil must be the determining cause for the party upon whom it is employed in entering into the contract.99 Idem; id. — Character of intimidation. — In order that intimidation may be sufficient to render a contract voidable, Art. 1335 requires that one of the contracting parties should be 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. This presupposes that the threat or intimidation must be actual, serious and possible of realization, and that the actor can and still will carry out his threat.100 The best illustrations of the application of this rule are those contracts entered into during the Japanese occupation involving payments in Japanese military notes, where it is established that one of the contracting parties was compelled to give his consent to the payment by reason of a threat to report his non-acceptance of the military notes to the Japanese authorities. Thus, it has been held that the threat to deliver anyone to the Kempetai or to the now infamous Fort Santiago, for refusal to accept Japanese military notes, or for any cause, even to intelligent persons of ordinary firmness would surely infuse just fear of great bodily harm, should there be a refusal considering the inquisitorial methods employed by the invaders and what they had done.101 But the mere knowledge of the severe penalties Ibid., pp. 337-338. Ibid. 100 This rule, which is taken from Manresa (Vol. 8, Bk. 2, 5th Ed., p. 411), is enunciated in the cases of Alarcon vs. Kasilag, CA, 40 Off. Gaz. 11th S, p. 203; De Asis vs. Buenviaje, CA, 45 Off. Gaz. 317; Mirano vs. Mossessgeld Santiago, CA, 45 Off. Gaz. 343; Derequito vs. Dolutan, CA, 45 Off. Gaz. 1351; Valdeabella vs. Marquez, CA, 48 Off. Gaz. 719. 101 Rodriguez vs. De Leon, CA, 47 Off. Gaz. 6296. 98 99

436

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1335-1336

imposed by the invaders upon a violation of their proclamations and orders regarding non-acceptance of military notes, which was common and applicable to all, without any proof of direct acts showing the imminence and gravity of any injury, does not in itself establish intimidation, since according to the law, such intimidation exists only when one of the contracting parties is inspired with a reasonable and well grounded fear of suffering an imminent and grave injury to his person or property, or to the person or property of his spouse, descendants or ascendants.102 Idem; id. — Distinguished from reluctant consent. — From what had been stated, consent given through intimidation must not be confused with consent given reluctantly and even against good sense and judgment. There must be a distinction to be made between a case where a person gives his consent reluctantly and even against his good sense and judgment and where he, in reality, gives no consent at all as where he executes a contract against his will under a pressure which he cannot resist. It is clear that one acts as voluntarily and independently in the eyes of the law when he acts reluctantly and with hesitation as when he acts spontaneously and joyously. Legally speaking, he acts voluntarily and freely when he acts wholly against his better sense and judgment as when he acts in conformity with them. Between the two acts there is no difference in law.103 The test in order to determine whether consent given “under pressure” is intimidation within the meaning of the law or not is given by Justice Moreland in the following words: “All men are presumed to be sane and normal and subject to be moved by substantially the same motives. When of age and sane, they must take care of themselves. In their resolutions with others in the business of life, wits, sense, intelligence, training, ability and judgment meet and clash and contest, sometimes with gain and advantage to all, sometimes to a few only, with loss and injury to others. In these contests men must depend upon themselves — upon their own abilities, talents,

Valdeabella vs. Marquez, CA, 48 Off. Gaz. 719. To the same effect: Mirano vs. Mossessgeld Santiago, CA, 45 Off. Gaz. 343; Phil. Trust Co. vs. Araneta, 46 Off. Gaz. 4254; Laraga vs. Bañez, 47 Off. Gaz. 696; Fernandez vs. Brownell, 51 Off. Gaz. 713. 103 Vales vs. Villa, 35 Phil. 769; Reyes vs. Zaballero, G.R. No. L-3561, May 23, 1951. 102

437

Arts. 1335-1336

CONTRACTS

training, sense, acumen, judgment. The fact that one may be worsted by another, of itself, furnishes no cause of complaint. One man cannot complain, because another is more able, or better trained, or has better sense or judgment than he has; and when the two meet on a fair field the inferior cannot murmur if the battle goes against him. The law furnishes no protection to the inferior simply because he is inferior, any more than it protects the strong because he is strong. The law furnishes protection to both alike — to one no more or less than to the other. It makes no distinction between the wise and the foolish, the great and the small, the strong and the weak. The foolish may lose all they have to the wise; but that does not mean that the law will give it back to them again. Courts cannot follow one every step of his life and extricate him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally incompetent. Courts operate not because one person has been defeated or overcome by another, but because he has been defeated or overcome illegally. Men may do foolish things, make ridiculous contracts, use miserable judgments, and lose money by them — indeed, all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of law, the commission of what the law knows as an actionable wrong before the courts are authorized to lay hold of the situation and remedy it. “Furthermore, even if an actionable wrong be committed in such manner as to authorize the court to intervene, the person injured may renounce his right to take the matter to the courts and may compromise with the wrong-doer. Or, having been placed in a very disadvantageous position by the wrong committed against him, he may be offered by his adversary one or more avenues of escape. He may be required to lose more property to his enemy or go to the court for redress. In such case the payment of an additional sum as a means of escape is not necessarily a payment for duress. The act was preceded by an exercise of judgment. This much was plain to him; he had either to let the matter stand as it was with the loss already sustained or go to the courts to be relieved. His judgment, operating upon this condition, told him to pay the additional sum rather than to suffer the inconvenience and expense of an action in court. A payment made under such conditions is not voidable. It is a voluntary act of a sane and mature man performed upon reflection. Not only this; it is a compromise of the original wrong and a ratification of the relation which the wrongful act was intended to establish between the parties.

438

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1335-1336

“The same may be said with greater force of a case where a person’s own voluntary act, uninfluenced by another, has put him in a disadvantageous position — a position which another may unjustly make use of to his injury. The failure to reduce a contract to writing or to have witnesses present when a verbal agreement is made, or to record an instrument, or to exclude from the operation of its terms things verbally agreed to be excluded, etc., may place a person in a disadvantageous position with respect to another; but the demand that he pays to secure his extrication is not illegal, and payment made pursuant to such demand is not necessarily voidable. He pays for his lack of foresight. While the demand may be reprehensible morally, it is not illegal; and of itself is not ground for relief. “There must, then, be a distinction to be made between a case where a person gives his consent reluctantly and even against his good sense and judgment, and where he, in reality, gives no consent at all, as where he executes a contract or performs an act against his will under a pressure which he cannot resist. It is clear that one acts as voluntarily and indepedently in the eyes of the law when he acts reluctantly and with hesitation, as when he acts spontaneously and joyously. Legally speaking, he acts as voluntarily and freely when he acts wholly against his better sense and judgment as when he acts in conformity with them. Between the two acts there is no difference in law. But when his sense, judgment, and his will rebel and he refuses absolutely to act as requested, but is nevertheless overcome by force or intimidation to such an extent that he becomes a mere automaton and acts mechanically only, a new element enters, namely, a disappearance of the personality of the actor. He ceases to exist as an independent entity with faculties and judgment and in his place is substituted another — the one exercising the force or making use of the intimidation. While his hand signs, the will which moves it is another’s. While a contract is made, it has, in reality and in law, only one party, the one using the force or the intimidation; it is unenforceable for lack of a second party. “From these considerations it is clear that every case of an alleged intimidation must be examined to determine within which class it falls. If it is within the first class, it is not duress in law, if it falls in the second, it is.’’104

104 Vales vs. Villa, 35 Phil. 769. To a certain extent the doctrine of absolute judicial objectivity as applied to contractual relations has been humanized by the provision of Art. 24 of the New Civil Code.

439

Arts. 1335-1336

CONTRACTS

Martinez vs. Hongkong and Shanghai Bank 15 Phil. 252 This is an action to annul a contract on the ground that plaintiff’s consent thereto was obtained under duress. Under this contract, she agreed to a conveyance of several properties to Aldecoa & Co. and the Hongkong and Shanghai Bank as settlement of their claims against her and against her husband, who in order to escape criminal charges, had escaped to Macao, a territory not covered by any extradition treaty. It was established at the trial that during the period of negotiation, representations were made to her by the defendants and concurred in by her lawyers, that if she assented to the requirements of the defendants, the civil suit against herself and her husband would be dismissed and the criminal charges against the latter withdrawn, but if she refused, her husband must either spend the rest of his life in Macao or be criminally prosecuted. The question now is whether or not there was duress which would invalidate the contract. Held: “In order that this contract can be annulled it must be shown that the plaintiff never gave her consent to the execution thereof. It is, however, necessary to distinguish between real duress and the motive which is present when one gives his consent reluctantly. A contract is valid even though one of the parties entered into it against his wishes and desires or even against his better judgment. Contracts are also valid even though they are entered into by one of the parties without hope of advantage or profit. A contract whereby reparation is made by one party for injuries which he has wilfully inflicted upon another is one which from its inherent nature is entered into reluctantly by the party making the reparation. He is confronted with a situation in which he finds the necessity of making reparation or of taking the consequences, civil or criminal, of his unlawful acts. He makes the contract of reparation with extreme reluctance and only by the compelling force of the punishment threatened. Nevertheless, such contract is binding and enforceable. “It is undisputed that the attorneys for the plaintiff in this case advised her that, from the facts which they had before them, facts of which she was fully informed, her husband had been guilty of embezzlement and misappropriation in the management of the business of Aldecoa & Co. and that, in their judgment, if prosecuted therefor, he would be convicted. In other words, under the advice of her counsel, the situation was so presented to her that it was evident that in signing the agreement, she

440

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1335-1336

had all to gain and nothing to lose, whereas, in refusing to sign said agreement, she had all to lose and nothing to gain. In the one case, she would lose her property and save her husband. In the other, she would lose her property and her husband too. The argument thus presented to her by her attorneys addressed itself to judgment and not to fear. It appealed to reason and not to passion. It asked her to be moved by common sense and not by love of family. It spoke to her own interests as much as to those of her husband. The argument went to her financial interests as well as to those of the defendants. It spoke to her business judgment as well as to her wifely affections. From the opinions of her attorneys as they were presented to her upon facts assumed by all to be true, we do not well see how she could reasonably have reached a conclusion other than that which she did reach. It is of no consequence here whether or not her lawyers advised her wrongly. It is of no importance whether, as a matter of law, she would have been deprived of her alleged interests in the properties mentioned in the manner described and advised by her attorneys. The important thing is that she believed and accepted their judgment and acted upon it. The question is not did she make a mistake, but did she consent; not was she wrongly advised, but was she coerced; not was she wise, but was she duressed. “From the whole case we are of the opinion that the finding of the court below that the plaintiff executed the contract in suit of her own free will and choice and not from duress is fully sustained by the evidence.’’

Idem; id. — Determination of degree of intimidation. — According to the third paragraph of Art. 1335, to determine the degree of the intimidation, the age, sex and condition of the person shall be borne in mind. It is evident that this provision refers principally to the person intimidated. By condition here is meant not only the resolute or weak character of the person intimidated, but also his other circumstances, such as his capacity or culture, which permits him to appreciate whether or not there is an imminent danger, his position, by which he can determine whether or not it gives him a chance to thwart the danger, his financial condition, because while a certain amount may mean nothing to some, to others it may mean economic ruin.105 105

8 Manresa, 5th Ed., Bk. 2, p. 418; Rodriguez vs. De Leon, CA, 47 Off. Gaz.

6296.

441

Art. 1337

CONTRACTS

But the applicability of the provision is even more evident in the case of the spouse, descendant or ascendant of the contracting party. When the evil which threatens is directed not against the contracting party but against his spouse, descendant or ascendant, we must consider not only the conditions of the contracting party, but also the conditions of such spouse, descendant or ascendant, because, although the evil which threatens may not be sufficiently grave or serious to bring harm to the contracting party, it may have a different effect upon a weak woman, an aged father, or a defenseless child.106 Idem; id. — Effect of just or legal threat. — According to the last paragraph of Art. 1335, a threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent. Consequently, even if it can be established that the reason or motive of a party in entering into a contract was the threat of the other to proceed against him through the courts, the contract would still be perfectly valid and not voidable.107 Thus, where it is established that a demand for the settlement of an obligation made by the creditor upon the debtor was accompanied by the threat that upon failure of the latter to do so, an action would be instituted against him in court, it was held that such threat is proper within the realm of the law as a means to enforce collection of the obligation, and therefore, cannot constitute intimidation which would invalidate any settlement entered into even if the claim proves to be unfounded so long as the creditor who made the threat believed that it was his right to do so.108 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

8 Manresa, 5th Ed., Bk. 2, p. 418. Doronilla vs. Lopez, 3 Phil. 360; Martinez vs. Hongkong and Shanghai Bank, 5 Phil. 252; Jalbuena vs. Ledesma, 8 Phil. 601; Berg vs. Nat. City Bank of New York, 102 Phil. 309. 108 Berg vs. Nat. City Bank of New York, G.R. No. L-9312, Oct. 31, 1957. 106 107

442

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1337

unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.109 Undue Influence. — According to Art. 1337 of the Code, 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. Concisely stated, undue influence invalidating a contract is that which substitutes the wishes of another for those of a party to the contract or that which deprives the latter of his free agency.110 Idem; Undue influence which vitiates consent. — Although it has often been stated that undue influence is an unlawful influence, it appears that no more is meant by the expression “undue influence,” as used in this connection than that it is the influence which deprives a person of his free agency. Consequently, even if it can be established that a person entered into a contract through the importunity or persuasion of another against his better judgment, if the deprivation of his free agency is not proved, there is no undue influence which will invalidate the contract. Thus, according to the Supreme Court: “Solicitation, importunity, argument, and persuasion are not undue influence and a contract is not to be set aside merely because one party used these means to obtain the consent of the other. Influence obtained by persuasion or argument or by appeals to the affections is not prohibited either in law or morals and is not obnoxious even in courts of equity. Such may be termed ‘due influence.’ The line between due and undue influence when drawn, must be with full recognition of the liberty due every true owner to obey the voice of justice, the dictates of friendship, of gratitude and of benevolence, as well as the claims of kindred, and when not hindered by personal incapacity or particular regulations, to dispose of his own property according to his own free choice. (9 Cyc. 455, and cases there cited.)’’111

The test, therefore, in order to determine whether or not there is undue influence which will invalidate a contract is to determine whether or not the influence exerted has so overpowered or subjugated New provision. 57 Am. Jur., Sec. 350, p. 258. 111 Martinez vs. Hongkong and Shanghai Bank, 15 Phil. 252. 109 110

443

Art. 1338

CONTRACTS

the mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own.112 However, in determining whether or not there is undue influence, 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.113 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.114 Fraud. — Fraud which will render a contract voidable refers to those insidious words or machinations employed by one of the contracting parties in order to induce the other to enter into a contract, which, without them, he would not have agreed to.115 Idem; Kinds of fraud. — The fraud which is defined in Art. 1338 must not be confused with the fraud which is mentioned in Arts. 1170 and 1171 of the Code.116 Fraud or dolo under the Civil Code, as distinguished from fraud or dolo under the Revised Penal Code, may, therefore, be classified as either fraud in the perfection of a contract (Art. 1338) or fraud in the performance of an obligation (Art. 1170). The first is the fraud which is employed by a party to the contract in securing the consent of the other party, while the second is the fraud which is employed by the obligor in the performance of a pre-existing obligation. Fraud or dolo which is present or employed at the time of the birth or perfection of a contract, on the other hand, may be subdivided into dolo causante and dolo incidente. Dolo causante or causal fraud refers to those deceptions or misrepresentations of a serious character employed by one party and without which the other party would not have entered into the contract. This is the fraud which is defined in Art. 1338. Dolo incidente or incidental

Coso vs. Fernandez Deza, 42 Phil. 595. Art. 1337, Civil Code. 114 Art. 1269, Spanish Civil Code. 115 Art. 1338, Civil Code. 116 See distinctions under Art. 1171, Civil Code. 112 113

444

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1338

fraud refers to those deceptions or mispresentations which are not serious in character and without which the other party would still have entered into the contract. This is the fraud referred to in Art. 1344. The two may be distinguished from each other as follows: (1) The first refers to a fraud which is serious in character, while the second is not serious. (2) The first is the cause which induces the party upon whom it is employed in entering into the contract, while the second is not the cause. (3) The effect of the first is to render the contract voidable, while the effect of the second is to render the party who employed it liable for damages.117 Idem; Requisites. — It is evident from the provisions of Arts. 1338 to 1344 of the Code that in order that the consent of a party to a contract is vitiated by fraud, it is essential that the following requisites must concur: (1) Fraud or insidious words or machinations must have been employed by one of the contracting parties; (2) The fraud or insidious words or machinations must have been serious; (3) The fraud or insidious words or machinations must have induced the other party to enter into the contract; and (4) The fraud should not have been employed by both of the contracting parties or by third persons. Idem; id. — Nature of fraud. — According to Manresa, the essence of this class of fraud lies in the deception or misrepresentation employed by one of the contracting parties to secure the consent of the other. This is indicated by the phrase “insidious words or machinations’’ used in Art. 1338 which is broad enough to comprehend any kind of deception, such as false promises, fictitious names, fictitious qualifications, or fictitious authority — in short, all the thousand and one forms of deception which may delude a contract-

117 8 Manresa, 5th Ed., Bk. 2, pp. 240-241; Hill vs. Veloso, 31 Phil. 160; Woodhouse vs. Halili, 49 Off. Gaz. 3374.

445

Art. 1338

CONTRACTS

ing party to give his consent, without necessarily constituting estafa or some other offense under our penal laws.118 Before a contract can be invalidated because of fraud, it is, however, essential that there must be proof of concrete facts constituting the fraud or insidious words or machinations employed by one of the contracting parties by virtue of which the other party was induced to enter into the contract, which, without them, he would not have agreed to.119 Furthermore, it is also essential that such insidious words or machinations must be prior to or contemporaneous with the birth or perfection of the contract.120 Eguaras vs. Great Eastern Life Assurance Co. 33 Phil. 263 This is an action for the collection of the value of an insurance policy. The records show that Dominador Albay filed an application for an insurance on his life with the defendant company; that since Albay was in poor health, the person who presented himself for medical examination to the company physician was not the applicant, but Castor Garcia, who posed as Dominador Albay; that as a result of the favorable report of the physician, the defendant company executed the contract of insurance; that a short time thereafter the insured died. In this action the company contends that the contract should be annulled on the ground of fraud. Held: “The fraud which gave rise to the mistaken consent given by the defendant company to the application for insurance made by Albay and to the execution of the contract through deceit, is plain and unquestionable. The fraud consisted in the substitution at the examination of Castor Garcia in place of the insured Dominador Albay, and as the deceit practiced in the said contract is of a serious nature, the same is also ipso facto void and ineffective (voidable), in accordance with the provision of Article 1270 (now Art. 1344) of the Civil Code.’’121

8 Manresa, 5th Ed., Bk. 2, p. 423; Eguaras vs. Great Eastern Life Ass. Co., 33 Phil. 263. 119 Ramos vs. Valencia, 47 Off. Gaz. 1978. 120 Eguaras vs. Great Eastern Life Ass. Co., 33 Phil. 263. 121 To the same effect: Musngi vs. West Coast Ins. Co., 61 Phil. 864. 118

446

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1339-1340

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.122 Effect of Failure To Disclose Facts. — Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud.123 Thus, where the defendant, who is the manager of a certain corporation as well as the owner of about 3/4 of the shares of capital stock thereof, bought through an agent 800 shares of capital stock from the plaintiff, without disclosing the fact that he had just negotiated the sale of valuable properties to the government thus enhancing the value of the capital stocks of the company, such nondisclosure is clearly fraudulent; therefore, the sale can be annulled.124 However, the innocent nondisclosure of a fact, when there is no duty to reveal it, does not constitute fraud; consequently, such nondisclosure does not affect the formation of the contract or operate to discharge the parties from their agreement.125 Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent.126 Effect of Exaggerations in Trade. — The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent.127 Thus, according to the Supreme Court: “When the purchaser proceeds to make investigations by himself, and the vendor does nothing to prevent such investigations from being as complete as the former might wish, the purchaser cannot later allege that the vendor made false representations to him. “One who contracts for the purchase of real estate in reliance on the representations and statements of the vendor New provision. Art. 1339, Civil Code. 124 Strong vs. Gutierrez Repide, 213 U.S. 419; 41 Phil. 947. 125 Tuazon vs. Marquez, 45 Phil. 481. To the same effect: Escudero vs. Flores, 51 Off. Gaz. 3444. 126 New provision. 127 Art. 1340, Civil Code. 122 123

447

Arts. 1339-1340

CONTRACTS

as to its character and value, but after he has visited and examined it for himself, and has had the means and opportunity of verifying such statements, cannot avoid the contract on the ground that such statements were false or exaggerated.’’128

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.129 Effect of Expression of Opinion. — 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.130 This principle is illustrated in the following case: Songco vs. Sellner 37 Phil. 254 The principal defense in this action for specific performance relates to the false representation which, it is claimed, was made by the plaintiff Songco with respect to the quantity of uncut cane standing in the fields at the time the defendant Sellner became the purchaser thereof. It is proved that Songco estimated that the crop would yield 3,000 piculs of sugar. As the crop turned out, it produced only 2,017 piculs of sugar. The question now is whether such representation of the plaintiffvendor is fraudulent, which, under Art. 1338, would invalidate the contract. Holding that such representation can only be considered as a mere expression of an opinion, the Supreme Court ruled: “It is of course elementary that a misrepresentation upon a mere matter of opinion is not an actionable deceit, nor is it a sufficient ground for avoiding a contract as fraudulent. We are aware that statements may be found in the books to the effect that there is a difference between giving an honest opinion and making a false representation as to what one’s real opinion is. We do not think, however, that this is a case where any such distinction should be drawn.

128 Azarraga vs. Gay, 52 Phil. 599. To the same effect: Songco vs. Sellner, 37 Phil. 254; Puato vs. Mendoza, 64 Phil. 457. 129 New provision. 130 Art. 1341, Civil Code.

448

ESSENTIAL REQUISITES OF CONTRACTS Consent

Art. 1342

“The law allows considerable latitude to seller’s statement, or dealer’s talk, and experience teaches that it is exceedingly risky to accept it at its face value. The refusal of the seller to warrant his estimate should have admonished the purchaser that such estimate was put forth as a mere opinion; and we will not now hold the seller to a liability equal to that which would have been created by a warranty, if one had been given. “Assertions concerning the property which is the subject of a contract of sale, or in regard to its qualities and characteristics, are the usual and ordinary means used by sellers to obtain a high price and are always understood as affording to buyers no ground for omitting to make inquiries. A man who relies upon such an affirmation made by a person whose interest might so readily prompt him to exaggerate the value of his property does so at his peril and must take the consequences of his own imprudence.’’

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.131 Effect of Misrepresentation by Third Persons. — Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.132 Even without Art. 1342, this rule would still be applicable since it is a logical corollary to the principle that in order to vitiate consent, the fraud must be employed only by one of the contracting parties. Besides, it would be clearly unjust to visit upon a contracting party the disastrous effects of nullity simply because the other contracting party has indiscreetly reposed his confidence upon a third party. The precept, however, would not be applicable if the third person makes the misrepresentation with the complicity or, at least, with the knowledge, but without any objection, of the contracting party who is favored. Neither is it applicable if the misrepresentation has created substantial mistake and the same is mutual.133 Problem — C, an old and ignorant woman, was helped by V in obtaining a loan of P3,000.00 from X Rural Bank secured by a mortgage on her house and lot. On the day she signed the New provision. Art. 1342, Civil Code. 133 8 Manresa, 5th Ed., Bk. 2, p. 427; Hill vs. Veloso, 31 Phil. 160. 131 132

449

Arts. 1343-1344

CONTRACTS

promissory note and the mortgage covering the loan, she also signed several documents. One of these documents signed by her was promissory note of V for a loan of P3,000.00 also secured by a mortgage on her house and lot. Several years later, she received advice from the sheriff that her property shall be sold at public auction to satisfy the two obligations. Immediately she filed suit for annulment of her participation as co-maker in the obligation contracted by V as well as of the mortgage in relation to said obligation of V on the ground of fraud and mistake. Upon filing of the complaint, she deposited P3,383.00 in court as payment of her personal obligation including interests. (a)

Can be held liable for the obligation of V? Why?

(b) Was there a valid and effective consignation considering that there was no previous tender of payment made by C to the Bank? Why? Answer — (a) C cannot be held liable for the obligation of V. It is crystal clear that C’s participation in V’s obligation both as co-maker and as mortgagor is voidable not on the ground of fraud because the Bank was not a participant in the fraud committed by V, but on the ground of mistake. There was substantial mistake on the part of both C and the Bank mutually committed by them as a consequence of the fraud employed by V. (See Rural Bank of Caloocan City vs. CA, 104 SCRA 151.) (b) Despite the fact that there was no previous tender of payment made directly to the Bank, nevertheless, the consignation was valid and effective. The deposit was attached to the record of the case and the Bank had not made any claim thereto. Therefore, C was right in thinking that it was useless and futile for her to make a previous offer and tender of payment directly to the Bank. Under the foregoing circumstances, the consignation was valid, if not under the strict provisions of the law, under the more liberal consideration of equity. (Ibid.)

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.134 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.

134

New provision.

450

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1343-1344

Incidental fraud only obliges the person employing it to pay damages.135 Magnitude of Fraud. — The second indispensable requisite in order that the fraud employed by one of the contracting parties will vitiate the consent of the other is that it should be serious in character. This requisite is expressly stated in the first paragraph of Art. 1344 of the Code. According to Manresa, the serious character of the fraud refers not to its influence, but to its importance or magnitude. By virtue of this requisite, the annulment of a contract cannot, therefore, be invoked just because of the presence of minor or common acts of fraud whose veracity could easily have been investigated; neither can such annulment be invoked because of the presence of ordinary deviations from the truth, deviations, which are almost inseparable from ordinary commercial transactions, particularly those taking place in fairs or markets.136 Relation Between Fraud and Consent. — The third indispensable requisite in order that the fraud employed by one of the contracting parties will vitiate consent is that it should have induced the other party to enter into the contract. In other words, such fraud must be the principal or causal inducement or consideration for the consent of the party who is deceived in the sense that he would never have given such consent were it not for the fraud. This is the fraud which Spanish commentators can dolo causante (dolus causam dans). If the fraud is merely incidental in the sense that the party who is deceived would have agreed to the contract even without it, his consent is not vitiated and, as a consequence, the validity of the contract is not at all affected. Its only effect is to render the party who has employed it liable for damages. This is the fraud which Spanish commentators call dolo incidente (dolus incidens). The following case will serve to illustrate the effect of dolo incidente:

135 136

Art. 1270, Spanish Civil Code. 8 Manresa, 5th Ed., Bk. 2, p. 426.

451

Arts. 1343-1344

CONTRACTS

Woodhouse vs. Halili 49 Off. Gaz. 3374 Plaintiff and defendant entered into a contract whereby it was agreed that they shall organize a partnership for the bottling and distribution of Mission soft drinks, plaintiff to act as industrial partner and manager, and defendant as capitalist partner; that plaintiff was to secure the Mission soft drinks franchise for and in behalf of the partnership; and that he was to receive 30% of the net profits of the business. Because of the alleged failure of defendant to comply with this contract after the bottling plant was already in operation, plaintiff brought this action against him praying for the execution of the agreed contract of partnership, an accounting of the profits of the business, as well as damages amounting to P200,000. Defendant, in his answer, alleged that his consent to the contract was secured through plaintiff’s false representation that he had the exclusive bottling franchise of the Mission Dry Corporation in the Philippines and that, although such franchise was later on obtained from the Mission Dry Corporation, it was he, the defendant, and not the plaintiff, who obtained it. He also presented a counterclaim for P200,000 as damages. Consequently, the principal questions which will have to be decided in this case are: first, whether or not the plaintiff had falsely represented that he had the exclusive franchise to bottle Mission beverages in the Philippines; and second, whether this false representation, if it existed, annuls the agreement to form a partnership. Holding that there was breach of contract on the part of the defendant as well as misrepresentation on the part of the plaintiff, the Supreme Court, speaking through Justice Labrador, ruled: “We now come to the legal aspect of the false representation. Does it amount to a fraud that would vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or gradations, from the innocent praises of a salesman about the excellence of his wares to those malicious machinations and representations that the law punishes as a crime. In consequence, Article 1270 (now Art. 1344) of the Civil Code distinguishes two kinds of (civil) fraud or dolo — the causal fraud which may be a ground for the annulment of a contract, and the incidental deceit, which only renders the party who employs it liable for damages. This Court has held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. The record abounds with circumstances in-

452

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1343-1344

dicative of the fact that the defendant was led to the belief that plaintiff had the exclusive franchise, but that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had already lost his option thereto (when the contract was entered into), the principal obligation that he assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false representation, this was not the causal consideration, or the principal inducement, that led defendant to enter into the partnership agreement. But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the share of 30% granted him in the net profits of the partnership business. Defendant agreed to give plaintiff 30% share in the net profits because he was transferring his exclusive franchise to the partnership. “We conclude from the above that while the representation that plaintiff had the exclusive franchise did not vitiate defendant’s consent to the contract, it was used by plaintiff to get from defendant a share of 30% of the net profits; in other words, by pretending that he had the exclusive franchise and promising to transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net profits. This is the dolo incidente defined in Article 1270 (now Art. 1344) of the Civil Code, because it was used to get the other party’s consent to a big share in the profits, an incidental matter in the agreement. “The last question for us to decide is that of damages, damages that plaintiff is entitled to receive because of defendant’s refusal to form the partnership, and damages that defendant is also entitled to collect because of the falsity of plaintiff’s representation. Under Article 1106 (now Art. 2200) of the Civil Code, the measure of damages is the actual loss suffered and the profits reasonably expected to be received embraced in the terms daño emergente and lucro cesante. Plaintiff is entitled under the terms of the agreement to 30% of the net profits of the business. Against this amount of damages, we must set off the damage defendant suffered by plaintiff’s misrepresentation that he had the exclusive franchise, by which misrepresentation he obtained a very high percentage of share in the profits.’’

453

Arts. 1345-1346

CONTRACTS

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.137 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.138 Simulation of Contracts. — Simulations of contract, which Castan calls vices of declaration (vicios de la declaración), may be either absolute or relative. The simulation is absolute when there is colorable contract but it has no substance as the contracting parties do not intend to be bound by the contract at all, as when a debtor simulates the sale of his properties to a friend in order to prevent their possible attachment by creditors. The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties.139 It is relative when the contracting parties state a false cause in the contract to conceal their true agreement, as when a person conceals a donation by simulating a sale of the property to the beneficiary for a fictitious consideration. The primary consideration in determining the true nature of a contract is the intention of the parties. such intention is determined from the express terms of their agreement as well as from their contemporaneous and subsequent acts (Nena Lazalita Tating vs. Felicidad Tating Marcella, et al., G.R. No. 155208, March 27,2007). Idem; Effects. — While the other vices of consent (vicios de la formacion de la voluntad) render the contract voidable, simulation of contracts affects the contract in an entirely different manner. Thus, according to Art. 1346, an absolutely simulated contract is void, while a relatively simulated contract binds the parties and the parties may recover from each other what they may have given

New provision. Art. 1270, Spanish Civil Code. 139 Rodriguez vs. Rodriguez, 28 SCRA 229; Carrantes vs. Court of Appeals, 76 SCRA 514. 137 138

454

ESSENTIAL REQUISITES OF CONTRACTS Consent

Arts. 1345-1346

under the contract, while a relatively simulated contract is binding and enforceable between the parties and their successors in interest to their real agreement, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy (Gaudencio Valerio et al., vs. Vicenta Refresca, et al., G.R. No. 163687, March 28,2006). The legal presumption is in favor of the validity of contracts. The party who impugns the validity and regularity of a contract has the burden of proving his allegation. Contracts of Adhesion — In the case of Development Bank of the Philippines vs. Perez, G.R. No. 14854, Nov. 11, 2004, the Court held that: (a) A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. A contract of adhesion is just as binding as ordinary contracts. It is true that we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. Nevertheless, contracts of adhesion are not invalid per se; they are not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent In the case of Sps. Francisco and Ruby Reyes vs. BPI Family Savings Bank, Inc., et al., G. R. Nos. 149840-41, March 31,2006, where the petitioner spouses undertook to secure the P15M loan of Transbuilders Resources & Development Corporation to BPI-FSB “and other credit accomodations of whatever nature obtained by the Borrower/Mortgagor” under the Real Estate Mortgage they executed in favor of BPI-FSB, the SC held that while the stipulation proved to be onerous to the petitioners, neither the law nor the courts will extricate a party from an unwise or undesirable contract entered into with all the required formalities and with full awareness of its consequences. Petitioners voluntarily executed the REM on their property in favor of BPI-FSB to secure the loan. They cannot now be allowed to repudiate their obligation to the bank after Transbuilder’s default . While petitioner’s liability was written in fine print and in a contract written by BPI-FSB, it has been the consistent holding 455

Arts. 1347-1348

CONTRACTS

of the Court that contracts of adhesion are not invalid per se. On numerous occasions, the Supreme Court has upheld the binding effects of such contracts. Section 2. — Object of Contract Concept of Object. — Of all the requisites of a contract, the object is, if not the most fundamental, the most indispensable in order to have at least the shadow of a contract. Without a cause an agreement is possible, although inexplicable; without consent it is possible at least to have the appearance of a contract; but without an object there is nothing. Although there are commentators who distinguish between the juridical relations or obligations created and the prestations which constitute the objects of these obligations, under the Civil Code, the objects of contracts and that of obligations are identical. This fact is recognized by the provisions of Art. 1347 in relation with the definition of obligations in Art. 1156 of the Code.140 Consequently, the object of a contract may be defined as the thing, right or service which is the subject matter of the obligation which is created or established.141 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 contract may be entered into upon future inheritance except 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.142 Art. 1348. Impossible things or services cannot be the object of contracts.143

8 Manresa, 5th Ed., Bk. 2, pp. 430-431. Adopted from the definition given by Castan (Vol. 3, 7th Ed., p. 243). 142 Art. 1271, Spanish Civil Code, in modified form. 143 Art. 1272, Spanish Civil Code. 140 141

456

ESSENTIAL REQUISITES OF CONTRACTS Object of Contract

Art. 1349

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.144 What May Be the Object of Contracts. — As a general rule, all things or services may be the object of contracts. It is, however, essential that the following requisites must concur: First: The object should be within the commerce of men; in other words, it should be susceptible of appropriation and transmissible from one person to another. Second: The object should be real or possible; in other words, it should exist at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future. Third: The object should be licit; in other words, it should not be contrary to law, morals, good customs, public order or public policy. Fourth: The object should be determinate, or at least, possible of determination, as to its kind.145 Consequently, the following cannot be the object of contracts: (1) Things which are outside the commerce of men;146 (2) intransmissible rights;147 (3) future inheritance, except in cases expressly authorized by law;148 (4) services which are contrary to law, morals, good customs, public order or public policy;149 (5) impossible things or services;150 and (6) objects which are not possible of determination as to their kind.151 Idem; Appropriability and transmissibility. — In order that a thing, right or service may be the object of a contract, it is essential that it must be within the commerce of men. Consequently,

Art. 1273, Spanish Civil Code. 3 Castan, 7th Ed., pp. 342-343; 8 Manresa, 5th Ed., Bk. 2, pp. 431-432. 146 Art. 1347, par. 1, Civil Code. 147 Ibid. 148 Ibid. 149 Art. 1348, par. 3, Civil Code. 150 Ibid. 151 Art. 1349, Civil Code. 144 145

457

Art. 1349

CONTRACTS

two conditions must concur. In the first place, the thing, right or service should be susceptible of appropriation; and in the second place, it should be transmissible from one person to another.152 Those things, rights or services which do not possess these conditions or characteristics are outside the commerce of men, and therefore, cannot be the object of contracts. These include: (1) those things which are such by their very nature, such as common things like the air or the sea, sacred things, res nullius, and property belonging to the public domain; (2) those which are made such by special prohibitions established by law, such as poisonous substances, drugs, arms, explosives, and contrabands; and (3) those rights which are intransmissible because either they are purely personal in character, such as those arising from the relationship of husband and wife, like jus consortium, or from the relationship of paternity and filiation, like patria potestas, or they are honorary or political in character, such as the right to hold a public office and the right of suffrage.153 Thus, in this jurisdiction, it has been held that communal things, such as public plazas, sidewalks, streets, rivers, fountains and other things for public use cannot be sold or leased because they are by their very nature outside the commerce of men.154 Idem; Existence of object. — The most evident and fundamental requisite in order that a thing, right or service may be the object af a contract is that it should be in existence at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future. Hence, according to the first sentence of Art. 1347, even future things may be the object of contracts. Idem; id. — Things which have perished. — In principle, these things cannot be the object of contracts because they are inexistent. The rule declared in Art. 1493 of the Civil Code to the effect that “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’’ can, therefore, be generalized.155

6 Sanchez Roman 1281. 8 Manresa, 5th Ed., Bk. 2, pp. 441-443. 154 Mun. of Cavite vs. Rojas, 30 Phil. 602; Muyot vs. de la Fuente, CA, 48 Off. Gaz. 4866. 155 8 Manresa, 5th Ed., Bk. 2, p. 432. 152 153

458

ESSENTIAL REQUISITES OF CONTRACTS Object of Contract

Art. 1349

Idem; id. — Future things. — It is clear from Art. 1347 that a future thing may be the object of a contract.156 Such contract, according to Manresa, maybe interpreted in two possible ways. It may be interpreted as a conditional contract if its efficacy should depend upon the future existence of the thing, or as an aleatory contract if one of the contracting parties should bear the risk that the thing will never come into existence. In case of doubt about the nature of the contract, it must be deemed to be conditional because of the principle stated in Art. 1378 of the Code that the doubt shall be resolved in favor of the greatest reciprocity of interests.157 Idem; id. — Rule with respect to future inheritance. — There is, however, one very important exception to the rule that a future thing may be the object of a contract. This exception is found in the second paragraph of Art. 1347 which states that no contract may be entered into with respect to future inheritance.158 There are several reasons for this exception. If the rule were otherwise, there would always be the possibility that one of the contracting parties may be tempted to instigate the death of the other in order that the inheritance will become his. There would also be the possibility, and this is more probable, that fraud and prejudice may be committed or occasioned thereby. Besides, the right to make a will would then be subordinated to the right to enter into a contract.159 By reason of the rule that no contract may be entered into with respect to future inheritance, it has been held that an agreement for the partition of the estate of a living person, made between those who, in case of death, would inherit the estate is null and void.160 It has also been held that where the vendor undertook to convey to the vendee his participation in the property left by his deceased father, the part of the property belonging to his mother, who is still living, cannot at all be affected by the conveyance, since his interest in the property of his mother at the time of the execution of the deed of sale was a future inheritance and could not be the subject matter of a valid contract, pursuant to the second paragraph of Art. 1347.161 But See also Arts. 1461 and 1462, Civil Code. 8 Manresa, 5th Ed., Bk. 2, p. 433. See Art. 1461, Civil Code. 158 This rule is complemented by Arts. 905 and 2035, No. 6, Civil Code. 159 8 Manresa, 5th Ed., Bk. 2, p. 437. 160 Arroyo vs. Gerona, 58 Phil. 226. To the same effect: Tinsay vs. Yusay, 47 Phil. 639; Tordilla vs. Tordilla, 60 Phil. 162; Reyes vs. Reyes, CA, 45 Off. Gaz. 1836. 161 Rivero vs. Serrano, 48 Off. Gaz. 642. 156 157

459

Art. 1349

CONTRACTS

after the death of the decedent, anyone of the co-heirs may enter into a contract with respect to the inheritance even before partition has been effected. This is so because of the principle announced in Art. 777 of the Code that the rights to the succession are transmitted at the moment of the death of the decedent.162 The following case, however, provides an interesting study of the applicability or inapplicability of the rule enunciated in the second paragraph of Art. 1347: Blas vs. Santos 1 SCRA 899 Simeon Blas married Marta Cruz in 1898. Out of this marriage there were three children. The following year after Marta’s death, Simeon contracted a second marriage with Maxima Santos. There were no children out of this marriage. At the time of the second marriage, no liquidation of the properties of the first marriage was made. On Dec. 26, 1936, only over a week before his death on Jan. 9, 1937, Simeon executed a will declaring all of his properties as conjugal and giving one-half thereof to Maxima as her share. On the same date, Maxima signed a notarized document, stating that she had read the will of her husband and that she promises to convey by will onehalf of the share given to her to the children of her husband by his previous marriage. As a result, the children of Simeon by his first marriage brought this action against the estate of Maxima asking for the enforcement of the promise contained in the document. It is now contended that the promise is not enforceable because it lacks a sufficient cause or consideration and that, being a contract with respect to future inheritance, it falls within the purview of the prohibition enunciated in Art. 1271 (now Art. 1347) of the Civil Code. Held: Considering that the properties of the first marriage had not been liquidated, and the further fact that such properties were actually included as conjugal properties of the second marriage, it is clear that the document signed by Maxima is the compromise defined in Art. 1809 ( now Art. 2128) of the Civil Code. Its execution was ordered by the testator evidently to prevent his heirs by his first marriage from contesting his will and demanding liquidation of the conjugal properties acquired

162

Osorio vs. Osorio, 41 Phil. 53; Ibarle vs. Po, 49 Off. Gaz. 1836.

460

ESSENTIAL REQUISITES OF CONTRACTS Object of Contract

Art. 1349

during his first marriage. It is, therefore, a contract with a sufficient cause or consideration. Neither does the prohibition enunciated in Art. 1271 (now Art. 1347) of the Civil Code apply. What is prohibited under this article is a contract which deals with any property or right not in existence or capable of determination at the time of the contract, that a person may in the future acquire by succession. Here, the subject matters of the contract signed by Maxima are well-defined properties, existing at the time of the agreement.

Idem; id. — Exceptions. — The prohibition enunciated in the second paragraph of Art. 1347, however, is not absolute in character. There are two exceptions. They are: (1) Under Art. 130 of the Code, which allows the future spouses to give or donate to each other in their marriage settlement their future property to take effect upon the death of the donor and to the extent laid down by the provisions of the Civil Code relating to testamentary succession; and (2) Under Art. 1080 of the Code, which allows a person to make a partition of his estate by an act inter vivos, provided that the legitime of compulsory heirs is not prejudiced. Idem; id. — Impossible things or services. — According to Art. 1348, impossible things or services cannot be the object of contracts. Thus, if the parties enter into a contract with respect to an impossible thing like a mythical bird or animal or with respect to an impossible service like a trip to some distant planet or galaxy, the contract is void or inexistent.163 It must be observed, however, that as far as impossible services are concerned, a distinction should be made between absolute and relative impossibility. Absolute impossibility, which arises from the very nature or essence of the act or service itself, renders the contract void; relative impossibility, which arises from the circumstances or qualifications of the obligor rendering him incapable of executing the act or service, allows the perfection of the contract, although the fulfillment thereof is hardly probable. Thus, as a consequence, in a contract of partnership where one of the partners obligates himself to contribute to the common fund an amount which is beyond his means, the contract is not void because the impossibility may disappear. When the impossibility 163

Art. 1409, Nos. 3 and 5, Civil Code.

461

Art. 1349

CONTRACTS

is permanent, however, as in the case of a person who is unable to perform the service which he has contracted because of total blindness, the contract is void.164 Idem; Licitness of object. — It is also an indispensable requisite that the object must be licit. Hence, the third paragraph of Art. 1347 provides that all services which are not contrary to law, morals, good customs, public order and public policy may be the object of a contract. This provision complements the provision of Art. 1306 of the Code. Consequently, the same principles which we have taken up under that article may also be applied here. Idem; Determinability of object. — It is also an indispensable requisite that the object is determinable, or at least, determinable, as to its kinds. When Art. 1349 says that the object must be determinate as to its kind, it simply means that the genus of the object should be expressed although there might be no determination of the individual specie. Consequently, there need not be any specification of the qualities and circumstances of the thing which constitutes the object of the contract, since anyway according to Art. 1246 of the Code: “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.”165 Hence, if A and B enter into an agreement by virtue of which the former binds himself to deliver “ten horses” to the latter, the contract is perfectly valid since the law merely requires that the object must be determinate, or at least, determinable, as to its kind. Let us, however, assume that there is no specification of the quantity, although there is a specification of the class or genus to which the object belongs, is the contract valid? According to the second sentence of Art. 1349, 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 8 Manresa, 5th Ed., Bk. 2, pp. 433-434. For a detailed discussion of Art. 1349, see Manresa, Vol. 8, Bk. 2, 5th Ed., pp. 444-448. 164 165

462

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1350-1351

a new contract between the parties. Consequently, so long as it is possible to determine the quantity of the object without the necessity of any new contract, there can be no question about the validity of a contract in which there is no specification of the quantity. This would occur in those cases where the contract itself has established the basis upon which such quantity can be determined, such as the needs of a family, the provisions needed for a factory, the materials for a particular work, and others of a similar nature.166 This can be determined from the purpose or motive of the contract itself. In case of failure of any of these means, the contract is without force whatsoever.167 In the case of Aurora Fe B. Camacho vs. CA et al., G.R. No.127520, Feb. 9, 2007, the SC held that Arts. 1349 and 1460 of the New Civil Code provide the guidelines in determining whether or not the object of the contract is certain. In this case, the object of the contract is a 5,000 sq.m.portion of Lot 261, Balanga Cadastre. The failure of the parties to state the exact location in the contract is of no moment. This is a mere error occasioned by the parties’ fsilure to describe with particularity the subject property, which does not indicate the absence of the principal object as to render the contract void. Since in this case, Camacho bound herself to deliver a potion of Lot 261 to Atty. Banzon, the description of the property subject of the contract is sufficient to validate the same. Section 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.168 Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof.169 Concept of Cause. — In general, cause is the why of the contract or the essential reason which moves the contracting parties Liebenow vs. Phil. Vegetable Co., 39 Phil. 63. 8 Manresa, 5th Ed., Bk. 2, pp. 445-446. 168 Art. 1274, Spanish Civil Code. 169 New provision. 166 167

463

Arts. 1350-1351

CONTRACTS

to enter into the contract.170 In other words, it is the immediate, direct or most proximate reason which explains and justifies the creation of an obligation through the will of the contracting parties.171 In particular, 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 contracts, it is the service or benefit which is remunerated; and in contracts of pure beneficence, it is the liberality of the benefactor.172 Idem; Distinguished from consideration. — Actually, in this jurisdiction, cause and consideration are used interchangeably. After all, causa is merely the civil law term, while consideration is the common law term. It is, however, undisputed that the causa in civil law jurisdictions is broader in scope than consideration in Anglo-American jurisdictions. Many agreements which cannot be supported in Anglo-American law for want of consideration can be enforced under the broader doctrine of causa.173 Idem; Distinguished from object. — The cause must not be confused with the object of the contract. Of course, there can be no question about the difference between the two in cases of remuneratory and gratuitous contracts, it is evident that, in the first, the cause is the service or benefit which is remunerated, while the object is the thing which is given in remuneration, and in the second, the cause is the liberality of the donor or benefactor, while the object is the thing which is given or donated. In onerous contracts, however, there is a tendency to confuse one with the other. Nevertheless, it is clear that the cause, for each contracting party, is the prestation or promise of a thing or service by the other, while the object of the contract, on the other hand, is the thing or service itself. Thus, in a contract of sale, the cause, as far as the vendor is concerned, is the acquisition of the purchase price, while the cause, as far as the vendee is concerned, is the acquisition of the thing,174 stated in another way, the cause of the obligation of the vendor is 8 Manresa, 5th Ed., Bk. 2, pp. 445-446. 3 Castan, 7th Ed., p. 347, citing 2 Planiol, 1949 Ed., Sec. 279. These definitions have been cited with approval in General Enterprises, Inc. vs. Lianga Bay Logging Co., 11 SCRA 733. 172 Art. 1350, Civil Code. 173 5 Tolentino, Civil Code, 1956 Ed., p. 486. 174 3 Castan, 7th Ed., p. 346. 170 171

464

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1350-1351

the obligation of the vendee, while the cause of the obligation of the vendee is the obligation of the vendor.175 The objects of the contract, on the other hand, are the thing which is sold and the price which is paid.176 This view, which is upheld by Manresa and Castan, may be illustrated by an example. If A sells, an automobile to B for P20,000, delivery and payment to be made at some specified date, the cause of the contract, as far as A is concerned, is the promise of B to pay him P20,000, while the cause, as far as B is concerned, is the promise of A to deliver the automobile to him. The objects of the contract, on the other hand, are the automobile and the purchase price of P20,000. Dr. Tolentino, however, while concurring with the opinion of Manresa and Castan that as to the vendor the cause is the obligation of the vendee to pay the price, and as to the vendee it is the obligation of the vendor to deliver the automobile, maintains that in the example given, the object is the automobile itself because it is the starting point of agreement, without which the negotiations would never have begun. Consequently, the object of an onerous contract is the same as to both parties, although the cause is different.177 Dr. Padilla, on the other hand, contends that in bilateral contracts like sale, the thing sold is the object, while the price paid is the cause.178 We believe that the view of Dr. Tolentino is the most logical. Idem; Distinguished from motives. — Neither must the cause be confused with the motives of the parties in entering into a contract.179 The motives which impel one to a sale or purchase are not always the consideration of the contract as the term is understood in law. One may purchase an article not because it is cheap, for in fact it may be dear, but because he may have some particular use to which it may be put, because of a particular quality which the article has, or the relation which it will bear, to other articles with which it will be associated. These circumstances may constitute the motive which induces the purchase, but the real consideration of the purchase (as far as the vendor is concerned) is the money which

175 Dualde, “Concepto de la causa de los contratos,’’ cited by Castan, Vol. 3, 7th Ed., p. 450. 176 8 Manresa, 5th Ed., Bk. 2, p. 450. 177 4 Tolentino, Civil Code, 1956 Ed., p. 485. 178 Padilla, Civil Code, 1956 Ed., p. 553. 179 Art. 1351, Civil Code.

465

Arts. 1350-1351

CONTRACTS

passed.180 As Castan says: “In the case of a contract of sale, the cause as far as the vendor is concerned, is always the acquisition of the purchase price, and as far as the vendee is concerned, it is always the acquisition of the thing; the motives of the contracting parties, on the other hand, are as different or complex and as capable of infinite variety as the individual circumstances which may move men to acquire things or to make money.’’181 Consequently, the cause of the contract and the motives of the contracting parties may be distinguished from each other in the following ways: (1) While the cause is the direct or most proximate reason of a contract, the motives are the indirect or remote reasons; (2) While the cause is the objective or juridical reason of a contract, the motives are the psychological or purely personal reasons; (3) While the cause is always the same, the motives differ for each contracting party;182 and (4) While the legality or illegality of the cause will affect the existence or validity of the contract, the legality or illegality of the motives will not affect the existence of the contract. There are times, however, when the boundary line between motive and cause disappears altogether. The motive may be regarded as causa when the contract is conditioned upon the attainment of the motive of either contracting party. In other words, motive becomes causa when it predetermines the purpose of the contract. The best examples are the decided cases. Thus — (1) Where a married man of mature years donated a parcel of land to a girl of sixteen subject to the condition that the latter shall cohabit with him, and such condition is accepted, it is clear that the donation is conditioned upon the attainment of the motive of the donor; in other words, it predetermines the purpose of the contract. Thus considered, the conveyance is clearly predicated upon an illegal causa. Consequently, it is void. Therefore, under what is De Jesus vs. Urrutia & Co., 33 Phil. 171. 3 Castan, 7th Ed., pp. 346-347. 182 Ibid. 180 181

466

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1350-1351

now Art. 1412 of the New Civil Code, there can be no recovery of what has already been delivered. (Liguez vs. CA, 102 Phil. 577.) (2) Where a mother sold two fishponds to a daughter and the latter, in turn, resold the same fishponds to her and her stepfather, as a consequence of which said fishponds were converted into conjugal properties, it is clear that the motive or purpose is to circumvent the law against donations between spouses (Art. 133, CC). This motive or purpose is the illegal causa rendering the contract void. Consequently, the rule of in pari delicto non oritur actio, now enunciated in Art. 1412 of the New Civil Code, is applicable. (Rodriguez vs. Rodriguez, 20 SCRA 908.) (3) Where a Filipino leased a parcel of land to an alien for 99 years with an option to buy the property within 50 years, provided that the latter shall become a Filipino citizen, it is clear that the motive or purpose of the arrangement, which has resulted in the virtual transfer of ownership to the lessee, is to circumvent the Constitutional prohibition of transfer of lands to aliens. This motive or purpose is the illegal causa rendering the contract void. However, it will be the provision of Art. 1416 and not of Art. 1412, of the New Civil Code that will apply. Because of public policy, the lessor will be allowed to recover the property. (Phil. Banking Corp. vs. Lui She, 21 SCRA 52.) Liguez vs. Court of Appeals 102 Phil. 577 This is an action commenced by Conchita Liguez against the widow and heirs of Salvador Lopez to recover a parcel of land in their possession. The records show that Salvador Lopez, a married man of mature years, donated the land to Conchita, who was then a minor of 16, subject to the condition that she will cohabit with him as his mistress. The donation was accepted and Conchita became the donor’s mistress until his death. Because defendants have advanced the defense of the nullity of the contract by virtue of the illegality of the cause is of pure beneficence, the cause is actually the liberality of the donor; hence, what is illicit or illegal is the motive of such donor and not the cause of the contract, since liberality per se can never be illegal. The Supreme Court, however, speaking through Justice J.B.L. Reyes, held: “The flaw in this argument lies in ignoring the fact that the liberality of the donor is deemed causa only in contracts of

467

Arts. 1350-1351

CONTRACTS

pure beneficence; that is to say, contracts in which the idea of self-interest is totally absent on the part of the transferor. Here the facts demonstrate that in making the donation, the donor was not moved exclusively by the desire to benefit Conchita Liguez, but also gratify his sexual impulse. Actually, therefore, the donation was but one part of an onerous transaction that must be viewed in its totality. Thus considered, the conveyance was clearly predicated upon an illicit causa. “With respect to appellant’s contention regarding the distinction between causa and motive, it is well to note that Manresa himself (Vol. 8, pp. 641-642), while maintaining the distinction, expressly excepts from the rule those contracts that are conditioned upon the attainment of the motives of either party. The same view is held by the Supreme Court of Spain in its decisions of February 4, 1941, and December 4, 1946, holding that the motive may be regarded as causa when it predetermines the purpose of the contract. In the present case, it is scarcely disputable that Lopez would not have conveyed the property in question had he known that appellant would refuse to cohabit with him; so that the cohabitation was an implied condition to the donation and being unlawful, necessarily tainted the donation itself. “However, since the rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be left where it finds them, has been interpreted as barring the party from pleading the illegality of the bargain as a cause of action or as a defense, appellant is, therefore, entitled to so much of the donated property as may be found upon proper liquidation not to prejudice the share of the widow or the legitimes of the forced heirs.’’

Cause in Onerous Contracts. — 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. From this it necessarily follows that a promise made by one party may be a sufficient cause for a promise made by another party. It is not, therefore, necessary that the cause or consideration should pass from one party to the other at the time of the execution of the contract.183 Thus, where a logging company by contract designated a certain agency as its distributor to 183 Enriguez de Cavada vs. Diaz, 37 Phil. 982; Phil. Banking Corp. vs. Lui She, 102 Phil. 577.

468

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1350-1351

export logs to Korea and Europe at the best market price obtainable on condition that it would pay the latter a commission of 13% of the gross value of the logs, it was held that for the former the cause of the agreement is the distribution of its logs in the areas agreed upon which the latter undertook to accomplish, whereas for the latter the cause is its commitment to sell or export the logs for onerous consideration.184 Idem; Accessory contracts. — In accessory contracts the rule is that the cause of the accessory contract is identical with that of the principal contract. Thus, it has been held that as a mortgage is an accessory contract, its cause is the very cause of the principal contract from which it receives its life, and without which it cannot exist as an independent contract, although it may secure an obligation incurred by another.185 The same principle is applicable to the case of an accommodation party who binds himself jointly and severally with the principal debtor for the payment of a debt by affixing his signature to a promissory note for the accommodation of the latter. This is so in spite of the fact that he might not have received even a single centavo of the money given to the accommodated party. In the words of the Supreme Court, “the consideration which supports the promise of the accommodation maker is that parted with by the person taking the note and received by the person accommodated.’’186 Idem; Moral obligations. — May a moral or natural obligation constitute a sufficient cause or consideration to support an onerous contract? The jurisprudence with respect to this question in this jurisdiction is meager. It is, however, clear that where the moral obligation arises wholly from ethical considerations, unconnected with any civil obligation and, as such, is not demandable in law but only in conscience, it can not constitute a sufficient cause or consideration to support an onerous contract,187 but where such moral obligation is based upon a previous civil obligation which has already been barred by the statute of limitations at the time General Enterprises, Inc. vs. Lianga Bay Co., 11 SCRA 733. China Banking Corp. vs. Lichauco, 46 Phil. 460. 186 National Bank vs. Maza, 48 Phil. 207; Acuna vs. Veloso, 50 Phil. 241. But see Standard Oil Co. vs. Arenas, 19 Phil. 363. 187 Fisher vs. Robb, 69 Phil. 101. 184 185

469

Arts. 1350-1351

CONTRACTS

when the contract is entered into, it constitutes a sufficient cause or consideration to support the said contract.188 Fisher vs. Robb 69 Phil. 101 The defendant was one of the organizers of a certain enterprise known as the Philippine Greyhound Club, Inc. which was formed for the purpose of introducing dog racing in the Philippines, while the plaintiff was one of those who had invested a certain sum of money in the venture. It appears that this venture did not succeed, and, as a result, the defendant wrote a letter to the plaintiff explaining the critical condition of the company, and, at the same time, stating that he felt “a moral responsibility for those who had sent in the second payment of their subscription” and that he will see to it that “stockholders who had made such payment shall be reimbursed such amount as soon as possible out of his own personal funds.” This action now is brought to enforce the “obligation.” The principal question to be decided, among others, is whether there is a sufficient cause or consideration to justify the promise made by the defendant in his letter. Answering this question in the negative, the Supreme Court, speaking through Justice Villareal, held: “The contract sought to be judicially enforced by the plaintiff appellee against the defendant is onerous in character, because it supposes the deprivation of the latter of an amount of money which impairs his property, which is a burden, and for it to be legally valid it is necessary that it should have a consideration consisting in the lending or promise of a thing or service by such party. The defendant-appellant is required to give a thing, namely the payment of the sum of P2,000, but the plaintiff-appellee has not given or promised anything or service to the former which may compel him to make such payment. The promise which said defendant-appellant has made to the plaintiff-appellee to return to him P2,000 which he had paid to the Philippine Greyhound Club, Inc. as a second installment of the amount of the shares for which he had subscribed, was prompted by a feeling of pity which said defendant-appellant had for the plaintiff-appellee as a result of the loss which the latter had suffered because of the failure of the enterprise. The

188 Villaroel vs. Estrada, 71 Phil. 14. Strictly speaking, the moral obligation in this case is a natural obligation (Arts. 1423, et seq., Civil Code), as distinguished from a purely moral obligation, such as that referred to in the case of Fisher vs. Robb.

470

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1350-1351

obligation which the said defendant-appellant had contracted with the plaintiff-appellee is, therefore, purely moral, and, as such, is not demandable in law, but only in conscience, over which human judges have no jurisdiction.” Villaroel vs. Estrada 71 Phil. 140 This was originally an action commenced by the plaintiff (respondent) against the defendant (petitioner) for the purpose of enforcing a contract entered into on August 9, 1930, by virtue of which the defendant undertook to pay to the plaintiff a certain debt which his deceased mother had incurred from the deceased parents of the said plaintiff more than eighteen years ago. It is submitted that this debt had already prescribed. The question now is whether this action will prosper, considering that the debt incurred by the defendant’s mother had already prescribed. The Supreme Court, speaking through Justice Avanceña, ruled: “The present action is not founded on the original obligation contracted by the mother of the defendant, which had already prescribed, but on that contracted by the defendant on August 9, 1930, in assuming the obligation which had already prescribed. The defendant being the only heir of the original debtor with the right to succeed in her inheritance, that debt lawfully contracted by his mother, although it lost its efficacy by prescription, is nevertheless now a moral obligation as far as he is concerned, a moral obligation which is a sufficient consideration to create and make effective and demandable the obligation which he had voluntarily contracted on August 9, 1930.’’

Cause in Remuneratory Contracts. — According to Art. 1350, the cause in remuneratory contracts is the service or benefit which is remunerated. From this we can say that a remuneratory contract is one in which one of the contracting parties remunerates or compensates the service or benefit rendered or given by the other party, although such service or benefit does not constitute a demandable debt.189 This may be clarified by means of an example. If A gives a certain property in accordance with the formalities prescribed by law to his lawyer friend, B, in remuneration for legal services which the latter had rendered to him freely in the past and such gift is duly accepted, the cause as far as A is concerned would 189

See Art. 726, Civil Code.

471

Arts. 1352-1355

CONTRACTS

be the legal services rendered by B, although such services do not constitute demandable debts. Cause in Contracts of Pure Beneficence. — The cause in contracts of pure beneficence, on the other hand, is the mere liberality of the benefactor. Thus, if A makes a pure donation of a certain property to B in accordance with the formalities prescribed by law, its cause is the mere liberality (causa liberalitatis) of the donor or benefactor. The liberality would be the equivalent of what Manresa calls “el cariño, el desprendimiento, la admiracion, la generosidad, el agradecimiento, la compasion.” Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy.190 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.191 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.192 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.193 Essential Requisites of Cause. — In order that there will be a sufficient cause upon which a contract may be founded, it is essential that the following requisites must concur: First: The cause should be in existence at the time of the celebration of the contract; Second: The cause should be licit or lawful; and Third: The cause should be true.194 Art. 1275, Spanish Civil Code, in modified form. Art. 1276, Spanish Civil Code. 192 Art. 1277, Spanish Civil Code. 193 New provision. 194 3 Castan, 7th Ed., pp. 348-351. 190 191

472

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1352-1355

If the contract has no cause, or even if it has, if the cause should be illicit or unlawful, the rule is that it shall not produce any effect whatsoever, or what amounts to the same thing, it is inexistent or void from the beginning.195 The same is true if the cause stated in the contract is false, unless it can be proved that the contract is, in reality, founded upon another cause which is true and lawful.196 Idem; Effect of lack of cause. — By express provision of Art. 1352, if the contract is not founded upon any cause, then it shall not produce any effect whatsoever. This precept is confirmed by Art. 1409 of the Code which declares as inexistent those contracts which are absolutely simulated or fictitious as well as those whose cause did not exist at the time of the transaction. Hence, it has been held that if the purchase price in a contract of sale was never in fact paid by the purchaser or vendee to the vendor, the contract is inexistent for all purposes for lack of a cause or consideration.197 The same rule is applicable in cases of conveyances of property where the conveyance or transfer is simulated without any cause or consideration whatsoever whether the purpose of the grantor is to defraud his creditors or to avert the possible attachment of the property.198 However, the rule is not applicable where the purchaser or vendee failed to fully pay for the property, even if there is a stipulation in the contract of sale that full payment shall be made at the time of the celebration thereof.199 As a matter of fact, even where the contract itself expressly states that the consideration for the sale of a piece of land is only one peso (P1.00), it does not follow that the contract or sale is void or inexistent for lack of a cause or consideration. The reason is obvious. There is a consideration. The contract may be voidable because of the inadequacy of the cause or consideration, but certainly, it is not void or inexistent. Thus, in Carantes vs. Court of Appeals,200 speaking through Chief Justice Fred Ruiz Castro, the Supreme Court declared:

Arts. 1352, 1409, Nos. 1, 2, 3, Civil Code. Art. 1353, Civil Code. 197 Ocejo, Perez & Co. vs. Flores, 40 Phil. 921; Onejera vs. Iga Sy, 76 Phil. 580. 198 De Belen vs. Coll. of Customs, 46 Phil. 241; Gallon vs. Gayares, 53 Phil. 43; Escutin vs. Escutin, 60 Phil. 922; Gonzales vs. Trinidad, 67 Phil. 682; Navarro vs. Diego, CA, 40 Off. Gaz. 2106. 199 Puato vs. Mendoza, 64 Phil. 457. 200 76 SCRA 514. 195 196

473

Arts. 1352-1355

CONTRACTS

“We do not agree with the respondent court’s legal conclusion that the deed of “Assignment of Right to Inheritance’’ is void ab initio and inexistent on the grounds that real consent was wanting and the consideration of P1.00 is so shocking to the conscience that there was in fact no consideration, hence, the action for the declaration of the contract’s inexistence does not prescribe pursuant to Article 1410 of the new Civil Code. “Article 1409(2) of the new Civil Code relied upon by the respondent court provides that contracts “which are absolutely simulated or fictitious’’ are inexistent and void from the beginning. The basic characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties. “The respondents’ action may not be considered as one to declare the inexistence of a contract for lack of consideration. It is total absence of cause or consideration that renders a contract absolutely void and inexistent. In the case at bar consideration was not absent. The sum of P1.00 appears in the document as one of the considerations for the assignment of inheritance. In addition — and this of great legal import — the document recites that the decedent Mateo Carantes had, during his lifetime, expressed to the signatories to the contract that the property subject-matter thereof rightly and exclusively belonged to the petitioner Maximino Carantes. This acknowledgment by the signatories definitely constitutes valuable consideration for the contract.”

In order that the cause shall be considered as existing, is it necessary that it should be stated in the contract? This question must be resolved in the negative. According to Art. 1354, even if the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary.201 This is true even where the contract falls within the purview of the Statute of Frauds.202 If instead of an absolute lack of cause or consideration, there is lesion or inadequacy of cause, shall this not invalidate the contract? Again, this question must be resolved in the negative. This is clear 201 Azarraga vs. Rodriguez, 9 Phil. 637; Eliot vs. Montemayor, 9 Phil. 960; Standard Oil Co. vs. Arenas, 19 Phil. 211; Dumaguin vs. Reynolds, 48 Off. Gaz. 3887. 202 Bhen, Meyer & Co. vs. Davis, 37 Phil. 431. See Art. 1403, No. 2, Civil Code.

474

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1352-1355

from the provision of Art. 1355, which states that lesion or inadequacy of cause, except in cases specified by law, shall not invalidate a contract, unless there has been fraud, mistake or undue influence. This provision (which is new) reiterates the doctrine enunciated by the Supreme Court in several notable cases.203 However, if it can be established that the lesion or inadequacy of the cause was due to fraud, mistake or undue influence, such fact will render the contract voidable.204 Despite the fact that lesion or inadequacy of cause, in itself, can not render the contract inexistent or void under Art. 1355 or voidable under Art. 1330, the party who has suffered the lesion or damage is not left without a remedy. There is always the possibility that the contract may be rescissible in accordance with the provisions of Art. 1381 of the Code, in which case he can file an action for rescission. Idem; Effect of unlawful cause. — According to Art. 1352 of the Code, the cause is unlawful when it is contrary to law, morals, good customs, public order or public policy. According to the same article, if a contract has an unlawful cause, it shall not produce any effect whatsoever; in other words it is void from the very beginning.205 Thus, it has been held that where the cause or consideration for the sale of a certain property is no other than the accumulated usurious interests which the vendor-debtor has not yet paid, the sale is void because of the illegality of the cause or consideration.206 It has also been held that a contract affecting the course of a criminal prosecution is invalid, because such a contract would be manifestly contrary to public policy and the due administration of justice.207 In the words of the Supreme Court, “in the interest of the public it is of the utmost importance that criminals should be prosecuted and that all criminal proceedings should be instituted and maintained in the form and manner prescribed by law. To permit an offender to

Asky vs. Cosalan, 46 Phil. 179; Gabriel vs. Mateo, 71 Phil. 497; Garcia vs. Manas, 45 Off. Gaz. 1815. 204 See Arts. 1330, et seq., Civil Code; see also Alsua-Betts vs. Court of Appeals, 92 SCRA 332, 368. 205 See Art. 1409, No. 1, Civil Code. 206 Mulet vs. People of the Phil., 73 Phil. 63. But see Briones vs. Cammayo, 41 SCRA, 404; see also comments under Art. 1420. 207 Arroyo vs. Berwin, 36 Phil. 386; Velez vs. Ramas, 40 Phil. 787; Navarro vs. Yuan, CA, 40 Off. Gaz. 1675; Reyes vs. Gonzales, 45 Off. Gaz. 381; Monteney vs. Gomez, 104 Phil. 1059. 203

475

Arts. 1352-1355

CONTRACTS

escape the penalties prescribed by law by the purchase of immunity from private individuals would result in a manifest perversion of justice.’’208 This doctrine, which has been reiterated several times in the past, is very aptly illustrated in the case of Velez vs. Ramas.209 The facts of this case are as follows: C, wife of A and daughter of B, while employed in a pawnshop owned by X, embezzled the amount of more than P2,000. In order to prevent her criminal prosecution, A and B signed a document obligating themselves jointly and severally to pay to X the amount embezzled including interest. Because of their failure to comply with their promise, the latter filed this action against them. The Supreme Court, however, ruled: “We are of the opinion that the trial court was correct in the conclusion that an action cannot be maintained upon this contract. In our opinion, the consideration for this agreement is clearly illicit, which fact is apparent on the face of the contract, and the case is accordingly governed by Art. 1275 (now Art. 1352) of the Civil Code. “There has been no period since contract law reached the state of consciousness, when the maxim ex turpi causa non oritur actio was not recognized. A contract based upon an unlawful object is and always has been void ab initio by the common law, by the civil law, moral law, and all laws whatsoever. It is immaterial whether the illegal character of the contract is revealed in the matter of the consideration, in the promise as expressed in the agreement or in the purpose which the agreement, though legal in expression, is intended to accomplish. If the illegality lurks in any element, or even subsists exclusively in the purpose of the parties, it is fatal to the validity of the contract. “By the universal consensus of judicial opinion in all ages it has been considered contrary to public policy to allow parties to make agreements designed to prevent or stifle prosecutions for crime. It is self-evident that the law cannot sanction an engagement which is subversive of human society. The machinery for the administration of justice cannot be used to promote an unlawful purpose.’’

208 209

Arroyo vs. Berwin, 36 Phil. 386. 40 Phil. 787.

476

ESSENTIAL REQUISITES OF CONTRACTS Cause of Contracts

Arts. 1352-1355

However, the above case should be distinguished from the following case: Mactal vs. Melegrito 111 Phil. 363 Plaintiff gave to defendant P1,770 to be used in the purchase of palay, with the obligation to return said amount within 10 days, if not spent for said purpose. The latter never bought palay nor returned said amount. As a result, the former accused him of estafa. When the case was about to be heard, a common friend, acting upon defendant’s request, prevailed upon plaintiff to move for the dismissal of the case and be contented with a promissory note to be executed by the defendant. The note was executed and, accordingly, the criminal case was dismissed. Defendant, however, was unable to comply with his promise despite repeated demands. Subsequently, plaintiff brought this action against him for the recovery of the P1,770. Defendant now contends that the promissory note is void because the consideration thereof is the dismissal of the estafa case which is certainly contrary to public policy. Held: This contention is untenable. It is admitted that defendant had received the P1,770 from plaintiff to be used for the purchase of palay. The cause or consideration, therefore, for the promise was the pre-existing debt of said defendant, not the dismissal of the estafa case, which merely furnished the occasion for the execution of the promissory note.

It must also be noted that in applying the provision of Art. 1352 regarding the effect of an unlawful cause, it is always necessary to consider the provisions of Arts. 1411 and 1412 of the Code. It must be observed that these provisions presuppose the existence of an illicit or illegal cause which is determinative of the nullity of the contract. Accordingly, they cannot be applied to simulated or fictitious transfers of property, where the motive of the grantor may be either to defraud his creditors or to avert the possible attachment of the property. As stated in a previous section, the cause of the contract should not be confused with the motive of the contracting parties.210 However, when the motive of one of the contracting parties predetermines the purpose of the contract and such motive 210

Gonzales vs. Trinidad, 67 Phil. 862; Navarro vs. Diego, CA, 40 Off. Gaz. 2106.

477

Arts. 1352-1355

CONTRACTS

or purpose is illegal or immoral, it is clear that such illegal or illicit motive or purpose becomes the illegal causa, thus rendering the contract void from the beginning.211 Idem; Effect of false cause. — According to 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. Thus, where the deed of sale expressly states that the purchase price has been paid when in fact it has never been paid, it is evident that the contract of sale is invalid in accordance with the general rule announced in Art. 1353 and confirmed by Art. 1409, No. 2, which declares as inexistent those contracts which are absolutely simulated or fictitious. It must be observed, however, that the simulation of a contract may be either absolute or relative.212 The first is inexistent from the very beginning, while the second binds the parties to their true agreement, provided that it does not prejudice third persons and is not contrary to law, morals, good customs, public order or public policy.213 It is, therefore, clear that if a contract is simulated, it does not necessarily follow that it is inexistent or void, provided, of course, that it can be established that it is, in reality, founded upon another cause which is true and lawful.

211 Liguez vs. Court of Appeals, 102 Phil. 577; Rodriguez vs. Rodriguez, 20 SCRA 908; Philippine Banking Corp. vs. Lui She, 21 SCRA 52. 212 Art. 1345, Civil Code. 213 Art. 1346, Civil Code.

478

CHAPTER 3 FORMS 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 articles cannot be exercised.1 Form of Contracts; General Rule. — According to the above article, whatever, may be the form in which a contract may have been entered into, the general rule is that it shall be obligatory, provided all of the essential requisites for its validity are present. We have, therefore, retained the “spiritual system” of the Spanish Code by virtue of which the law looks more at the spirit rather than at the form of contracts. Hence, under our legal system, the form in which a contract is executed has no effect, as a general rule, upon its obligatory force, provided all of the essential requisites for its validity are present. Thus, it has been held that contracts of partnership,2 of agency,3 and of lease of services,4 although executed verbally, are obligatory as far as the contracting parties are concerned. It has been also held that a verbal extrajudicial partition of property is valid and binding among the parties thereto.5 In such a case,

Art. 1278, Spanish Civil Code, in modified form. Fernandez vs. De la Rosa, 1 Phil. 671; Thunga Chiu vs. Que Bentec, 2 Phil. 561. 3 Gutierrez Hnos. vs. Orense, 28 Phil. 571; Del Castillo vs. Robinson, CA, 44 Off. Gaz. 4981. 4 Arroyo vs. Azur, 76 Phil. 493. 5 Duran vs. Cecilio, CA, 43 Off. Gaz. 2237; Hernandez vs. Andal, 44 Off. Gaz. 2672. 1 2

479

Art. 1356

CONTRACTS

however, the right of a partitioner or of his successor in interest is merely a jus ad rem (personal), not a jus in re (real), if the partition involves immovable property; in other words, his right over the land which has been alloted to him or to his predecessor in interest is personal, and, as a consequence, is enforceable only against the other partitioners, provided that no innocent purchasers for value are prejudiced.6 Idem; Exceptions. — It must be observed, however, that when Art. 1356 speaks of contracts as being obligatory regardless of the form in which they may have been entered into, it does not include those contracts for which the law prescribes a certain form either for validity or for enforceability. It is, therefore, evident that there are two exceptions to the general rule. These exceptions are: (1) when the law requires that the contract must be in a certain form in order to be valid; and (2) when the law requires that the contract must be in a certain form in order to be enforceable. Commenting on these exceptions, the Code Commission declared: “The project seeks to combine the spiritual system of the Spanish Code and the principles of Anglo-American law as manifested in the Statute of Frauds. “Examples when form is essential to validity are donations of an immovable (Art. 749) and of a movable worth more than P5,000 (Art. 748). Instances when a contract is unenforceable, unless it be in a certain form, are those embodied in the Statute of Frauds as formulated in Article 1403 of the project. “These exceptions are calculated to avoid litigation. Oral contracts frequently lead to fraud in the fulfillment of obligations, or to false testimony. So long as the possibility of dishonesty exists in contractual relations, the spiritual system cannot be adopted in an unqualified manner.’’7

Idem; id. — Formalities for validity. — There are certain contracts for which the law prescribes certain forms for their validity. These contracts maybe classified as follows: first, those

6 7

Ibid. Report of the Code Commission, pp. 137-138.

480

FORMS OF CONTRACTS

Art. 1356

which must appear in writing; second, those which must appear in a public document; and third, those which must be registered. Contracts which must appear in writing are as follows: (1) Donations of personal property whose value exceeds five thousand pesos. According to Art. 748 of the Code, the donation and the acceptance shall be made in writing; otherwise, it shall be void. (2) Sale of a piece of land or any interest therein through an agent. According to Art. 1874 of the Code, the authority of the latter shall be in writing; otherwise, the sale shall be void. (3) Agreements regarding payment of interest in contracts of loan. According to Art. 1956 of the Code, no interest shall be due unless it has been expressly stipulated in writing. The validity of the contract of loan, however, is not affected. (4) Antichresis. According to Art. 2134 of the Code, in contracts of antichresis, the amount of the principal and of the interest shall be specified in writing; otherwise, the contract shall be void. Contracts which must appear in a public document are as follows: (1) Donations of immovable property. According to Art. 749 of the Code, the donation must be made in a public document. The acceptance, on the other hand, may be made in the same deed of donation or in a separate public document. If the acceptance is made in a separate public document, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. Noncompliance with any of these formalities shall render the donation void. (2) Partnerships where immovable property or real rights are contributed to the common fund. According to Arts. 1771 and 1773 of the Code, in a contract of partnership where immovable property or real rights are contributed to the common fund, it is necessary that the contract must appear in a public instrument and that there must be an inventory of the immovable property or real rights, signed by the partners, and attached to the public instrument; otherwise, the contract is void.

481

Art. 1357

CONTRACTS

Contracts which must be registered are as follows: (1) Chattel mortgages. According to Art. 2140 of the Code, by a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. (2) Sales or transfers of large cattle. According to the Cattle Registration Act, no sale or transfer of large cattle shall be valid unless it is duly registered and a certificate of transfer is secured.8 Idem; id. — Formalities for enforceability. — There are also certain contracts which are unenforceable by action, unless they are in writing and properly subscribed, or unless they are evidenced by some note or memorandum, which must also be in writing and properly subscribed. These contracts are governed by the Statute of Frauds.9 Form of Contracts Required by Law. — It must be noted that it is not only in the two exceptional cases mentioned in the preceding sections where the law prescribes a certain form in the execution of contracts. Art. 1358 of the Code enumerates certain kinds of contracts which must appear either in a public or in a private document. The purpose of the requirement, however, is not to validate or to enforce the contract, but to insure its efficacy; in other words, the form required is neither for validity nor enforceability but for the convenience of the contracting parties. Hence, the forms required by law for the execution of certain contracts may be divided into: (1) those which are necessary for the convenience of the contracting parties or for the efficacy of the contract; (2) those which are necessary for the validity of the contract; and (3) those which are necessary for the enforceability of the contract. The first is governed by Arts. 1356 to 1358 of the Code, the second by scattered provisions of the Code and by special laws, and the third by the Statute of Frauds. Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel 8 9

Sec. 22, Act No. 1147; Art. 1581; Civil Code. Arts. 1403, et seq., Civil Code.

482

FORMS OF CONTRACTS

Art. 1358

each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.10 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 1405.11 Formalities for Efficacy. — Although, as a general rule, contracts shall be obligatory in whatever form they may have been entered into, yet there are certain contracts falling within the purview or scope of this rule which, by reason of their importance, should be executed in accordance with certain formalities in order to insure their efficacy and to protect the interests of the contracting parties as well as that of third persons. The Civil Code, recognizing this necessity, enumerates in Art. 1358 the different classes of contracts which must appear either in a public or in a private document, and grants in Art. 1357 a coercive power to the contracting parties by

10 11

Art. 1279, Spanish Civil Code, in modified form. Art. 1280, Spanish Civil Code, in modified form.

483

Art. 1358

CONTRACTS

which they can reciprocally compel the observance of the required form.12 The following principles are clearly deducible from an examination of the cases decided by the Supreme Court in which these provisions were applied: (1) Arts. 1357 and 1358 do not require the execution of the contract either in a public or in a private document in order to validate or enforce it but only to insure its efficacy, so that after its existence has been admitted, the party bound may be compelled to execute the necessary document.13 (2) Even where the contract has not been reduced to the required form, it is still valid and binding as far as the contracting parties are concerned.14 Consequently, both articles presuppose the existence of a contract which is valid and enforceable.15 (3) From the moment one of the contracting parties invokes the provisions of Arts. 1357 and 1358 by means of a proper action, the effect is to place the existence of the contract in issue, which must be resolved by the ordinary rules of evidence.16 (4) Art. 1357 does not require that the action to compel the execution of the necessary document must precede the action upon the contract.17 As a matter of fact, both actions may be exercised simultaneously.18 (5) However, although the provisions of Art. 1357, in connection with those of Art. 1358, do not operate against the validity of the contract nor the validity of the acts voluntarily performed by the parties for the fulfillment thereof, yet from the moment when any of the contracting parties invokes said provisions, it is evident that un-

12 Thunga Chiu vs. Que Bentec, 2 Phil. 261; Bian Hing vs. Tan Bomping, 48 Phil. 253; Escueta vs. Pando, 76 Phil. 256; Dauden-Hernaez vs. De los Angeles, 27 SCRA 1276. 13 Doliendo vs. Depino, 12 Phil. 758; Dievas vs. Acuña, 16 Phil. 447; HawaiianPhilippine Co. vs. Hernaez, 45 Phil. 760. 14 Thunga Chiu vs. Que Bentec, 2 Phil. 251; Soriano vs. Cortez, 8 Phil. 459; Conlu vs. Araneta, 15 Phil. 387; Osorio vs. Cortez, 24 Phil. 653. 15 Solis vs. Barroso, 53 Phil. 913. 16 Peyer vs. Peyer, 77 Phil. 366. 17 Rodriguez vs. Pamintuan, 37 Phil. 876. 18 Art. 1357, Civil Code.

484

FORMS OF CONTRACTS

Art. 1358

der them the execution of the required document must precede the determination of the other obligations derived from the contract.19 Dauden-Hernaez vs. De los Angeles 27 SCRA 1276 Marlene Dauden, a movie actress, filed a complaint against the Hollywood Far East Productions, Inc. and its President and General Manager, Ramon Valenzuela, to recover P14,700 representing the balance of her compensation as leading actress in two motion pictures produced by the defendant company. Upon motion of defendants, the lower court dismissed the complaint because “the claim of plaintiff was not evidenced by any written document, either public or private’’ in violation of Art. 1358 of the New Civil Code. As a last recourse, plaintiff appealed to the Supreme Court on the ground that the court below had abused its discretion. Held: We hold that there was abuse, since the ruling herein contested betrays a basic and lamentable misunderstanding of the role of the written form in contracts, as ordained in the present Civil Code. In the matter of formalities, the contractual system of our Civil Code still follows that of the Spanish Civil Code of 1889 and of the “Ordenamiento de Alcala” of upholding the spirit and intent of the parties over formalities; hence, in general, contracts are valid and binding from their perfection regardless of form, whether they be oral or written. This is plain from Articles 1315 and 1356 of the present Civil Code. To this general rule, the Code admits two exceptions, to wit: (1) Contracts for which the law itself requires that they be in some particular form in order to make them valid and enforceable (the so called solemn contracts). Examples of these are the contracts or agreements contemplated in Arts. 748, 749, 1744, 1773, 1874, 1956, and 2134 of the present Civil Code. (2) Contracts that the law requires to be proved by some writing (memorandum) of its terms, as in those covered by the Statute of Frauds, now Art. 1403(2) of the Civil Code. Their existence not being probable by mere oral testimony (unless wholly or partly executed), these contracts are exceptional in requiring a writing embodying the terms thereof for their enforceability by action in court.

19

Manalo vs. De Mesa, 25 Phil. 495.

485

Art. 1358

CONTRACTS

The contract sued upon by petitioner herein does not come under either exception. It is true that it appears included in the last clause of Art. 1358, but it nowhere provides that the absence of written form in this case will make the agreement invalid or unenforceable. On the contrary, Art. 1357 clearly indicates that contracts covered by Art. 1358 are binding and enforceable by action despite the absence of writing. Wherefore, the order dismissing the complaint is set aside, and the case is ordered remanded to the court of origin for further proceedings not at variance with this decision. Problem — Spouses Robert and Yollie wanted to sell their house. They found a prospective buyer, Nina. Yollie negotiated with Nina for the sale of the property. They agreed on a fair price of P2 Million. Nina sent Yollie a letter confirming her intention to buy the property. Later, another couple, Marius and Ellen , offered a similar house at a lower price of P1.5 Million. But Nina insisted on buying the house of Robert and Yollie for sentimental reasons. Nina prepared a deed of sale to be signed by the couple and a manager’s check for P2 Million. After receiving the P2 Million, Robert signed the deed of sale. However, Yollie was not able to sign it because she was saying she changed her mind. Yollie filed suit for nullification of the deed of sale and for moral and exemplary damages against Nina. Does Nina have any cause of action against Robert and Yollie? (2006 Bar Problem) Answer — Considering that the contract has already been perfected and taken out of the operation of the statute of frauds, Nina can compel Robert and Yollie to observe the form required by law in order for the property to be registered in the name of Nina which can be filed together with the action for the recovery of house.(Art. 1357, NCC). In the alternative, she can recover the amount of P2 Million that she paid. Otherwise, it would result in solution indebiti or unjust enrichment.

486

CHAPTER 4 REFORMATION OF INSTRUMENTS 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.1 Doctrine of Reformation of Instruments. — When the true intention of the parties to a perfected and valid contract are not expressed in the instrument purporting to embody their agreement by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument so that such true intention may be expressed.2 In order that there can be a reformation of the instrument, the following requisites must, therefore, concur: (1) parties;

There must be a meeting of the minds of the contracting

(2)

Their true intention is not expressed in the instrument;

and

1 2

New provision. Art. 1359, par. 1, Civil Code.

487

Art. 1359

CONTRACTS

(3) Such failure to express their true intention is due to mistake, fraud, inequitable conduct or accident.3 Thus, where the complaint fails to allege that the instrument to be reformed does not express the real agreement or intention of the parties, it is clear that no cause of action is stated therein since such allegation is essential considering the fact that the object of an action for reformation is to make the instrument conform to the real agreement or intention of the parties.4 Idem; Rationale of doctrine. — The doctrine of reformation of instruments is based on justice and equity. According to the Code Commission: “Equity orders the reformation of an instrument in order that the true intention of the contracting parties may be expressed. “The courts do not attempt to make another contract for the parties. The rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. The rigor of the legalistic rule that a written instrument should be the final and inflexible criterion and measure of the rights and obligations of the contracting parties is thus tempered, to forestall the effects of mistake, fraud, inequitable conduct or accident.’’5

Idem; Distinguished from annulment of contracts. — The most fundamental distinction between an action for the reformation of an instrument and an action for the annulment of a contract is that while the first presupposes a perfectly valid contract in which there has already been a meeting of the minds of the contracting parties, the second is based on a defective contract in which there has been no meeting of the minds because the consent of one or both of the contracting parties has been vitiated. Consequently, if mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not

Ibid. Garcia vs. Bisaya, 97 Phil. 609. To the same effect: Ongsiaco vs. Ongsiaco, 101 Phil. 1196. 5 Report of the Code Commission, p. 56. 3 4

488

REFORMATION OF INSTRUMENTS

Arts. 1360-1365

reformation of the instrument but annulment of the contract.6 Thus, where the vendee has been led to enter into a contract of sale through fraud or mispresentation on the part of the vendor or in the mistaken belief, that, as stated in the deed, the property he was buying was unregistered land, it is evident that the proper remedy is not reformation of the deed of sale but annulment of the contract.7 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.8 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.9 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.10 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.11 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.12 Art. 1365. If two parties agree upon the mortgage or pledge or real or personal property, but the instrument

Art. 1359, par. 2, Civil Code. Garcia vs. Bisaya, 97 Phil. 609. 8 New provision. 9 New provision. For illustrative cases see Philippine Sugar Estate Development Co. vs. Gov’t. of P.I., 247 U.S. 385; Bank of the P.I. vs. Fidelity and Surety Co., 51 Phil. 57; Jardenil vs. Solas, 73 Phil. 626; De la Cruz vs. Del Pilar, 95 Phil. 444. 10 New provision. See Ong Chua vs. Carr, 53 Phil. 975. 11 New provision. 12 New provision. 6 7

489

Arts. 1366-1369

CONTRACTS

states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper.13 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.14

Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.15 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.16 Contracts of Adhesion. — A contract of adhesion is defined as one in which one of the parties imposes a ready made form of contract, which the other party may accept or reject, but which the latter cannot modify. (PCIB vs. CA, 255 SCRA 299.) The Supreme Court ruled in the case of Ayala Corporation vs. Ray Burton Development Corp., August 7, 1998, 294 SCRA 48, that a contract of adhesion in itself is not an invalid agreement. This type of contract is as binding as a mutually executed transaction. The Supreme Court has emphatically ruled in the case of Ong Yiu vs. Court of Appeals, et al., that “contracts of adhesion wherein one party imposes a ready-made form of contract on the other x x x are contracts not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres he gives New provision. See Aquino vs. Deala, 63 Phil. 582; Marquez vs. Valencia, 77 Phil. 782. 14 New provision. 15 New provision. 16 New provision. 13

490

REFORMATION OF INSTRUMENTS

Arts. 1366-1369

his consent.’’ This ruling was reiterated in Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., et al., wherein the Supreme Court further declared through Justice Florenz Regalado that “not even an allegation of ignorance of a party excuses noncompliance with the contractual stipulations since the responsibility for ensuring full comprehension of the provisions of a contract of carriage (a contract of adhesion) devolves not on the carrier but on the owner, shipper, or consignee as the case may be.’’ The Supreme Court continued to state in the above-cited case that contracts of adhesion, however, stand out from other contracts (which are bilaterally drafted by the parties) in that the former is accorded inordinate vigilance and scrutiny by the courts in order to shield the unwary from deceptive schemes contained in ready-made covenants. As stated by the Court, speaking through Justice J.B.L. Reyes, in Qua Chee Gan vs. Law Union and Rock Insurance Co., Ltd.: “The courts cannot ignore that nowadays, monopolies, cartels and concentration of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared ‘agreements’ that the weaker party may not change one with, his participation in the ‘agreement’ being reduced to the alternative to ‘take it or leave it’ labeled since Raymond Saleilles ‘contracts by adherence’ (contracts d’ adhesion) in contrast to those entered into by parties bargaining on an equal footing. Such contracts (of which policies of insurance and international bill of lading are prime examples) obviously call for greater strictness and vigilance on the part of the courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwary.’’ The stringent treatment towards contracts of adhesion which the courts are enjoined to observe is in pursuance of the mandate in Article 24 of the New Civil Code that “(i)n all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, courts must be vigilant for his protection.’’ (Ayala Corporation vs. Ray Burton Development Corp., 294 SCRA 48.) The Supreme Court further ruled in the case of Ayala Corporation vs. Ray Burton Development Corp. (RBDC), that the validity and/or enforceability of a contract of adhesion will have to be deter491

Arts. 1366-1369

CONTRACTS

mined by the peculiar circumstances obtaining in each case and the situation of the parties concerned. In the instant case, the stipulations in the Deed Restrictions and Special Conditions are plain and unambiguous which leave no room for interpretation. Moreover, there was even no attempt on the part of RBDC to prove that, in the execution of the Deed of Sale on the subject lot, it was a weaker or a disadvantaged party on account of its moral dependence, ignorance, mental weakness or other handicap. On the contrary, as testified to by Edwin Ngo, President of RBDC, the latter is a realty firm and has been engaged in realty business, and that he, a businessman for 30 years, represented RBDC in the negotiations and in the eventual purchase of the subject lot from PALMCREST. Edwin Ngo’s testimony proves that RBDC was not an unwary party in the subject transaction. Instead, Edwin Ngo has portrayed RBDC as a knowledgeable realty firm experienced in real estate business. Problem — (a) What is a contract of adhesion? (b) Are contracts of adhesion void or prohibited? Answer — In the case of Development Bank of the Philippines vs. Perez, G.R. No. 14854, Nov. 11, 2004, the Court held that: (a) A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. (b) A contract of adhesion is just as binding as ordinary contracts. It is true that we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the. Nevertheless, contracts of adhesion are not invalid per se; they are not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. In the case of Sps. Francisco and Ruby Reyes vs. BPI Family Savings Bank, Inc., et al., G. R. Nos. 149840-41, March 31,2006, where the petitioner spouses undertook to secure the P15M loan of Transbuilders Resources & Development Corporation to BPI-FSB “and other credit accomodations of whatever nature obtained by the Borrower/Mortgagor” under the Real Estate Mortgage they executed in favor of BPI-FSB, the Supreme Court held that while the stipulation proved to be onerous to the petitioners, neither the law nor the courts will

492

REFORMATION OF INSTRUMENTS

Arts. 1366-1369

extricate a party from an unwise or undesirable contract entered into with all the required formalities and with full awareness of its consequences. Petitioners voluntarily executed the REM on their property infavor of BPI-FSB to secure the loan. They cannot now be allowed to repudiate their obligation to the bank after Transbuilder’s default. While petitioner’s liability was written in fine print and in a contract written by BPI-FSB, it has been the consistent holding of the Court that contracts of adhesion footing are not invalid per se. On numerous occasions, the Supreme Court has upheld the binding effects of such contracts.

Contracts of Credit Cards. — In the case of Spouses Ermitano vs. Court of Appeals, April 21, 1999, G.R. No. 127246, the Supreme Court ruled that the contract between the parties is indeed a contract of adhesion, so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contracts are not void in themselves. They are as binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations entirely. This Court will not hesitate to rule out blind adherence to such contracts if they prove to be too one-sided under the attendant facts and circumstances. Because of the peculiar nature of contracts of adhesion, the validity thereof must be determined in the light of the circumstances under which the stipulation is intended to apply. For the cardholder to be absolved from liability for unauthorized purchases made through his lost or stolen card, two steps must be followed: (1) the cardholder must give written notice to the credit card company, and (2) the credit card company must notify its member establishments of such loss or theft, which, naturally, it may only do upon receipt of a notice from the cardholder. Both the cardholder and the credit card company, then, have a responsibility to perform, in order to free the cardholder from any liability arising from the use of a lost or stolen card. In this case, the cardholder has complied with what was required of her under the contract with credit card company. Having thus performed her part of the notification procedure, it was reasonable for the cardholder to expect that the credit card company would perform its part of the procedure, which is to forthwith notify its member-establishments. Prompt notice by the cardholder to the credit card company of the loss or theft of her card should be enough to relieve the former of 493

Arts. 1366-1369

CONTRACTS

any liability occasioned by the unauthorized use of her lost or stolen card. The questioned stipulation in this case, which still requires the cardholder to wait until the credit card company has notified all its member-establishments, puts the cardholder at the mercy of the credit card company which may delay indefinitely the notification of its members to minimize if not to eliminate the possibility of incurring any loss from unauthorized purchases. Or, as in this case, the credit card company may for some reason fail to promptly notify its members through absolutely no fault of the cardholder. To require the cardholder to still pay for unauthorized purchases after he has given prompt notice of the loss or theft of her card to the credit card company would simply be unfair and unjust. The Court cannot give its assent to such a stipulation that could clearly run against public policy. In the case of Emmanuel Aznar vs. Citibank, N.A. (Philippines), G. R. No.164273, March 28, 2007, the Supreme Court held that the terms and conditions of Citibank’s Mastercard constitute a contract of adhesion. It is settled that the contracts between cardholders and the credit card companies are contracts of adhesion, so-called, because their terms are prepared by only one party while the other merely affixes his signature signifying his adhesion thereto. In this case, paragraph 7 of the terms and conditions states that Citibank is not responsible if the card is not honoured by any merchant affiliate for any reason. While it is true that Citibank may have no control of all the actions of its merchant affiliates, and should not be held liable therefor, it is incorrect, however, to give it blanket freedom from liability if its card is dishonoured by any merchant affiliate for any reason. Such phrase renders the statement vague and as the said terms and conditions constitute a contract of adhesion, any ambiguity in its provisions must be construed against the party who prepared the contract, in this case Citibank. Citibank also invokes paragraph 15 of its terms and conditions which limits its liability to P1,000.00 or the actual damage proven, whichever is lesser. Again, such stipulation cannot be considered as valid for being unconscionable as it precludes payment of a larger amount even though damage may be clearly proven. The Supreme Court is not precluded from ruling out blind adherence to the terms of a contract if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided.

494

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. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.1 Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.2 Primacy of Intention of Parties. — The cardinal rule in the interpretation of contracts is to the effect that the intention of the contracting parties should always prevail because their will has the force of law between them. Art. 1370 of the Civil Code consecrates this rule and provides, further, that if the terms of contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed; and if the words appear to be contrary to the evident intention of the contracting parties, the intention shall prevail.3 As a rule, in the construction and interpretation of a document the intention of the parties must be sought. This is the basic rule in the interpretation of contracts because all other rules are but ancilliary to the ascertainment of the meaning intended by the parties. And once this intention has been

Art. 1281, Spanish Civil Code. Art. 1282, Spanish Civil Code. 3 Kasilag vs. Rodriguez, 69 Phil. 317. To the same effect: Manila Engineering Co. vs. Cranston, 45 Phil. 842; Roman vs. Asia Banking Corp., 46 Phil. 705; Valdez vs. Sibal, 46 Phil. 930; National Bank vs. Paez, 54 Phil. 393; Abella vs. Gonzaga, 56 Phil. 132; Acosta vs. Llacuna, 59 Phil. 540; H.E. Heacock Co. vs. Buntal Manufacturing Co., 66 Phil. 245; Jose vs. Veloso, 67 Phil. 191; Marquez vs. Valencia, 44 Off. Gaz. 895. 1 2

495

Arts. 1370-1371

CONTRACTS

ascertained it becomes an integral part of the contract as though it had been originally expressed therein in unequivocal terms.4 These principles were reiterated by the SC in the case of Manila Banking Corp. vs. Teodoro, Jr. (169 SCRA 95), where it was held: The character of the transactions between the parties is not, however, determined by the language used in the document but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured Transaction, Section 50) said: “The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and ambiguous language or other circumstances excluding an intent to pledge. (Lopez vs. Court of Appeals, 114 SCRA 671 [1982].) Further, in the case of Philippine National Construction Corporation vs. The Hon. CA, et al., G.R. No. 159417, Jan.25,2007, the Court held that the contract between parties is the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be , between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. Furthermore, it is a rule that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning

4

Nielsen & Co. vs. Lepanto Consolidated Mining Co., 18 SCRA 1040.

496

INTERPRETATION OF CONTRACTS

Arts. 1370-1371

of its stipulation shall control. The contract is the law between the parties and when the words of the contract are clear and can easily be understood, there is no room for contruction (Olivares and Robles vs. Sarmiento, G.R. 158384, June 12, 2008). Idem; How to judge intention. — In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. This is, of course, without prejudice to the consideration of other factors as fixed or determined by the other rules of interpretation mentioned in the Civil Code and in the Rules of Courts. Hence, as a general rule, documents are interpreted in the precise terms in which they are expressed, but the courts, in the exercise of their sound discretion, are called upon to admit direct and simultaneous circumstantial evidence necessary for their interpretation with the purpose of making the true intention of the parties prevail.5 One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties in relation to the transaction under consideration. Thus, where there is evidence regarding the intention of the parties to extend the contract equivalent to the period of suspension caused by the war and the parties understood the suspension to mean extension, it was held that the suspension of the agreement means the extension of the same for a period equivalent to the suspension.6 Problem — What is the cardinal rule applicable in a case where the terms of a contract are clear and leave no doubt upon the intention of the contracting parties? Answer — It is a cardinal rule that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control. In the case of Philippine National Construction Corporation vs. The Hon. CA, et al., G.R. No. 159417, Jan.25, 2007, the Court held that the contract between parties is the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the intention of the parties. Thus, when

5 Aves vs. Orillenedo, 70 Phil. 262, citing Arts. 1370 and 1371 of the Civil Code. To the same effect: Atlantic Gulf Co. vs. Insular Government, 10 Phil. 166; Figueras vs. Rocha, 13 Phil. 504; Tanido vs. Jumaoan, 17 Phil. 335; Soler vs. Chesley, 43 Phil. 529; Kidney vs. Carter, 43 Phil. 953; Rivero vs. Rabe, 54 Phil. 982; Gonzales vs. La Previsora, 74 Phil. 165. 6 Nielsen & Co. vs. Lepanto Consolidated Mining Co., 18 SCRA 1040.

497

Arts. 1372-1377

CONTRACTS

the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. It is further required that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that which may result from all of them taken jointly (Bobie Rose V. Frias vs. Flora San Diego-Sison, G.R. No.155223, April 3, 2007).

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.7 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.8 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.9 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.10 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.11 Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.12

Art. 1283, Spanish Civil Code. Art. 1284, Spanish Civil Code. 9 Art. 1285, Spanish Civil Code. 10 Art. 1286, Spanish Civil Code. 11 Art. 1287, Spanish Civil Code. 12 Art. 1288, Spanish Civil Code. 7 8

498

INTERPRETATION OF CONTRACTS

Arts. 1378-1379

Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void.13 Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts.14

Art. 1289, Spanish Civil Code. New provision. The provisions of Rule 123 of the Rules of Court referred to are Secs. 58-67, now Secs. 8-17, Rule 130, New Rules of Court. 13 14

499

CONTRACTS

CHAPTER 6 RESCISSIBLE CONTRACTS Classes of Defective Contracts. — There are four classes of defective contracts under the present Civil Code. They are: first, rescissible contracts; second, voidable contracts; third, unenforceable contracts; and fourth, void or inexistent contracts. Explaining the reasons behind this new classification, the Code Commission declared in its report: “A great deal of confusion has been created by the faulty terminology used by the Spanish Code as regards defective contracts. There is no sufficient clarity as to ‘contratos nulos’ and ‘contratos anulables’ — void and voidable contracts. “In order to put an end to the foregoing uncertainty and other ambiguities in the Spanish Code, the project in a clear-cut and unequivocal way classifies and defines the various kinds of defective contracts, and states their consequences. There are, under the recommended plan, four kinds of such contracts, namely (in the order of defectiveness): (1) rescissible; (2) voidable; (3) unenforceable; and (4) void or inexistent contracts. “It is believed that with the explicit provisions of the Project upon the subject of defective contracts, the present nebulous state of the law will be dispelled. It is neither wise nor just that parties should be left in doubt as to the degree of effectiveness of their contractual relations. The legal profession is also entitled to know in a positive and unequivocal manner what contracts are rescissible, voidable, unenforceable, and void. It is hoped that this clarification of the law on this most far-reaching subject will go far toward forestalling many controversies and litigations.’’1

1

Report of the Code Commission, pp. 138-140.

500

RESCISSIBLE CONTRACTS

Idem; Essential features. — The essential features of the different classes of defective contracts are: 1.

As to defect:

(a) In rescissible contracts, there is damage or injury either to one of the contracting parties or to third persons; (b) In voidable contracts, there is vitiation of consent or legal incapacity of one of the contracting parties; (c) In unenforceable contracts, the contract is entered into in excess or without any authority, or does not comply with the Statute of Frauds, or both contracting parties are legally incapacitated; (d) In void or inexistent contracts, one or some of the essential requisites of a valid contract are lacking either in fact or in law. 2.

As to effect:

(a) The first are considered valid and enforceable until they are rescinded by a competent court; (b) The second are considered valid and enforceable until they are annulled by a competent court; (c) court;

The third cannot be enforced by a proper action in

(d) The fourth do not, as a general rule, produce any legal effect. 3.

As to prescriptibility of action or defense: (a)

In the first, the action for rescission may prescribe;

(b) In the second, the action for annulment or the defense of annulability may prescribe; (c) In the third, the corresponding action for recovery, if there was total or partial performance of the unenforceable contract under No. 1 or No. 3 of Art. 1403, may prescribe. (d) In the fourth, the action for declaration of nullity or inexistence or the defense of nullity or inexistence does not prescribed. 501

Art. 1380

4.

5.

CONTRACTS

As to susceptibility of ratification: (a)

The first are not susceptible of ratification;

(b)

The second are susceptible of ratification;

(c)

The third are susceptible of ratification;

(d)

The fourth are not susceptible of ratification.

As to who may assail contracts:

(a) The first maybe assailed not only by a contracting party but even by a third person who is prejudiced or damaged by the contract; (b) party;

The second may be assailed only by a contracting

(c) party;

The third may be assailed only by a contracting

(d) The fourth may be assailed not only by a contracting party but even by a third person whose interest is directly affected. 6.

As to how contracts may be assailed:

(a) The first may be assailed directly only, and not collaterally; (b)

The second may be assailed directly or collaterally;

(c)

The third may be assailed directly or collaterally;

(d)

The fourth may be assailed directly or collaterally.

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law.2 Rescissible Contracts in General. — In a rescissible contract, all of the essential requisites of a contract exist and the contract is valid, but by reason of injury or damage to either of the contracting parties or to third persons, such as creditors, it may be rescinded.3 A rescissible contract is, therefore, a contract which is 2 3

Art. 1290, Spanish Civil Code. Report of the Code Commission, p. 139.

502

RESCISSIBLE CONTRACTS

Art. 1380

valid because it contains all of the essential requisites prescribed by law, but which is defective because of injury or damage to either of the contracting parties or to third persons, as a consequence of which it may be rescinded by means of a proper action for rescission. Before it is rescinded, a rescissible contract is valid and, therefore, legally effective. The only way by which it can be attacked is by means of a direct action for rescission based on any of the causes expressly specified by law; hence, it cannot be attacked collaterally.4 Idem; Characteristics. — Rescissible contracts, therefore, possess the following characteristics: (1) Their defect consists in injury or damage either to one of the contracting parties or to third persons. (2) Before rescission, they are valid and, therefore, legally effective. (3)

They can be attacked directly only, and not collaterally.

(4) They can be attacked only either by a contracting party or by a third person who is injured or defrauded. (5) They are susceptible of convalidation only by prescription, and not by ratification. Idem; Concept of rescission. — Rescission is a remedy granted by law to the contracting parties, and even to third persons, to secure the reparation of damages caused to them by a contract, even if the same should be valid, by means of the restoration of things to their condition prior to the celebration of the contract.5 Idem; id. — Distinguished from resolution. — Rescission of rescissible contracts must not be confused with the rescission or resolution of reciprocal obligations under Art. 1191 of the Code. Although there are similarities both with respect to validity and effects, they are distinguished from each other in the following ways: (1) As to party who may institute action: In rescission the action may be instituted not only by a party to the contract but even by a third person, while in resolution the action may be instituted only by a party to the contract. 4 5

Borja vs. Addison, 44 Phil. 895. 8 Manresa, 5th Ed., Bk. 2, p. 545.

503

Art. 1380

CONTRACTS

(2) As to causes: In rescission there are several causes or grounds such as lesion, fraud and others expressly specified by law, while in resolution the only ground is failure of one of the parties to comply with what is incumbent upon him. (3) As to power of the courts: In rescission there is no power of the courts to grant an extension of time for performance of the obligation so long as there is a ground for rescission, while in resolution the law expressly declares that courts shall have a discretionary power to grant an extension for performance provided that there is a just cause. (4) As to contracts which may be rescinded or resolved: In rescission any contract, whether unilateral or reciprocal, may be rescinded, while in resolution only reciprocal contracts may be resolved. Idem; id. — Distinguished from rescission by mutual consent. — Neither must rescission be confused with rescission of a contract by mutual consent of the contracting parties. One must be distinguished from the other — first, with respect to the causes of rescisssion, second, with respect to the laws applicable, and third, with respect to the effects. The following case will serve to illustrate these distinctions: Aquino vs. Tañedo 31 Phil. 517 The records show that plaintiff purchased some lands from the defendant and, as a consequence, took possession of the same and collected their products. Subsequently, they dissolved the contract of sale, and, as a result thereof, plaintiff returned the lands, while defendant bound himself to return the part of the purchase price which plaintiff has paid. The question now is whether or not the plaintiff is obliged to return to the defendant the products of the lands which he had collected during his possession. The defendant contends that he is obliged, invoking the provisions of Art. 1295 (now Art. 1385) of the Civil Code. The Supreme Court, however, ruled: “The rescission mentioned in the contract is not the rescission referred to in Article 1295 (now Art. 1385). Although the plaintiff and the defendant employed the word rescind, it has not, in the contract executed by them, either the scope or the meaning of the word rescission to which Article 1295

504

RESCISSIBLE CONTRACTS

Art. 1381

(now Art. 1385) refers and which takes place only in the cases mentioned in the preceding Articles, 1291 and 1292 (now Arts. 1381 and 1382). Rescission, in the light of these provisions, is a relief which the law grants, on the premise that the contract is valid, for the protection of one of the contracting parties and third persons from all injury and damage that the contract may cause, or to protect some incompatible and preferential right created by the contract. Article 1295 (now Art. 1385) refers to contracts that are rescissible in accordance with law in the cases expressly fixed thereby, but it does not refer to contracts that are rescinded by mutual consent and for the mutual convenience of the contracting parties. The rescission in question was not originated by any of the causes specified in Articles 1291 and 1292 (now Arts. 1381 and 1382), nor is it any relief for the purposes sought by these articles. It is simply another contract for the dissolution of a previous one, and its effects, in relation to the contract so dissolved, should be determined by the agreement made by the parties, or by the application of other legal provisions, but not by Article 1295 (now Art. 1385), which is not applicable.’’6

Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any 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.7

6 7

To the same effect: Luneta Motor Co. vs. Richey, CA, 39 Off. Gaz. 1101. Art. 1291, Spanish Civil Code, in modified form.

505

Art. 1382

CONTRACTS

Art. 1382. Payments made in a state insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible.8 Contracts in Behalf of Ward. — The first of the rescissible contracts are those which are entered into by guardians whenever the wards whom they represent suffer lesion or damage by more than one-fourth of the value of the things which are the object thereof.9 This is, however, without prejudice to the provision of Art. 1386 which states that rescission shall not take place with respect to contracts approved by the courts. It must be noted that under the Rules of Court, a judicial guardian entering into a contract with respect to the property of his ward must ordinarily secure the approval of a competent court.10 This is also true in the case of a father or mother considered as a natural guardian of the property of a child under parental authority where such property is worth more than two thousand pesos.11 As a matter of fact, if the contract involves the sale or encumbrance of real property, judicial approval is indispensable.12 Consequently, if a guardian sells, mortgages or otherwise encumbers real property belonging to his ward without judicial approval, the contract is unenforceable,13 and not rescissible even if the latter suffers lesion or damage of more than one-fourth of the value of the property. However, if he enters into a contract falling within the scope of his powers as guardian of the person and property, or only of the property, of his ward, such as when the contract involves acts of administration, express judicial approval is not necessary,14 in which case the contract is rescissible if the latter suffers the lesion or damage mentioned in No. 1 of Art. 1381 of the Code. Contracts in Behalf of Absentees. — The second of the rescissible contracts are those entered into in behalf of absentees, if the latter suffer the lesion or damage stated in the preceding

Art. 1292, Spanish Civil Code. Art. 1281, No. 1, Civil Code. 10 See Rules 95-96, New Rules of Court. 11 Art. 326, Civil Code. 12 Sec. 1, Rule 95, New Rules of Court. 13 Arts. 1403, No. 1, and 1317, Civil Code. 14 Sec. 1, et seq., Rule 96, New Rules of Court. See 2 Moran, 1957 Ed., p. 506. 8 9

506

RESCISSIBLE CONTRACTS

Art. 1382

number.15 However, such contracts are not rescissible if they have been approved by the courts.16 Since the powers and duties of a legal representative of an absentee are exactly the same as those of a guardian,17 the principles enunciated in the preceding section are also applicable here. Whether the contract is entered into by a guardian in behalf of his ward or by a legal representative in behalf of an absentee, before it can be rescinded on the ground of lesion, it is indispensable that the following requisites must concur: (1) The contract must have been entered into by a guardian in behalf of his ward or by a legal representative in behalf of an absentee;18 (2) The ward or absentee must have suffered lesion of more than one-fourth of the value of the property which is the object of the contract;19 (3) The contract must have been entered into without judicial approval;20 (4) There must be no other legal means for obtaining reparation for the lesion;21 (5) The person bringing the action must be able to return whatever he may be obliged to restore;22 and (6) The object of the contract must not be legally in the possession of a third person who did not act in bad faith.23 If the object of the contract is legally in the possession of a third person who did not act in bad faith, the remedy available to the person suffering the lesion is indemnification for damages and not rescission.24 Art. 1381, No. 2, Civil Code. Art. 1386, Civil Code. 17 Art. 382, Civil Code. 18 Art. 1381, Nos. 1 and 2, Civil Code. 19 Ibid. 20 Art. 1386, Civil Code. 21 Art. 1383, Civil Code. 22 Art. 1385, par. 1, Civil Code. 23 Art. 1385, par. 2, Civil Code. 24 Art. 1385, par. 3, Civil Code. 15 16

507

Art. 1382

CONTRACTS

Contracts in Fraud of Creditors. — The third of the rescissible contracts are those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them.25 This complements Art. 1177 of the Code which states that one of the remedies available to the creditor after he has exhausted all the property in possession of the debtor is to impugn the acts which the latter may have done to defraud him. However, before a contract can be rescinded on the ground that it has been entered into in fraud of creditors, it is indispensable that the following requisites must concur: (1) There must be a credit existing prior to the celebration of the contract; (2) There must be a fraud, or at least, the intent to commit fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking the rescission; (3) The creditor cannot in any other legal manner collect his credit;26 and (4) The object of the contract must not be legally in the possession of a third person who did not act in bad faith.27 If the object of the contract is legally in the possession of a third person who did not act in bad faith, the remedy available to the creditor is to proceed against the person causing the loss for damages.28 Accion pauliana — Article 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are “those contracts undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them.’’ The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation; (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; (5) the Art. 1381, No. 3, Civil Code. 3 Castan, 7th Ed., p. 422. 27 Art. 1385, par. 2, Civil Code. 28 Art. 1385, par. 3, Civil Code. 25 26

508

RESCISSIBLE CONTRACTS

Art. 1382

third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement setting aside the contract. Without any prior existing debt, there can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with retraoctive effect to the date when the credit was constituted. (Citations omitted.) (Chief Justice Davide, Jr., First Division, Siguan vs. Lim, G.R. No. 134685, November 19, 1999.) Contracts Referring to Things Under Litigation. — The fourth of the rescissible contracts are 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.29 The case contemplated in this number is different from that contemplated in the preceding number. Here the purpose is to secure the possible effectivity of a claim, while in the preceding number the purpose is to guarantee an existing credit; here there is a real right involved, while in the preceding number there is a personal right, both of which deserve the protection of the law. They are, however, similar in the sense that in both cases the person who can avail of the remedy of rescission is a stranger to the contract.30 Contracts by Insolvent. — Under 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. In order that the payment can be rescinded, it is indispensable (1) that it must have been made in a state of insolvency, and (2) that the obligation must have been one which the debtor could not be compelled to pay at the time such payment was effected. It is, therefore, clear that the basis of the rescissible character of the transaction is fraud as in the case of Nos. 3 and 4 of Art. 1381. 29 30

Art. 1381, No. 4, Civil Code. 8 Manresa, 5th Ed., Bk. 2, p. 558.

509

Art. 1382

CONTRACTS

Insolvency, as it is used in this article, should be understood in its popular or vulgar, not technical, sense. Hence, it refers to the financial situation of the debtor by virtue of which it is impossible for him to fulfill his obligations.31 A judicial declaration of insolvency is not, therefore, necessary.32 According to Manresa, the obligations contemplated by this article comprehend not only those with a term or which are subject to a suspensive condition, but even void and natural obligations as well as those which are condoned or which have prescribed.33 An interesting question arises with respect to the payment of an obligation which is subject to a suspensive period. Let us assume that A is indebted to B for P10,000 and to C for P5,000. Let us say that the obligation in favor of C is subject to a suspensive period. While in a state of insolvency, A pays his obligation to C before the expiration of the term or period. Can B rescind the payment? Under Art. 1382, there is no question that the payment is rescissible, but then this conclusion would be in direct conflict with the provision of No. 1 of Art 1198 of the Code under which A can be compelled by C to pay the obligation even before the expiration of the stipulated term or period since by his insolvency he has already lost his right to the benefit of such term or period. According to Manresa, however, the conflict can easily be resolved by considering the priority of dates between the two debts. If the obligation with a period became due before the obligation to the creditor seeking the rescission became due, then the latter cannot rescind the payment even if such payment was effected before the expiration of the period; but if the obligation with a period became due after the obligation to the creditor seeking the rescission became due, then the latter can rescind the payment.34 Other Rescissible Contracts. — Besides those enumerated in Arts. 1381 and 1382, there are also other contracts which are specially declared by law to be subject to rescission.35 Examples of Ibid., p. 561. Under Sec. 70 of the Insolvency Law (Act No. 1956), any payment, pledge, mortgage, conveyance, sale, assignment or transfer of property made by an insolvent within one month before the filing of the petition in insolvency by or against him, is void, except when made for a valuable consideration and in good faith. 33 8 Manresa, 5th Ed., Bk. 2, p. 562. 34 Ibid., p. 536. This is, of course, without prejudice to the provisions of the Civil Code regarding preference of credits. See Arts. 2241, et seq., Civil Code. 35 Art. 1381, No. 5, Civil Code. 31 32

510

RESCISSIBLE CONTRACTS

Art. 1383

these contracts are those contemplated in Arts. 1098, 1189, 1526, 1534, 1539, 1542, 1556, 1560, 1567, and 1659 of the Code. 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.36 Subsidiary Character of Action. — The action for rescission is subsidiary, consequently, it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.37 Hence, before a party who is prejudiced can avail himself of this remedy, it is essential that he has exhausted all of the other legal means to obtain reparation.38 Thus, even where the fraud charged which is the ground for an action for rescission actually did exist, where there is no allegation or evidence that the creditor has already exhausted all of legal remedies to obtain reparation from the debtor, the action to rescind the sale in question made by said debtor is not maintainable.39 Nevertheless, if it can be established that the property which is alienated or transferred by the debtor to another was his only property at the time of the transaction, an action for rescission can certainly be maintained because it is clear that in such case the creditor can have no other remedy.40 Parties Who May Institute Action. — According to Castan, the action for rescission may be instituted by the following: (1) The person who is prejudiced, such as the party suffering the lesion in rescissory actions on the ground of lesion, the creditor who is defrauded in rescissory actions on the ground of fraud, and other persons authorized to exercise the same in other rescissory actions; (2) their representatives; (3) their heirs; and (4) their creditors by virtue of the subrogatory action defined in Art. 1177 of the Code.41 An heir, therefore, may institute an action for the rescission of a rescissible contract. As a rule, he may do so as a representative of the person who suffers from lesion or of the creditor who is Art. 1294, Spanish Civil Code. Art. 1383, Civil Code. 38 Art. 1177, Civil Code. 39 Goquiolay vs. Sycip, 9 SCRA 663. 40 Regalado vs. Luchsinger & Co., 5 Phil. 625; Guash vs. Espiritu, 11 Phil. 184; Honrado vs. Mercayda, CA, 49 Off. Gaz. 1492. 41 3 Castan, 7th Ed., p. 433. 36 37

511

Art. 1384

CONTRACTS

defrauded. Suppose, however, that it can be established that the decedent, during his lifetime, entered into a contract with another in order to defraud him of his legitime, can he institute an action for the rescission of such contract after the death of the decedent? It is clear that in this case the compulsory heir does not have any right to institute the action as a representative of the decedent, since the decedent himself does not have the right. It would, however, be possible for him to institute the action in his own right under No. 3 of Art. 1381 of the Civil Code. This was recognized in the case of Concepcion vs. Sta. Ana. According to the Supreme Court: “The reason why a forced heir has the right to institute an action of rescission is that the right to the legitime is similar to a credit of a creditor. As Manresa correctly states in commenting on Article 1291 (now Art. 1381) of the Civil Code: “The rights of a forced heir to the legitime are undoubtedly similar to a credit of a creditor insofar as the right to the legitime may be defeated by fraudulent contracts, and are superior to the will of those bound to respect them. In its judgment of October 28, 1897, the Supreme Court of Spain held that the forced heirs instituted as such by their father in the latter’s testament have the undeniable right to institute an action to annul contracts entered into by the father to their prejudice. As it is seen the action is called action of nullity, but it is rather an action of rescission taking into account the purpose for which it is instituted and the confusion of ideas that has prevailed in this matter.’’42

Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused.43 Extent of Rescission. — It must be observed that the primary purpose of rescission is reparation for the damage or injury which is suffered either by a party to the contract or by a third person. In order that this purpose may be realized the rescission does not necessarily have to be total in character; it may also be partial. Consequently, according to Art. 1384, rescission shall be only to the extent necessary to cover the damages caused. This precept, which

42 Concepcion vs. Sta. Ana, 87 Phil. 787. The opinion of Manresa quoted here is found in Vol. 8, Bk. 2, 5th Ed., pp. 555-556. See Art. 221, No. 4, Civil Code. 43 New provision.

512

RESCISSIBLE CONTRACTS

Art. 1385

was not found in the old Code, is in accordance with the doctrine enunciated by the Supreme Tribunal of Spain on December 10, 1904, to the effect that a contract in fraud of creditors may be partially rescinded to an extent which is sufficient to satisfy the damage caused to the creditor.44 Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss.45 Effect of Rescission in Case of Lesion. — It is evident that the first paragraph of Art. 1385 is applicable only to rescissory actions on the ground of lesion and not to rescissory actions on the ground of fraud. This is so because in the latter there can certainly be no obligation on the part of the plaintiff-creditor to restore anything since he has not received anything.46 Once a contract is rescinded on the ground of lesion, there arises an obligation on the part of both contracting parties to return to the other the object of the contract, including fruits or interests. Consequently, rescission is not possible, unless he who demands it can return whatever he may be obliged to restore. Thus, where a guardian alienates certain properties of a minor for P85,000 to a certain person, and subsequently, the minor, upon reaching the age of majority, brings an action for the rescission of the contract on the ground of lesion, the effect if rescission is granted would be the restoration of things to their condition prior to the celebration of the contract. But if the plaintiff cannot refund the amount including interest, the action will certainly fail because positive statutory

8 Manresa, 5th Ed., Bk. 2, p. 572. Art. 1295. Spanish Civil Code. 46 8 Manresa, 5th Ed., Bk. 2, p. 578. 44 45

513

Art. 1385

CONTRACTS

law, no less than uniform court decisions, require, as a condition precedent to rescission, that the consideration received should be refunded.47 The “fruits of the thing” stated in Art. 1385 refer not only to natural, industrial and civil fruits but also to other accessions obtained by the thing, while interest refers to legal interest. It must be observed, however, that as far as the obligation to restore the fruits is concerned, the rules on possession shall be applied.48 Consequently, the determination of the good or bad faith of the party obliged to restore is of transcendental importance in order to assess the fruits or the value thereof which must be returned as well as the expenses which must be reimbursed.49 Thus, it has been held that as a condition to the rescission of a contract of sale of a parcel of land, the vendor must refund to the vendees (who are in good faith) an amount equal to the purchase price, plus the sum expended by them in improving the land.50 Effect of Rescission Upon Third Persons. — According to the second paragraph of Art. 1385, rescission shall not take place when the thing which constitutes the object of the contract is legally in the possession of a third person who did not act in bad faith. It is evident that this rule is applicable to all kinds of rescissible contracts. There are, however, two indispensable requisites which must concur in order that the acquisition of the thing which constitutes the object of the contract by a third person shall defeat an action for rescission. These requisites are: first, that the thing must be legally in the possession of the third person; and second, that such third person must not have acted in bad faith. Where the thing which constitutes the object of the contract happens to be movable property, the concurrence of these requisites offers no difficulty because of the principle that possession of movable property acquired in good faith is equivalent to a title.51 Where the thing happens to be immovable property, however, it is indispensable that the right of the third person must be registered or recorded in the proper registry before we can say that the thing is legally in his possession, or what

Uy Soo Lim vs. Tan Unchuan, 38 Phil. 522. Arts. 543, et seq., Civil Code. 49 8 Manresa, 5th Ed., Bk 2, pp. 577-578. 50 Gov’t. of the P.I. vs. Wagner, 54 Phil. 132. 51 Art. 559, Civil Code. 47 48

514

RESCISSIBLE CONTRACTS

Art. 1385

amounts to the same thing, before he is protected by law. Thus, Manresa, commenting on the provision of the second paragraph of Art. 1385, says: “The acquisition by a third person is an obstacle to the efficaciousness of the action for rescission, where the following two circumstances are present, to wit, that such third person is in lawful possession of the realty, that is to say that he is protected by the law against said action by the registration in the registry, and that he did not act in bad faith.’’52

Consequently, it has been held that a third person to whom the realty has been transferred who has not registered his right in the proper registry cannot be protected against the effects of a judgment rendered in the action for rescission.53 However, where he has registered his right over the realty under the Land Registration Act (Act No. 496), there would then be no legal obstacle to the transfer of the title of the said property, and for this special reason the said transfer cannot be rescinded. This doctrine was enunciated by the Supreme Court in the following case: Sikatuna vs. Guevara 45 Phil. 371 The records show that a contract of a lease of certain lot situated in Manila was entered into between the partnership Jacinto, Palma y Hnos, as lessor, and Potenciana Guevara, as lessee. This contract contained an option by which the lessor is given the right to purchase within a period of one year from the time of the execution thereof a house which the lessee had constructed on the lot, but in case of failure to exercise such right, the lessee is given the right to purchase the lot. The period for the option having expired without the lessor exercising its right, Guevara offered to purchase the lot, but the said lessor refused. In view of such refusal, Guevara brought an action to compel the lessor to sell the lot to her. There was, however, no notice of the commencement of such action filed with the office of the Register of Deeds. During the pendency of such case, the aforesaid lessor sold the lot under litigation to the Sikatuna

52 8 Manresa, 5th Ed., Bk 2, pp. 379-380, quoted by the Supreme Court in Cordevero vs. Villaruz, 46 Phil. 473, and in Gatchalian vs. Manalo, 68 Phil. 608. 53 Cordevero vs. Villaruz, 46 Phil. 473.

515

Art. 1385

CONTRACTS

Corporation. This sale was recorded in the Registry in accordance with Act No. 496, otherwise known as the Land Registration Act. Subsequently, judgment was rendered in the civil case in favor of Guevara, but it was not executed because the lot had already been sold to the Sikatuna Corporation. Later, the new owner ordered Guevara to vacate the premises. Having declined to do so, the corporation commenced these proceedings against her for unlawful detainer. In her answer, she contended that since the contract involves the sale of property under litigation without the approval of the litigants or of competent judicial authority, it should be rescinded. This contention was upheld by the lower court. The Supreme Court, speaking through Justice Romualdez, however, ruled: “As the appellant rightfully contends the rescission of the sale does not lie in the present case because the property is now in the legal possession of a third person who has not acted in bad faith. There is no doubt but that in this case the plaintiff corporation has the character of a third person, and it has not been shown that it had acted in bad faith. “This case has a special circumstance in that it deals with property registered under the Land Registration Act No. 496, Section 78, which provides that acts concerning properties registered under the law shall affect only the parties litigant, unless a notice of the commencement of the action is recorded, which does not appear to have been done in the case before us. There was, therefore, no legal obstacle to the transfer of the title of the said property, and for this special reason the said transfer cannot be rescinded.’’54

In spite of the impossibility of maintaining an action for the rescission of the contract where the object thereof is legally in the possession of a third person who did not act in bad faith, the person who is prejudiced is not left without any remedy. He may still bring an action for indemnity for damages against the person who caused the loss.55 This action may be directed against the guardian,

From this case, it is clear that when the law speaks of “third persons,” it refers not only to subsequent transferees who are strangers to the contract which is sought to be rescinded, but even to the immediate transferees who are not strangers to the contract. 55 Art. 1385, par. 3, Civil Code. 54

516

RESCISSIBLE CONTRACTS

Arts. 1386-1388

representative of the absentee or litigant who transferred the thing, as the case may be.56 It may even be directed against a third person who, in bad faith, had previously acquired the thing and, subsequently, had alienated it to an innocent purchaser for value.57 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.58 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.59 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.60 Proof of Fraud. — As we have seen in a previous section one of the requisites which must be established in order that a contract may be rescinded on the ground that it has been entered into in 8 Manresa, 5th Ed., Bk. 2, p. 582. Art. 1388, par. 1, Civil Code. 58 Art. 1296, Spanish Civil Code, in modified form. 59 Art. 1297, Spanish Civil Code, in modified form. 60 Art. 1298, Spanish Civil Code, in modified form. 56 57

517

Arts. 1386-1388

CONTRACTS

fraud of creditors is the existence of fraud, or at least, the intent to defraud. Such fraud or intent to defraud may be either presumed in accordance with Art. 1387 of the Code or duly proved in accordance with the ordinary rules of evidence. Idem; Presumptions of fraud. — The law presumes that there is fraud of creditors in the following cases: (1) Alienations of property by gratuitous title if the debtor has not reserved sufficient property to pay all of his debts contracted before such alienations.61 (2) Alienations of property by onerous title if made by a debtor against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated and need not have been obtained by the party seeking the rescission.62 Thus, where the debtor alienated a certain property, which was his only attachable property, to his son after judgment had been rendered against him and a writ of execution had been issued, there is a presumption that such alienation is fraudulent in accordance with the rule stated in the second paragraph of Art. 1387.63 This presumption becomes stronger when it is established that the conveyance by the judgment debtor is for the purpose of preventing the judgment creditor or other creditors from seizing the property.64 But where no judgment or preliminary attachment exists against the debtor, the presumption is not applicable.65 Cabaliw vs. Sadorra 64 SCRA 310 Isidora Cabaliw was the wife of Benigno Sadorra by his second marriage solemnized on May 5, 1915, before the Justice of the Peace of Bayambang, Pangasinan. This couple had a daughter named Soledad Sadorra. During their marriage, the

Art. 1387, par. 1, Civil Code. Art. 1387, par. 2, Civil Code. 63 Regalado vs. Luchsinger & Co., 5 Phil. 25. To the same effect: see Cabaliw vs. Sadorra, 64 SCRA 310. 64 Bachrach vs. Peterson, 7 Phil. 571. To the same effect: Panlileo vs. Victorio, 36 Phil. 706; Saavedra vs. Martinez, 68 Phil. 676; Contreras vs. China Banking Corp., 76 Phil. 709. 65 Manila Mercantile Co. vs. Flores, 50 Phil. 759. 61 62

518

RESCISSIBLE CONTRACTS

Arts. 1386-1388

spouses acquired two (2) parcels of land situated in Iniangan, Dupax, Nueva Vizcaya. One parcel with an area of 14.4847 hectares was acquired by a Sales Patent and covered by Original Certificate of Title No. 1 of the Land Records of Nueva Vizcaya issued in the name of Benigno Sadorra. The other piece of land about 1-1/2 hectares and covered by Tax Declaration Nos. 6209 and 6642 was secured through purchase. Having been abandoned by her husband, Isidora Cabaliw instituted an action for support with the Court of First Instance of Manila, entitled “Isidora Cabaliw de Orden versus Benigno Sadorra’’ docketed therein as Civil Case No. 43193. On January 30, 1933, judgment was rendered requiring Benigno Sadorra to pay his wife, Isidora Cabaliw, the amount of P75.00 a month in terms of support as of January 1, 1933, and P150.00 in concept of attorney’s fees and the costs. Unknown to Isidora Cabaliw, on August 19, 1933, Benigno Sadorra executed two (2) deeds of sale over the two parcels of land above described in favor of his son-in-law, Sotero Sadorra, the latter being married to Encarnacion Sadorra, a daughter of Benigno Sadorra by his first marriage. These deeds were duly registered and Original Certificate of Title No. 1 was cancelled and replaced with T.C.T. No. 522 of the Register of Deeds of Nueva Vizcaya. Because of the failure of her husband to comply with the judgment of support, Isidora Cabaliw filed in Civil Case 43192 a motion to cite Benigno Sadorra for contempt and the Court of First Instance of Manila in its Order of May 12, 1937, authorized Isidora to take possession of the conjugal property, to administer the same, and to avail herself of the fruits thereof in payment of the monthly support in arrears. With this order of the Court, Isidora proceeded to Nueva Vizcaya to take possession of the aforementioned parcels of land, and it was then that she discovered that her husband had sold them to his son-in-law Sotero. On February 1, 1940, Isidora filed with the Court of First Instance of Nueva Vizcaya Civil Case No. 449 against her husband and Sotero Sadorra for the recovery of the lands in question on the ground that the sale was fictitious; at the same time a notice of lis pendens was filed with the Register of Deeds of Nueva Vizcaya. In May of 1940, Benigno Sadorra died. On June 7, 1948, the above-mentioned notice of lis pendens was cancelled by the Register of Deeds of Nueva Viscaya upon

519

Arts. 1386-1388

CONTRACTS

the filing of an affidavit by Sotero Sadorra to the effect that Civil Case No. 449 had been decided in his favor and that he was adjudged the owner of the land covered by T.C.T. No. 522, but that his copy of the decision was lost during the war. On October 1, 1954, Isidora and her daughter Soledad filed with the Court of First Instance of Nueva Vizcaya Civil Case 634 to recover from the spouses Sotero and Encarnacion Sadorra the aforementioned two parcels of land; they also caused the annotation of a cautionary notice and notice of lis pendens over T.C.T. 522. On November 22, 1955, the complaint was amended and named additional party-defendants were the children of Benigno Sadorra by his first marriage. The amended complaint prayed among others: (1) that the deeds of sale executed by Benigno Sadorra be declared null and void; (2) that defendantspouses Sotero and Encarnacion Sadorra be directed to yield the possession of the lands in question; and (3) that said lands be ordered partitioned among plantiffs and defendants who are children by the first marriage of Benigno Sadorra in the proportions provided by law. During the pendency of Civil Case 634 certain parties intervened claiming that they had purchased parts of the land covered by T.C.T. 522. After trial, the lower court rendered judgment and among other things: (1) declared the deed of sale executed by Benigno Sadorra to be simulated and fictitious; (2) recognized and upheld the rights of the intervenor-purchasers who acquired their portions prior to the registration of the notice of lis pendens on October 1, 1954, but dismissed the claims of the intervenors who allegedly bought parts of the land subsequent thereto; and (3) ordered the partition of the remaining unsold lands between Isidora Cabaliw, Sotero Sadorra, on one hand and the children by the first marriage of Benigno Sadorra on the other. From the foregoing decision of the lower court in Civil Case 634 spouses Sotero and Encarnacion Sadorra appealed to the Court of Appeals and so did the intervenors whose claims were dismissed. (CA-G.R. No. 26956-R.) On November 29, 1965, the appellate court by a vote of 3 to 2 reversed the decision of the trial court, and dismissed the amended complaint of Isidora Cabaliw. Hence, this petition filed by Isidora Cabaliw and her daughter, Soledad Sadorra, for the Court to review the adverse judgment of the Court of Appeals.

520

RESCISSIBLE CONTRACTS

Arts. 1386-1388

The Supreme Court, speaking through Justice Muñoz Palma, held: The Court of Appeals sustained the validity and efficacy of the deeds of sale executed by Benigno Sadorra in favor of his son-in-law (Exhibits I and I-1) on the ground that these are public documents and as such are presumed by law to have been fair and legal; that the vendee Sotero Sadorra is presumed to have acted in good faith, citing Art. 44, Spanish Civil Code, Art. 627, New Civil Code; that fraud is never presumed, and it is settled in this jurisdiction that strong and convincing evidence is necessary to overthrow the validity of an existing public instrument. The appellate court continued that inasmuch as under the old Civil Code in force at the time of the sale, the husband was empowered to dispose of the conjugal property without the consent of the wife, the sales made by Benigno Sadorra were valid, and the wife Isidora cannot now recover the property from the vendee. The judgment of the Court of Appeals cannot be sustained. The facts narrated in the first portion of this Decision which are not disputed, convincingly show or prove that the conveyances made by Benigno Sadorra in favor of his son-in-law were fraudulent. For the heart of the matter is that about seven months after a judgment was rendered against him in Civil Case No. 43192 of the Court of First Instance of Manila and without paying any part of that judgment, Benigno Sadorra sold the only two parcels of land belonging to the conjugal partnership to his son-in-law. Such a sale even if made for a valuable consideration is presumed to be in fraud of the judgment creditor who in this case happens to be the offended wife. Article 1297 of the old Civil Code (now Art. 1387 of the New Civil Code) which was the law in force at the time of the transaction provides: “Contracts by virtue of which the debtor alienates property by gratuitous title are presumed to be made in fraud of creditors. “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 rescission.’’ (Emphasis supplied.)

521

Arts. 1386-1388

CONTRACTS

The above-quoted legal provision was totally disregarded by the appellate court, and there lies its basic error. We agree with petitioners that the parties here do not stand in equipoise, for the petitioners have in their favor, by a specific provision of law, the presumption of fraudulent transaction which is not overcome by the mere fact that the deeds of sale in question were in the nature of public instruments. As well said in the dissenting opinion of Justice Magno Gatmaitan, the principle invoked by the majority opinion that to destroy the validity of an existing public document “strong and convincing evidence is necessary” operates “where the action was brought by one party against the other to impugn the contract . . . but that rule can not operate and does not, where the case is one wherein in the suit is not between the parties inter se but is one instituted by a third person, not a party to the contract but precisely the victim of it because executed to his prejudice and behind his back; neither law, nor justice, nor reason, nor logic, should so permit, otherwise, in such case, the courts would be furnishing a most effective shield of defense to the aggressor.” (pp. 30-31, CA Decision) Furthermore, the presumption of fraud established by the law in favor of petitioners is bolstered by other indicia of bad faith on the part of the vendor and vendee. Thus (1) the vendee is the son-in-law of the vendor. In the early case of Regalado vs. Luchsinger & Co., 5 Phil. 625, this Court held that the close relationship between the vendor and the vendee is one of the known badges of fraud. (2) At the time of the conveyance, the vendee, Sotero, was living with his father-in-law, the vendor, and he knew that there was a judgment directing the latter to give a monthly support to his wife Isidora and that his fatherin-law was avoiding payment and execution of the judgment. (3) It was known to the vendee that his father-in-law had no properties other than those two parcels of land which were being sold to him. The fact that a vendor transfers all of his property to a third person when there is a judgment against him is a strong indication of a scheme to defraud one who may have a valid interest over his properties. Added to the above circumstances is the undisputed fact that the vendee Sotero Sadorra secured the cancellation of the lis pendens on No. O.C.T. 1, which was annotated in 1940 at the instance of Isidora Cabaliw, and the issuance of a transfer certificate of title in his favor, by executing an affidavit (Exhibit H) on June 7, 1948, wherein he referred to Isidora as “the late Isidora Cabaliw’’ when he knew for a fact that she was alive,

522

RESCISSIBLE CONTRACTS

Arts. 1386-1388

and alleged that Civil Case 449 of the Court of First Instance of Nueva Vizcaya was decided in his favor where in truth there was no such decision because the proceedings in said case were interrupted by the last world war. Such conduct of Sotero Sadorra reveals, as stated by the lower court, an “utter lack of sincerity and truthfulness” and belies his pretensions of good faith. On the part of the transferee, he did not present satisfactory and convincing evidence sufficient to overthrow the presumption and evidence of a fraudulent transaction. His is the burden of rebutting the presumption of fraud established by law, and having failed to do so, the fraudulent nature of the conveyance in question prevails. The decision of the Court of Appeals makes mention of Art. 1413 of the old Civil Code (now Art. 166 of the New Civil Code) which authorizes the husband as administrator to alienate and bind by onerous title the property of the conjugal partnership without the consent of the wife, and by reason thereof concludes that petitioner Isidora Cabaliw can not now seek annulment of the sale made by her husband. On this point, counsel for petitioners rightly claims that the lack of consent of the wife to the conveyances made by her husband was never invoked nor placed in issue before the trial court. What was claimed all along by plaintiff, Isidora Cabaliw now petitioner, was that the conveyances or deeds of sale were executed by her husband to avoid payment of the monthly support adjudged in her favor and to deprive her of the means to execute said judgment. In other words, petitioner seeks relief not so much as an aggrieved wife but more as a judgment creditor of Benigno Sadorra. Art. 1413 therefore is inapplicable; but even if it were, the result would be the same because the very article reserves to the wife the right to seek redress in court for alienations which prejudice her or her heirs. The undisputed facts before Us clearly show that the sales made by the husband were merely a scheme to place beyond the reach of the wife the only properties belonging to the conjugal partnership and deprive her of what rightly belongs to her and her only daughter Soledad. PREMISES CONSIDERED, We find merit to this Petition for Review and We set aside the decision of the appellate court for being contrary to the law applicable to the facts of the case. The decision of the trial court stands affirmed with costs against private respondents. So Ordered.

523

Arts. 1386-1388

CONTRACTS

It must be observed, however, that the above presumptions are disputable, and therefore, may be rebutted by satisfactory and convincing evidence to the contrary.66 Thus, if it can be established that the transferee acquired the property in good faith, without the least intention of impairing the judgment obtained by the creditor against the transferor, and that he paid the purchase price in the belief that the latter could freely dispose of the said property, the presumption of fraud is overthrown.67 Honrado vs. Marcayda, et al. 49 Off. Gaz. 1492, C.A. This is an action commenced by plaintiff against the defendants for the rescission of a contract of sale on the ground that such contract was entered into in fraud of creditors. The records show that Felipe Lotivio purchased a parcel of land from Luisa Marcayda for P1,000, although at the time the contract was executed there was already a judgment in favor of the plaintiff against the latter with regard to the property and a writ of attachment had already been issued. The plaintiff contends that the sale is fraudulent in accordance with the rule stated in the second paragraph of Art. 1297 (now Art. 1387) of the Civil Code; the defendant Felipe Lotivio, on the other hand, contends that he is a purchaser in good faith and for value. Consequently, the questions upon which this case hinges are (1) whether or not Felipe Lotivio was a purchaser in good faith and for value, and (2) if he is, whether or not the contract of sale executed could be rescinded. Held: “The sale was consummated on January 6, 1936, in consideration of P1,000. Original certificate of title No. 14567 showed that the land was free from any lien or encumbrance. Felipe Lotivio was not, under the law, supposed to go farther to find out whether the land has any other lien not appearing on the face of the title as held in the cases of Reynes vs. Barrera, 68 Phil. 656; Hernandez vs. Vda. de Salas, 69 Phil. 744; Visayan Surety and Insurance Corp. vs. Verzosa, 72 Phil. 362. It is well settled that when the property sold on execution is registered under the Torrens system, registration is the operative act Peña vs. Mitchell, 9 Phil. 587 & Streiff vs. Coll. of Customs, 31 Phil. 643; National Exchange Co. vs. Katigbak, 54 Phil. 599; Buencamino vs. Bantug, 58 Phil. 521; Gatchalian vs. Manalo, 68 Phil. 708. 67 Buencamino vs. Bantug, 58 Phil. 521. To the same effect: Peña vs. Mitchell, 9 Phil. 587; Gatchalian vs. Manalo, 68 Phil. 706. 66

524

RESCISSIBLE CONTRACTS

Arts. 1386-1388

that gives validity to the transfer or creates a lien on the land and a purchaser on execution is not required to go behind the registry to determine the condition of the property, and he is only charged with notice of the burdens of the certificate of title. To require him to do more is to defeat one of the primary objects of the Torrens system. “In the present case, the writ of attachment issued by the justice of the peace court of Daraga, Albay was not annotated on the back of the original certificate of title. True enough that it was filed with the office of the Register of Deeds of Albay, but such fact is not a notice to the whole world. Consequently, such unregistered order of attachment does not create any lien or burden upon the land in question. “The valuable consideration of P1,000 paid to Luisa Marcayda by Felipe Lotivio, who does not appear to be her relative is, in our opinion, not small for the property since its improvements are assessed at no less than P800. It is fitting to apply in this case the principle of ‘innocent purchaser for value’ as declared and applied in the case of Bailon vs. Cacias, et al., 40 Off. Gaz., p. 1896, August, 1941. “ ‘According to our Supreme Court in the case of Cui, et al. vs. Henson, 51 Phil. 600: ‘A purchaser in good faith is one who buys property of another without notice that some other person has a right to, or an interest in, such property and pays a full and fair price for the same, at the time of such purchase, or before he has notice of the claim or interest of some other person in the property. Good faith consists in an honest intention to abstain from taking any unconscientious advantage of another. Good faith is the opposite of fraud and of bad faith and its nonexistence must be established by competent proofs.’ “Tested by these doctrines, we hold and declare that defendant Felipe Lotivio was, under the foregoing circumstances, a purchaser in good faith and for value; and for this reason, we also hold that the presumption of fraud as contemplated in Article 1297 of the old Civil Code (now Art. 1387 of the new Civil Code) can be considered overcome and overthrown as held in the cases of Peña vs. Mitchell, 9 Phil. 587; Guash vs. Espiritu, 11 Phil. 184; Kuenkle vs. Watson & Co., 13 Phil. 26; Golinko vs. Monjardin, 31 Phil. 643; Asia Banking Corp. vs. Corcuera, 51 Phil. 781. “Therefore, the contract of sale, for the reasons above stated, is not rescissible.’’

525

Arts. 1386-1388

CONTRACTS

Idem; Badges of fraud. — It is not, however, indispensable that the creditor shall have to depend upon the two presumptions established in the first and second paragraphs of Art. 1387 in order to prove the existence of fraud or the intention to defraud. According to the third paragraph of the same article, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.68 Thus, in determining whether or not a certain conveyance is fraudulent the question in every case, in the words of Justice Moreland, is whether the conveyance was a bona fide transaction or merely a trick or contrivance to defeat creditors. It is not sufficient that it is founded on a good or valuable cause or consideration or is made with bona fide intent: it must have both elements. If defective in either of these particulars, although good between the parties, it is rescissible as far as the creditors are concerned. The rule is universal both at law and in equity that whatever fraud creates justice will destroy. The test as to whether or not a conveyance is fraudulent is — does it prejudice the rights of creditors?69 In the consideration of whether or not certain transfers or conveyances are fraudulent, the following circumstances have been denominated by the courts as badges of fraud.70 (1) The fact that the cause or consideration of the conveyance is inadequate. (2) A transfer made by a debtor after suit has been begun and while it is pending against him. (3)

A sale on credit by an insolvent debtor.

(4)

Evidence of large indebtedness or complete insolvency.

(5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially. (6) The fact that the transfer is made between father and son, when there are present others of the above circumstances. (7) The failure of the vendee to take exclusive possession of all the property.

Ayles vs. Reyes, 18 Phil. 243. Oria vs. McMicking, 21 Phil. 243. 70 Ibid. 68 69

526

RESCISSIBLE CONTRACTS

Arts. 1386-1388

Thus, where it is proved that a certain corporation, which is heavily indebted to a certain bank, sold a large tract of land worth P400,000 to the vendee for only P36,000 in spite of the fact that at the time of such sale it did not have any liquidated assets and that all of its other assets were pledged or mortgaged, some of which were for far more than their actual value, such circumstances would be sufficient to establish the fraudulent character of the conveyance.71 Consequently, the sale can be set aside by means of an action for rescission at the instance of the creditor. But where the sale is founded on a fictitious cause or consideration it would be futile for such creditor to invoke its rescission since such action presupposes the existence of a valid, not inexistent, contract.72 The remedy of the creditor in such case would be to ask for a declaration of nullity of the conveyance. Similarly, where it is proved that the person to whom the property conveyed is a son of the transferor or a mother-in-law or a near relative, coupled with the fact that at the time of the transfer or conveyance the said transferor was financially embarrassed or had no other means with which he could settle his personal obligations, the weight of evidence would be sufficient to justify a decree of rescission on the ground of fraud.73 The evidence becomes more conclusive if the fact of relationship between the vendor and the vendee is aggravated by the fact that the conveyance was made in secrecy and for an inadequate consideration at a time when the vendor had no other means with which he could settle his obligations.74 It must be noted, however, that the mere fact of relationship between vendor and vendee, as when the vendor is the vendee’s mother, is not in itself an element of fraud, if the sale was made for a valuable consideration and said vendor was not at the time of the conveyance insolvent.75

Asia Banking Corp. vs. Nable Jose, 51 Phil. 763. Onglengco vs. Ozaeta, 70 Phil. 43. 73 Gaston vs. Hernaez, 58 Phil. 823. 74 Ayles vs. Reyes, 18 Phil. 243; Alpuerto vs. Perez, 38 Phil. 785. 75 Standard Oil Co. vs. Castro, 64 Phil. 716. 71 72

527

Arts. 1386-1388

CONTRACTS

Rivera vs. Li Tam & Co. 4 SCRA 1072 Rafael Li Tam died intestate, survived by his wife, Marcosa Rivera, and several children by a Chinese wife. Marcosa filed a claim for P252,658.33 against the intestate which the court approved on the strength of a deed wherein the decedent acknowledged said indebtedness to his wife. Thereafter, Arminio Rivera, administrator of the estate, proceeded against the defendant company for an accounting of the income derived from the shares of stock owned by the decedent in said company. In answer, defendant company alleged that the decedent was no longer a stockholder in said company, having transferred his shares to his children by his Chinese wife. Hence, Rivera brought this action asking for the rescission of the transfer on the ground that it was made in fraud of creditors. Held: The fraudulent character of the transfer is clearly inferable from the facts that the transferees are the decedents’ own children, that no consideration was given for the transfer, that the corporation was the business of the decedent, and that he has an outstanding obligation of more than P250,000 with his wife which he had invested in the corporation. And to complete the fraudulent scheme, the defendants dissolved the old corporation and formed a new one for no apparent reason. In view of such fraud, the transfer is, therefore, of no effect.

Idem; id. — Acquisition by third person in good faith. — While it is true that the test as to whether or not a conveyance is fraudulent is to determine whether or not it is prejudicial to the rights of the creditors, nevertheless, it is also true that such a test would not be applicable if the conveyance is made in good faith or with a bona fide intent and for a valuable cause or consideration.76 In other words, if the property is acquired by a purchaser in good faith and for value, the acquisition as far as the law is concerned is not fraudulent. The right of such purchaser over the property is legally superior to that of any other person even as against the creditor who is prejudiced by the conveyance. Consequently, the contract or conveyance is not rescissible.77

Oria vs. McMicking, 21 Phil. 243. See Honrado vs. Marcayda, supra, for definition of “purchaser in good faith and for value” and also for authorities 76 77

528

RESCISSIBLE CONTRACTS

Art. 1389

Idem; id. — Acquisition by third person in bad faith. — On the other hand, if the property is acquired by one who is not a purchaser in good faith and for value, it is clear that the contract or conveyance is rescissible. In such case the creditor who is prejudiced can still proceed after the property. This is so, even though the said property may have been transferred or conveyed to other persons who are not innocent purchasers for value. However, if for any cause or reason, it should be impossible for the acquirer in bad faith to return the property, he shall indemnify the creditor seeking the rescission for damages suffered on account of the alienation. If it happens that there are two or more alienations, the first acquirer shall be liable first, and so on successively.78 Thus, if A, against whom a judgment for the payment of a certain debt in favor of X has been rendered, conveys his only property to B in fraud of X, and B, who is aware of the fraud, in turn, conveys the property to C, and the latter, who is also aware of the fraud, also conveys the property to D, who is a purchaser in good faith and for value, although the conveyance to D cannot be rescinded, yet X can still proceed against B for damages suffered by him on account of the fraudulent alienation, and if he fails to recover he can still proceed against C. It must be noted, however, that if the reason for the impossibility of returning the property acquired in bad faith is a fortuitous event, then under the principle announced in Art. 1174 of the Code, there can be no liability of the acquirer.79 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.80 Prescriptive Period. — As a general rule, the action for the rescission of a contract must be commenced within four years. Under No. 1 of Art. 1391, this period must be counted from the time of the termination of the incapacity of the ward; under No. 2, it must be

Art. 1388, Civil Code. 8 Manresa, 5th Ed., Bk. 2, p. 549. 80 Art. 1299, Spanish Civil Code. 78 79

529

Art. 1389

CONTRACTS

counted from the time the domicile of the absentee is known; under Nos. 3 and 4 and also under Art. 1382, it must be counted from the time of the discovery of the fraud. In certain cases of contracts of sale which are specially declared by law to be rescissible, however, the prescriptive period for the commencement of the action is six months or even forty days, counted from the day of delivery.81

81

Arts. 1543, 1571, 1577, Civil Code.

530

CHAPTER 7 VOIDABLE CONTRACTS Voidable Contracts in General. — Voidable contracts may be defined as those in which all of the essential elements for validity are present, although the element of consent is vitiated either by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence, or fraud.1 The most essential feature of a voidable contract is that it is binding until it is annulled by a competent court. Consequently, once it is executed there are only two possible alternatives left to the party who may invoke its voidable character — to attack its validity or to convalidate it either by ratification or by prescription. Its validity may be attacked either directly by means of a proper action in court or indirectly by way of defense. The action itself is called annulment in order to distinguish it from an action for the rescission of rescissible contracts or from an action for the declaration of absolute nullity or inexistence of void or inexistent contracts, while the defense itself is called annulability or relative nullity in order to distinguish it from the defense of absolute nullity or inexistence in void or inexistent contracts or the defense of unenforceability in unenforceable contracts.2 Idem; Characteristics. — Voidable contracts possess the following characteristics: (1) Their defect consists in the vitiation of consent of one of the contracting parties.

See Art. 1390, Civil Code, and Art. 1300, Spanish Civil Code. Castan calls the defect of voidable contracts (contratas anulables) “anulabilidado nulidad relativa’’ in order to distinguish it from the defect of void contracts (contratos inexistentes) which he calls “nulidad absoluta.’’ Derecho Civil, Vol. 3, 7th Ed., pp. 409-415. 1 2

531

CONTRACTS

(2) court.3

They are binding until they are annulled by a competent

(3) They are susceptible of convalidation by ratification or by prescription.4 Their defect or voidable character cannot be invoked by third persons.5 Idem; Distinguished from rescissible contracts. — Voidable and rescissible contracts may be distinguished from each other in the following ways: (1) In a voidable contract the defect is intrinsic because it consists of a vice which vitiates consent, while in a rescissible contract the defect is external because it consists of damage or prejudice either to one of the contracting parties or to a third person.6 (2) In the former the contract is voidable even if there is no damage or prejudice, while in the latter the contract is not rescissible if there is no damage or prejudice.7 (3) In the former the annulability of the contract is based on the law, while in the latter the rescissibility of the contract is based on equity. Hence, annulment is not only a remedy but a sanction, while rescission is a mere remedy. Public interest, therefore, predominates in the first, while private interest predominates in the second.8 (4) The causes for annulment are different from the causes for rescission.9 (5) is not.10

The former is susceptible of ratification, while the latter

(6) Annulment may be invoked only by a contracting party, while rescission may be invoked either by a contracting party or by a third person who is prejudiced.11 Art. 1390, Civil Code. Arts. 1390, 1391, 1392-1396, Civil Code. 5 Art. 1397, Civil Code. 6 Arts. 1381, 1390, Civil Code. 7 Ibid. 8 8 Manresa, 5th Ed., Bk. 2, pp. 544-545. 9 Arts. 1381, 1390, Civil Code. 10 Ibid. 11 8 Manresa, 5th Ed., Bk. 2, p. 545. 3 4

532

VOIDABLE CONTRACTS

Art. 1390

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.12 Contracts Which Are Voidable. — The two general classes of voidable contracts enumerated in Art. 1390 of the Code have already been discussed in detail in our discussion of consent as an essential requisite of contracts.13 Hence, it is unnecessary to discuss them again in this chapter. It must be observed that in a voidable contract all of the essential requisites for validity are present, although the requisite of consent is defective because one of the contracting parties does not possess the necessary legal capacity, or because it is vitiated by mistake, violence, intimidation, undue influence or fraud. Consequently, if consent is absolutely lacking or simulated, the contract is inexistent, not voidable.14 It must also be observed that even though there may have been no damage to the contracting parties, the contracts enumerated in Art. 1390 are still voidable. Hence, whether a contract which the law considers as voidable has already been consummated or is merely executory is immaterial; it can always be annulled by a proper action in court. The following decision penned by Justice Abad Santos is quite interesting:

New provision superseding Art. 1300, Spanish Civil Code. See comments on Arts. 1327-1329, with respect to legal incapacity, and on Arts. 1330-1344, with respect to mistake, violence, intimidation, undue influence, and fraud. 14 Arts. 1345, 1409, No. 2, Civil Code. 12 13

533

Art. 1390

CONTRACTS

Felipe vs. Heirs of Aldon 120 SCRA 628 Maximo Aldon married Gimena Almosara in 1936. The spouses bought several pieces of land sometime between 1948 and 1950. In 1960-62, the lands were divided into three lots, 1370, 1371 and 1415 of the San Jacinto Public Land Subdivision, San Jacinto, Masbate. In 1951, Gimena Almosara sold the lots to the spouses Eduardo Felipe and Hermogena V. Felipe. The sale was made without the consent of her husband, Maximo. On April 26, 1976, the heirs of Maximo Aldon, namely his widow Gimena and their children Sofia and Salvador Aldon, filed a complaint in the Court of First Instance of Masbate against the Felipes. The complaint which was docketed as Civil Case No. 2372 alleged that the plaintiffs were the owners of Lots 1370, 1371 and 1415; that they had orally mortgaged the same to the defendants; and an offer to redeem the mortgage had been refused so they filed the complaint in order to recover the three parcels of land. The defendants asserted that they had acquired the lots from the plaintiffs by purchase and subsequent delivery to them. The trial court sustained the claim of the defendants and rendered the following judgment: “a. declaring the defendants to be the lawful owners of the property subject of the present litigation; b. declaring the complaint in the present action to be without merit and is therefore hereby ordered dismissed; c. ordering the plaintiffs to pay to the defendants the amount of P2,000.00 as reasonable attorney’s fees and to pay the costs of the suit.’’ The plaintiffs appealed the decision to the Court of Appeals which rendered the following judgment: “PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and SET ASIDE, and a new one is hereby RENDERED, ordering the defendants-appellees to surrender the lots in question as well as the plaintiffs’appellants’ muniments of title thereof to said plantiffsappellants, to make an accounting of the produce derived from the lands including expenses incurred since 1951, and to solidarily turn over to the plaintiffs-appellants the NET monetary value of the profits, after deducting the

534

VOIDABLE CONTRACTS

Art. 1390

sum of P1,800.00. No attorney’s fees nor moral damages are awarded for lack of any legal justification; therefore, No costs.” The ratio of the judgment is stated in the following paragraphs of the decision penned by Justice Edgardo L. Paras with the concurrence of Justices Venicio Escolin and Mariano A. Zosa: “One of the principal issues in the case involves the nature of the aforementioned conveyance or transaction, with appellants claiming the same to be an oral contract of mortgage or antichresis, the redemption of which could be done anytime upon repayment of the P1,800.00 involved (incidentally the only thing written about the transaction is the aforementioned receipt re the P1,800). Upon the other hand, appellees claim that the transaction was one of sale, accordingly, redemption was improper. The appellees claim that plaintiffs never conveyed the property because of a loan or mortgage or antichresis and that what really transpired was the execution of a contract of sale through a private document designated as a ‘Deed of Purchase and Sale’ (Exhibit 1), the execution having been made by Gimena Almosara in favor of appellee Hermogena V. Felipe. “After a study of this case, we have come to the conclusion that the appellants are entitled to recover the ownership of the lots in question. We so hold because although Exh. 1 concerning the sale made in 1951 of the disputed lots is, in Our opinion, not a forgery the fact is that the sale made by Gimena Almosara is invalid, having been executed without the needed consent of her husband, the lots being conjugal. Appellees’ argument that this was an issue not raised in the pleadings is baseless, considering the fact that the complaint alleges that the parcels were purchased by plaintiff Gimena Almosara and her late husband Maximo Aldon’ (the lots having been purchased during the existence of the marriage, the same are presumed conjugal) and inferentially, by force of law, could not be disposed of by a wife without her husband’s consent.” The defendants are now the appellants in this petition for review. They invoke several grounds in seeking the reversal of the decision of the Court of Appeals. One of the grounds is factual in nature; petitioners claim that “respondent Court of Appeals has found as a fact that the ‘Deed of Purchase and Sale’

535

Art. 1390

CONTRACTS

executed by respondent Gimena Almosara is not a forgery and therefore its authenticity and due execution is already beyond question.’’ We cannot consider this ground because as a rule only questions of law are reviewed in proceedings under Rule 45 of the Rules of Court subject to well-defined exceptions not present in the instant case. The legal ground which deserves attention is the legal effect of a sale of lands belonging to the conjugal partnership made by the wife without the consent of the husband. It is useful at this point to re-state some elementary rules: The husband is the administrator of the conjugal partnership. (Art. 165, Civil Code) Subject to certain exceptions, the husband cannot alienate or encumber any real property of the conjugal partnership without the wife’s consent. (Art. 166, Idem.) And the wife cannot bind the conjugal partnership without the husband’s consent, except in cases provided by law. (Art. 172, Idem.) In the instant case, Gimena, the wife, sold lands belonging to the conjugal partnership without the consent of the husband and the sale is not covered by the phrase “except in cases provided by law.” The Court of Appeals described the sale as “invalid” — a term which is imprecise when used in relation to contracts because the Civil Code uses specific names in designating defective contracts, namely rescissible (Arts. 1380, et seq.), voidable (Arts. 1390, et seq.), unenforceable (Arts. 1403, et seq.), and void or inexistent (Arts. 1409, et seq.) The sale made by Gimena is certainly a defective contract but of what category? The answer: it is a voidable contract. According to Art. 1390 of the Civil Code, among the voidable contracts are “Those where one of the parties is incapable of giving consent to the contract.” (Par. 1.) In the instant case Gimena had no capacity to give consent to the contract of sale. The capacity to give consent belonged not even to the husband alone but to both spouses. The view that the contract made by Gimena is a voidable contract is supported by the legal provision that contracts entered by the husband without the consent of the wife when such consent is required, are annullable at her instance during the marriage and within ten years from the transaction questioned. (Art. 173, Civil Code.) Gimena’s contract is not rescissible for in such contract all the essential elements are untainted but Gimena’s consent was

536

VOIDABLE CONTRACTS

Art. 1390

tainted. Neither can the contract be classified as unenforceable because it does not fit any of those described in Art. 1403 of the Civil Code. And finally, the contract cannot be void or inexistent because it is not one of those mentioned in Art. 1409 of the Civil Code. By process of elimination, it must perforce be a voidable contract. The voidable contract of Gimena was subject to annulment by her husband only during the marriage because he was the victim who had an interest in the contract. Gimena, who was the party responsible for the defect, could not ask for its annulment. Their children could not likewise seek the annulment of the contract while the marriage subsisted because they merely had an inchoate right to the lands sold. The termination of the marriage and the dissolution of the conjugal partnership by the death of Maximo Aldon did not improve the situation of Gimena. What she could not do during the marriage, she could not do thereafter. The case of Sofia and Salvador Aldon is different. After the death of Maximo they acquired the right to question the defective contract insofar as it deprived them of their hereditary rights in their father’s share in the lands. The father’s share is one-half (1/2) of the lands and their share is two-thirds (2/3) thereof, one-third (1/3) pertaining to the widow. The petitioners have been in possession of the lands since 1951. It was only in 1976 when the respondents filed action to recover the lands. In the meantime, Maximo Aldon died. Two questions come to mind, namely: (1) Have the petitioners acquired the lands by acquisitive prescription? (2) Is the right of action of Sofia and Salvador Aldon barred by the statute of limitations? Anent the first question, We quote with approval the following statement of the Court of Appeals: “We would like to state further that appellees [petitioners herein] could not have acquired ownership of the lots by prescription in view of what we regard as their bad faith. This bad faith is revealed by testimony to the effect that defendant-appellee Vicente V. Felipe (son of appellees Eduardo Felipe and Hermogena V. Felipe) attempted in December in 1970 to have Gimena Almosara sign a ready-made document purporting to sell the disputed lots to the appellees. This actuation clearly indicated that the appellees knew the lots did not still

537

Art. 1390

CONTRACTS

belong to them, otherwise, why were they interested in a document of sale in their favor? Again why did Vicente V. Felipe tell Gimena that the purpose of the document was to obtain Gimena’s consent to the construction of an irrigation pump on the lots in question? The only possible reason for purporting to obtain such consent is that the appellees knew the lots were not theirs. Why was there an attempted improvement (the irrigation tank) only in 1970? Why was the declaration of property made only in 1974? Why were no attempts made to obtain the husband’s signature, despite the fact that Gimena and Hermogena were close relatives? All these indicate the bad faith of the appellees. Now then, even if we were to consider appellees’ possession in bad faith as possession in the concept of owners, this possession at the earliest started in 1951, hence the period for extraordinary prescription (30 years) had not yet lapsed when the present action was instituted on April 26, 1976. As to the second question, the children’s cause of action accrued from the death of their father in 1959 and they had thirty (30) years to institute it (Art. 1141, Civil Code). They filed action in 1976 which is well within the period. WHEREFORE, the decision of the Court of Appeals is hereby modified. Judgment is entered awarding to Sofia and Salvador Aldon their shares of the lands as stated in the body of this decision; and the petitioners as possessors in bad faith shall make an accounting of the fruits corresponding to the share aforementioned from 1959 and solidarily pay their value to Sofia and Salvador Aldon; costs against the petitioners. SO ORDERED. Note: There are others who believe that when a wife sells or encumbers conjugal land without the consent of her husband, the contract is unenforceable, not voidable. According to them, the defect of the contract consists of lack of authority, not incapacity. Therefore, No. (1) of Art. 1403 of the Civil Code is applicable. In the case of Guiang vs. Court of Appeals (June 26, 1998, 291 SCRA 372), the Supreme Court clearly stated that Article 1390, par. 2, refers to contracts visited by vices of consent, i.e., contracts which were entered into by a person whose consent was obtained and vitiated through mistake, violence, intimidation, undue influence or fraud. In the said case, private respondent’s consent to the contract of sale of their conjugal

538

VOIDABLE CONTRACTS

Art. 1391

property was totally inexistent or absent. x x x This being the case, said contract properly falls within the ambit of Article 124 of the Family Code, which was correctly applied by the two lower courts. x x x In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the conjugal properties, the other spouse may assume sole powers of administration. These powers do not include the powers of disposition or encumbrance which must have the authority of the court or the written consent of the other spouse. In the absence of such authority or consent, the disposition or encumbrance shall be void. However, the transaction shall be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors. (165a)

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.15 Prescriptive Period. — According to Art. 1391, the action for annulment must be commenced within a period of four years. If the action refers to contracts entered into by incapacitated persons, the period shall be counted from the time the guardianship ceases; if it refers to those where consent is vitiated by violence, intimidation or undue influence, the period shall be counted from the time such violence, intimidation or undue influence ceases or disappears; and if it refers to those where consent is vitiated by mistake or fraud, the period shall be counted from the time of the discovery of such mistake or fraud. If the action is not commenced within such period, the right of the party entitled to institute the action shall prescribe.16 Art. 1301, Spanish Civil Code, in modified form. Naval vs. Enriquez, 3 Phil. 699; Ullman vs. Hernaez, 30 Phil. 69; Villanueva vs. Villanueva, 91 Phil. 43. 15 16

539

Art. 1391

CONTRACTS

Carantes vs. Court of Appeals 76 SCRA 514 This is an appeal by certiorari from the decision of the Court of Appeals in CA-G.R. 36078-R promulgated on December 23, 1970 reversing the judgment of the Court of First Instance of Baguio City, Branch II, in Civil Case 804, and from the appellate court’s resolution dated March 7, 1971 denying herein petitioner’s motion for reconsideration. Mateo Carantes was the original owner of Lot No. 44 situated at Loakan, Baguio City, as evidenced by Original Certificate of Title No. 3 issued in his name on September 22, 1910 by virtue of Free Patent No. 5 granted to him on the same date. In 1913 Mateo died. He was survived by his widow Ogasia and six children, namely, Bilad, Crispino, Maximino, Apung and Sianang, all surnamed Carantes. In 1930, construction of the Loakan Airport was commenced by the Government. Because a portion of Lot No. 44 was needed for the landing field, the Government instituted proceedings (Civil Case 338) for its expropriation. For the purpose, Lot No. 44 was subdivided into Lots Nos. 44-A, 44-B, 44-C, 44-D, and 44-E. The portion expropriated by the Government was Lot No. 44-A. In 1933, Special Proceedings Nos. 409 to 413 were filed with the court for the settlement of the estate of the late Mateo Carantes. One of his sons, herein petitioner Maximino Carantes, was appointed and qualified as judicial administrator of the estate. In his capacity as administrator, Maximino filed on June 20, 1939 a project of partition wherein he listed as the heirs of Mateo Carantes who were entitled to inherit the estate, himself and his brothers and sisters, or the latter’s surviving children. Apparently because negotiations were, by that time, under way for the purchase by the Government of Lots Nos. 44-B and 44-C for the purpose of widening the Loakan Airport, the only property listed by Maximino in the project of partition was the remaining portion of Lot No. 44. On October 23, 1939 a deed denominated “Assignment of Right to Inheritance” was executed by four of Mateo Carantes’ children, namely, Bilad, Sianang, Lauro and Crispino, and the heirs of Apung Carantes (also a son of Mateo who died in 1923), namely, Pitag, Bill, Alson, Eduardo and Juan, assigning to Maximino Carantes their rights to inheritance in Lot No. 44. The stated monetary consideration for the assignment was P1.00. However, the document contains a recital to the effect

540

VOIDABLE CONTRACTS

Art. 1391

that the said lots, “by agreement of all the direct heirs and heirs by representation of the deceased Mateo Carantes as expressed and conveyed verbally by him during his lifetime, rightly and exclusively belong to the particular heir, Maximino Carantes, now and in the past in the exclusive, continuous, peaceful and notorious possession of the same for more than ten years.” On the same date Maximino Carantes sold to the Government Lots Nos. 44-B and 44-C and divided the proceeds of the sale among himself and the other heirs of Mateo. On February 6, 1940, upon joint petition of the heirs of Mateo Carantes, the Court of First Instance of Baguio City issued an Order in another proceeding — Administrative Case No. 368 — cancelling O.C.T. No. 3. Pursuant thereto the said title was cancelled, and in its place Transfer Certificate of Title No. 2533 was issued in the joint names of the five children of Mateo Carantes and the children of Apung Carantes (representing their deceased father) as co-owners pro indiviso, or one-sixth share for each child. On March 16, 1940, Maximino Carantes registered the deed of “Assignment of Right to Inheritance.’’ Accordingly, T.C.T. No. 2533 in the names of the heirs was cancelled, and in lieu thereof Transfer Certificate of Title No. 2540 was issued on the same date in the name of Maximino Carantes. Also on the same date, Maximino, acting as exclusive owner of the land covered by T.C.T. No. 2540, executed a formal deed of sale in favor of the Government over Lots Nos. 44-B and 44-C. On February 21, 1947, as a result of the approval of the Subdivision Survey Plan psd-16786, and pursuant to the deed of sale executed in 1940 by Maximino Carantes in favor of the Government, T.C.T. No. 2540 in Maximino’s name was cancelled, and in lieu thereof Transfer Certificate of Title No. T-98, covering Lots Nos. 44-A, 44-B and 44-C, was issued in the name of the Government, while Transfer Certificate of Title No. T-99, covering the remaining Lots Nos. 44-D (100,345 square meters) and 44-E (10,070 square meters) was issued in the name of Maximino Carantes, who has up to the present remained the registered owner of said lots. On September 4, 1958, the present complaint was filed by three children of the late Mateo Carantes, namely, Bilad, Lauro and Crispino, and by some of the surviving heirs of Apung and of Sianang (also children of Mateo Carantes). Maximino Carantes was named principal defendant, and some of the heirs of Apung

541

Art. 1391

CONTRACTS

and Sianang were impleaded as parties-defendants in view of their alleged reluctance to join as parties-plaintiffs. In their complaint, the plaintiffs alleged inter alia that they and/or their predecessors-in-interest executed the deed of “Assignment of Right to Inheritance” on October 23, 1939, only because they were made to believe by the defendant Maximino Carantes that the said instrument embodied the understanding among the parties that it merely authorized the defendant Maximino to convey portions of Lot No. 44 to the Government in their behalf to minimize expenses and facilitate the transaction; and that it was only on February 18, 1958, when the plaintiffs secured a copy of the deed, that they came to know that the same purported to assign in favor of Maximino their rights to inheritance from Mateo Carantes. The plaintiffs prayed that the deed of “Assignment of Right to Inheritance” be declared null and void; that Lots Nos. 44-D and 44-E covered by T.C.T. No. T-99 be ordered partitioned into six (6) equal shares and the defendant Maximino Carantes be accordingly ordered to execute the necessary deeds of conveyance in favor of the other distributees; and that the said defendant be ordered to pay the plaintiffs the sum of P1,000 as attorney’s fees and the sum of P200 as costs of suit. After trial, the court rendered its decision on January 28, 1965. It was the trial court’s opinion that since an action based on fraud prescribes in four years from the discovery of the fraud, and in this case the fraud allegedly perpetrated by the defendant Maximino Carantes must be deemed to have been discovered on March 16, 1940 when the deed of assignment was registered, the plaintiffs’ right of action had already prescribed when they filed the action in 1958; and even assuming that the land remained the common property of the plaintiffs and the defendant Maximino Carantes notwithstanding the execution of the deed of assignment, the co-ownership was completely repudiated by the said defendant by performance of several acts, the first of which was his execution of a deed of sale in favor of the Government on October 23, 1939, hence, ownership had vested in the defendant Maximino Carantes by acquisitive prescription. The court accordingly dismissed the complaint. It likewise dismissed the counter claim. The plaintiffs moved for reconsideration. Their motion having been denied in an Order dated March 8, 1965, they appealed to the Court of Appeals. As adverted to above, the Court of Appeals reversed the judgment of the trial court, hence the present recourse.

542

VOIDABLE CONTRACTS

Art. 1391

Speaking through Chief Justice Fred Ruiz Castro, the Supreme Court held: “We do not agree with the respondent court’s legal conclusion that the deed of “Assignment of Right to Inheritance’’ is void ab initio and inexistent on the grounds that real consent was wanting and the consideration of P1.00 is so shocking to the conscience that there was in fact no consideration, hence, the action for the declaration of the contract’s inexistence does not prescribe pursuant to Article 1410 of the new Civil Code. “Article 1409(2) of the New Civil Code relied upon by the respondent court provides that contracts “which are absolutely simulated or fictitious” are inexistent and void from the beginning. The basic characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties. “The respondents’ action may not be considered as one to declare the inexistence of a contract for lack of consideration. It is total absence of cause or consideration that renders a contract absolutely void and inexistent. In the case at bar, consideration was not absent. The sum of P1.00 appears in the document as one of the considerations for the assignment of inheritance. In addition — and this is of great legal import — the document recites that the decedent Mateo Carantes had, during his lifetime, expressed to the signatories to the contract that the property sub matter thereof rightly and exclusively belonged to the petitioner Maximino Carantes. This acknowledgment by the signatories definitely constitutes valuable consideration for the contract. “The present action is one to annul the contract entitled “Assignment of Right to Inheritance” on the ground of fraud. “Article 1390 of the new Civil Code provides that a contract “where the consent is vitiated by mistake, violence, intimidation, undue infuence or fraud,” is voidable or annullable. Even Article 1359, which deals on reformation of instruments, provides in its paragraph 2 that ‘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.’ When the consent to a contract

543

Art. 1391

CONTRACTS

was fraudulently obtained, the contract is voidable. Fraud or deceit does not render a contract void ab initio, and can only be a ground for rendering the contract voidable or annullable pursuant to Article 1390 of the new Civil Code by a proper action in court. “The present action, being one to annul a contract on the ground of fraud, its prescriptive period is four years from the time of the discovery of the fraud. “The next question that must be resolved is: from what time must fraud, assuming that there was fraud, be deemed to have been discovered in the case at bar? From February, 1958, when according to the private respondents, and as found by the respondent court, the private respondents actually discovered that they were defrauded by the petitioner Maximino Carantes when rumors spread that he was selling the property for half a million pesos? Or from March 16, 1940, when, as admitted by the parties and found by both the trial court and the respondent court, the deed of “Assignment of Right to Inheritance” was registered by the petitioner in the Office of the Register of Deeds? “The weight of authorities is to the effect that the registration of an instrument in the Office of the Register of Deeds constitutes constructive notice to the whole world, and, therefore, discovery of the fraud is deemed to have taken place at the time of the registration. In this case the deed of assignment was registered on March 16, 1940, and in fact on the same date T.C.T. No. 2533 in the names of the heirs of Mateo Carantes was cancelled, and T.C.T. No. 2540 in the name of the petitioner was issued in lieu thereof. The four-year period within which the private respondents could have filed the present action consequently commenced on March 16, 1940; and since they filed it only on September 4, 1958, it follows that the same is barred by the statute of limitations.”

Should the defense also prescribe within the same period as the action for annulment? Although Art. 1391 speaks only of the action, Spanish commentators advance the view that the defense shall also prescribe after the lapse of four years, since the basis of the action and the basis of the defense are identical.17 In Braganza 17

3 Castan, 7th Ed., pp. 415-416, citing Manresa, De Buen and Ramos.

544

VOIDABLE CONTRACTS

Art. 1391

vs. Villa Abrille,18 however, the Supreme Court declared that “there is reason to doubt the pertinency of the period fixed by Art. 1301 — now Art. 1391 of the Civil Code where minority is set up only as a defense to an action, without the minors asking for any positive relief from the contract.” Although this statement in the decision is not controlling because it is based on an assumption, nevertheless, we believe that this view is more just and logical. It is interesting to note that the above aspect of the law was taken up in the Bar Examinations of 1979. Thus — Problem — Mrs. S borrowed P20,000.00 from PG. She and her 19-year old son, Mario, signed the promissory note for the loan, which note did not say anything about the capacity of the signers. Mrs. S made partial payments little by little. After seven (7) years, she died leaving a balance of P10,000.00 on the note. PG demanded payment from Mario who refused to pay. When sued for the amount, Mario raised the defense: that he signed the note when he was still a minor. Should the defense be sustained? Why? Answer No. 1 — The defense should be sustained. Mario cannot be bound by his signature in the promissory note. It must be observed that the promissory note does not say anything about the capacity of the signers. In other words, there is no active fraud or misrepresentation; there is merely silence or constructive fraud or misrepresentation. It would have been different if the note says that Mario is of age. The principle of estoppel would then apply. Mario would not be allowed to invoke the defense of minority. The promissory note would then have all the effects of a perfectly valid note. Hence, as far as Mario’s share in the obligation is concerned, the promissory note is voidable because of minority or non-age. He cannot, however, be absolved entirely from monetary responsibility. Under the Civil Code, even if his written contract is voidable because of minority he shall make restitution to the extent that he may have been benefited by the money received by him (Art. 1399, Civil Code). True, more than four years have already elapsed from the time that Mario had attained the age of 21. Apparently, his right to interpose the defense has already prescribed. It has been held, however, that where minority is used as a defense and no positive relief is prayed for, the four-year period (Art. 1391,

18

105 Phil. 456.

545

Arts. 1392-1395

CONTRACTS

Civil Code) does not apply. Here, Mario is merely interposing his minority as an excuse from liability. (Braganza vs. Villa Abrille, 105 Phil. 456.) Answer No. 2 — The defense should not be sustained. It must be noted that the action for annulment was instituted by PG against Mario when the latter was already 26 years old. Therefore, the right of Mario to invoke his minority as a defense has already prescribed. According to the Civil Code, actions for annulment of voidable contracts shall prescribe after four years. In the case of contracts which are voidable by reason of minority or incapacity, the four-year period shall be counted from the time the guardianship ceases (Art. 1391, Civil Code). The same rule should also be applied to the defense. In the instant case, since more than four years already elapsed from the time Mario had attained the age of 21, therefore, he can no longer interpose his minority as a defense. It would have been different if four years had not yet elapsed from the time Mario had attained the age of 21. Since there was no active fraud or misrepresentation on his part at the time of execution of the promissory note, it is clear that the contract is voidable as far as he is concerned. In such case, the defense of minority should then be sustained. (Braganza vs. Villa Abrille, 105 Phil. 456.)

Art. 1392. Ratification extinguishes the action to annul a voidable contract.19 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.20 Art. 1394. Ratification may be effected by the guardian of the incapacitated person.21 Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment.22 Art. 1309, Spanish Civil Code, in modified form. Art. 1311, Spanish Civil Code, in modified form. 21 New provision. 22 Art. 1312, Spanish Civil Code. 19 20

546

VOIDABLE CONTRACTS

Art. 1396

Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted.23 Concept of Ratification. — Besides prescription, the action for annulment of a voidable contract may also be extinguished by ratification.24 Ratification or confirmation as it is known in the Spanish Civil Code is defined as the act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity.25 Requisites of Ratification. — Ratification or confirmation requires the concurrence of the following requisites:26 First: The contract should be tainted with a vice which is susceptible of being cured. Second: The confirmation should be effected by the person who is entitled to do so under the law. Third: It should be effected with knowledge of the vice or defect of the contract. Fourth: The cause of the nullity or defect should have already disappeared. The first requisite of confirmation is that the contract should be tainted with a vice which is susceptible of being cured. It is evident that confirmation presupposes the existence of a vice in the contract because otherwise it would not have any object. Furthermore, such vice should be susceptible of being cured because otherwise the contract would be void or inexistent and, therefore, not susceptible of confirmation.27 The second requisite is that the confirmation should be effected only by the person who is entitled to do so under the law. This is implied from the provisions of Arts. 1394 and 1395. Hence, if the contract was entered into by an incapacitated person, the confirmation can be effected only by such person upon attaining or Art. 1313, Spanish Civil Code. Art. 1392, Civil Code. For a third mode of extinguishing the action, see Art. 1401, Civil Code. 25 8 Manresa, 5th Ed., Bk. 2, p. 665. 26 3 Castan, 7th Ed., p. 419; 8 Manresa, 5th Ed., 2, pp. 668-671. 27 8 Manresa, 5th Ed., Bk. 2, pp. 668-670. 23 24

547

Art. 1396

CONTRACTS

regaining capacity or by his guardian if he has not yet attained or regained capacity, and if the contract was executed through mistake, violence, intimidation, undue influence, or fraud, it can be effected only by the innocent party.28 The third requisite is that the confirmation should be effected with knowledge of the vice or defect of the contract. This is clear from the provision of Art. 1393. Since confirmation is above all a form of expressing the will, as such it requires, independently of the act to which it refers, the same conditions of freedom, knowledge and clarity which consent also requires, although it does not require the conformity of the other party who has no right to invoke the nullity of the contract. Consequently, confirmation may also be invalidated by mistake, violence, intimidation, undue influence, or fraud.29 It must be noted, however, that the contract may be tainted with several vices, such as when it has been executed through mistake and fraud. In such case, if the person entitled to effect the confirmation ratifies or confirms the contract with knowledge of the mistake, but not of the fraud, his right to ask for annulment is not extinguished thereby since the ratification or confirmation has only purged the contract of mistake, but not of fraud.30 The fourth requisite is that the cause of nullity should have already ceased or disappeared because otherwise the act of confirmation would also suffer from the very vice or defect which it seeks to cure.31 It must be observed, however, that in the case of contracts entered into by incapacitated persons, this is not indispensable in a sense, because even while the incapacity continues to exist, the confirmation may be effected by the guardian of the incapacitated person.32 Forms of Ratification. — There is no special form required for confirmation, but, as the law provides, it may be effected expressly or tacitly. The first is not defined in the Code, but, undoubtedly, there is an express confirmation 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 expressly declare Arts. 1394-1395, Civil Code. See 3 Castan, 7th Ed., p. 419. 8 Manresa, 5th Ed., Bk. 2, pp. 670-671. 30 Ibid., p. 672. 31 3 Castan, 7th Ed., p. 419. 32 Art. 1349, Civil Code. 28 29

548

VOIDABLE CONTRACTS

Art. 1397

his desire to convalidate it, or what amounts to the same thing, to renounce his right to annul the contract.33 On the other hand, there is a tacit confirmation, 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.34 Thus, where it is established that a minor who had entered into a contract of sale, not only failed to repudiate it upon reaching the age of majority, but also disposed of the greater part of the proceeds after he became of age and after he had knowledge of the facts which he now seeks to disaffirm, it was held that there was a tacit ratification or confirmation of the contract.35 Similarly, if the person who can effect the confirmation, instead of demanding the annulment of a contract of sale, should proceed to collect the greater part of the purchase price, as set out in a promissory note, it is clear that there is already a tacit confirmation of the contract.36 Effects of Ratification. — The effects of ratification or confirmation are clearly pointed out in Arts. 1392 and 1396. In the first place, ratification extinguishes the action to annul the contract; and in the second place, it cleanses the contract of its defects from the moment it was constituted.37 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.38 Who May Institute Action. — From Art. 1397 of the Code it can be inferred that two different requisites are required to confer the necessary capacity for the exercise of the action for annulment.

8 Manresa, 5th Ed., Bk. 2, p. 671. Art. 1393, Civil Code. 35 Uy Soo Lim vs. Tan Unchuan, 38 Phil. 552. 36 Tacalinar vs. Corro, 34 Phil. 8898. 37 Arts. 1392, 1396, Civil Code; 3 Castan, 7th Ed., p. 420. 38 Art. 1302, Spanish Civil Code, in modified form. 33 34

549

Art. 1397

CONTRACTS

The first requisite is that the plaintiff must have an interest in the contract. The second is that the victim and not the party responsible for the vice or defect must be the person who must assert the same.39 Discussing the first requisite, the Supreme Court, in a leading case, declared: “From these legal provisions (referring to what are now Arts. 1390 and 1397 of the Civil Code) it is deduced that it is the interest had in a given contract, that is the determining reason of the right which lies in favor of the party obligated principally or subsidiarily to enable him to bring an action for the annulment of the contract in which he intervened and therefore he who has no right in a contract is not entitled to prosecute an action for annulment, for according to the precedents established by the courts the person who is not a party to a contract, or who has no cause of action or representation from those who intervened therein, is manifestly without right of action and personality such as to enable him to assail the validity of the contract.’’40

Consequently, a third person who is a stranger to the contract cannot institute an action for its annulment. There is, however, an exception to this rule. According to the Supreme Court, a person who is not a party obliged principally or subsidiarily under a contract may exercise an action for annulment of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention.41 Thus, where the remaining partners of a partnership executed a chattel mortgage over the properties of the partnership in favor of a former partner to the prejudice of creditors of the partnership, the latter have a perfect right to file the action to nullify the chattel mortgage.42

8 Manresa, 6th Ed., Bk. 2, p. 639; Wolfson vs. Estate of Martinez, 20 Phil. 340. Ibañez vs. Hongkong & Shanghai Bank, 22 Phil. 572. To the same effect: Compania General vs. Topino, 4 Phil. 33; Martell Ong vs. Jariol, 17 Phil. 244; Dy Sun vs. Brilliantes, 93 Phil. 175. 41 Teves vs. People’s Homesite & Housing Corp., 23 SCRA 1141; De Santos vs. City of Manila, 45 SCRA 409; Singsong vs. Isabela Sawmill, 88 SCRA 623. 42 Singsong vs. Isabela Sawmill, 88 SCRA 623. But would this not be confusing the concept of annulment of voidable contracts with the concept of rescission of rescissible contracts? 39 40

550

VOIDABLE CONTRACTS

Art. 1397

The second requisite, on the other hand, is based on the wellknown principle of equity that whoever goes to court must do so with clean hands.43 Some commentators say that only the party who is prejudiced can institute the action. This statement, however, is misleading for the simple reason that the action for annulment is independent of the lesion or damage suffered by the plaintiff. This is clear from the provision of Art. 1390 which states that the contracts enumerated therein are voidable, even though there may have been no damage to the contracting parties.44 Problem No. 1 — X, of age, entered into a contract with Y, a minor. X knew and the contract specifically stated the age of Y. May X successfully demand annulment of the contract? Reason. (1971 Bar Problem) Answer — X cannot successfully demand annulment of the contract. True, said contract is voidable because of the fact that at the time of the celebration of the contract, Y, the other contracting party, was a minor, and such minority was known to X (Arts. 1327, No. 1, 1390 CC). However, the law is categorical with regard to who may institute the action for annulment of the contract. In addition to the requirement that the action may be instituted only by the party who has an interest in the contract in the sense that he is obliged thereby either principally or subsidiarily, Art. 1397 of the Civil Code further requires that in case of contracts voidable by reason of incapacity of one of the contracting parties, the party who has capacity cannot allege the incapacity of the party with whom he contracted. Because of this additional requisite, it is clear that Y and not X can institute the action for annulment. Problem No. 2. — Pedro sold a piece of land to his nephew Quintin, a minor. One month later, Pedro died. Pedro’s heirs then brought an action to annul the sale on the ground that Quintin was a minor and therefore without legal capacity to contract. If you are the judge, would you annul the sale? (1974 Bar Problem) Answer — If I am the judge, I will not annul the sale. The Civil Code in Art. 1397 is explicit. Persons who are capable cannot allege the incapacity of those with whom they contracted. True, Pedro who sold the land to the minor Quintin is already

43 44

Bastida vs. Dy Buncio & Co., 93 Phil. 195. 8 Manresa, 5th Ed., Bk. 2, p. 641.

551

Arts. 1398-1399

CONTRACTS

dead, and it is his heirs who are now assailing the validity of the sale. However, under the principle of relativity of contracts recognized in Art. 1311 of the Civil Code, the contract takes effect not only between the contracting parties, but also between their assigns and heirs. (Note: Another way of answering the above problem would be to state the two requisites which must concur in order that a voidable contract may be annulled. These requisites are: (a) that the plaintiff must have an interest in the contract; and (b) that the victim or the incapacitated party must be the person who must assert the same. The second requisite is lacking in the instant case.)

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.45 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.46 Effects of Annulment. — If the contract has not yet been consummated, it is evident, although the Code does not expressly say so, that the contracting parties shall be released from the obligations arising therefrom.47 However, if the contract has already been consummated, the rules provided for in Arts. 1398 to 1402 of the Code shall govern. Idem; Obligation of mutual restitution. — Upon the annulment of the contract, if the prestation thereof consisted in obligations to give, the 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. If, on Art. 1303, Spanish Civil Code, in modified form. Art. 1304, Spanish Civil Code. 47 3 Castan, 7th Ed., pp. 416-417. 45 46

552

VOIDABLE CONTRACTS

Arts. 1398-1399

the other hand, the prestation consisted in obligations to do or not to do, there will have to be an apportionment of damages based on the value of such prestation with corresponding interests.48 In other words, upon annulment the contracting parties should be restored to their original position by mutual restitution.49 There is, therefore, practically no difference between the effect of rescission based on lesion as enunciated in the first paragraph of Art. 1385 of the Code and the general effect of annulment as enunciated in Art. 1398. As in the case of rescission, the question of fruits shall be governed by the rules on possession. Interest of course, refers to the legal interest.50 Idem; id. — Rule in case of incapacity. — The principle of mutual restitution as enunciated in Art. 1398 is, however, modified by the provision of Art. 1399. When the defect of the contract consists in the incapacity of one of the contracting 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.51 It is evident that this rule is applicable only and exclusively to those cases where the nullity arises from the incapacity of one of the contracting parties. Consequently, if the nullity should arise from some other cause, the general rule enunciated in Art. 1398 shall govern.52 The benefit spoken of in Art. 1399 which obliges the incapacitated person to make restitution does not necessarily presuppose a material and permanent augmentation of fortune; it is sufficient if there has been a prudent and beneficial use by the incapacitated person of the thing which he has received. In order to determine this, it is necessary to know his necessities, his social position as well as his duties as a consequence thereof to others. Thus, such benefit is present if the thing received is used for food, clothing, shelter, health, and others of a similar character. It is, however, clear that the proof of such benefit is cast upon the person who has capacity, since it is presumed in the absence of proof that no such benefit has accrued

Art. 1398 Civil Code; 3 Castan, 7th Ed., pp. 416-417. Cadwallader & Co. vs. Smith, Bell & Co., 7 Phil. 461. To the same effect: Dumasug vs. Modelo, 34 Phil. 252; Oliveros vs. Porciongcola, 69 Phil. 305; Talag vs. Tankengco, 92 Phil. 1066. 50 8 Manresa, 5th Ed., Bk. 2, p. 646. 51 See Art. 1426, Civil Code. 52 8 Manresa, 5th Ed., Bk. 2, p. 647. 48 49

553

Arts. 1400-1401

CONTRACTS

to the incapacitated person.53 Thus, where two minors borrowed a certain amount from the creditor during the Japanese occupation, and such indebtedness is evidenced by a promissory note, while it is true that they cannot be bound by their signatures because of their minority, they can still be compelled to make restitution to the extent that they may have been benefited by the money which they received. Since there is proof that the funds were used for their support during the Japanese occupation, it is but fair to hold that they had profited to the extent of the value of such money. They must, therefore, reimburse the creditor the value of such money, which value must be computed in accordance with the Ballantyne Schedule.54 It must be observed that Art. 1399 cannot be applied to those cases where the incapacitated person can still return the thing which he has received. Thus, according to the Supreme Court, whatever difference may exist in the authorities as to the obligation of an incapacitated person to return the entire consideration received by virtue of a contract of sale as a condition precedent to disaffirming the contract, they are unanimous in holding that he must return such portion thereof as remains in his possession upon reaching or attaining capacity. Hence, if after attaining capacity, it is established that he not only failed to ask for the annulment of the contract but he also squandered that part of the consideration which remained, it is clear that there is already an implied ratification or confirmation.55 Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.56 Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is Ibid., pp. 648-649. Braganza vs. Villa Abrille, 105 Phil. 456. 55 Uy Soo Lim vs. Tan Unchuan, 38 Phil. 552. See also Young vs. Tecson, CA, 39 Off. Gaz. 953. 56 Art. 1307, Spanish Civil Code, in modified form. 53 54

554

VOIDABLE CONTRACTS

Art. 1402

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.57 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.58 Effect of Failure to Make Restitution. — Sometimes, for some reason or other, the action for annulment is commenced after the lapse of several years from the time of the consummation of the contract. Suppose then that prior to the commencement of the action, the thing which constitutes the object of the contract is lost, what is the effect upon the right of the party who, ordinarily, is entitled to institute the action for annulment? This question is resolved in part by the provisions of Arts. 1400 to 1402 of the Code. Idem; Where loss is due to fault of defendant. — According to Art. 1400, when the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. It is evident that this rule is applicable only when the loss of the thing is due to the fault of the party against whom the action for annulment may be instituted.59 This is so because if the loss is due to the fault of the party who has a right to institute the action, the provision of Art. 1401 shall apply. The loss of the thing which constitutes the object of the contract through the fault of the party against whom the action for annulment may be instituted shall not, therefore, extinguish the action for annulment. The only difference from an ordinary action for annulment is that, instead of being compelled to restore the thing, the defendant can only be compelled to pay the value thereof at the time of the loss.

Art. 1314, Spanish Civil Code, in modified form. Art. 1308, Spanish Civil Code. 59 8 Manresa, 6th Ed., Bk. 2, p. 658. 57 58

555

Art. 1402

CONTRACTS

Idem; Where loss is due to fault of plaintiff. — However, if the loss of the thing is due to the fraud or fault of the party who is entitled to institute the proceedings, according to the first paragraph of Art. 1401, the action for annulment shall be extinguished. There are, therefore, three modes whereby such action may be extinguished. They are: (1) prescription; (2) ratification; and (3) the loss of the thing which is the object of the contract through the fraud or fault of the person who is entitled to institute the action. The second paragraph of Art. 1401, on the other hand, which at first blush seems to be an exception to the rule stated in the first paragraph, has created a legal absurdity. Under the old Code, the provision was as follows: “If the cause of action is the incapacity of any of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless it has occurred through the fraud or fault of the plaintiff after having acquired capacity.”60 Hence, under the old law, if the loss of the thing was due to the fraud or fault of the plaintiff after he had acquired capacity, the general rule was applicable; in other words, the action was extinguished. But if the loss was due to the fraud or fault of the plaintiff during his incapacity, the exception was applicable; in other words, the loss would not be an obstacle to the success of the action. However, with the deletion of the phrase “after having acquired capacity” from the provision of the second paragraph of Art. 1401 of the present Code, the result is an absolute redundancy. Whether the loss occurred during the plaintiff’s incapacity or after he had acquired capacity, the action for annulment would still be extinguished in accordance with the rule stated in the first paragraph. Idem; Where loss is due to fortuitous event. — Unfortunately, the Code in Arts. 1400 and 1401 does not provide for the effect of the loss of the object of the contract through a fortuitous event upon the right to ask for the annulment of the contract. In spite of this omission, it is, however, possible to apply the general principles regarding the effects of fortuitous events to any problem that may arise. If the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through a fortuitous event, the contract can still be annulled, but with this difference — 60

Art. 1314, Spanish Civil Code.

556

VOIDABLE CONTRACTS

Art. 1402

the defendant can be held liable only for the value of the thing at the time of the loss, but without interest thereon. The defendant, and not the plaintiff, must suffer the loss because he was still the owner of the thing at the time of the loss; he should, therefore, pay the value of the thing, but not the interest thereon because the loss was not due to his fault.61 If it is the plaintiff who cannot return the thing because it has been lost through a fortuitous event, the contract may still be annulled, but with this difference — he must pay to the defendant the value of the thing at the time of the loss, but without interest thereon. According to Dr. Tolentino, if the plaintiff offers to pay the value of the thing at the time of its loss as a substitute for the thing itself, the annulment of the contract would still be possible, because, otherwise, we would arrive at the absurd conclusion that an action for annulment would in effect be extinguished by the loss of the thing through a fortuitous event.62

61 62

4 Tolentino, Civil Code, 1956 Ed., pp. 558-559. Ibid., pp. 557-558.

557

CONTRACTS

CHAPTER 8 UNENFORCEABLE CONTRACTS

Unenforceable Contracts in General. — Unenforceable contracts are those which cannot be enforced by a proper action in court, unless they are ratified, because, either they are entered into without or in excess of authority or they do not comply with the statute of frauds or both of the contracting parties do not possess the required legal capacity.1 As regards the degree of defectiveness, they occupy an intermediate ground between voidable and void contracts.2 Idem; Classes. — There are three general classes of unenforceable contracts. They are: first, those contracts entered into in the name of another person by one without any authority or in excess of his authority; second, those which do not comply with the Statute of Frauds; and third, those where both contracting parties are legally incapacitated. Under the old law, the first were considered as a special type of void contracts — void contracts which were susceptible of ratification as distinguished from void and inexistent contracts which were (and still are) not susceptible of ratification. Under the present law, they are now placed in the same category as contracts which do not comply with the Statute of Frauds.3 Yet there is no question that the defects from which each of these three classes of unenforceable contracts suffers are essentially different Art. 1403, Civil Code. Report of the Code Commission, p. 139. 3 While the classification in the other defective contracts is based on the defect from which the contracts suffer, here it is based on the consequence. As a result, the classification found in Art. 1403 has been criticized on the ground that it places contracts which are tainted with a vice or defect which affects not only their enforceability but also their validity in the same category as contracts which are tainted with a mere formal defect which affect only their enforcement. 1 2

558

UNENFORCEABLE CONTRACTS

from each other. In the first, there is absolutely no consent insofar as the person in whose name the contract is entered into is concerned; in the second, there is no writing, note or memorandum by which the contract maybe proved; while in the third, consent is absolutely vitiated by the legal incapacity of both of the contracting parties. From these differences, consequences which are also essentially different from each other arise. Idem; Characteristics. — Although they are essentially different from each other, yet all unenforceable contracts possess the following characteristics: (1)

They cannot be enforced by a proper action in court;4

(2)

They are susceptible of ratification;5

(3)

They cannot be assailed by third persons.6

Idem; Distinguished from rescissible contracts. — An unenforceable contract may be distinguished from a rescissible contract in the following ways: (1) An unenforceable contract cannot be enforced by a proper action in court, while a rescissible contract can be enforced, unless it is rescinded. (2) The causes for the unenforceable character of the former are different from the causes for the rescissible character of the latter. (3) is not.

The former is susceptible of ratification, while the latter

(4) The former cannot be assailed by third persons, while the latter may be assailed by third persons who are prejudiced. Idem; Distinguished from voidable contracts. — An unenforceable contract may be distinguished from a voidable contract in the following ways: (1) An unenforceable contract cannot be enforced by a proper action in court, while a voidable contract can be enforced, unless it is annulled. Art. 1403, Civil Code. Arts. 1403, 1405, 1407, 1371, Civil Code. 6 Art. 1408, Civil Code. 4 5

559

Art. 1403

CONTRACTS

(2) The causes for the unenforceable character of the former are different from the causes for the voidable character of the latter. Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (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; 560

UNENFORCEABLE CONTRACTS

Art. 1403

(f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract.7 Contracts Without or in Excess of Authority. — Contracts entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers are unenforceable. Under the old law, such contracts were classified as void contracts, although susceptible of ratification.8 According to Art. 1404, such contracts shall be governed by Art. 1317 and by the principles of agency in Title X of the Code. Consequently, the following principles are applicable: (1) No one may contract in the name of another without being authorized by the latter or unless he has a right to represent him. If he is duly authorized, he must act within the scope of his powers.9 (2) 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, is unenforceable.10 This principle is reiterated in the law on agency.11 (3) However, such contract may be ratified, expressly or impliedly, by the person in whose behalf it has been executed, before it is revoked by the other contracting party.12 It must be noted that under the old law (Spanish Civil Code), the terms “confirmation” and “ratification” were not interchangeable.

New provision. Tipton vs. Velasco, 6 Phil. 67; Gutierrez Hnos. vs. Orense, 28 Phil. 517; Tacalinar vs. Corro, 34 Phil. 898; Ibañez vs. Rodriguez, 47 Phil. 554; Zamboanga Trans. Co. vs. Bachrach Motor Co., 62 Phil. 244; Gana vs. Archbishop of Manila, 43 Off. Gaz. 3224. 9 Arts. 1317, 1881, Civil Code. 10 Arts. 1403, No. 1, 1317, Civil Code. 11 Art. 1898, Civil Code. “If the agent contracts in the name of the principal, exceeding the scope of his authority, and the principal does not ratify the contract, it shall be void if the party with whom the agent contracted is aware of the limits of the powers granted by the principal. In this case, however, the agent is liable if he undertook to secure the principal’s ratification.” It must be noted that this article says that the contract is void, whereas Art. 1403, No. 1, says that it is unenforceable. Now, which is which? The mistake is in Art. 1898. The correct term is “unenforceable.” 12 Art. 1317, Civil Code. 7 8

561

Art. 1403

CONTRACTS

Confirmation was a term used to designate the act by which a voidable contract was cured of its vice or defect, while ratification was used exclusively to designate the act by which a contract entered into by a person in behalf of another without or in excess of authority is cured of its defect. Under the present Code, the term ratification is now used to designate the act of validating any kind of defective contract. Under the old law, it was also customary to distinguish confirmation and ratification from recognition. Recognition or acknowledgment refers to an act whereby a defect of proof is cured, such as when an oral contract is put in writing, or when a private instrument is converted into a public instrument. Thus, according to the Supreme Court, in the case of Luna vs. Linatoc:13 “Confirmation tends to cure a vice of nullity, and ratification is for the purpose of giving authority to a person who previously acted in the name of another without authority. Recognition, on the other hand, is merely to cure a defect of proof. In recognition, there is no vice to be remedied such as fraud, violence or mistake, so that the case is distinguished from confirmation. In recognition, the person acting on behalf of another is duly authorized to do so, so the situation is different from ratification.’’

Contracts Infringing Statute of Frauds. — The second class of unenforceable contracts are those which do not comply with the Statute of Frauds. The Statute of Frauds, being essentially a rule of substantive law, is now found in No. 2 of the Art. 1403 of the Civil Code, thus superseding the statute as enunciated in Sec. 21 of Rule 123 of the old Rules of Court. Idem; Purpose of Statute. — The Statute of Frauds was enacted for the purpose of preventing frauds. Hence, it should not be made the instrument to further them.14 Idem; Form required by Statute. — Under the Statute of Frauds, the only formality required is that the contract or agreement must be in writing and subscribed by the party charged or by his

74 Phil. 15. Phil. National Bank vs. Phil. Vegetable Oil Co., 49 Phil. 857; Shoemaker vs. La Tondeña, 68 Phil. 24. 13 14

562

UNENFORCEABLE CONTRACTS

Art. 1403

agent.15 However, it has been held that a telegram advising a person to whom a verbal promise for the sale of land had been previously made to come at once in order to complete the purchase, but which telegram neither describes the property nor states the purchase price, and which is not signed by any person having authority to bind the seller, is not a sufficient memorandum of sale to satisfy the requirement of the statute.16 Idem; Effect of noncompliance with Statute. — In case of noncompliance with the Statute of Frauds, the contract or agreement is unenforceable by action. This is clear from the statute itself which states that evidence of the agreement cannot be received without the writing, or a secondary evidence of its contents. What is, therefore, affected by the defect of the contract or agreement is not its validity, but its enforceability. The Statute of Frauds simply provides the method by which the contracts enumerated therein may be proved. It does not declare that said contracts are invalid because they are not reduced to writing. A contract exists and is valid even though it is not clothed with the necessary form. Consequently, the effect of non-compliance with the requirement of the statute is simply that no action can be enforced unless the requirement is complied with.17 It is, therefore, clear that the form required is for evidential purposes only. Hence, if the parties permit a contract to be proved, without any objection, it is then just as binding as if the statute has been complied with.18 Idem; Contracts Covered by Statute. — There are six classes of contracts which are covered by the Statute of Frauds. They are: (1) An agreement that by its terms is not to be performed within a year from the making thereof. It is well-settled that this refers only to agreements which by their terms are not to be performed on either side within a year from the execution thereof. Hence, those which are to be fully performed on one side within a year are taken out of the operation of the statute.19 Thus, when in an

Jimenez vs. Rabot, 38 Phil. 378. Basa vs. Raquel, 45 Phil. 655. 17 Gallemit vs. Tabilaran, 20 Phil. 241. 18 Domalagan vs. Bolifer, 33 Phil. 471. 19 Phil. National Bank vs. Phil. Vegetable Oil Co., 49 Phil. 857. 15 16

563

Art. 1403

CONTRACTS

oral contract, which by its terms is not to be performed within one year from the execution thereof, one of the contracting parties has already complied within the year with the obligations imposed upon him by said contract, the other party cannot avoid the fulfillment of those incumbent upon him under the same contract by invoking the Statute of Frauds, because such statute aims to prevent and not to protect fraud.20 (2) A special promise to answer for the debt, default or miscarriage of another. It is well-settled that a promise in order to fall under the statute must be collateral, not independent or original. Thus, in the case of Reiss vs. Memije,21 the Supreme Court held: “The true test as to whether a promise is within the statute has been said to lie in the answer to the question whether the promise is an original or a collateral one. If the promise is an original or an independent one, that is, if the promisor becomes thereby primarily liable for the payment of the debt, the promise is not within the statute. But, on the other hand, if the promise is collateral to the agreement of another and the promisor becomes thereby merely a surety, the promise must be in writing. Just what is the character of a promise as original or collateral is a question of law and fact which must in each case be determined from the evidence as to the language used in making the promise, and the circumstances under which the promise was made; and since as a general rule the parties making a promise of this nature rarely understand the legal and technical difference between an original and collateral promise, the precise form of words used, even when established by undisputed testimony, is not always conclusive. So that it is said that ‘While, as a matter of law, a promise, absolute in form, to pay or to be responsible or to be the paymaster is an original promise, and while on the other hand, if the promisor says, ‘I will see you paid,’ or ‘I will pay if he does not,’ or uses equivalent words, the promise standing alone is collateral, yet under all the circumstances of the case, an absolute promise to pay, or a promise to be responsible, may be found to be collateral, or promises deemed prima facie collateral may be adjudged original.’’

20 21

Shoemaker vs. La Tondeña, 68 Phil. 24. 15 Phil. 350.

564

UNENFORCEABLE CONTRACTS

Art. 1403

(3) An agreement made in consideration of marriage, other than a mutual promise to marry.22 Thus, marriage settlements and donations by reason of marriage, according to the Code, shall be regulated by the Statute of Frauds.23 (4) An agreement for the sale of goods, chattels or things in action, at a price not less than Five hundred pesos.24 (5) An agreement for the leasing of real property for a longer period than one year, or for the sale of real property or an interest therein.25 Thus, in the case of Syquia vs. CA (151 SCRA 507), the Supreme Court ruled that an alleged oral assurance or promise of the representatives of the lessor that the lessee should be given priority or a renewal of the lease cannot be enforceable. This is because under Article 1403, No. 2(e), of the New Civil Code, an agreement for the leasing for a longer period than one year is 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. In the subsequent case of Zaide vs. CA (163 SCRA 705), the SC reiterated the principle enunciated in Syquia case and further ruled that the writing be in the form of a public document, thus it held: “If the agreement concerns “the sale of land or of an interest therein,’’ the law requires not only that “the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged,’’ in order that it may be enforceable by action (Article 1403 [2]), but also that the writing be in the form of a “public document’’ (Article 1358). The law finally provides that, “if the law requires a document or other special form,’’ as in the acts and contracts enumerated in Article 1358, the contracting parties may compel each other to observe that form, once the contract has been perfected and such right may be exercised simultaneously with the action upon the contract (Article 1357).

22 For illustrative cases, see Atienza vs. Castillo, 72 Phil. 589; Cabague vs. Auxilio, 48 Off. Gaz. 4823. 23 Arts. 122, 127, Civil Code. 24 For illustrative case, see Robles vs. Lizarraga Hnos, 50 Phil. 387. 25 For illustrative cases, see Gorospe vs. Ilayat, 29 Phil. 21; Fernandez vs. Bayan, 62 Phil. 909; Pascual vs. Realty Investment, Inc., 91 Phil. 257; Valino vs. Medina, CA, 49 Off. Gaz. 592.

565

Art. 1403

CONTRACTS

Western Mindanao Co. vs. Medalle 79 SCRA 703 Appeal from the order of the Court of First Instance of Zamboanga City dismissing the complaint upon the ground that the claim on which it is founded is unenforceable under the Statute of Frauds and special law. The complaint, filed on December 16, 1960, alleges that: “2. — The Plaintiff is engaged in logging operations in Curuan, Zamboanga City and in connection with the said logging operation it obtained on September 8, 1955 a right-of-way through the said Lot 2136 of the Cadastral Survey of Zamboanga from Mr. Luciano Hernandez, then the registered owner, a copy of the agreement being enclosed as Annex ‘A’; “3. — The former owners of the logging concession operated by the Plaintiff constructed and maintained the said road through Lot 2136, but the Plaintiff improved the said road, paying to the registered owner for all the improvements damaged by the improvement of the road; “4. — Long before the execution of the right-of-way agreement on September 8, 1955, since then and up to the present time the said road has been maintained and used not only by the predecessor of the Plaintiff and the Plaintiff, but also by the public; “5. — The said Lot 2136 was purchased by the defendants in 1958 and the said road then existed and was in public use and the defendants did not oppose but instead allowed the continued use and maintenance of the road by the Plaintiff and the public; “6. — The said road is indispensable to the business operations of the Plaintiff, because it is the only access from their concession to the highway; “7. — That defendants have now sent to the Plaintiff a notice (Annex ‘B’) of their intention to close the road; and “8. — The Plaintiff has the right to the continued use of said road, the closing of which will cause injustice and irreparable damages to the Plaintiff and the Plaintiff is willing to post a bond for the issuance of a writ of preliminary injunction to stop the defendants from closing the road.”

566

UNENFORCEABLE CONTRACTS

xxx

xxx

Art. 1403

xxx

Wherefore, the plaintiff prayed that a writ of preliminary injunction be issued restraining the defendants from closing the said road, and after hearing, make the injunction permanent. It also prayed that the defendants be directed to recognize and respect the said road right-of-way agreement. Copies of the road right-of-way agreement and the letter of the defendants advising the plaintiff of the closure of the road were attached thereto. Upon the filing of a bond in the amount of P1,000.00, a writ of preliminary injunction was issued, restraining the defendants from closing the road. Instead of a responsive pleading, the defendant filed a motion to dismiss the complaint on January 4, 1961, upon the ground that the claim on which the action or suit is founded is unenforceable under the provisions of the Statute of Frauds and special law, in that the first page of the said road rightof-way agreement was not signed by both parties and their instrumental witnesses; page two thereof is not dated, and the signature of the plaintiff’s corporate agent does not appear; and that said agreement is not acknowledged before a person authorized to administer oaths. The plaintiff opposed the motion, stating that the agreement between plaintiff and Luciano Hernandez is not one of those agreements specified in the Statute of Frauds. Nevertheless, the trial court granted the motion to dismiss on January 17, 1961 and dismissed the cases. The plaintiff filed a motion for reconsideration of the said order, insisting that the road right-of-way agreement is not covered by the Statute of Frauds. Then, on March 4, 1961, the plaintiff filed an Amended Complaint, accompanied by a motion for its admission. The plaintiff therein prayed, among others, that the Defendants be ordered to keep the road open and to respect the right-of-way agreement and “should it be ascertained that under the law the plaintiff is bound to pay compensation for the right-of-way to the defendants, it is prayed that the reasonable amount of such compensation be fixed. After hearing the parties, the trial court issued an order on September 6, 1961, denying the motion for reconsideration. Whereupon, the plaintiff perfected an appeal to the Court of Appeals. The appellate court, finding that only questions of law are raised, elevated the appeal to this Court.

567

Art. 1403

CONTRACTS

The Supreme Court, speaking through Justice H. Concepcion, held: The appeal is meritorious. The Statute of Frauds refers to specific kinds of transactions and cannot apply to any that is not enumerated therein. The transactions or agreements covered by said statute are the following: “(a) An agreement that by its terms is not to be performed within a year from the making thereof; “(b) A special promise to answer for the debt, default, or miscarriage of another; “(c) An agreement made in consideration of marriage, other than a mutual promise to marry; “(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of purchasers and person on whose account the sale is made, it is sufficient memorandum; “(e) An agreement for the leasing for a longer period than one year, for the sale of real property or of an interest therein; “(f) person.’’

A representation as to the credit of a third

Obviously, an agreement creating an easement of right-ofway is not one of those contracts covered by the statute of frauds since it is not a sale of real property or of an interest therein. The trial court, therefore erred in dismissing the case upon the defendants’ claim that the road right-of-way agreement in question is unenforceable under the Statute of Frauds. Besides, the complaint, as amended, may be viewed not only as a claim for the recognition of the existence of an easement of right-of-way on defendants’ estate, but also a demand for the establishment of an easement of right-of-way, if none exists, pursuant to Art. 649 of the Civil Code, in view of the plaintiff’s offer to pay reasonable compensation for the use of the land. WHEREFORE, the judgment appealed from is hereby reversed and the orders of January 17, 1961 and September 6, 1961 set aside. Costs against the defendant-appellees. SO ORDERED.

568

UNENFORCEABLE CONTRACTS

(6)

Art. 1403

A representation as to the credit of a third person.

Problem — “A” and “B” entered into a verbal contract whereby “A” agreed to sell to “B” his only parcel of land for P20,000.00 and “B” agreed to buy at the aforementioned price. “B” went to the bank, withdrew the necessary amount, and returned to “A” for the consummation of the contract. “A,” however, had changed his mind and refused to go through with the sale. Is the agreement valid? Will an action by “B’’ against “A” for specific performance prosper? Reason. (1982 Bar problem) Answer — It must be observed that there are two questions which are asked. They are: (1) Is the agreement valid? The answer is yes. It is a time honored rule that even a verbal agreement to sell land is valid so long as there is already an agreement with respect to the object and the purchase price. (2) Will an action by “B” against “A” for specific performance prosper? The answer is no, unless it is ratified. The reason is obvious. The agreement, being an agreement of sale of real property, is covered by the Statute of Frauds. It cannot, therefore, be enforced by a court action because it is not evidenced by any note or memorandum or writing properly subscribed by the party charged. (Note: The above answer is based on No. 2 of Art. 1403 of the Civil Code and on decided cases.)

Idem; Effect of Performance of Contract. — The rule is well established that the Statute of Frauds is applicable only to those contracts which are executory and not to those which have been consummated either totally or partially.26 The basis of this rule is, of course, the fact that in such case there is already a ratification of the contract within the meaning of Art. 1405 of the Civil Code. There is acceptance of benefits.

26 Arroyo vs. Azur, 76 Phil. 493. To the same effect: Almirol vs. Monserrat, 48 Phil. 67; Asturias Sugar Central, Inc. vs. Montinola, 69 Phil. 725; Diana vs. Macalibo, 74 Phil. 70; Facturan vs. Sabanal, 46 Off. Gaz. 310; Carbonnel vs. Poncio, 103 Phil. 655.

569

Art. 1403

CONTRACTS

Carbonnel vs. Poncio, et al. 103 Phil. 655 The records show that plaintiff purchased from defendant Poncio a parcel of land; that she paid part of the agreed price with the understanding that she will pay the balance upon the execution of the deed of conveyance; that defendant refused to execute the deed in spite of repeated demands; and that defendant sold the land to his co-defendants who knew of the first sale. Defendants, however, contend that plaintiff’s claim is unenforceable under the Statute of Frauds. Held: “It is well settled in this jurisdiction that the Statute of Frauds is applicable only to executory contracts (Facturan vs. Sabanal, 81 Phil. 512), not to contracts that are totally or partially performed. (Almirol, et al. vs. Monserrat, 48 Phil. 67, 70; Robles vs. Lizarraga Hermanos, 50 Phil. 387; Diana vs. Macalibo, 74 Phil. 70) The reason is simple. In executory contracts there is a wide field for fraud because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to prevent fraud. (Moran, Comments on the Rules of Court, Vol. III, 1957 ed., p. 178) However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already derived by him from the transaction in litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby. So that when the party concerned has pleaded partial performance, such party is entitled to a reasonable chance to establish by parol evidence the truth of his allegation, as well as the contract itself.”

Idem; Ratification. — Contracts infringing the Statute of Frauds are susceptible of ratification. According to Art. 1405 of the Civil Code, such contracts may be ratified either (1) by the failure to object to the presentation of oral evidence to prove the same, or (2) by the acceptance of benefits under them. Problem — Can an oral sale of land be judicially enforced as between the contracting parties, if the land has not been delivered but the buyer has paid ten percent (10%) of the purchase price? (1974 Bar problem) Answer — Yes, an oral sale of land where the land has not been delivered but the buyer has paid ten percent (10%) of the purchase price may be judicially enforced. Well-settled is the rule that the Statute of Frauds by virtue of which oral contracts

570

UNENFORCEABLE CONTRACTS

Art. 1403

are unenforceable by court action is applicable only to those contracts which are executory and not to those which have been consummated either totally or partially. The reason is obvious. In effect, there is already a ratification of the contract because of acceptance of benefits. As a matter of fact, this reason is now embodied in the New Civil Code. According to Art. 1405 of said Code, contracts infringing the Statute of Frauds 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. Problem — “O” verbally leased his house and lot to “L’’ for two years at a monthly rental of P250.00 a month. After the first year, “O” demanded a rental of P500.00 claiming that due to the energy crisis, with the sudden increase in the price of oil, which no one expected, there was also a general increase in prices. “O” proved an inflation rate of 100%. When “L’’ refused to vacate the house, “O” brought an action for ejectment. “O” denied that they had agreed to a lease for two years. Question No. 1 — Can the lessee testify on a verbal contract of lease? Reason. (1981 Bar problem) Answer — Yes, the lessee “L” may testify on the verbal contract of lease. Well-settled is the rule that the Statute of Frauds by virtue of which oral contracts (such as the contract in the instant case) are unenforceable by court action is applicable only to those contracts which have not been consummated, either totally or partially. The reason for this is obvious. In effect, there is already a ratification of the contract by acceptance of benefits. Here “L’’ has been paying to “O” a monthly rental of P250.00 for one year. The case is, therefore, withdrawn from the coverage of the Statute of Frauds. (Note: The above answer is based on Arts. 1403, No. 2 and 1405 of the Civil Code, and on decided cases.) Question No. 2 — Assuming that “O” admits the two-year contract, is he justified in increasing the rental? Why? (1981 Bar problem) Answer — Yes, “O’’ is justified in increasing the monthly rental. Since it is admitted that the contract of lease is for a definite term or period of two years, it is crystal clear that the case is withdrawn from the coverage of the new rental law. Now during the hearing of the case, “O” was able to prove an inflation rate of 100%. Therefore, an increase is justified. (Note: The above answer is based on Batas Pambansa Blg. 25.)

571

Arts. 1404-1407

CONTRACTS

Contracts Where Both Parties Are Incapacitated. — Contracts where both parties are legally incapacitated are also unenforceable.27 If only one of the parties is incapacitated, the contract is voidable.28 As in the case of those entered into in the name of another by one without or in excess of authority, contracts where both parties are legally incapacitated may be ratified either expressly or impliedly. Such ratification may be effected by the parents or guardians of the contracting parties. Although the Code does not say so, there is no reason why it cannot also be effected by the parties themselves upon attaining or regaining capacity. We must, however, distinguish between the effect of ratification by the parent or guardian of one of the contracting parties or by the latter himself upon attaining capacity and the effect of ratification by the parents or guardians of both parties or by both of such themselves upon attaining capacity. In the first, the contract becomes voidable; hence, the rules on voidable contracts shall govern. In the second, the contract shall be validated from its inception.29 Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book.30 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.31 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 1357.32 Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parArt. 1403, No. 3, Civil Code. Art. 1390, No. 1, Civil Code. 29 Art. 1407, Civil Code. 30 New provision. 31 New provision. 32 New provision. 27 28

572

UNENFORCEABLE CONTRACTS

Art. 1408

ent, or guardian, as the case may be, of one of the contracting parties shall give 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.33 Art. 1408. Unenforceable contracts cannot be assailed by third persons.34

33 34

New provision. New provision.

573

CONTRACTS

CHAPTER 9 VOID OR INEXISTENT CONTRACTS Void and Inexistent Contracts in General. — In general, a void or inexistent contract may be defined as one which lacks absolutely either in fact or in law one or some of the elements which are essential for its validity.1 Thus, if there is absolutely no consent, object or cause, or if the formalities which are essential for validity are not complied with, or even if there is a cause and an object, if such cause or object is contrary to law, morals, good customs, public order or public policy, or if the contract is expressly prohibited or declared by law to be void, the contract is void or inexistent. Although used interchangeably, strictly speaking, void and inexistent contracts are different from each other. Contracts which are void refer to those where all of the requisites of a contract are present, but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, or contract itself is prohibited or declared void by law. On the other hand, contracts which are inexistent refer to those where one or some or all of those requisites which are essential for the validity of a contract are absolutely lacking, such as those which are absolutely simulated or fictitious, or those where the cause or object did not exist at the time of the transaction. This distinction between void and inexistent contracts, which has already been expressly recognized by the Supreme Court,2 is important especially in connection with the application of the in pari delicto principle as enunciated in Arts. 1411 and 1412 of the Code. This is so because if the contract is inexistent, it is open to attack even by the parties thereto, but if the contract is

8 Manresa, 5th Ed., Bk. 2, p. 608. Liguez vs. Court of Appeals, 102 Phil. 577; Motion for Reconsideration, Feb. 13, 1958. 1 2

574

VOID OR INEXISTENT CONTRACTS

not inexistent but merely void or illegal, specific articles of the Civil Code command that neither party thereto may be heard to invoke its unlawful character as a ground for relief.3 Consequently, the two may be distinguished from each other as follows: (1) In a void contract, all of the requisites of a contract are present, but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, or the contract itself is prohibited or declared by law to be void; in an inexistent contract, one or some or all of those requisites which are essential for validity are absolutely lacking. (2) The principle of pari delicto is applicable in the first, but not in the second. Consequently, the first may produce legal effects, but the second cannot produce any effect whatsoever. Idem; Distinguished from Rescissible Contracts. — A void or inexistent contract may be distinguished from a rescissible contract in the following ways: (1) A void or inexistent contract produces as a rule no effect even if it is not set aside by a direct action, while a rescissible contract is valid, unless it is rescinded.4 (2) The defect of the former consists in absolute lack in fact or in law of one or some of the essential elements of a contract, while the defect of the latter consists in lesion or damage to one of the contracting parties or to third persons.5 (3) In the former, the nullity or inexistence of the contract is based on the law, whi1e in the latter the rescissible character is based on equity. Hence, absolute nullity is not only a remedy but a sanction, while rescission is a mere remedy. Public interest, therefore, predominates in the first, while private interest predominates in the second.6 (4) The action for the declaration of the nullity or inexistence of a contract is imprescriptible, while the action for the rescission of a contract is prescriptible.7 Ibid. Art. 1380, 1409, Civil Code. 5 Ibid. 6 8 Manresa, 5th Ed., Bk. 2, pp. 544-545. 7 Arts. 1389, 1410, Civil Code. 3 4

575

CONTRACTS

(5) The nullity or inexistence of a contract cannot as a rule be assailed by third persons, while the rescissible character of a contract may be assailed by third persons.8 Idem; Distinguished from Voidable Contracts. — A void or inexistent contract may be distinguished from a voidable contract in the following ways: (1) A void or inexistent contract produces as a rule no effect even if it is not set aside by a direct action, while a voidable contract is binding, unless it is annulled.9 (2) The causes for the inexistence or absolute nullity of the former are different from the causes for the annulability or relative nullity of the latter.10 (3) The former is not susceptible of ratification, while the latter is susceptible of ratification.11 (4) The action for the declaration of the nullity or inexistence of a contract is imprescriptible, while the action for the annulment of a contract is prescriptible.12 (5) The defense of inexistence or absolute nullity is available to third persons whose interests are directly affected, while the defense of annulability is not available to third persons.13 Idem; Distinguished from Unenforceable Contracts. — A void or inexistent contract may be distinguished from an unenforceable contract in the following ways: (1) In a void or inexistent contract, there is in reality no contract at all, while in an unenforceable contract, there is actually a contract which cannot be enforced by a court action, unless it is ratified.14 (2) The causes for the inexistence or absolute nullity of the former are different from the causes for the unenforceability of the latter.15 Arts. 1381, 1382, 1409, Civil Code. Arts. 1390, 1409, Civil Code. 10 Ibid. 11 Ibid. 12 Arts. 1391, 1410, Civil Code. 13 Arts. 1397, 1421, Civil Code. 14 Arts. 1403, 1409, Civil Code. 15 Ibid. 8 9

576

VOID OR INEXISTENT CONTRACTS

Art. 1409

(3) The former is not susceptible of ratification, while the latter is susceptible of ratification.16 (4) The former can be assailed by third persons whose interests are directly affected, while the latter cannot be assailed by third persons.17 Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2)

Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction; (4) men; (5)

Those whose object is outside the commerce of Those which contemplate an impossible service;

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

Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.18 Contracts Which Are Void or Inexistent. — The seven classes of void or inexistent contracts enumerated in Art. 1409 have already been discussed in previous chapters of this text.19 It is, therefore unnecessary to discuss them all over again in this chapter. It must be observed, however, that Nos. 1, 4, 5, 6 and 7 refer to contracts which are void, while Nos. 2 and 3 refer to contracts which are inexistent. Arts. 1404, 1405, 1407, 1409, Civil Code. Arts. 1408, 1421, Civil Code. 18 New provision. 19 For comments, cases and related provisions on No. 1, see those under Arts. 1306, 1346, 1347, 1352; on No. 2, see those under Arts. 1345, 1346, on No. 3, see those under Arts. 1347, 1352; on No. 4, see those under Art. 1347; on No. 5, see those under Art. 1348; on No. 6, see those under Art. 1378. 16 17

577

Art. 1409

CONTRACTS

Besides those enumerated in the article, we can include those which are the direct results of previous illegal contracts,20 those where there is no concurrence between the offer and the acceptance with regard to the object and the cause of the contract, and those which do not comply with the required form when such form is essential for validity.21 No. 7, however, is broad enough to include all other contracts which are not included in the enumeration. The first part is a reiteration of the principle declared in Art. 5 of the Code that acts which are executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. Examples of such acts are those regulated by Arts. 133, 1490, 1491, 1689, 1782, 1799, 2035, 2088 and 2130 of the Code. Problem — (a) Cite an example of a contract which is contrary to morals. (b) Can the nullity of the stipulation on the usurious interest affect (i)

the lender’s rights to recover the principal loan;

(ii)

the terms of the real estate mortgage?

Answer — (a) Stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. Under Art. 1409 of the New Civil Code, these contracts are inexistent and void from the very beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. (b) The nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to recover the principal loan. Nor would it affect the terms of the real estate mortgage (REM). The right to foreclose the mortgage remains with the creditors and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed.

20 21

Art. 1422, Civil Code. 3 Castan, 7th Ed., p. 409.

578

VOID OR INEXISTENT CONTRACTS

Art. 1409

But in a situation where the total amount of indebtedness during the foreclosure proceedings is pegged in an amount which included interest which is excessive, iniquitous and exorbitant, the foreclosure proceedings cannot be given effect and will be considered invalid.. If the foreclosure proceedings were considered valid, this would result in an inequitable situation wherein the borrowers will have their land foreclosed for failure to pay an over-inflated loan only a small part of which they were obligated to pay. (Heirs of Zoilo Espiritu and Primitiva Espiritu vs. Sps. Maximo Landrito and Paz Landrito, etc., G.R.No. 169617, April 3, 2007).

Idem; Characteristics. — In Tongoy vs. Court of Appeals, 123 SCRA 99 (1983), the Court said that the following are the most fundamental characteristics of void or inexistent contracts: (1) As a general rule, they produce no legal effects whatsoever in accordance with the principle “quod nullum est nullum producit effectum.’’22 (2)

They are not susceptible of ratification.23

(3) The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced.24 (4) The action or defense for the declaration of their inexistence or absolute nullity is imprescriptible.25 (5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests are not directly affected.26 Idem; Effects. — As far as inexistent contracts are concerned, it is clear that such contracts can produce no legal effect whatsoever in accordance with the principle “quod nullum est nullum producit effectum.’’27 However, in the case of void contracts where the nullity proceeds from the illegality of the cause or object, a certain qualification must be made. Under Arts. 1411 and 1412 of the Civil Code, nullity of contracts due to illegal cause or object, when executed Ibid., p. 410. Art. 1409, Civil Code. 24 Ibid. 25 Art. 1410, Civil Code. 26 Art. 1421, Civil Code; 3 Castan, 7th Ed., p. 410. 27 3 Castan, 7th Ed., p. 409. 22 23

579

Art. 1409

CONTRACTS

(and not merely executory), will produce the effect of barring any action by a guilty to recover what he has already given under the contract. The above principle is very well illustrated in the case of Liguez vs. Court of Appeals.28 Here, the deceased, Salvador Lopez, a married man of mature years, donated a parcel of land belonging to the conjugal partnership to Conchita Liguez, a minor of sixteen, subject to the condition that the latter shall become his mistress. The donation was duly accepted. After the perfection of the donation, Conchita became the mistress of Lopez. When Lopez died, his widow and heirs took possession of the land. Subsequently, Conchita commenced an action for the recovery of the property. The widow and heirs of the deceased now maintain that since the cause of the contract is illegal or immoral, consequently, it is inexistent, and therefore, can produce no effect whatsoever; hence, they are entitled to the property donated. Plaintiff, on the other hand, contends that what is illegal is the motive of the donor and not the cause, since the contract in this case is one of pure beneficence. Hence, the principal questions to be resolved are: (1) What is the character of the contract — valid, void or inexistent? (2) Assuming that the contract is either void or inexistent, what are its effects, if any? The decision of the Supreme Court may be summarized as follows: (1) According to the plaintiff, the contract is valid because the condition that she will become the mistress of the donor is merely the motive of a party to the contract and not the causa. In other words, according to her, the contract here is a contract of pure beneficence; hence, the causa is the liberality of the benefactor,29 and certainly, under the law, liberality per se can never be illegal. This contention is untenable. The contract is onerous in character. Here the facts clearly demonstrate that in making the donation, the donor was not moved exclusively by the desire to benefit the donee, but also to gratify his sexual impulse. While it is true that we must not confuse the causa of a contract with the motives of the contracting parties,30 there is an exception. The motive may be regarded as causa when it pre-determines the purpose of the contract. In other words, we must except from the rule those contracts that are conditioned upon 102 Phil. 577. Art. 1350, Civil Code. 30 Art. 1351, Civil Code. 28 29

580

VOID OR INEXISTENT CONTRACTS

Art. 1409

the attainment of the motives of either party. In the present case, it is scarcely disputable that the donor would not have conveyed the property in question had the donee refused to accept the condition that she will cohabit with him. Hence, the cohabitation was an implied condition of the donation, and being unlawful, necessarily tainted the donation. Because of the illegality of the causa, according to the defendants, the contract is inexistent. Again this contention is untenable. The contract here is void, not inexistent. A void contract is different from an inexistent contract. The first refers to those contracts where all of the requisites of a contract are present, but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, or the contract itself is prohibited or declared by law to be void, while the second refers to those contracts where one or some of those requisites which are essential for validity are absolutely lacking. (2) Since the contract is void by reason of the illegality of the cause, the provisions of Art. 1412 of the Civil Code are, therefore, applicable. It must be noted, however, that the principle of in pari delicto is not applicable here. Plaintiff was only a minor of 16 at the time of the donation, while the donor was a married man of mature years and experience. It is well known that minors occupy a privileged position under our law. As a matter of fact, the law’s tender care for them is now emphasized in Art. 1415 of the Civil Code. Consequently, the two parties are not in pari delicto. At any rate, even if they were in pari delicto the same rules would still apply. Under Arts. 1411 and 1412 of the Code, nullity of contracts due to illegal cause or object, when executed (and not merely executory) will produce the effect of barring any action by a guilty party to recover what he has already given under the contract. These articles make it plain that, as far as the guilty party is concerned, his act of conveying property pursuant to an illicit contract operates to divest him of the ownership of the property, and to bar him from recovering it from his transferee, just as if the transfer were through a bargain legal from its inception. Although repugnant, “the law deems it more repugnant that a party should invoke his own guilt as a reason for relief from a situation which he has deliberately entered. This serves to explain why the tainted conveyance to the extent that it has been carried out becomes conclusive as between the guilty parties, even if without effect against strangers without notice; and 581

Art. 1409

CONTRACTS

why a guilty party may not ask the courts for a restoration to the status quo ante.” The same reasons can also be applied to the case of the successors or heirs of the guilty party. They cannot attack the validity of the donation in their quality as successors or heirs of the donor, since it is undeniable that they cannot be placed in a better position than their predecessor. It must be observed, however, that the property donated is conjugal. Does that mean that the donation made by Lopez to the plaintiff shall not be given any effect with respect to the share of the widow? The answer is simple. Since the donation was made under the old law, the Civil Code of 1889 shall apply. The second paragraph of Art. 1419 of the old Code considers the donation as merely fraudulent, subject to collation upon liquidation of the conjugal partnership and deduction of its value from the donor’s share in the conjugal profits.31 Therefore, the plaintiff is entitled to so much of the donated property as may be found upon proper liquidation not to prejudice the share of the widow or the legitimes of the compulsory heirs. But suppose that the above donation had been made after the effectivity of the New Civil Code, would the same rules stated in the decision still apply? It is submitted that as far as the donor is concerned, the same rules with respect to the illegality of the donation and its consequences would still apply. The contract would still be void because of the illegality of the causa or consideration for the reasons stated in Liguez. It would also be void under Art. 174 of the New Civil Code (a provision not found in the Spanish Civil Code) which declares that “with the exception of moderate donations for charity, neither husband nor wife can donate any property of the conjugal partnership without the consent of the other.’’ Consequently, as far as the donor is concerned, Art. 1412 of the Civil Code would be applicable. However, as far as the wife of the donor is concerned the applicable rules would be different. Art. 173 of the New Civil Code states: “The wife may, during the marriage and within ten years

31

The law which is now applicable is found in Arts. 173 and 174 of the New Civil

Code.

582

VOID OR INEXISTENT CONTRACTS

Art. 1409

from the transaction questioned, ask the courts for the annulment of any contract of the husband entered into without her consent, when such consent is required, or any act or contract of the husband which tends to defraud her or impair her interest in the conjugal partnership property. Should the wife fail to exercise this right, she or her heirs, after the dissolution of the marriage, may demand the value of the property fraudulently alienated by the husband.” Does this provision, which was not found in the Spanish Civil Code, spell the remedy of the wife in Liguez? I do not think so; it only indicates it. It must be observed that the article presupposes either a voidable (or unenforceable) contract executed by the husband, and not a void contract. Therefore, the remedy of the wife is to bring an action for the declaration of absolute nullity of the contract of donation, a remedy which will have all of the effects of an action for reconveyance. The action would be imprescriptible because it would be based on a void contract. If she dies without bringing the action, her heirs in their capacity as heirs, would be able to institute the action. The principle of pari delicto in such a case cannot be applied because the wife or her heirs were not parties to the illegal contract. The case of Francisco J. Chavez vs. PCGG (May 19, 1999, 307 SCRA 394) states, among others that where the Agreements undeniably contain terms and conditions that are clearly contrary to the Constitution and the laws and are not subject to compromise, such terms and conditions cannot be granted by the PCGG to anyone. Being so, no argument of the contractors will make such illegal and unconstitutional stipulations pass the test of validity. The void agreement will not be rendered operative by the parties’ alleged performance (partial or full) of their respective prestations. A contract that violates the Constitution and the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all. A void contract cannot be ratified. — In the case of Guiang vs. Court of Appeals (June 26, 1998, 291 SCRA 372), the Supreme Court ruled that the trial court correctly held: “By the specific provision of the law (Art. 1390, Civil Code) therefore, the Deed of Transfer of Rights cannot be ratified, even by an ‘amicable settlement.’ The participation by some barangay authorities in the ‘amicable settlement’ cannot otherwise validate an invalid act. Moreover, it cannot be denied that the ‘amicable settlement’ entered into by plaintiff Gilda Corpuz and defendant spouses Guiang is a 583

Art. 1410

CONTRACTS

contract. It is a direct offshoot of the Deed of Transfer of Rights. By express provision of law, such a contract is also void. Thus, the legal provision, to wit: ‘Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.’ (Civil Code of the Philippines.) In summation therefore, both the Deed of Transfer of Rights and the ‘amicable settlement’ are null and void.’’ Doctrinally and clearly, a void contract cannot be ratified. In the same case, the Supreme Court also ruled that the sale of a conjugal property requires the consent of both the husband and the wife. The absence of the consent of one renders the sale null and void, while the vitiation thereof makes it merely voidable. Only in the latter case can ratification cure the defect. Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.32 Imprescriptibility of Action or Defense. — Because of the fact that the defect of void or inexistent contracts is of a more or less permanent character, mere lapse of time cannot give efficacy to such contracts. In other words, the defect is of such a nature that it cannot be cured by prescription.33 This principle of imprescriptibility is applicable not only to the action for the declaration of the inexistence or absolute nullity of the contract but also to the defense. Castillo vs. Galvan 85 SCRA 526 Appeal from the order of the Court of First Instance of Pangasinan dismissing the complaint filed in Civil Case No. D-1227 and the order denying the motion for the reconsideration of said order. The complaint, filed on August 1, 1961, is for the annulment of a document, denominated “DEED OF ABSOLUTE SALE,’’ executed on August 3, 1965, by and between Paulino Galvan, professedly the predecessor-in-interest of herein plaintiffs, and defendants Josefa Galvan and Natividad S. Galvan, and for damages and attorney’s fees. The plaintiffs therein alleged that Paulino Galvan, during his lifetime, was the registered owner New provision. Eugenio vs. Perdido, 97 Phil. 41. But how about the doctrine of stale demands (laches) — has not this doctrine eroded entirely the provision of Art. 1410? 32 33

584

VOID OR INEXISTENT CONTRACTS

Art. 1410

of an undivided one-half (1/2) interest over two parcels of land, known as Lot Nos. 4541 and 4542 of the Dagupan Cadastre and covered by OCT Nos. 3813 and 3917, respectively, of the Register of Deeds of Dagupan City. The other undivided half is owned by his two daughters by a first marriage, herein defendants Josefa Galvan and Natividad Galvan. On these lots, which are contiguous, is built the family home. On February 10, 1961, Paulino Galvan died and the plaintiffs, out of “delicadeza” waited for the defendants to initiate the move for the settlement of his estate. But, after waiting for some time and finding that none was forthcoming, the plaintiffs became apprehensive, so that they began to go over the papers concerning the properties of the decedent. In the office of the Register of Deeds of Dagupan City, they were surprised to find a deed of sale, signed by the late Paulino Galvan and the plaintiff, Maria Encarnacion Castillo, whereby they had purportedly sold for P500.00 the one-half undivided portion of Paulino Galvan over said lots in favor of the defendants. When apprised of the existence of a deed of sale, plaintiff Maria Encarnacion Castillo remembered that way back in 1953, she and her husband Paulino Galvan were made to sign a certain document by Josefa Galvan “upon the fraudulent misrepresentation that the said document was only for purpose of enabling them, the co-owners of the parcels of land in question, to have their separate tax declarations for the respective portions owned by them so that they can pay their respective real estate taxes separately, the said spouses not knowing that the said document is a deed of sale for which no consideration was even paid.’’ The plaintiffs further alleged that Paulino Galvan could not have intented to sell his share and participation over the lots in question during his lifetime as he had no other residential lot to live in and there is no necessity for him to sell the same as he and his wife had sufficient income to sustain them. Besides, the undivided half share of Paulino Galvan was worth around P22,500.00 so that he could not have sold it for only P500.00. Wherefore, they prayed that the deed of sale be declared null and void; that the plaintiffs be declared the owners of four-sixths (4/6) of the undivided half share pertaining to Paulino Galvan; that the defendants be ordered to pay the amount of P1,500.00 as attorney’s fees; and to pay the costs of suit. The defendants filed their answer with counterclaim on August 23, 1961 wherein they interposed negative and affirmative defenses. As their affirmative defense, the defendants claim that “they are the absolute and exclusive owners of whole parcels of land described in the complaint for having acquired the portions

585

Art. 1410

CONTRACTS

belonging to their late father Paulino Galvan through legal and valid conveyance and this fact is known to the plaintiffs long before the filing of the complaint.” Three years thereafter, or on August 24, 1964, but before the case was tried, the defendants filed an amended answer with the corresponding motion to admit it, which amended answer contained an allegation that “the action of plaintiffs is barred by the statute of limitations.” The plaintiffs filed objections to the defendants’ motion to amend their answer. Plaintiffs’ principal objection was their contention that the defendants had waived the right to plead the statute of limitations and were estopped from pleading it by reason of the fact that they had tried to do so after the filing of their answer to the complaint. The plaintiffs further contend that the inclusion of the defense of prescription substantially altered the defense. Over plaintiffs’ objections, the trial court permitted the defendants to amend their answer by adding the defense of statute of limitations. Then two more years later or on August 27, 1966, the defendants filed a motion to dismiss the complaint upon the ground that the action is barred by the statute of limitations for the reason that the present action for the annulment of the instrument of sale is based upon fraud which should be brought within four (4) years from the time of the discovery of the same in accordance with Article 1391 of the Civil Code; and fraud, as a ground for annulment, shall be deemed to be discovered from the date of the registration of the alleged fraudulent documents; and considering that the deed of sale in question was registered on August 4, 1955, while the action for its annulment was commenced only on August 1, 1961, or after the lapse of more than four (4) years from its registration with the Register of Deeds, the action for annulment had prescribed. The trial court sustained the defendants’ contention, and, consequently, dismissed the complaint without costs, on September 22, 1966. A motion for the reconsideration of this order having been denied on November 2, 1966, the plaintiffs interposed the present appeal. On the question of extinctive prescription, the Supreme Court, speaking through Justice H. Concepcion, ruled: The other issue raised is whether or not the trial court improperly dismissed the complaint on the ground

586

VOID OR INEXISTENT CONTRACTS

Art. 1410

of prescription. In its order dated September 22, 1966, dismissing the complaint, the trial court said: “The complaint, among others, prays for the annulment of document, which is a deed of sale dated August 3, 1955, purporting conveyance of the two parcels described in the complaint in favor of defendants Josefa Galvan and Natividad Galvan and Emilio Samson. Said document (Exh. 1 for defendants) was registered on August 4, 1955 (Exhs. 1-A and 1-B). It is the contention of the defendants that plaintiffs’ action has prescribed as the same was not presented within four years from the registration of the document. “The court sustains defendants’ contention. The basis of the annulment is alleged fraud, and the action for the annulment of the document should be brought within 4 (four) years from the discovery of fraud (Mauricio vs. Villanueva, L-11072, September 24, 1959), and that such discovery of fraud is deemed to have taken place when the instrument was filed and registered with the Register of Deeds and a new transfer certificate of title is issued in the name of the vendee for the registration of the deed constitutes constructive notice to the whole world (Diaz vs. Gorricho, L-11229, March 29, 1958; Ignacio Gerona, et al. vs. Carmen de Guzman, et al., L-19060, May 29, 1964). “In view of the foregoing, the court resolves to dismiss as it hereby dismisses, the complaint without costs.” The allegations of the complaint show, however, that the plaintiffs’ action is to declare void and inexistent the deed of sale executed by Paulino Galvan and Encarnacion Castillo on August 3, 1955 in favor of Josefa and Natividad Galvan, upon the grounds that: (a) there is fraud in securing the signatures of the vendors in said deed of sale; and (b) there was no consideration given at the time of the transaction. In other words, the plaintiffs are seeking a judicial declaration that the deed of sale in question is void ab initio, which action is impres-criptible. The trial court erred, therefore, in dismissing the complaint for the reasons stated. WHEREFORE, the judgment appealed from is reversed and the order of September 22, 1966, dismissing the complaint, is hereby set aside. Let this case be remanded to the court of origin for further proceedings. Without costs. SO ORDERED.

587

Art. 1410

CONTRACTS

The concurring opinion of Justice Aquino to the above decision is as follows: I concur. The trial court committed a grievous error in dismissing the complaint on the ground of prescription. It erroneously assumed that plaintiffs’ cause of action is for the annulment of a deed of sale on the ground of fraud. In reality, plaintiffs’ action is to declare void or inexistent the fictitious deed of sale of August 3, 1955 on the ground that its consideration did not exist at the time of the transaction. That action is imprescriptible (Arts. 1409[3] and 1410, Civil Code). Fraud was alleged in the complaint merely to show why the alleged vendor (the septuagenarian father of the vendees) signed the deed of sale. The plaintiffs categorically alleged in paragraph 9 of the complaint that no consideration was paid for the sale. They prayed that the sale “be declared null and void.” (pp. 4-6, Record on Appeal.) The thrust of the action is to secure a judicial declaration that the sale is void ab initio. A contract of sale is void and produces no effect whatsoever where the price, which appears thereon as paid, has in fact never been paid by the purchaser to the vendor (Arts. 1352 and 1353, Civil Code; Ocejo, Perez and Co. vs. Flores and Bas, 40 Phil. 921; Mapalo vs. Mapalo, L-21489, May 19, 1966, 17 SCRA 114, 122.) Such a sale is nonexistent and cannot be considered consummated. (Borromeo vs. Borromeo, 98 Phil. 432; Cruzado vs. Bustos and Escaler, 34 Phil. 17; Garanciang vs. Garanciang, L-22351, May 21, 1969, 28 SCRA 229.) Plaintiffs’ cause of action is supported by the following ultimate facts alleged in their complaint: Paulino Galvan married twice. By his first marriage, he begot two daughters, defendants Josefa Galvan and Natividad Galvan. His second wife was Encarnacion Castillo with whom he begot three children named Elisea, Patrocinio and Florangel. Paulino Galvan was the owner of a one-half pro-indiviso share in two parcels of land located at Burgos Street, Dagupan City with a total area of 1,115 square meters. The other one-half share is owned by Natividad Galvan and Josefa Galvan, his two daughters of the first marriage.

588

VOID OR INEXISTENT CONTRACTS

Art. 1410

Existing on those two lots is the conjugal house of the spouses Paulino Galvan and Encarnacion Castillo. The house is made of wood with galvanized iron roofing. On August 3,1955, when Paulino Galvan, who did not have much education, was already seventy-eight years old, his daughter, Josefa, asked him and his wife, Encarnacion, also old and not highly educated, to sign a document which, according to Josefa, was necessary in order to have separate tax declarations for their respective one-half portions of the two lots. The Galvan spouses signed the document. Paulino Galvan died on February 10, 1961 at the age of eighty-four years. He was survived by his second wife and his five above-named children. It was only after the death of Paulino Galvan that his widow and their three children discovered that the document, which Josefa had asked her father to sign, was a deed of sale, which is in English, a language not known to the Galvan spouses. Paulino Galvan could not have sold his one-half share in the two lots for a measly sum of P500, the price stated in the deed of sale, because in 1961 the two lots were worth P45,000, at forty pesos a square meter. Paulino Galvan’s one-half share was worth at least P22,500. The action to declare the sale void was filed on August 1, 1961 against Natividad Galvan and Josefa Galvan. They pleaded as a defense that the sale was valid. Later, they amended their answer by pleading prescription. The trial court dismissed the complaint on that ground. The trial court overlooked the fact that the fraudulent manner by which the signatures of the Galvan spouses in the deed were obtained strengthens plaintiffs’ theory that the sale is void or inexistent because it would appear that the said spouses did not consent at all to the sale. In the Mapalo case, supra, the spouses, Miguel Mapalo and Candida Quiba, illiterate farmers, decided to donate to Maximo Mapalo the brother of Miguel, the eastern half of their 1,635-square meter residential land located in Manaoag, Pangasinan. However, they were deceived into signing on October 15, 1936 a deed of absolute sale for the entire land in favor of Miguel Mapalo. Their signatures were procured by fraud. They were made to believe by Maximo and the notary public that the

589

Art. 1410

CONTRACTS

document was a deed of donation covering the eastern half of their land. Although the deed of sale stated a consideration of P500 (as in the instant case), the said spouses did not receive anything of value for the land. The spouses remained in possession of the western half of the land. On March 15, 1938 Maximo Mapalo registered the sale and obtained a Torrens title for the entire land. On October 20, 1951 Maximo sold the entire land to Evaristo, Petronila, Pacifico and Miguel, all surnamed Narciso. A transfer certificate of title was issued to the Narcisos’ for the whole land. They took possession of the eastern half of the land. On February 7, 1952 the Narcisos’ sued the Mapalo spouses. They prayed that they be declared the owners of the entire land. They sought to recover possession of its western portion. The Mapalo spouses filed a counterclaim, wherein they prayed that the western half of the land be conveyed to them. They alleged that their signatures to the deed of sale were obtained through fraud. They sued the Narcisos’ in 1957. They asked that the 1936 and 1951 deeds of sale be declared void as to the western portion. The Court of Appeals held that the sale was merely voidable on the ground of fraud; that the action for annulment should have been brought within four years from the registration of the sale, and that, as that period had already expired, the action had also prescribed. This Court, reversing the decision of the Court of Appeals, held that the 1936 sale was not merely voidable but was void or inexistent and that the “inexistence of a contract is permanent and incurable and cannot be the subject of prescription.’’ The holding of the trial court that the Mapalo spouses should be issued a Torrens title for the western half of the land was affirmed. The ruling in the Mapalo case is squarely applicable to this case. In the instant case, the plaintiffs, the widow and a child of the first marriage, as compulsory heirs of Paulino Galvan, the victim of the alleged fraud, have the right to sue to declare the sale void because they were deprived of their legitime in the estate of Paulino Galvan. (Art. 221[4], Civil Code; Reyes vs. Court of Appeals, 95 Phil. 952; Armentia vs. Patriarca, L-18210, December 29, 1966, 18 SCRA 1253, 1258-1260.)

590

VOID OR INEXISTENT CONTRACTS

Arts. 1411-1412

It is interesting to note that the above case became the basis of a problem asked in the Bar Examinations of 1979. The problem is as follows: “On the basis of a document entitled ‘Deed of Absolute Sale’ a certain lot and building then leased by its owner, PC, to JG with monthly rental of P1,000.00 was sold to, and thus registered in the latter’s name. Six years after the issuance of the title to JG, MC the sole heir of PC who had just died, brought an action for recovery of the property alleging in his complaint, among others, that PC then very old and with weak eyesight was tricked by JG into signing the Deed of Absolute Sale upon the fraudulent misrepresentation that said document was only a renewal of the lease contract over the property; that the price stated in the document is only P10,000.00 although the property was then worth about P50,000.00. JG moved to dismiss the action on the ground of prescription. Should the motion be granted?’’ Also, in the case of Paluwagan ng Bayan Savings Bank vs. King (172 SCRA 60), it was held that an action to declare the nullity of a void judgment 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.34 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

34

Art. 1410 in relation to Art. 1409(3) of the Civil Code.

591

Arts. 1411-1412

CONTRACTS

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.35 Principle of In Pari Delicto. — When the defect of a void contract consists in the illegality of the cause or object of the contract, and both of the parties are at fault or in pari delicto, the law refuses them every remedy and leaves them where they are. This rule which is embodied in Arts. 1411 and 1412 of the Code is what is commonly known as the principle of in pari delicto. Thus, where the contract involves a violation of our coast-wise trade law,36 or of our contraband laws, such as the importation of silver into this country,37 and both of the contracting parties are in pari delicto, it is evident that under Art. 1411 of the Code neither party would have any remedy against the other. The rule is expressed in the maxims: “Ex dolo malo non oritur actio’’ and “In pari delicto potior est conditio defendantis.’’ The law will not aid either party to an illegal agreement it leaves them where they are. Of course, this presupposes that the fault of one party is more or less equal or equivalent to the fault of the other party.38 Rodriguez vs. Rodriguez 20 SCRA 908 This is an appeal by Concepcion Felix Vda. de Rodriguez from the decision of the Court of First Instance of Bulacan in Civil Case No. 2565, which she commenced on May 28, 1962, to secure declaration of nullity of two contracts executed on January 24, 1934 and for the recovery of certain properties.

Art. 1306, Spanish Civil Code. Perez vs. Herranz, 7 Phil. 693. 37 Iribar vs. Millat, 5 Phil. 362. For cases illustrating Art. 1411, see Go Chioco vs. Martinez, 45 Phil. 256; Harden vs. Benguet Consolidated Mining Co., 58 Phil. 141. 38 Bough vs. Cantiveros, 40 Phil. 209. 35 36

592

VOID OR INEXISTENT CONTRACTS

Arts. 1411-1412

The facts of this case may be briefly stated as follows: Concepcion Felix, widow of the late Don Felipe Calderon, and with whom she had one living child, Concepcion Calderon, contracted a second marriage on June 20, 1929, with Domingo Rodriguez, a widower with four children by a previous marriage, named Geronimo, Esmeragdo, Jose and Mauricio, all surnamed Rodriguez. There was no issue in this second marriage. Prior to her marriage to Rodriguez, Concepcion Felix was the registered owner of 2 fishponds located in the barrio of Babañgad, municipality of Bulacan, Bulacan province, Nos. 605 and 807. Under the date of January 24, 1934, Concepcion Felix appeared to have executed a deed of sale conveying ownership of the aforesaid properties of her daughter, Concepcion Calderon, for the sum of P2,500.00, which the latter in turn appeared to have transferred to her mother and stepfather by means of a document dated January 27, 1934. Both deeds, notarized by Notary Public Jose D. Mendoza, were registered in the office of the Register of Deeds of Bulacan on January 29, 1934, as a consequence of which, the original titles were cancelled and TCT Nos. 13815 and 13816 were issued in the names of the spouses Domingo Rodriguez and Concepcion Felix. On March 6, 1953, Domingo Rodriguez died intestate, survived by the widow, Concepcion Felix, his children Geronimo, Esmeragdo, and Mauricio and grandchildren Oscar, Juan and Ana, surnamed Rodriguez, children of a son, Jose, who had predeceased him. On March 16, 1953, the above-named widow, children and grandchildren of the deceased entered into an extrajudicial settlement of his (Domingo’s) estate, consisting of one-half of the properties allegedly belonging to the conjugal partnership. Among the properties listed as conjugal were two parcels of land in Bulacan, Bulacan, which, together with another piece of property, were divided among the heirs in this manner: “WHEREAS, the parties have furthermore agreed that the fishpond covered by TCT Nos. 13815, 13816, and 24109 of the Office of the Register of Deeds of Bulacan, containing an area of 557,971 sq.m., which is likewise the conjugal property of the deceased and his surviving spouse; 1/2 of the same or 278,985.50 sq.m. belongs to said Concepcion Felix Vda. de Rodriguez, as her share in the conjugal property; and 3/4 of the remaining half

593

Arts. 1411-1412

CONTRACTS

or 209,239.125 sq.m. are transferred in full ownership to Geronimo Rodriguez. Esmeragdo Rodriguez and Mauricio Rodriguez, share and share alike, while the other 1/4 or 69,746.375 sq.m. of the said remaining half goes in equal shares to Oscar Rodriguez, Juan Rodriguez and Ana Rodriguez.” As a result of this partition, TCT Nos. 13815 and 13816 were cancelled and TCT Nos. T-11431 and T-14432 were issued in the names of the said heirs of the deceased. On March 23, 1953, in a power of attorney executed by the children and grandchildren of Domingo Rodriguez, Concepcion Felix Vda. de Rodriguez was named their attorney-in-fact, authorized to manage their shares in the fishponds (Exh. 4). On July 2, 1954, the heirs ended their co-ownership by executing a deed of partition, dividing and segregating their respective shares in the properties, pursuant to a consolidation and subdivision plan (PCS-3702), in accordance with which, Concepcion Felix Vda. de Rodriguez obtained TCT No. T-12910, for the portion pertaining to her (Exh. L), while TCT No. T-12911 was issued to the other heirs, for their shares. This latter title was subsequently replaced by TCT No. 16660 (Exh. M). On October 12, 1954, the Rodriguez children executed another document granting unto the widow lifetime usufruct over one-third of the fishpond which they received as hereditary share in the estate of Domingo Rodriguez, which grant was accepted by Concepcion Felix Vda. de Rodriguez. Then, in a contract dated December 15, 1961, the widow appeared to have leased from the Rodriguez children and grandchildren the fishpond (covered by TCT No. 16660) for a period of 5 years commencing August 16, 1962, for an annual rental of P7,161.37 (Exh. 5). At about this time, it seemed that the relationship between the widow and her stepchildren had turned for the worse. Thus, when she failed to deliver to them the balance of the earnings of the fishponds, in the amount of P3,000.00, her stepchildren endorsed the matter of their lawyer who, on May 16, 1962, sent a letter of demand to the widow for payment thereof. On May 28, 1962, Concepcion Felix Vda. de Rodriguez filed the present action in the Court of First Instance of Manila naming as defendants, Geronimo Rodriguez, Esmeragdo Rodriguez, Oscar Rodriguez, Concepcion Bautista Vda. de Rodriguez, as guardian of the minors Juan and Ana Rodriguez, and Antonio Diaz de

594

VOID OR INEXISTENT CONTRACTS

Arts. 1411-1412

Rivera and Renato Diaz de Rivera, as guardians of the minors Maria Ana, Mercedes, Margarita, Mauricio, Jr. and Domingo (children of Mauricio Rodriguez who had also died). The action to declare null and void the deeds of transfer of plaintiff’s properties to the conjugal partnership was based on the force and pressure on her; that the conveyances of the properties — from plaintiff to her daughter and then to the conjugal partnership of plaintiff and her husband — are both without consideration; that plaintiff participated in the extrajudicial settlement of estate (of the deceased Domingo Rodriguez) and in other subsequent deeds or instruments involving the properties in dispute, on the false assumption that the said properties had become conjugal by reason of the execution of the deeds of transfer in 1934, then laboring under the same false assumption, plaintiff delivered to defendants, as income of the properties from 1953 to 1961, the total amount of P56,976.58. As alternative cause of action, she contented that she would claim for her share, as surviving widow, of 1/5 of the properties in controversy, should such properties be adjudged as belonging to the conjugal partnership. Thus, plaintiff prayed that the deeds of transfer mentioned in the complaint be declared fictitious and simulated; that the “Extrajudicial Settlement of Estate’’ be also declared null and void; that TCT No. 16660 of the Registry of Deeds of Bulacan be cancelled and another one be issued in the name of plaintiff, Concepcion Felix Vda. de Rodriguez; that defendants be ordered to pay plaintiff the sum of P56,976.58, with legal interest thereon from the date of the filing of the complaint, and for appropriate relief in connection with her alternative cause of action. In their separate answers, defendants not only denied the material allegations of the complaint, but also set up as affirmative defenses lack of cause of action, prescription, estoppel and laches. As counterclaim, they asked for payment by the plaintiff of the unpaid balance of the earnings of the land up to August 15, 1962 in the sum of P3,000.00, for attorney’s fees and expenses of litigation. On October 5, 1963, judgment was rendered for the defendants. In upholding the validity of the contracts, the court found that although the two documents, Exhibits A and B, were executed for the purpose of converting plaintiff’s separate properties into conjugal assets of the marriage with Domingo Rodriguez, the consent of the parties thereto was voluntary, contrary to the allegations of plaintiff and her witness. The court also ruled that having taken part in the questioned transactions,

595

Arts. 1411-1412

CONTRACTS

plaintiff was not the proper party to plead lack of consideration to avoid the transfers; that contracts without consideration are not inexistent, but are only voidable, following the ruling in the case of Concepcion vs. Sta. Ana (87 Phil. 787); that there was ratification or confirmation by the plaintiff of the transfer of her property, by her execution (with the other heirs) of the extrajudicial settlement of estate; that being a voluntary party to the contracts, Exhibits A and B, plaintiff cannot recover the properties she gave thereunder. Plaintiff’s alternative cause of action was also rejected on the ground that action for rescission of the deed of extrajudicial settlement should have been filed within 4 years from its execution (on March 16, 1953). From the decision of the Court of First Instance, plaintiff duly appealed to this Court, insisting that the conveyances in issue were obtained through duress, and were inexistent, being simulated and without consideration. Speaking through Justice J.B.L. Reyes, the Supreme Court held: We agree with the trial Court that the evidence is not convincing that the contracts of transfer from Concepcion Felix to her daughter, and from the latter her mother and stepfather were executed through violence or intimidation. The charge is predicated solely upon the improbable and biased testimony of appellant’s daughter, Concepcion C. Martelino, whom the trial court refused to believe, considering that her version of violence and harassment was contradicted by Bartolome Gualberto, who had lived with the Rodriguez spouses from 1917 to 1953, and by the improbability of Rodriguez threatening his stepdaughter in front of the Notary Public who ratified her signature. Furthermore, as pointed out by the appealed decision, the charge of duress should be treated with caution considering that Rodriguez had already died when the suit was brought for duress, like fraud, is not to be lightly laid at the door of men already dead. (Cf. Prevost vs. Gratz, 6 Wheat. [U.S.] 481, 498; Sinco vs. Longa, 51 Phil. 507.) What is more decisive is that duress being merely a vice or defect of consent, an action based upon it must be brought within four years after it has ceased;39 and the present action 39 Article 1301 of the Civil Code of 1889, in force when the assailed contracts were executed (1934).

596

VOID OR INEXISTENT CONTRACTS

Arts. 1411-1412

was instituted only in 1962, twenty-eight (28) years after the intimidation is claimed to have occurred, and no less than nine (9) years after the supposed culprit died (1953). On top of it, appellant entered into a series of subsequent transactions with appellees that confirmed the contracts that she now tries to set aside. Therefore, this cause of action is clearly barred. Appellant’s main stand in attacking the conveyances in question is that they are simulated or fictitious, and inexistent for lack of consideration. We shall examine each purported defect separately. The charge of simulation is untenable, for the characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties. Thus, where a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and control of the property, hence, the deed of transfer is but a sham. But appellant contends that the sale by her to her daughter, and the subsequent sale by the latter to appellant and her husband, the late Domingo Rodriguez, were done for the purpose of converting the property from paraphernal to conjugal, thereby vesting a half interest in Rodriguez, and evading the prohibition against donations from one spouse to another during coverture (Civil Code of 1889, Art. 1334). If this is true, then the appellant and her daughter must have intended the two conveyances to be real and effective; for appellant could not intend to keep the ownership of the fishponds and at the same time vest half of them in her husband. The two contracts of sale then could not have been simulated, but were real and intended to be fully operative, being the means to achieve the result desired. Nor does the intention of the parties to circumvent by these contracts the law against donations between spouses make them simulated ones. Ferrara, in his classic book “La Simulacion de los Negocios Juridicos” (Sp. trans, 1926), pp. 95, 105, clearly explains the difference between simulated transactions and transactions in fraudem legis: Otra figura que debe distinguirse de la simulacion es el fraus legis. Tambien aqui se di una gran confucion que persiste aun en la jurisprudencia, apegada tenazmente a antiguos errores. Se debe a Bahr el haber defendido con vigor la antitesis teorica que existe entre negocio

597

Arts. 1411-1412

CONTRACTS

fingido y haber atacada la doctrina comun que hacia una mescolanza con los dos conceptos. “Se confunde — dice (2) —, el negocio in fraudem legis con el negocio simulado; aunque la naturaleza de ambos sea totalmente diversa. El negocio fraudulento no es, en absoluto, un negocio aparante. Es perfectamente serio: se quiere realmente. Es mas, se quiere tal como se ha realizado, con todas las consecuencias que corresponden a la forma juridica elegida. Muchas veces, estas consecuencias con incomodas para una u otra de las partes, aunque serian mucho mas incomodas las consecuencias que llevaria consigo el acto prohibido. xxx

xxx

xxx

“El resultado de las precedentes investigaciones es el siguiente: el negocio simulado quiere producir una apariencia; el negocio fraudulente, una realidad; los negocios simulados son ficticios, no queridos; los negocios in fraudem son serios, reales, y realizados en tal forma por las partes para consequir un resultado prohibido: la simulacion nunca es un medio para eludir la ley, sino para ocultar su violacion. La transgresion del contenido verbal e inmediato de la norma se encubre bajo el manto de un negocio licito, lo cual no altera el caracter del contra legem agere. Tan verdad es, que si se ha redactado una contraescritura que documenta y declara la verdadera naturaleza del negocio realizado, no queda mas que aplicar pura y simplemente la prohibicion. “Tambien el fraude quiere perjudicar la ley, pero emplea para ello medios diversos y sigue distintos caminos. No oculta el acto eterior, sino que lo deja claro y visible, tratando de huir sesgadamente de la aplicacion de la ley merced a una artistica y sabia combinacion de varios medios juridicos no reprobados.” Appellant invokes our decision in Vasquez vs. Porta, 98 Phil. 490, but to no purpose. The mortgage and foreclosure sale involved in that case were typical simulations, merely apparent but not really intended to produce legal effects, as proved by the Court’s finding that the alleged creditor and buyer at the foreclosure sale “Porta himself ostensibly acknowledged by his inertia in allowing the doctor (alleged mortgagor debtor) to exercise dominical power thereon without any protest on his part “(cas. cit., p. 495). Not only this, but the mortgagor’s wife, when her husband died “found among his papers Porta’s

598

VOID OR INEXISTENT CONTRACTS

Arts. 1411-1412

cancellation of the mortgage in his favor and the draft of the complaint for foreclosure.’’ Plainly, the precedent cited is here inapplicable. Were the two conveyances from appellant to her daughter and from the latter to the spouses Rodriguez void ab initio or inexistent for lack of consideration? We do not find them to be so. In the first transaction, the price of P2,500.00 is recited in the deed itself (Exh. A); in the second (Exh. B), the consideration set forth is P3,000.00. Now, Article 1274 of the Civil Code of 1889 (in force when the deeds were executed) provided that — “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.’’ (Italics supplied.) Since in each conveyance the buyer became obligated to pay a definite price in money, such undertaking constituted in themselves actual causa or consideration for the conveyance of the fishponds. That the prices were not paid (assuming ad arguendo that Concepcion Martelino’s testimony to this effect is true) does not make the sales inexistent for want of causa. As ruled in Enriquez de la Cavada vs. Diaz, 37 Phil. 982, “the consideration (causa) need not pass from one (party) to the other at the time the contract is entered into. x x x The consideration need not be paid at the time of the promise. The one promise is a consideration for the other.’’ What would invalidate the conveyances now under scrutiny is the fact that they were resorted to in order to circumvent the legal prohibition against donations between spouses contained in Article 1334, paragraph 1, of the Civil Code of 1889, then prevailing. That illegal purpose tainted the contracts, for as held by the Spanish Tribunal Supremo in its decision of 2 April 1941: “ha de ser reputado ineficaz, por exigencias ineludibles del caracter social y moral del Derecho, todo contrato que persiga un fin ilicito o inmoral, sea cualquiera el medio empleado por los contratantes para lograr esa finalidad, no justificada por un interes digno de ser socialmente protegido.’’ The illicit purpose then becomes illegal causa within the terms of the old Civil Code, for as declared by the same Spanish Court in its decision of 14 December 1940 — “toda vez que to que caracteriza fundamentalmente la ilicitud de la causa es la lesion de un interes general juridico o moral,’’ a ruling reiterated in the decision of 2 April 1941 when the Court ruled: “El concepto de la causa ilicita, tal como la desenvuelve y aplica con gran amplitud y flexibilidad la doctrina moderna, permite cobijar, no solo

599

Arts. 1411-1412

CONTRACTS

las covenciones ilicitas por razon de su objeto o de su motivo x x x sino tambien multiples convenciones que no encerrando en si ningun de directa antijuricidad son ilicitas por el matiz in moral que reviste la operacion en su conjunto x x x.’’ Unfortunately for herein appellant, in contracts invalidated by illegal subject matter or illegal causa, Articles 1305 and 1306 of the Civil Code then in force apply rigorously the rule in pari delicto non oritur actio, denying all recovery to the guilty party inter se. And appellant is clearly as guilty as her husband in the attempt to evade the legal interdiction of Article 1334 of the Code, already cited. Wherefore, her present action to reinvindicate the conveyed properties was correctly repulsed by the Court below. “ART. 1306. If the act which constitutes the illicit consideration is neither a crime nor a misdemeanor, the following rules shall be observed: 1. When both parties are guilty, neither of them can recover what he may have given by virtue of the contract, or enforce the performance of the undertaking of the other party; xxx

xxx

xxx

That Article 1306 applies to cases where the nullity arises from the illegality of the consideration of the purpose of the contract was expressly recognized by this Supreme Court in Gustilo vs. Maravilla. 48 Phil. 449-450.40 Finally, it cannot be denied that plaintiff-appellant had knowledge of the nullity of the contract for the transfer of her properties in 1934, because she was even a party thereto. And yet, her present action was filed only on May 28, 1962 and after the breaking up of friendly relations between her and defendantsappellees. Appellant’s inaction to enforce her right, for 28 years, cannot be justified by the lame excuse that she assumed that the transfer was valid. Knowledge of the effect of that transaction would have been obtained by the exercise of diligence. Ignorance which is the effect of inexcusable negligence, it has been said, is no excuse for laches. (Go Chi Gun, etc., et al. vs. Co Cho, et al., G.R. No. L-5208, Feb. 28, 1955.) Even assuming for the sake of argument that appellant held her peace, during the lifetime of her husband, out of legitimate fear for her life, there is no justification for her failure to bring the proper action after his 40 See also Liguez vs. Court of Appeals, 102 Phil. 581-582; Perez vs. Herranz, 7 Phil. 695.

600

VOID OR INEXISTENT CONTRACTS

Arts. 1411-1412

death in 1953. Instead, she entered into a series of agreements with herein appellees, the children of her husband by a prior marriage, of partition, usufruct and lease of their share in the fishponds, transactions that necessarily assumed that Rodriguez has acquired one-half of the litigated fishponds. In the circumstances, appellant’s cause has become a stale demand and her conduct placed her in estoppel to question the validity of the transfer of her properties. (Manila, et al. vs. Galvan, et al., G.R. No. L-23507, May 24, 1967; Perez vs. Herranz, 7 Phil. 695-696.) In view of the foregoing, the decision appealed from is affirmed. Costs against appellant Concepcion Felix Vda. de Rodriguez. So ordered.

It must be observed, however, that the principle of in pari delicto applies only to cases of existing contracts with an illegal cause or object and not to simulated or fictitious contracts nor to those which are inexistent for lack of an essential requisite such as cause or consideration.41 In other words, the principle can have no application to inexistent contracts, since such contracts are always open to attack even by the parties thereto. But where the contract is void because of the illegality of the cause or the object, the principle is applicable since the Code in Arts. 1411 and 1412 commands that neither party thereto may be heard to invoke its unlawful character as a ground for relief.42 It must also be observed that the illegality must be with respect to the cause or the object of the contract and not with respect to the motives of the contracting parties. Thus, if the plaintiff transfers to the defendant a parcel of land by means of a fictitious deed of sale for the purpose of averting its attachment by his creditors, it is clear that the principle, enunciated in Art. 1412 of the Civil Code is not applicable, since what is illegal is the motive of the transferor and not the object or the cause of the contract.43 Idem; Effect if only one party is at fault. — When only one of the contracting parties is at fault, we must have to distinguish between a case where the contract has already been executed and one where it is merely executory. If the contract has already Vasquez vs. Porta, 98 Phil. 490. Liguez vs. Court of Appeals, supra. 43 Gonzales vs. Trinidad, 67 Phil. 682. 41 42

601

Arts. 1411-1412

CONTRACTS

been executed, the guilty party is barred from recovering what he has given to the other party by reason of the contract. Although repugnant, “the law deems it more repugnant that a party should invoke his own guilt as a reason for relief from a situation which he had deliberately entered.’’44 The innocent party, however, may demand for the return of what he has given.45 On the other hand, if the contract is merely executory, it is clear that it cannot produce any legal effect whatsoever. Neither of the contracting parties can demand for the fulfillment of any obligation arising from the contract nor be compelled to comply with such obligation.46 Idem; Exceptions. — The principle of pari delicto is not, however, absolute in character. The Civil Code recognizes the following exceptions: (1) Payment of usurious interest. In such case, the law allows the debtor to recover the interest paid in excess of that allowed by the usury laws, with interest thereon from the date of payment.47 (2) Payment of money or delivery of property for an illegal purpose, where the party who paid or delivered repudiates the contract before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may allow such party to recover what he has paid or delivered, if the public interest will thus be subserved.48 (3) Payment of money or delivery of property by an incapacitated person. In such case, the courts may allow such person to recover what he has paid or delivered, if the interest of justice so demands.49 (4) Agreement or contract which is not illegal per se but is merely prohibited by law, and the prohibition is designed for the protection of the plaintiff. In such case, such plaintiff, if public policy is thereby enhanced, may recover what he has paid or delivered.50

Liguez vs. Court of Appeals, supra. Arts. 1411, 1412, Civil Code. 46 Ibid. 47 Art. 1413, Civil Code. 48 Art. 1414, Civil Code. 49 Art. 1415, Civil Code. 50 Art. 1416, Civil Code. 44 45

602

VOID OR INEXISTENT CONTRACTS

Art. 1413

(5) Payment of any amount in excess of the maximum price of any article or commodity fixed by law. In such case, the buyer may recover the excess.51 (6) Contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by law. In such case, the laborer may demand for overtime pay.52 (7) Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law. In such case, the laborer may demand for the deficiency.53 Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment.54 Recovery by Debtor of Usurious Interest. — The first exception to the principle of pari delicto as enunciated in Arts. 1411 and 1412 is given in the above article. It must be noted, however, that the rule enunciated in this article, although consistent with the rule enunciated in Art. 1961, which states that “usurious contracts shall be governed by the Usury Law and other special laws so far as they are not inconsistent with this Code,” is inconsistent with the rule enunciated in Art. 1175, which states that “usurious transactions shall be governed by special laws,” and Art. 1957, which states that “the borrower may recover in accordance with the laws on usury.’’ Insofar as the amount recoverable by the debtor from the creditor is concerned, it is quite evident that there is absolute incompatibility between the provision of Art. 1961 which upholds the rule stated in Art. 1413, and the provisions of Arts. 1175 and 1957, which incorporate by reference the rule stated in Sec. 6 of the Usury Law (Act No. 2655). Under Art. 1413, the debtor may recover the interest paid in excess of the interest allowed by the Usury Law, with interest thereon from the date of payment; under Sec. 6 of the Usury Law, on the other hand, the debtor may recover the whole interest paid with costs and

Art. 1417, Civil Code. Art. 1418, Civil Code. 53 Art. 1419, Civil Code. 54 New provision. 51 52

603

Art. 1413

CONTRACTS

attorney’s fees in such sum as may be allowed by the court in an action against the creditor if such action is brought within two years after such payment. The above-stated conflict, however, is more apparent than real. Thus, in Angel Jose Warehousing Co. vs. Chelda55 the Supreme Court declared that, in reality, there is no conflict between the Civil Code and the Usury Law. Under the latter, in Sec. 6, the debtor may recover the whole interest paid. Under the Civil Code, in Art. 1413, “interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment.” When the Code speaks of “interest paid in excess of that allowed by the usury law,’’ it means the whole usurious interest. Thus, if the loan is P1,000.00, with interest of 20% per annum or P200 per year, and the borrower paid P200, the whole P200 is the usurious interest. The only change effected, therefore, by Art. 1413 of the Civil Code is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered “with interest thereon from the date of payment.” The Angel Jose Warehousing Co. case not only resolved all doubts with respect to the apparent conflict between Art. 1413 of the New Civil Code and Sec. 6 of the Usury Law; it also resolved all doubts with respect to the question as to whether or not the creditor will be allowed to recover the amount loaned. The factual backdrop of this case is as follows: The action is one for the recovery of an unpaid loan, with legal interest from the filing of the complaint, plus attorney’s fees. Defendants interposed the defense that since the loan is usurious and therefore void, the principle of pari delicto as enunciated in Art. 1411 of the New Civil Code is applicable. To strengthen this defense, they invoked the provisions of Arts. 1413 and 1961 of the Civil Code as well as the case of Sebastian vs. Bautista56 wherein the Court of Appeals held that in usurious contract, although the Civil Code in Art. 1413 provides for an exception to the rule of pari delicto in the case of the debtor, it does not provide for an exception in the case of the creditor. Is this correct? According to the Supreme Court, this is not correct. A contract of loan with usurious interest consists of principal and accessory stipulation; the principal 55 56

23 SCRA 119. 58 Off. Gaz. 3146. See also People vs. Masangkay, 58 Off. Gaz. 3565.

604

VOID OR INEXISTENT CONTRACTS

Art. 1413

one is to pay the debt; the accessory is to pay interest thereon. These two stipulations are divisible. According to Art. 1420 of the New Civil Code, “in case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.” In a simple contract of loan with usurious interest, the prestation of the debtor to pay the principal debt is not illegal; what is illegal is to pay the stipulated interest. Hence, being separable, the latter only should be deemed void. Plaintiff is therefore entitled to the recovery of the principal of the loan plus legal interest of 6% per annum from the filing of the complaint pursuant to Art. 2209 of the New Civil Code. Attorney’s fees, however, cannot be recovered since there is no showing that the case falls under any of the exceptions provided for in Art. 2208 of the New Civil Code. Besides, defendants had reasons to resist the claim since there was yet no definite ruling on the point of law involved herein in the light of the New Civil Code.57 The above doctrine was reiterated in Briones vs. Cammayo. In order that we shall have a complete picture of the case, we are reproducing the entire decision penned by Justice Dizon, including the dissenting opinion penned by Justice Castro and the concurring opinion penned by Justice Barredo. Briones vs. Cammayo 41 SCRA 404 DIZON, J.: On February 22, 1962, Aurelio G. Briones filed an action in the Municipal Court of Manila against Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover from them, jointly and severally, the amount of P1,500.00, plus damages, attorney’s fees and costs of suit. The defendants answered the complaint with specific denials and the following special defenses and compulsory counterclaim: “x x x; By way of —

57

Angel Jose Warehousing Co. vs. Chelda Enterprises, supra.

605

Art. 1413

CONTRACTS

SPECIAL DEFENSES Defendants Allege: 4. Defendants executed the real estate mortgage, Annex ‘A’ of the complaint, as security for the loan of P1,200.00 given to defendant Primitivo O. Cammayo upon the usurious agreement that defendant pays to the plaintiff and that the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself, out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year; 5. That although the mortgage contract, Annex ‘A’ was executed for securing the payment of P1,500 for a period of one year, without interest, the truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of P1,200.00 and withheld the sum of P300.00 which was intended as advance interest for one year; 6. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during the period from October, 1955 to July, 1956 the total sum of P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the account but as in interest of said loan for an extension of another term of one year; 7. That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a usurious contract and is contrary to law, morals, good customs, public order or public policy and is, therefore, inexistent and void from the beginning (Art. 1407, Civil Code); And as — COMPULSORY COUNTERCLAIM Defendants replead all their allegations in the preceding paragraphs; 8. That plaintiff, by taking and receiving interest in excess of that allowed by law, with full intention to violate the law, at the expense of the defendants, committed a flagrant violation of Act 2655, otherwise known as the Usury Law, causing the defendants damages and attorney’s fees, the amount of which will be proven at the trial; 9. That this is the second time this same case is filed before this court, the first having been previously filed and

606

VOID OR INEXISTENT CONTRACTS

Art. 1413

docketed in this court as Civil Case No. 75845 (Branch VII) and the same was dismissed by the Court of First Instance (Branch of Manila) on July 13, 1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly bringing this case to the court, harassing and persecuting defendants in the manner, defendants have suffered mental anguish and anxiety for which they should be compensated for moral damages.’’ On September 7, 1962, Briones filed an unverified reply in which he merely denied the allegations of the counterclaim. Thereupon, the defendants moved for the rendition of a summary judgment on the ground that, upon the record, there was no genuine issue of fact between the parties. The Municipal Court granted the motion and rendered judgment sentencing the defendants to pay the plaintiff the sum of P1,500.00, with interests thereon at the legal rate from February 22, 1962, plus the sum P150.00 as attorney’s fees. From this judgment, the defendants appealed to the Court of First Instance of Manila where, according to the appealed decision, “defendant has asked for summary judgment and plaintiff has agreed to the same.” (Record on Appeal, p. 21.) Having found the motion for summary judgment to be in order, the court then proceeded to render judgment as follows: “Judgment is, therefore, rendered, ordering defendant to pay plaintiff the sum of P1,180.00 with interest thereon at the legal rate from October 16, 1962 until fully paid. This judgment represents defendant’s debts of P1,500.00 less usurious interest of P120.00 and the additional sum of P200.00 as attorney’s fees or a total deduction of P320.00. Plaintiff shall pay the costs.” In the present appeal defendants claim that the trial court erred in sentencing them to pay the principal of the loan notwithstanding its finding that the same was tainted with usury, and erred likewise in not dismissing the case. It is now disputed that the contract of loan in question was tainted with usury. The only questions to be resolved, therefore, are firstly, whether the creditor is entitled to collect from the debtor the amount representing the principal obligation; secondly, in the affirmative, if he is entitled to collect interests thereon, and if so, at what rate. The Usury Law penalizes any person or corporation who, for any loan or renewal thereof or forbearance, shall collect or receive a higher rate or greater sum or value than is allowed by law, and provides further that, in such case, the debtor may

607

Art. 1413

CONTRACTS

recover the whole interest, commissions, premiums, penalties and surcharges paid or delivered, with costs and attorney’s fees, in an appropriate action against his creditor, within two (2) years after such payment or delivery. (Section 6, Act 2655, as amended by Acts 3291 and 3998.) Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil. 256, that even if the contract of loan is declared usurious the creditor is entitled to collect the money actually loaned and the legal interest due thereon. In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a usurious contract of loan should pay the creditor the amount which he justly owes him, citing in support of this ruling its previous decisions in Go Chioco, supra, Aguilar vs. Rublato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739. In all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void; that the creditor has no right of action to recover the interest in excess of the lawful rate; but that this did not mean that the debtor may keep the principal received by him as loan — thus unjustly enriching himself to the damage of the creditor. Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the standing jurisprudence of this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed by the latter. This Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture might appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved should not be resolved on the basis of convenience. Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter, We expressly held that when a contract is found to be tainted with usury “the only right of the respondent (creditor) x x x was merely to collect the amount of the loan, plus interest due thereon.’’ The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned because Article 1957 of the new Civil Code — a subsequent law —

608

VOID OR INEXISTENT CONTRACTS

Art. 1413

provides that contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases “the borrower may recover in accordance with the laws on usury.’’ From this the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to recover — not even his capital. The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated and the view referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, etc. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may nor recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the following: “x x x. The court found that there remained due from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests, of which P1,048.15 has actually been deducted in advance by plaintiff from the loan; that said amount of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50 leaving a balance of P19,247.35 still payable to the plaintiff. Said court held that notwithstanding the usurious interests charged, plaintiff is not barred from collecting the principal of the loan or its balance of P19,247.35. Accordingly, it stated in the dispositive portion of the decision, thus: “WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff the amount of P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional sum of P2,000.00 as damages for attorney’s fee; and, in case the assets of defendant partnership be insufficient to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half (1/2) of the unsatisfied portion on this judgment. “With costs against the defendants.” Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover the principal of the loan? (2) Should attorney’s fees be awarded in plaintiff’s favor?

609

Art. 1413

CONTRACTS

“Great reliance is made by appellants on Art. 1411 of the New Civil Code which states: “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.’’ Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover on the contract. So — they continue — the New Civil Code provisions must be upheld as against the Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the New Civil Code, that: “Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code.’’ (Italics ours.) We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the interest. True, as stated in Article 1411 of the New Civil Code the rule of pari delicto applies where a contract’s nullity proceeds from illegality of the cause or object of said contract. However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon.

610

VOID OR INEXISTENT CONTRACTS

Art. 1413

And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil Code, attests to this: “The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force.’’ The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: “In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.’’ In simple loan with stipulation of usurious interest the prestation of the debtor to pay the principal debt, which is the cause of the contracts (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only shouId be deemed void, since it is the only one that is illegal. Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: “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 payment.’’ Article 1413, in speaking of “interest paid in excess of the interest allowed by the usury laws’’ means the whole usurious interest; that is, in a loan of P1,000.00, with interest of 20% per annum or P200.00 for one year, if the borrower pays said P200 the whole P200.00 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The whole stipulation as to interest void, since payment of said interest is illegal. The only change effected, therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered “with interest thereon from the date of payment.’’ The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal for this would unjustly enrich

611

Art. 1413

CONTRACTS

the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil Code). The Court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the date of filing of the complaint. In answer to the contention that the forefeiture of the principal of the usurious loan is necessary to punish the usurer. We say this: Under the Usury Law there is already provision for adequate punishment for the usurer namely, criminal prosecution where, if convicted, he may be sentenced to pay a fine be not less than P50.00 nor than P500.00, or imprisonment of not less than 30 days nor more than one year, or both, in the discretion of the court. He may further be sentenced to return the entire sum received as interest, with subsidiary imprisonment in case of non-payment thereof. It is, of course, to be assumed that this last penalty may be imposed only if the return of the entire sum received as interest had not yet been the subject of judgment in a civil action involving the usurious contract of loan. In arriving at the above conclusion, We also considered our decision in Mulet vs. People, but found that the same does not apply to the present case. The facts therein involved were as follows: “On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos secured from petitioner Miguel Mulet a loan of P550, payable within 5 years at 30 per cent interest per annum. In the deed of mortgage executed by the Rubillos as a security, the sum of P1,375.00 was made to appear as capital loan of P550.00 and the total interest of P825.00 computed at 30 per cent per annum of 5 years. Within four years following the execution of the mortgage, the debtors made partial payments aggregating P278.27, on account of interest. Thereafter, the debtors paid the whole capital

612

VOID OR INEXISTENT CONTRACTS

Art. 1413

of P550.00 due to petitioner’s promise to condone the unpaid interest upon payment of such capital. But to their suprise, petitioner informed them that they were still indebted in the sum of P546.73 which represented the balance of the usurious interest. And in consideration of this amount, petitioner pressed upon the debtors to execute in October, 1933 in his favor, a deed of sale with pacto de retro of a parcel of land, in substitution of the original mortgage which was cancelled. From the date of the execution of the new deed up to 1936, petitioner received, as his share of the products of the land the total sum of P480.00. Prosecuted on November 18, 1936, for the violation of the Usury Law, petitioner was convicted by the trial court, and on appeal, the judgment was affirmed by the Court of Appeals. The instant petition for certiorari is directed at that portion of the decision of the appellate court ordering petitioner to return to the offended parties the sum of P373.27, representing interests received by him in excess of that allowed by law.’’ It was Mulet’s claim that, as the amount of P373.27 had been paid more than two years prior to the filing of the complaint for usury against him, its return could no longer be ordered in accordance with the prescriptive period provided therefor in Section 6 of the Usury Law. Said amount was made up of the usurious interest amounting to P278.27 paid to Mulet, in cash, and the sum of P480.00 paid to him in kind, from the total of which two amounts 14% interest allowed by law — amounting to P385.00 — was deducted. Our decision was that Mulet should return the amount of P480.00 which represented the value of the produce of the land sold to him under pacto de retro which, with the unpaid balance of the usurious interest, was the consideration of the transaction — meaning the pacto de retro sale. This Court then said: “x x x. This last amount is not usurious interest on the capital of the loan but the value of the produce of the land sold to petitioner under pacto de retro with the unpaid balance of the usurious interest (P546.73) as the consideration of the transaction. This consideration, because contrary to law, is illicit, and the contract which results therefrom, is null and void. (Art. 1275, Civil Code). And under the provisions of Article 1305, in connection with Article 1303, of the Civil Code, when the nullity of a contract arises from the illegality of the consideration which in itself constitutes as felony, the guilty party shall be subject to criminal proceeding while the innocent party

613

Art. 1413

CONTRACTS

may recover whatever he has given, including the fruits thereof.’’ (Italics supplied.) It is clear, therefore, that in the Mulet case, the principal of the obligation had been fully paid by the debtor to the creditor; that the latter was not sentenced to pay it back to the former, and that what this Court declared recoverable by debtor were only the usurious interest paid as well as the fruits of the property sold under pacto de retro. IN VIEW OF THE FOREGOING, the decision appealed from is modified in the sense that appellee may recover from appellant the principal of the loan (P1,180.00) only, with interest thereon at legal rate of 6% per annum from the date of the filing of the complaint. With costs. Makalintal, Zaldivar, Teehankee, Villamor and Makasiar, JJ., concur. Concepcion, C.J., and Fernando, J., concur in the dissenting opinion of Justice Castro. Reyes, J.B.L., J., concurs with Justice Barredo. Castro, J., dissents. Barredo, Jr., concurs in separate opinion. Castro J., dissenting: Beyond the area of debate is the principle that in a contract of loan of sum of money, the cause, with respect to the lender, is generally the borrower’s prestation to return the same amount. It is my view, however, that in a contract which is tainted with usury, that is, with a stipulation (whether written or unwritten) to pay usurious interest, the prestation to pay such interest is an integral part of the cause of the contract.58 It is also the controlling cause, for a usurer lends his money not just to have it returned but indeed to acquire inordinate gain. Article 1957, which is a new provision in the Civil Code, provides as follows: “Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury.” This article which declares the contract itself — not merely the stipulation to pay usurious interest — void, necessarily regards the prestation to pay such usurious interest as an integral part of the cause, making it illegal.

58

See Articles 1933, 1950 and 1957, New Civil Code.

614

VOID OR INEXISTENT CONTRACTS

Art. 1413

Undoubtedly, the motive of the usurer is his desire to acquire inordinate gain; this motive becomes an integral and controlling part of the cause because its realization can be achieved only by compliance by the borrower with the stipulated prestation to pay usurious interest. The law never proscribes a contract merely because of the immoral motive of a contracting party, for the reason that it does not concern itself with motive but only with cause.59 An exception is where such motive becomes an integral part of the cause, like the stipulated usurious interest in a contract of loan. While the old law, according to El Hogar,60 considered the usurious loan valid as to the loan and void as to the usurious interest, the new law, in Article 1957 of the new Civil Code, declares the usurious loan void as to the loan and void as to the usurious interest. What is the reason for the new law? In my view, it is none other than its intention to regard the usurious interest as an integral part of the cause, thus making it illegal; otherwise, the new law would be devoid of reason. Any interpretation that divests the new law of reason, that declares the usurious contract void and in the same breath permits recovery of the principal of the loan — which was the same result under the old law, as well as under El Hogar that considered the usurious contract valid as to the loan — renders Article 1957 of the new Civil Code meaningless and pointless. The prestation to pay usurious interest being an integral and controlling part of the cause, making it illegal and the contract of loan void, Article 1411 of the new Civil Code should be applied. This article provides: “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 instrument 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.’’ 59 60

De Jesus vs. Urrutia & Company, 32 Phil. 171. Lopez and Javelona vs. El Hogar Pilipino, 47 Phil. 249.

615

Art. 1413

CONTRACTS

An exception is, however, provided in the second sentence of Article 1957 which states: “The borrower may recover in accordance with the laws on usury.” As an exception to the general rule in Article 1411, the debtor is allowed in accordance with the Usury Law to recover the amount he has paid as usurious interest. Thus, Article 1413 explicitly authorizes that “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 payment.” But the lender is not allowed to recover the principal, because no such exception is made; hence, he falls within the general rule stated in Article 1411. In Mulet vs. People,61 the Supreme Court, in effect, reconsidered its opinion in El Hogar. In Mulet, the plaintiff extended a usurious loan to Rubillos. When the debtor failed to pay the whole usurious interest, the creditor, in consideration of the said unpaid interests, made the debtor execute a pacto de retro sale of certain properties to him. He then sought to be exempt from returning the value of the produce of the lands so transferred. Mr. Justice Moran, speaking for the Supreme Court, said: “* * * We are of the opinion that the petitioner should be ordered to return * * * the amount * * * of P480.00. This last amount is not usurious interest on the capital of the loan but the value of the produce of the land sold to petitioner under pacto de retro, with the unpaid balance of the usurious interest as the consideration, because contrary to law, is illicit, and the contract which results therefrom, is null and void. “If the unpaid usurious interests as the consideration of the pacto de retro sale render such sale null and void, a fortiori, the usurious interest as consideration of the contract of loan, also renders such loan null and void.” In Asturias, et al. vs. Court of Appeals,62 the Supreme Court, speaking through Mr. Justice Jesus Barrera, stressed that: “A contract designed to hide a usurious agreement not only violates the law but contravenes public policy. Such a contract can not be countenanced and is therefore illegal and void from its inception.”

61 62

73 Phil. 60. L-17895, promulgated Sept. 30, 1963, 9 SCRA 131.

616

VOID OR INEXISTENT CONTRACTS

Art. 1413

The ruling in El Hogar that a usurious loan was valid as to the principal but void as to the usurious interest was based upon the laws then in force, namely, the old Civil Code and the Usury Law, both of which did not contain any specific explicit provision prescribing the contract itself. I am fully persuaded that in drafting Chapter 2, Title XI of Book IV of the new Civil Code, the Code Commission knew of the majority opinion in El Hogar, took note of it, and, to offset any doubt concerning the intention of the Commission to overrule El Hogar, formulated Articles 1957 and 1961. And it is of great significance to me that when the Commission formulated Article 1957, knowing that under El Hogar the usurer may recover the principal of the loan, it omitted affirmance of the right of the lender to recover the principal, and instead emphasized that “the borrower may recover in accordance with the laws on usury.’’ BARREDO, J., concurring: I concur. I believe that this decision expresses the fair and just intent of our usury laws and sufficiently effectuates the public policy that should be pursued in usury cases. I consider usury to be unchristian and inhuman, particularly because it thrives best in the misery of people by taking advantage of them when they are precisely in urgent need of money to save themselves from a tight situation. Usury has always been considered as a scourge everywhere in the world since the time of the Holy Scriptures. All these notwithstanding, I do not believe in condoning the whole indebtedness of a person who borrows money, only because he has been made to agree, directly or indirectly, to pay more interest than that authorized by law. It is my considered view that what the law proscribes and declares null and void is not the lending of money, but only the collection of excessive interest. There is nothing morally wrong in allowing a money-lender to get back the money he has loaned because, after all, the borrower has used the same for his own needs, and it is only fair that he should not be enriched at the expense of another. And this, to my mind, is obvious from the language of Article 1957 of the Civil Code which provides that: “Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury be void. The borrower may recover in accordance with the laws on usury. (n)’’

617

Art. 1413

CONTRACTS

Properly construed, the phrase “contracts and stipulations” in this provision does not contemplate the totality of the contract of loan but only the portion thereof that is “intended to circumvent the laws against usury,” and that necessarily is no more than any term, “cloak or device which results in the collection of interest in excess of the rate allowed by law. In fact, the same provision expressly provides that in spite of the nullity it ordains, “the borrower may recover in accordance with the laws on usury.” In other words, instead of leaving the consequences of the declared nullity to be in accordance with general principles, the article itself spells out in black and white what should be done with the proceeds of the proscribed act, and it says that the special laws on usury shall be followed in that respect. To the same effect is Article 1961 of the Civil Code. It provides that: “Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (n)” And I see no point of collision between the Civil Code and the Usury Law for the simple reason that even before Art. 1957 declared usurious contracts and transactions null and void, Section 7 of the Usury Law already provided thus: “All covenants and stipulations, constrained in conveyances, mortgages, bonds, bills, notes and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for the renewal thereof or forbearance of money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of interest, made without intent to evade any of the provisions of this Act, shall render a contract void: And provided, further, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intent on the part of said purchaser to evade the provisions of this Act and said purchase was not a part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder

618

VOID OR INEXISTENT CONTRACTS

Art. 1413

the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney’s fees as may be allowed by the Court.” In this connection, it is to be noted that Section 6 of the Usury Law provides: “Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may recover the whole interest, commissions, premiums penalties and surcharges paid or delivered with costs and attorney’s fees in such sum as may be allowed by the court in an action against the person or corporation who took or received them if such action is brought within two years after such payment or delivery: Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year collected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and premiums do not exceed the rates fixed in this Act.” As a matter of fact, then, even as the Civil Code yields to the Usury Law in Articles 1957 and 1413, in reality, there is no conflict between their corresponding provisions. To say that because these laws specify only the remedies in favor of the borrower, they impliedly deny to the lender any remedy to recover the principal of the loan is, I submit, a non sequitur. It appears to me more logical to construe the provisions allowing the borrower to recover all the interest he has paid, as Article 1413 of the Civil Code and Section 6 of the Usury Law have been construed together to mean in Angel Jose vs. Chelda Enterprises, cited in the main opinion, as indicating that the borrower may not recover from the lender the amount he has paid as payment of his principal debt, and conversely, that the lender may collect the same if it has not been paid by the borrower. In brief, my point is that while it is true that Article 1957 of the Civil Code declares that all usurious contracts and stipulations are void, this is nothing new, for such has been the law even under the Usury Law before the Civil Code went into effect, and, moreover, it is evident that the Civil Code itself yields to the Usury Law when it comes to the question of how much of the loan and interests paid by the borrower may be recovered by him, and the Usury Law is clear that he may

619

Art. 1413

CONTRACTS

recover only all the interests, including, of course, the legal part thereof, with legal interest from the date of judicial demand, without maintaining that he can also recover the principal he has already paid to the lender. As first discussed under Art. 1175, there is now no longer any ceiling in interest rates on loans pursuant to Central Bank Circular No. 224 issued last Dec. 1, 1982. Problem — On Jan. 15, 1958, D borrowed P10,000 from C. as evidence of the indebtedness, D executed a promissory note promising to pay the entire obligation on Jan. 15, 1959, at 24% interest per annum. As security for the payment of the obligation, he also executed a real estate mortgage on a house and lot registered in his name in favor of C. This mortgage was duly registered. When the note matured, D paid the entire obligation plus interest amounting to P2,400. Considering that the contract is usurious, if D institutes an action against C for the recovery of the usurious interest which he has paid, how much can he recover? Reason. Answer — D can recover the entire interest of P2,400 which he has paid plus 6% interest thereon from the date of payment. This is in accordance with Sec. 6 of the Usury Law and Art. 1413 of the New Civil Code. It must be observed that under Sec. 6 of the Usury Law, the debtor may recover the whole interest paid. Under the New Civil Code , in Art. 1413, “interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment.” When the Code speaks of “interest paid in excess of the interest allowed by usury laws,” it means the whole usurious interest. The two provisions, therefore, are almost identical. The only change effected by Art. 1413, NCC, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered “with interest thereon from the date of payment.” (Angel Jose Warehousing Co. vs. Chelda Enterprises, 23 SCRA 119.) (Note: Prior to January 1, 1983 and under the Treasury Laws, no person shall receive a rate of interest, including commissions, premiums, fines and penalties, higher than 12% per annum or the maximum rate prescribed by the Monetary Board for a loan secured by a mortgage upon real estate the title to which is duly registered. Therefore, the 18% interest rate plus the additional interest and penalty charges of 18% and 8%, respectively, are highly usurious. [Development Bank of the

620

VOID OR INEXISTENT CONTRACTS

Arts. 1414-1416

Philippines vs. Perez, G.R. No. 148541, Nov. 11, 2004.] Under Central Bank (CB) Circular No. 905, which became effective on Jan. 1, 1983, whereby the Monetary Board is authorized to fix interest rates, the ceiling rates under the Usury law [Act No. 2655, as amended by P.D. No. 116] have been abolished. It should be noted that Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity. The legislation of usury is wholly the creature of legislation. A CB Circular cannot repeal a law. Only a law can repeal another law. Thus, retroactive application of a CB Circular cannot, and should not, be presumed. (Development Bank of the Philippines vs. Perez, G.R. No. 148541, Nov. 11, 2004.) In declaring void the stipulations authorizing excessive interest and charges, the SC declared that although the Usury Law was suspended by CB Circular No. 905 and consequently the parties are given wide latitude to agree on any interest rate, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. (Heirs of Zoilo Espiritu and Primitiva Espiritu vs. Sps. Maximo Landrito and Paz Landrito, etc., G.R. No. 169617, April 3, 2007)

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.63 Art. 1415. When 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.64 Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed

63 64

New provision. New provision.

621

Arts. 1414-1416

CONTRACTS

for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.65 Article Applied. — The above exception to the principle of pari delicto is illustrated in the following cases: Angeles vs. Court of Appeals 102 Phil. 1006 The records show that on March 12, 1935, a homestead patent was issued to Juan Angeles. On May 28, 1937, Angeles sold he homestead to defendants, Gregorio Inez and Anastacia Divino. This is now an action commenced by the heirs of Angeles to recover the homestead from the defendants on the ground that the sale is void since it was made within the prohibited period of five years as enumerated in Sec. 118 of the Public Land Law. Defendants, however, maintain that under the principle of pari delicto, there can be no recovery. The Supreme Court, speaking through Justice Labrado, held: “The principle of in pari delicto is not applicable to a homestead which has been illegally sold in violation to the homestead law. The reason for the rule is that the policy of the law is to give land to a family for home and cultivation; consequently, the law allows the homesteader to reacquire the land even if it has been sold; hence, the right may not be waived. The sale of the homestead in the case at bar is, therefore, null and void and petitioners have the right to recover the homestead illegally disposed of. Consequently, the action to recover the same does not prescribe. “While the rule of in pari delicto should not apply to the sale of the homestead, because such sale is contrary to the public policy enunciated in the homestead law, the loss of the products realized by the defendants and the value of the necessary improvements made by them on the land should not be excepted from the application of the said rule because no cause or reason can be cited to justify an exception. It has been held that the rule of in pari delicto is inapplicable only where the same violates a wellestablished public policy. The heirs of the homesteader should, therefore, be declared to have lost and forfeited the value of the products gathered from the land, and 65

New provision.

622

VOID OR INEXISTENT CONTRACTS

Arts. 1414-1416

so should the defendants lose the value of the necessary improvements that they have made thereon. With respect to the price for the land, in view of the rule that no one should enrich himself at the expense of another, the return of the price by the plaintiffs should be decreed, before the plaintiffs may be allowed to recover back the possession of the homestead.’’66 Philippine Banking Corp. vs. Lui She 21 SCRA 52 Justina Santos and her sister Lorenza were owners in common of a valuable piece of land located in Manila. In it are two residential houses with entrance on Florentino Torres street which were occupied by Justina and Lorenza and the Hen Wah Restaurant with entrance on Rizal Avenue which was occupied and operated by Wong Heng, a long time lessee. When Lorenza died in 1957, Justina became the absolute owner of the property. Then already well advanced in years, being 90 years old, blind, crippled, and an invalid, with no other companions except 8 maids and 17 dogs, her dreary existence was brightened only now and then by the visits of the four children of her friend, Wong Heng. Wong, on the other hand, who had always been her trusted man and friend, became closer to her. On Nov. 15, 1957, “in grateful acknowledgment of the personal services of the lessee to her,” Justina executed a contract of lease in favor of Wong, covering the portion then already leased to him and another portion fronting Florentino Torres street. The lease was for 50 years at a monthly rental of P3,120.00. Ten days later (Nov. 25), the contract was amended so as to make it cover the entire property at an additional monthly rental of P360.00. For his part, Wong undertook to pay out of the rental due from him an amount not exceeding P1,000.00 a month for the salaries of the maids and the food of her dogs. On Dec. 21, 1957, she executed another contract giving Wong the option to buy the leased premises for P120,000, payable within ten years at a monthly installment of P1,000.00. The option imposed on Wong the obligation to spend P1,800.00 a month for the salaries of her maids and the food of the dogs. In addition, it also imposed the condition that Wong must become a Filipino citizen. In order that this condition would be complied with,

66 To the same effect: Santander vs. Villanueva, 103 Phil. 1; Feliceo vs. Iriola 103 Phil. 125; Ras vs. Sua, 25 SCRA 153.

623

Arts. 1414-1416

CONTRACTS

Justina filed a petition to adopt Wong and his children on the erroneous belief that adoption would confer on them Philippine citizenship. The error was discovered and the proceedings were abandoned. On Nov. 18, 1958, she executed to other contracts, one extending the term of the lease to 99 years and another fixing the term of the option at 50 years. On Aug. 24 and 29, 1959, she executed two wills wherein she bade her legatees to respect the contracts she had entered into with Wong, but in a codicil executed on Nov. 4, 1959, she appears to have undergone a change of heart. Claiming that the various contracts were made by her because of machinations and inducements practised by Wong Heng, she now directed her executor to secure the annulment of the contracts. On Nov. 18, 1959, the present action was filed in the Court of First Instance of Manila. The case was heard after which the court rendered judgment declaring all the above stated contracts, with the exception of the lease contract of Nov. 15, 1957, null and void. From this judgment both parties appealed directly to the Supreme Court. After the case was submitted for decision, both parties died. Wong was substituted by his wife, Lui She, while Justina Santos was substituted by the Philippine Banking Corporation. The only question that has to be resolved now in this case is whether or not the above stated contracts are valid. The Supreme Court, speaking through Justice Castro, held: “With respect to the lower court’s finding that in all probability Justina Santos could not have intended to part with her property while she was alive nor even to lease it in its entirety as her house was built in it, suffice it to quote the testimony of her own witness and lawyer who prepared the contracts in question, Atty. Alonzo: “The ambition of the old woman, before her death, according to her revelation to me, was to see to it that these properties be enjoyed, even to own them, by Wong Heng because Doña Justina told me that she did not have any relatives near or far, and she considered Wong Heng as a son and his children her grandchildren; especially her consolation in life was when she would hear the children reciting prayers in Tagalog. She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her much, and she told me to see to it that no one would disturb Wong Heng from those properties. That is why we thought of the ninety-nine (99) years lease, we thought of

624

VOID OR INEXISTENT CONTRACTS

Arts. 1414-1416

adoption, believing that thru adoption Wong Heng might acquire Filipino citizenship; being the adopted child of a Filipino citizen.’ “This not to say, however, that the contracts are valid. For the testimony just quoted, while dispelling doubt as to the intention of Justina Santos, at the same time gives the clue to what we view as a scheme to circumvent the Constitutional prohibition against the transfer of lands to aliens. ‘The illicit purpose then becomes the illegal causa67 rendering the contracts void. “Taken singly, the contracts show nothing that is necessarily illegal but considered collectively, they reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to buy real property on condition that he is granted Philippine citizenship. As this Court said in Krivenko vs. Register of Deeds:68 ‘Aliens are not completely excluded by the Constitution from the use of lands for residential purposes. Since their residence in the Philippines is temporary, they may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire to remain here forever and share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire.’ “But an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages, not only of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to dispose of it (jus disponendi) — rights the sum total of which make up ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this case did within the space of one year, with the result that Justina

67 68

Rodriguez vs. Rodriguez, 20 SCRA 908. 29 Phil. 480-481 (1947).

625

Arts. 1414-1416

CONTRACTS

Santos’ ownership of her property was reduced to a hollow concept. If this can be done, then the Constitutional ban against alien landholding in the Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave peril. “It does not follow from what has been said, however, that because the parties are in pari delicto they will be left where they are, without relief. For one thing, the original parties who were guilty of a violation of the fundamental charter have died and have since been substituted by their administrators to whom it would be unjust to impute their guilt.69 For another thing, and this is not only cogent but also important, Article 1416 of the Civil Code provides, as an exception to the rule on pari delicto, that ‘When the agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.’ The Constitutional provision that ‘Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines’70 is an expression of public policy to conserve lands for the Filipinos. “That policy would be defeated and its continued violation sanctioned if, instead of setting the contracts aside and ordering the restoration of the land to the estate of the deceased Justina Santos, this Court should apply the general rule of pari delicto. To the extent that our ruling in this case conflicts with that laid down in Rellosa vs. Gaw Chee Hun71 and subsequent similar cases, the latter must be considered as pro tanto qualified. “Accordingly, the contracts in question are annulled and set aside; the land subject-matter of the contracts is ordered returned to the estate of Justina Santos as represented by the Philippine Banking Corporation; Wong Heng (as substituted by the defendant appellant Lui She) is ordered to pay the Philippine Banking Corporation the sum P56,564.35, with legal interest from the date of the

69 Cf. Concurring opinion of Justice Bengzon in Rellosa vs. Gaw Chee Hun, 93 Phil. 827, 836 (1953). 70 Const., Art. XIII, Sec. 5. 71 93 Phil. 827 (1953).

626

VOID OR INEXISTENT CONTRACTS

Arts. 1414-1416

filing of the amended complaint; and the amounts consigned in court by Wong Heng shall be applied to the payment of rental from November 15, 1959 until the premises shall have been vacated by his heirs. Costs against the defendant-appellant.’’ Fernando, J., concurring: “With the able and well-written opinion of Justice Castro, I am in full agreement. The exposition of the facts leaves nothing to be desired and the statement of the law is notable for its comprehensiveness and clarity. This concurring opinion has been written solely to express what I consider to be the unfortunate and deplorable consequences of applying the pari delicto concept, as was, to my mind, indiscriminately done, to alien landholding declared illegal under the Krivenko doctrines in some past decisions. “It is to be remembered that in Krivenko vs. The Register of Deeds of Manila,72 this Court over strong dissents held that residential and commercial lots may be considered agricultural within the meaning of the constitutional provision prohibiting the transfer of any private agricultural land to individuals, corporations or associations not qualified to acquire or hold lands of the public domain in the Philippines save in cases of hereditary succession. That provision of the Constitution took effect on November 15, 1935 when the Commonwealth Government was established. The interpretation as set forth in the Krivenko decision was only handed down on November 15, 1947. Prior to that date there were many who were of the opinion that the phrase agricultural land should be construed strictly and not be made to cover residential and commercial lots. Acting on that belief, several transactions were entered into transferring such lots to alienvendees by Filipino-vendors. “After the Krivenko decision, some Filipino vendors sought recovery of the lots in question on the ground that the sales were null and void. No definite ruling was made by this Court until September of 1953, when on the 20th of said month, Rellosa vs.

72

79 Phil. 461 (1947).

627

Arts. 1414-1416

CONTRACTS

Gaw Chee Hun,73 Bautista vs. Uy Isabelo,74 Talento vs. Mckiki,75 Caoile vs. Chiao Peng76 were decided. “Of the four decisions in September, 1953, the most estensive discussion of the question is found in Rellosa vs. Gaw Chee Hun, the opinion being penned by the retired Justice Bautista Angelo, with the concurrence only of one Justice, Justice Labrador, also retired. Former Chief Justice Paras as well as former Justices Tuazon and Montemayor concurred in the result. The necessary sixth vote for a decision was given by then Justice Bengzon, who had a two-paragraph concurring opinion disagreeing with the main opinion as to the force to be accorded to the two cases77 therein cited. There were two dissenting opinions by former Justices Pablo and Alex Reyes. “The doctrine as announced in the Rellosa case is that while the sale by a Filipino-vendor to an alien-vendee of a residential or a commercial lot is null and void as held in the Krivenko case, still the Filipino-vendor has no right to recover under a civil law doctrine, the parties being in pari delicto. The only remedy to prevent this continuing violation of the Constitution which the decision impliedly sanctions by allowing the alien vendees to retain the lots in question is either escheat or reversion. Thus: ‘By following either of these remedies, or by approving an implementary law as above suggested, we can enforce the fundamental policy of our Constitution regarding our natural resources without doing violence to the principle of pari delicto. “Were the parties really in pari delicto? Had the sale by and between Filipino-vendor and alien-vendee occurred after the decision in the Krivenko case, then the above view would be correct that both Filipino-vendor and alien-vendee could not be considered as innocent parties within the contemplation of the law. Both of them should be held equally guilty of evasion of the Constitution. “Since, however, the sales in question took place prior to the Krivenko decision, at a time when the assumption could be honestly entertained that there was no constitutional prohibition

93 Phil. 827. 93 Phil. 843. 75 93 Phil. 855. 76 93 Phil. 861. See also Arambulo vs. Cua So, 95 Phil. 749 (1954); Dinglasan vs. Lee Bun Ting, 99 Phil. 427 (1955). 77 Bough vs. Cantiveros, 40 Phil. 210 (1919) and Perez vs. Herranz, 7 Phil. 693 (1902). 73 74

628

VOID OR INEXISTENT CONTRACTS

Arts. 1414-1416

against the sale of commercial or residential lots by Filipinovendor to alien-vendee, in the absence of a definite decision by the Supreme Court, it would not be doing violence to reason to free them from the imputation of evading the Constitution. For evidently evasion implies at the very least knowledge of what is being evaded. The new Civil Code (Art. 526) expressly provides: ‘Mistakes upon a doubtful or difficult question of law may be the basis of good faith.’ “According to the Rellosa opinion, both parties are equally guilty of evasion of the Constitution, based on the broader principle that ‘both parties are presumed to know the law.’ This statement that the sales entered into prior to the Krivenko decision were at that time already vitiated by a guilty knowledge of the parties may be too extreme a view. It appears to ignore a postulate of a constitutional system, wherein the words of the Constitution acquire meaning through Supreme Court adjudication. “After the Krivenko decision, there is no doubt that continued possession by alien-vendee of property acquired before its promulgation is violative of the Constitution. It is as if an act granting aliens the right to acquire residential and commercial lots were annulled by the Supreme Court as contrary to the provision of the Constitution prohibiting aliens from acquiring agricultural land. “The question then as now, therefore, was and is how to divest the alien of such property rights on terms equitable to both parties. That question should be justly resolved in accordance with the mandates of the Constitution not by a wholesale condemnation of both parties for entering into a contract at a time when there was no ban as yet arising from the Krivenko decision, which could not have been anticipated. Unfortunately, under the Rellosa case, it was assumed that the parties, being in pari delicto, would be left in the situation in which they were, neither being in a position to seek judicial redress. “Would it not have been more in consonance with the Constitution, if instead the decision compelled the restitution of the property by the alien-vendee to the Filipino-vendor? Krivenko decision held in clear, explicit and unambiguous language that: ‘We are deciding the instant case under Section 5 of Article XIII of the Constitution which is more comprehensive and more absolute in the sense that it prohibits the transfer to aliens of any private agricultural land including residential land whatever its origin might have been x x x. This prohibition

629

Arts. 1414-1416

CONTRACTS

(Rep. Act No. 133) makes no distinction between private lands that are strictly agricultural and private lands that are residential or commercial. The prohibition embraces the sale of private lands of any kind in favor of aliens, which is again a clear implementation and a legislative interpretation of the constitutional prohibition. x x x It is well to note at this juncture that in the present case we have no choice. We are construing the Constitution as it is and not as we may desire it to be. Perhaps the effect of our construction is to preclude aliens, admitted freely into the Philippines, from owning sites where they may build their homes. But if this is the solemn mandate of the Constitution, we will not attempt to compromise it even in the name of amity or equity.78 “Alien-vendee is therefore incapacitated or disqualified to acquire and hold real estate. That incapacity and that disqualification should date from the adoption of the Constitution on November 15, 1935. That incapacity and that disqualification, however, was made known to Filipino-vendor and to alien-vendee only upon the promulgation of the Krivenko decision on November 15, 1947. Alien-vendee, therefore, cannot be allowed to continue owning and exercising acts of ownership over said property, when it is clearly included within the Constitutional prohibition. Alien-vendee should thus be made to restore the property with its fruits and rents to Filipino-vendor, its previous owner, if it could be shown that in the utmost good faith, he transferred his title over the same to alien-vendee, upon restitution of the purchase price of course. The Constitution bars alien-vendees from owning the property in question. By dismissing those suits, the lots remained in alien hands. Notwithstanding the solution of escheat or reversion offered, they are still at the moment of writing, for the most part in alien hands. There have been after almost twenty years no proceedings for escheat or reversion. “Yet it is clear that an alien-vendee cannot consistently with the constitutional provision, as interpreted in the Krivenko decision, continue owning and exercising acts of ownership over the real estate in question. It ought to follow then, if such a continuing violation of the fundamental law is to be put an end to, that the Filipino-vendor, who in good faith entered into, a contract with an incapacitated person, transferring ownership of a piece of land after the Constitution went into full force

78

79 Phil. 461, 480 (1947).

630

VOID OR INEXISTENT CONTRACTS

Arts. 1417-1419

and effect, in the light of the ruling in the Krivenko case, be restored to the possession and ownership thereof, when he has filed the appropriate case or proceeding. Any other construction would defeat the ends and purposes not only of this particular provision in question but the rest of the Constitution itself. “The Constitution frowns upon the title remaining in the alien-vendee. Restoration of the property upon payment of the price received by Filipino vendor or its reasonable equivalent as fixed by the court is the answer. To give the constitutional provision full force and effect, in consonance with the dictates of equity and justice, the restoration to Filipino-vendor upon the payment of a price fixed by the court is the better remedy. He thought he could transfer the property to an alien and did so. After the Krivenko case had made clear that he had no right to sell nor an alien-vendee to purchase the property in question, the obvious solution would be for him to reacquire the same. That way the Constitution would be given, as it ought to be given respect and deference. “It may be said that it is too late at this stage to hope for such a solution, the Rellosa opinion, although originally concurred in by only one justice, being too firmly inbedded. The writer however sees a welcome sign in the adoption by the Court in this case of the concurring opinion of the then Justice, later Chief Justice Bengzon. Had it been followed then, the problem would not be still with us now. Fortunately, it is never too late — not even in constitutional adjudication.’’

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.79 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.80 Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon 79 80

New provision. New provision.

631

Art. 1420

CONTRACTS

by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.81 Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.82 Article Applied. — The above article was applied to usurious contracts of loan in Angel Jose vs. Chelda (supra) and Briones vs. Cammayo (supra). The doctrine is illustrated in the following problem asked in the 1975 Bar Examinations: Problem — A partnership borrowed P20,000.00 from “A’’ at clearly usurious interest. Can the creditor recover anything from the debtor? Explain. Answer — Yes, the creditor can recover from the debtor the following: the principal, legal interest on the principal from the date of demand (Art. 2209, CC), legal interest on the legal interests from the time of judicial demand (Art. 2212, CC), and attorney’s fees, if proper, under Art. 2208 of the Civil Code. That the creditor can recover the principal from the debtor is now well settled. (Angel Jose vs. Chelda Enterprises, 23 SCRA 119; Briones vs. Cammayo, 41 SCRA 404.) In a usurious contract of loan, there are always two stipulations. They are: first, the principal stipulation whereby the debtor undertakes to pay the principal; and second, the accessory stipulation whereby the debtor undertakes to pay a usurious interest. These two stipulations are divisible. According to Art. 1420 of the Civil Code, in case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. It is clear that what is illegal is the prestation to pay the stipulated interest. Hence, being separable, the latter only should be deemed void. (Note: It must be noted that in Angel Jose vs. Chelda, it was held that attorney’s fees cannot be awarded. The principal reason is that, at the time when the decision was promulgated, there was yet no definite ruling on the point of law involved. Now, it is already well-settled that the creditor may recover the principal. Consequently, plaintiff creditor may recover the principal plus legal interest under Arts. 2209 and 2212 of the Civil Code. Hence, attorney’s fees may also be awarded.) 81 82

New provision. New provision.

632

VOID OR INEXISTENT CONTRACTS

Art. 1420

In a dissenting opinion, however, in Briones vs. Cammayo, the then Justice Castro (with Chief Justice Concepcion and Justice Fernando concurring) declared: “Beyond the area of debate is the principle that in a contract of loan of a sum of money, the cause, with respect to the lender, is generally the lender’s prestation to return the same amount. It is my view, however, that in a contract which is tainted with usury, that is, with a stipulation x x x to pay usurious interest, the prestation to pay such interest is an integral part of the cause of the contract. It is also the controlling cause, for a usurer lends his money not just to have it returned but indeed to acquire inordinate gain. x x x “Undoubtedly, the motive of the usurer is his desire to acquire inordinate gain; this motive becomes an integral and controlling part of the cause because its realization can be achieved only by compliance by the borrower with the stipulated prestation to pay usurious interest. “The law never proscribes a contract merely because of the immoral motive of a contracting party, for the reason that it does not concern itself with motive but only with cause. An exception is where such motive becomes an integral part of the cause, like the stipulated usurious interest in a contract of loan. xxx “The prestation to pay usurious interest being an integral part and controlling part of the cause, making it illegal and the contract of loan void, Article 1411 of the New Civil Code should be applied. x x x “An exception is, however, provided in the second sentence of Article 1957 which states: “The borrower may recover in accordance with the laws on usury.’ As an exception to the general rule in Article 1411, the debtor is allowed in accordance with the Usury Law to recover the amount he has paid as usurious interest. Thus, Article 1413 explicitly authorizes that “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 payment.” But the lender is not allowed to recover the principal, because no exception is made; hence, he falls within the general rule stated in Article 1411.’’

We believe that the above pronouncement is the correct law.

633

Arts. 1421-1422

CONTRACTS

Art. 1421. The defense of illegality of contracts is not available to third persons whose interests are not directly affected.83 Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.84

83 84

New provision. New provision.

634

TITLE III. — NATURAL OBLIGATIONS 1

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. Concept of Natural Obligations. — According to the above article, natural obligations are those based on equity and natural law, which do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, authorize the retention of what has been delivered or rendered by reason thereof. In other words, they refer to those “obligations without a sanction, susceptible of voluntary performance, but not through compulsion by legal means.”2 Examples of such obligations are those regulated by Arts. 1424 to 1430 of the Code. Idem; Distinguished from civil obligations. — While it is true that natural obligations are now regulated by the New Civil Code, there are still two essential distinctions between such obligations and civil obligations.3 They are: first, natural obligations are based on equity and natural law, while civil obligations are based on positive law; and second, natural obligations are not enforceable by court action, while civil obligations are enforceable by court action.4

All provisions in this Title are new. 4 Tolentino, Civil Code, 1956 Ed., p. 588, citing Colin & Capitant. 3 See comments under Art. 1156, Civil Code. 4 Art. 1423, Civil Code. 1 2

635

Art. 1423

CONTRACTS

Idem; Distinguished from moral obligations. — Although the terms “natural obligations’’ and “moral obligations’’ are used interchangeably in this jurisdiction, strictly speaking, there are two essential differences between the two. They are: first, in natural obligations there is a juridical tie between the parties which is not enforceable by court action, while in moral obligations there is no juridical tie whatsoever,5 and second, voluntary fulfillment of natural obligations by the obligor produces legal effects which the courts will recognize and protect, while voluntary fulfillment of moral obligations, on the other hand, does not produce any legal effect which courts will recognize and protect.6 Reasons for Regulation of Natural Obligations. — The Code Commission explains the reasons for the regulation of natural obligations in the new Code in the following words: “In all the specified cases of natural obligation recognized by the new Civil Code, there is a moral but not a legal duty to perform or pay, but the person thus performing or paying feels that in good conscience he should comply with his undertaking which is based on moral grounds. Why should the law permit him to change his mind and recover what he has delivered or paid? Is it not wiser and more just that the law should compel him to abide by his honor and conscience? Equity, morality, natural justice — these are, after all, the abiding foundations of all positive law. A broad policy justifies a legal principle that would encourage persons to fulfill their moral obligations. Furthermore, when the question is viewed from the side of the payee, the incorporation of natural obligations into the legal system becomes imperative. Under the laws in force under the old Code, the payee is obliged to return the amount received by him because the payor was not legally bound to make the payment. But the payee knows that by all considerations of right and justice he ought to keep what has been delivered to him. He is therefore dissatisfied over the law, which deprives him of that which in honor and fair dealing ought to pertain to him. Is it advisable for the state thus to give grounds to the citizens to be justly disappointed?

See 4 Tolentino, Civil Code, 1956 Ed., p. 589. See Villaroel vs. Estrada, 71 Phil. 140, and Fisher vs. Robb, 69 Phil. 101. See also Art. 1350, Civil Code. Strictly speaking, the obligation referred to the first case is a natural obligation, while that referred to the second case is a moral obligation. 5 6

636

NATURAL OBLIGATIONS

Arts. 1424-1425

To recapitulate: because they rest upon morality and because they are recognized in some leading civil codes, natural obligations should again become part and parcel of Philippine law.’’7

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. Article Applied. — The application of the above article may be illustrated by the following: Problem — A borrowed from B P1,000 which amount B failed to collect. After the debt has prescribed, A voluntarily paid B who accepted the payment. After a few months, being in need of money, A demanded the return of the P1,000 on the ground that there was a wrong payment, the debt having already prescribed, B refused to return the amount paid. May A succeed in collecting if he sues B in court? Reason out your answer. (1970 Bar problem) Answer — A will not succeed in collecting the P1,000 if he sues B in court. The case is expressly covered by Art. 1424 of the Civil Code which declares that 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. Because of extinction prescriptive, the obligation of A to pay his debt of P1,000 to B became a natural obligation. While it is true that a natural obligation cannot be enforced by court action, nevertheless, after voluntary fulfillment by the obligor, under the law, the obligee is authorized to retain what has been paid by reason thereof. (Art. 1423, Civil Code.)

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.

7

Report of the Code Commission, pp. 58-59.

637

Arts. 1426-1430

CONTRACTS

Art. 1426. When a minor between eighteen and twentyone 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 twentyone years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. 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.

638

TITLE IV. — ESTOPPEL

1

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. Concept of Estoppel. — Using the above article as basis, estoppel may be defined as a condition or state by virtue of which an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. The reason for the inclusion of a separate chapter in the New Civil Code on estoppel, according to the Code Commission, is that the principle of estoppel, which is an important branch of American law, will afford solution to many questions which are not foreseen in our legislation. It is, of course, true that under the old Code there are some articles whose underlying principle is that of estoppel; but the fact that it does not definitely recognize estoppel as a separate and distinct branch of our legal system has not at all helped in the solution of these problems.2 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. Kinds of Estoppel. — The New Civil Code, in Art. 1433, gives only two kinds of estoppel — estoppel in pais (by conduct) and estoppel by deed. This classification is based on the common law classification of estoppels into equitable and technical estoppel. 1 2

All provisions in this Title are new. Report of the Code Commission, p. 59.

639

Arts. 1431-1433

CONTRACTS

This classification, however, is too broad. Hence, in a recent case, the Supreme Court classified estoppels into: (1) estoppel in pais, (2) estoppel by deed or by record, and (3) estoppel by laches.3 Idem; Estoppel in pais. — Estoppel in pais or by conduct is that which arises when one by his acts, representations, or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, as a consequence of which he would be prejudiced if the former is permitted to deny the existence of such facts.4 Idem; id. — Estoppel by silence. — Estoppel by silence or inaction refers to a type of estoppel in pais which arises when a party, who has a right and opportunity to speak or act as well as a duty to do so under the circumstances, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other relies and acts on such belief, as a consequence of which he would be prejudiced if the former is permitted to deny the existence of such facts.5 A good example of this type of estoppel would be that which is contemplated in Art. 1437 of the New Civil Code. Idem; id. — Estoppel by acceptance of benefits. — Estoppel by acceptance of benefits refers to a type of estoppel in pais which arises when a party by accepting benefits derived from a certain act or transaction, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other relies and acts on such belief, as a consequence of which he would be prejudiced if the former is permitted to deny the existence of such facts.6 A good example of this type of estoppel would be that which is contemplated in Art. 1438 of the New Civil Code. Idem; Estoppel by deed or by record. — Strictly speaking, estoppel by deed and estoppel by record are two distinct types of technical estoppel. Thus, estoppel by deed is defined as a type of technical estoppel by virtue of which a party to a deed and his privies are precluded from asserting as against the other party and his

Tijam vs. Sibonghanoy, 23 SCRA 29. 31 C.J.S. 237. 5 Ibid. 6 Ibid. 3 4

640

ESTOPPEL

Arts. 1431-1433

privies any right or title in derogation of the deed, or from denying any material fact asserted therein.7 On the other hand, estoppel by record is defined as a type or technical estoppel by virtue of which a party and his privies are precluded from denying the truth of matters set forth in a record whether judicial or legislative.8 Idem; id. — Estoppel by judgment. — Estoppel by judgment refers to a type of estoppel by virtue of which the party to a case is precluded from denying the facts adjudicated by a court of competent jurisdiction. Actually, estoppel by judgment is merely a type of estoppel by record. It may be defined as the preclusion of a party to a case from denying the facts adjudicated by a court of competent jurisdiction.9 It must not, however, be confused with res judicata. Estoppel by judgment bars the parties from raising any question that might have been put in issue and decided in the previous litigation, whereas res judicata makes a judgment conclusive between the same parties as to the matter directly adjudged.10 Idem; Estoppel by laches. — Laches, in a general sense, is failure or neglect, for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it.11 It is, therefore, a type of equitable estoppel which arises when a party, knowing his rights as against another, takes no step or delays in enforcing them until the condition of the latter, who has no knowledge or notice that the former would assert such rights, has become so changed that he cannot without injury or prejudice, be restored to his former state. Idem; id. — Basis. — The doctrine of laches or of “stale demands” is based upon grounds of public policy which requires, for the peace of society, the discouragement of stale claims and, unlike the statute of limitations, is not a mere question of time but

Ibid. 19 Am. Jur. 601. 9 Ibid. 10 Phil. National Bank vs. Barretto, 52 Phil. 818; Namarco vs. Macadaeg, 52 Off. Gaz. 182. 11 Tijam vs. Sibonghanoy, supra. 7 8

641

Arts. 1431-1433

CONTRACTS

is principally a question of the inequity or unfairness of permitting a right or claim to be enforced or asserted.12 Idem; id. — Elements. — In order to apply the doctrine of laches, four essential elements must be present. These elements are: (1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which complaint is made and for which the complaint seeks a remedy; (2) delay in asserting the complainant’s rights, the complainant having had knowledge or notice, of the defendant’s conduct and having been afforded an opportunity to institute a suit; (3) lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held to be barred.13 Idem; id. id. — Application. — The doctrine of laches has been applied several times in actions based on void contracts practically rendering the doctrine of imprescriptibility of such actions useless. Thus, in Rodriguez vs. Rodriguez,14 where the plaintiff, in 1934, sold two fishponds to a daughter by a previous marriage, and the latter, in turn, sold the same fishponds to her mother and stepfather for the purpose of circumventing the legal prohibition against donations between spouses thus converting the said fishponds into conjugal properties, in an action commenced by said plaintiff to revindicate the conveyed properties twenty-eight years later, it was held that the doctrine of laches is applicable. The case of Miguel vs. Catalino15 is even more illustrative. The factual setting of this case is as follows: The father of the plaintiffs, a non-Christian, sold a parcel of land to the father of the defendant in 1928 without executive approval as required by Sec. 145 of the Administrative Code. Despite the invalidity of the sale, the former allowed the latter to enter, possess and enjoy the land in question without protest, from 1928 to 1943, when the former died. The plaintiffs, who succeeded the deceased in turn, remained inactive, without taking any step to revindicate the property from 1943 to 1962, when the present suit was finally commenced in court. Is this Ibid. Miguel vs. Catalino, 26 SCRA 234, and cases cited therein. 14 24 SCRA 908. 15 Supra. 12 13

642

ESTOPPEL

Arts. 1431-1433

suit now barred by laches? According to the Supreme Court, the suit is now barred by laches. Even granting plaintiff’s proposition that no prescription lies against their father’s recorded title, their passivity and inaction for more than thirty-four years justifies the defendant in setting up the equitable defense of laches. All of the four elements of laches are present. As a result, the action of plaintiffs must be considered barred.16 Heirs of Lacamen vs. Heirs of Laruan 65 SCRA 605 Petition for review by certiorari of a decision of the Honorable Court of Appeals affirming the judgment of the Court of First Instance of Baguio City in Civil Case No. 738 entitled “Heirs of Batiog Lacamen vs. Heirs of Laruan’’ . . . declaring the contract of sale between Lacamen and Laruan null and void for [lack of approval of the Director of the Bureau of Non-Christian Tribes] . . .’’ Petitioners-appellants are the surviving heirs of Batiog Lacamen, while respondents-appellants are the heirs of Laruan. Sometime on January 28, 1928, Laruan executed a Deed of Sale in favor of Batiog Lacamen conveying for the sum of P300.00 his parcel of land situated in the sitio of La Trinidad, Benguet, Mountain Province, comprising 86 acres and 16 centares and covered by Certificate of Title No. 420 of the Registry of Benguet. The deed was acknowledged before Antonio Rimando, a notary public in the City of Baguio. Immediately after the sale, Laruan delivered the certificate of title to Lacamen. Thereupon, Lacamen entered in possession and occupancy of the land without securing the corresponding transfer certificate of title in his name. He introduced various improvements and paid the proper taxes. His possession was open, continuous, peaceful, and adverse. After his death in 1942, his heirs remained in and continued possession and occupancy of the land. They too paid the taxes. After the last Global War, Lacamen’s heirs “started fixing up the papers of all properties” left by him. In or about June, 1957, they discovered that Laruan’s heirs, respondents-appel16 To the same effect — Lucas vs. Compania, 100 Phil. 277; Lotho vs. Ice and Cold Storage of the Phil., 113 Phil. 713; Heirs of Lacamen vs. Heirs of Laruan, 65 SCRA 605.

643

Arts. 1431-1433

CONTRACTS

lants, were able to procure a new owner’s copy of Certificate of Title No. 420 by a petition filed in court alleging that their copy has been lost or destroyed. Through this owner’s copy, respondents-appellants caused the transfer of the title on the lot in their names. Transfer Certificate of Title No. T-775 was issued to them by the Registry of Deeds of Benguet. Refused of their demands for reconveyance of the title, petitioners-appellants sued respondents-appellants in the Court of First Instance of Baguio City on December 9, 1957, praying among other things, that they be declared owners of the subject property; that respondents-appellants be ordered to convey to them by proper instruments or documents the land in question; and that the Register of Deeds of Benguet be ordered to cancel Transfer Certificate of Title No. T-775 and issue in lieu thereof a new certificate of title in their names. In answer, respondents-appellants traversed the averments in the complaint and claim absolute ownership over the land. They asserted that their deceased father, Laruan, never sold the property and that the Deed of Sale was not thumbmarked by him. On 5 April 1962, the Court of First Instance of Baguio City found for respondents-appellants and against petitionersappellants. Forthwith, petitioners-appellants appealed to the Court of Appeals. On 7 December 1966, the Court of Appeals sustained the trial court. The Supreme Court, speaking through Justice R. Martin, held: In this review, petitioners-appellants press that the Court of Appeals erred — I “. . . IN DECLARING THE SALE BETWEEN LACAMEN AND LARUAN TO BE NULL AND VOID. II “. . . IN APPLYING STRICTLY THE PROVISIONS OF SECTIONS 118 AND 122 OF ACT NO. 2874 AND SECTIONS 145 AND 146 OF THE MINDANAO AND SULU.

644

ESTOPPEL

Arts. 1431-1433

III “. . . IN AFFIRMING THE DECISION OF THE COURT OF FIRST INSTANCE OF BAGUIO CITY.’’ which assignments could be whittled down into the pervading issue of whether the deceased Batiog Lacamen and/or his heirs, herein petitioners-appellants, have validly acquired ownership over the disputed parcel of land. “The 1917 Administrative Code of Mindanao and Sulu declares in its Section 145 that no contract or agreement relating to real property shall be made by any person with any nonChristian inhabitant of the Department of Mindanao and Sulu, unless such contract shall bear the approval of the provincial governor of the province wherein the contract was executed, or his representative duly authorized for such purpose in writing endorsed upon it. Any contract or agreement in violation of this section is “null and void’’ under the succeeding Section 146. “On 24 February 1919, Act No. 2798 was approved by the Philippine Legislature extending to the Mountain Province and the Province of Nueva Vizcaya the laws and other legal provisions pertaining to the provinces and minor political subdivisions of the Department of Mindanao and Sulu, with the specific proviso that the approval of the land transaction shall be by the Director of the Bureau of Non-Christian Tribes. “Then on 29 November 1919, came Act No. 2874 otherwise known as “The Public Land Act.’’ It provided in Section 118 thereof that “Conveyances and encumbrances made by persons belonging to the so-called ‘non-Christian tribes,’ when proper shall not be valid unless duly approved by the Director of the Bureau of Non-Christian Tribes.” Any violation of this injunction would result in the nullity and avoidance of the transaction under the following Section 122. “During the regime of the Commonwealth, C.A. 141 otherwise known as “The Public Land Act” was passed — November 7, 1936 — amending Act No. 2874. However, it contained a similar provision in its Section 120 that “Conveyances and encumbrances made by illiterate non-Christians shall not be valid unless duly approved by the Commissioner of Mindanao and Sulu.’’ “The contracting parties, Lacamen and Laruan, are bound by the foregoing laws, since both of them are illiterate Igorots, belonging to the “non-Christian Tribes” of the Mountain

645

Arts. 1431-1433

CONTRACTS

Province and the Controverted land was derived from a Free Patent or acquired from the public domain. “The trial court did show cordiality to judicial pronouncements when it avoided the realty sale between Lacamen and Laruan for want of approval of the Director of the Bureau of Non-Christian Tribes. For jurisprudence decrees that non-approved conveyances and encumbrances of realty by illiterate non-Christians are not valid, i.e., not binding or obligatory. “Nevertheless, the thrust of the facts in the case before us weakens the gathered strength of the cited rule. The facts summon the equity of laches. “Laches” has been defined as “such neglect or omission to assert a right, taken in conjunction with lapse of time and other circumstances causing prejudice to an adverse party, as will operate as a bar in equity.” It is a delay in the assertion of a right “which works disadvantage to another” because of the “inequity founded on some change in the condition or relations of the property or parties.” It is based on public policy which, for the peace of society, ordains that relief will be denied to a stale demand which otherwise could be a valid claim. It is different from and applies independently of prescription. While prescription is concerned with the fact of delay, laches is concerned with the effect of delay. Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be enforced. This inequity being founded on some change in the condition of the property or the relation of the parties. Prescription is statutory; laches is not. Laches applies in equity, whereas prescription applies at law. Prescription is based on a fixed time, laches is not. “Laruan’s sale of the subject lot to Lacamen could have been valid were it not for the sole fact that it lacked the approval of the Director of the Bureau of Non-Christian Tribes. There was impressed upon its face full faith and credit after it was notarized by the notary public. The non-approval was the only “drawback” of which the trial court has found the respondentsappellants to “have taken advantage as their lever to deprive [petitioner-appellants] of this land and that their motive is out and out greed.” As between Laruan and Lacamen, the sale was regular, not infected with any flaw. Laruan’s delivery of his certificate of title to Lacamen just after the sale symbolizes nothing more than a bared recognition and acceptance on his part that Lacamen is the new owner of the property. Thus, not any antagonistic show of ownership was ever exhibited by Laruan after that sale and until his death in May 1938.

646

ESTOPPEL

Arts. 1431-1433

“From the transfer of the land on January 28, 1928, Lacamen possessed and occupied the ceded land in concepto de dueno until his death in April 1942. Thereafter, his heirs, petitioners-appellants herein, took over and exercised dominion over the property, likewise unmolested for nearly 30 years (1928-1957) until the heirs of Laruan, respondents-appellants, claimed ownership over the property and secured registration of the same in their names. At the trial, petitioners-appellants have been found to have introduced improvements on the land consisting of houses, barns, greenhouses, walls, roads, etc., and trees valued at P38,920.00. “At this state, therefore, respondents-appellants’ claim of absolute ownership over the land cannot be countenanced. It has been held that while a person may not acquire title to the registered property through continuous adverse possession, in derogation of the title of the original registered owner, the heir of the latter, however, may lose his right to recover back the possession of such property and the title thereto, by reason of laches.17 Much more should it be in the instant case where the possession of nearly 30 years or almost half a century now is in pursuance of sale which regrettably did not bear the approval of the executive authority but which the vendor never questioned during his lifetime. Laruan’s laches extends to his heirs, the respondents-appellants herein, since they stand in privity with him. “Indeed, in a like case,18 it was ruled that — “Courts can not look with favor at parties who, by their silence, delay and inaction, knowingly induce another to spend time, effort and expense in cultivating the land, paying taxes and making improvements thereon for 30 long years, only to spring from ambush and claim title when the possessor’s efforts and the rise of land values offer an opportunity to make easy profit at his expense.” “For notwithstanding the invalidity of the sale, the vendor Laruan suffered the vendee Lacamen to enter, possess and occupy the property in concepto de dueno without demurrer and molestation, from 1928 until the former’s death in 1938; and when respondents-appellants succeeded to the estate of their

17 De Lucas vs. Gamponia, 100 Phil. 277; Wright, Jr. vs. Lepanto Consolidated Mining Co., L-18904, July 11, 1964, 11 SCRA 508. 18 Miguel vs. Catalino, L-23072, November 29, 1968, 26 SCRA 234.

647

Arts. 1431-1433

CONTRACTS

father, they too kept si1ent, never claiming that the lot is their own until in 1957 or after almost 30 years they took “advantage of the [non-approval of the sale] as their lever to deprive [petitioners-appellants] of this land’’ with a motive that was “out and out greed.’’ Even granting, therefore, that no prescription lies against their father’s recorded title, their quiescence and inaction for almost 30 years now commands the imposition of laches against their adverse claim. (Miguel, footnote 27) “It results that as against Laruan and his heirs, respondents-appellants herein, the late Batiog Lacamen and his heirs, petitioners-appellants herein, have superior right and, hence, have validly acquired ownership of the litigated land. Vigilantibus non dormientibus sequitas subvenit. “IN VIEW OF THE FOREGOING, the judgment of the Court of Appeals affirming that of the trial court is hereby reversed and set aside. “The petitioners-appellants are hereby declared the lawful owners of the land in question. Accordingly, Transfer Certificate of Title No. T-775 in the name of respondents-appellants is hereby cancelled and in lieu thereof the Register of Deeds of Benguet is ordered to issue a new transfer certificate of title in the name of petitioners-appellants.’’

As a matter of fact, the doctrine has even been applied to actions for reconveyance of property held in constructive or implied trust. Thus, where some of the co-heirs were able, through fraud, to register a large tract of land in their names in 1937, while it is very true that the principle is that if property is acquired through fraud, the person obtaining it is considered a trustee of an implied trust for the benefit of the person from whom the property comes or to whom it belongs, nevertheless, since the action by the beneficiary for reconveyance of the property was commenced only in 1960, it is clear that the doctrine of laches is applicable. In other words, the action is already barred.19 Idem; id. — Laches distinguished from prescription. — Laches is different from prescription. Thus — (1) Laches is concerned with the effect of delay; prescription is concerned with the fact of delay. 19

Fabian vs. Fabian, 22 SCRA 231.

648

ESTOPPEL

Art. 1434

(2) Laches is principally a question of inequity of permitting a claim to be enforced, this inequity being founded on some changes in the condition of the property or the relation of the parties; prescription is a question or matter of time; (3)

Laches is not statutory, whereas prescription is statutory.

(4)

Laches applies in equity, whereas prescription applies at

law. (5) Laches is not based on fixed time, whereas prescription is based on fixed time.20 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. Article Applied. — The above article is illustrated in the following case: Bucton vs. Gabar 55 SCRA 499 Appeal from the decision of the Court of Appeals in CAG.R. No. 49091-R, dated January 10, 1973, reversing the judgment of the trial court and dismissing the complaint filed by herein petitioners, and from said appellate court’s resolution dated February 5, 1973, denying petitioners’ motion for reconsideration. The facts of the case, as found by the trial court, which have not been disturbed by respondent Court of Appeals, are as follows: “Plaintiff Nicanora Gabar Bucton (wife of her coplaintiff Felix Bucton) is the sister of defendant Zosimo Gabar, husband of his co-defendant Josefina Llamoso Gabar. “This action for specific performance prays, interalia, that defendants-spouses be ordered to execute in

20 Miguel vs. Catalino, supra; Nielsen vs. Lepanto Consolidated Mining Co., 18 SCRA 1040.

649

Art. 1434

CONTRACTS

favor of plaintiffs a deed of sale of the western half of a parcel of land having an area of 728 sq.m. covered by TCT No. II (from OCT No. 6337) of the office of the Register of Deeds of Misamis Oriental. “Plaintiff’s evidence tends to show that sometime in 1946 defendant Josefina Llamoso Gabar bought the abovementioned land from the spouses Villarin on installment basis, to wit, P500.00 down, the balance payable in installments. Josefina entered into a verbal agreement with her sister-in-law, plaintiff Nicanora Gabar Bucton, that the latter would pay one-half of the price (P3,000) and would then own one-half of the land. Pursuant to this understanding Nicanora on January 19, 1946 gave her sister-in-law Josefina the initial amount of P1,000, for which the latter signed a receipt marked as Exhibit A. “Subsequently, on May 2, 1948, Nicanora gave Josefina P400. She later signed a receipt marked as Exhibit B. “On July 30, 1951 plaintiffs gave defendants P1,000.00 in concept of loan, for which defendant Zosimo Gabar signed a receipt marked as Exhibit E. “Meanwhile, after Josefina had received in January, 1946 the initial amount of P1,000.00 as above stated, plaintiffs took possession of the portion of the land indicated to them by defendants and built a modest nipa house therein. About two years later plaintiffs built behind the nipa house another house for rent. And, subsequently, plaintiffs demolished the nipa house and in its place constructed a house of strong materials with three apartments in the lower portion for rental purposes. Plaintiffs occupied the upper portion of this house as their residence, until July, 1969 when they moved to another house, converting and leasing the upper portion as a dormitory. “In January, 1947, the spouses Villarin executed the deed of sale of the land abovementioned in favor of defendant Josefina Llamoso Gabar, Exhibit I, to whom was issued on June 20, 1947 TCT No. II, cancelling OCT No. 6337 (Exhibit D). “Plaintiffs then sought to obtain a separate title for their portion of the land in question. Defendants repeatedly declined to accommodate plaintiffs. Their excuse: the entire land was still mortgaged with the

650

ESTOPPEL

Art. 1434

Philippine National Bank as guarantee for defendants’ loan of P3,500 contracted on June 16, 1947 (Exhibit D-1). “Plaintiffs continued enjoying their portion of the land, planting fruit trees and receiving the rentals of their buildings. In 1953, with the consent of defendants (who were living on their portion), plaintiffs had the entire land surveyed and subdivided preparatory to obtaining their separate title to their portion. After the survey and the planting of the concrete monuments defendants erected a fence from point 2 to point 4 of the plan, Exhibit I, which is the dividing line between the portion pertaining to defendants, Exhibit I-1, and that pertaining to plaintiffs, Exhibit I-2. “In the meantime, plaintiffs continued to insist on obtaining their separate title. Defendants remained unmoved, giving the same excuse. Frustrated, plaintiffs were compelled to employ Atty. Bonifacio Regalado to intercede; counsel tried but failed. Plaintiffs persevered, this time employing Atty. Aquilino Pimentel, Jr. to persuade defendants to comply with their obligation to plaintiffs; this, too, failed. Hence, this case, which has cost plaintiff’s P1,500.00 in attorney’s fees. “Defendants’ evidence — based only on the testimony of defendant Josefina Llamoso Gabar — denies agreement to sell to plaintiffs one-half of the land in litigation. She declared that the amounts she had received from plaintiff Nicanora Gabar Bucton — first, P1,000 then P400 — were loans, not payment of one-half of the price of the land (which was P3,000.00). This defense is devoid of merit. “When Josefina received the first amount of P1,000 the receipt she signed, Exhibit A, reads: ‘Cagayan, Mis. Or. January 19, 1946 ‘Received from Mrs. Nicanora Gabar the sum of one thousand (P1,000) pesos, victory currency, as part payment of the one thousand five hundred (P1,500.00) pesos, which sum is one-half of the purchase value of Lot No. 337, under Torrens Certificate of Title No. 6337, sold to me by Mrs. Carmen Roa Villarin. ‘(Sgd.) Josefina Ll. Gabar.’’’

651

Art. 1434

CONTRACTS

On the basis of the facts quoted above the trial court on February 14, 1970, rendered judgment the dispositive portion of which reads: “WHEREFORE, judgment is hereby rendered for plaintiffs: “1) Ordering defendants within thirty days from receipt hereof to execute a deed of conveyance in favor of plaintiffs of the portion of the land covered by OCT No. II, indicated as Lot 337-B in the Subdivision Plan, Exhibit I, and described in the Technical Description, Exhibit I-2; should defendants for any reason fail to do so, the deed shall be executed in their behalf by the Provincial Sheriff of Misamis Oriental, or his Deputy; “2) Ordering the Register of Deeds of Cagayan de Oro, upon presentation to him of the above-mentioned deed of conveyance, to cancel TCT No. II and in its stead to issue two Transfer Certificates of Title, to wit, one to plaintiffs and another to defendants, based on the subdivision Plan and Technical Description above-mentioned; and ordering defendants to present and surrender to the Register of Deeds their TCT No. II so that the same maybe cancelled; and “3) Ordering defendants to pay unto plaintiffs attorney’s fees in the amount of P1,500.00 and to pay the costs. “SO ORDERED.” Appeal was interposed by private respondents with the Court of Appeals, which reversed the judgment of the trial court and ordered petitioners’ complaint dismissed, on the following legal disquisition: “Appellees’’ alleged right of action was based on the receipt (Exh. A) which was executed way back on January 19, 1946. An action arising from a written contract does not prescribe until after the lapse of ten (10) years from the date of action accrued. This period of ten (10) years is expressly provided for in Article 1144 of the Civil Code. “From January 19, 1946 to February 15, 1968, when the complaint was filed in this case, twenty-two (22) years and twenty-six (26) days had elapsed. Therefore, the plaintiffs’ action to enforce the alleged written contract (Exh. A) was not brought within the prescriptive period of ten (10) years from the time the cause of action accrued.

652

ESTOPPEL

Art. 1434

“The land in question is admittedly covered by a torrens title in the name of Josefina Llamoso Gabar so that the alleged possession of the land by the plaintiffs since 1947 is immaterial because ownership over registered realty may not be acquired by prescription or adverse possession (Section 40 of Act 496). “It is not without reluctance that in this case we are constrained to sustain the defense of prescription, for we think that plaintiffs really paid for a portion of the lot in question pursuant to their agreement with the defendants that they would then own one-half of the land. But we cannot apply ethical principles in lieu of express statutory provisions. It is by law provided that: ‘ART. 1144. The following actions must be brought within ten years from the time the right of action accrues: 1.

Upon a written contract;

2.

Upon an obligation created by law;

3.

Upon a judgment.’

“If eternal vigilance is the price of safety, one cannot sleep on one’s right and expect it to be preserved in its pristine purity.’’ Petitioners appeal is predicated on the proposition that as owners of the property by purchase from private respondents, and being in actual, continuous and physical possession thereof since the date of its purchase, their action to compel the vendors to execute a formal deed of conveyance so that the fact of their ownership may be inscribed in the corresponding certificate of title, had not yet prescribed when they filed the present action. The Supreme Court, speaking through Justice Antonio, held: “We hold that the present appeal is meritorious. “1. There is no question that petitioner Nicanora Gabar Bucton paid P1,500.00 to respondent Josefina Gabar as purchase price of one-half of the lot now covered by TCT No. II, for respondent Court of Appeals found as a fact “that plaintiffs really paid for a portion of the lot in question pursuant to their agreement with the defendants that they would own one-half (1/2) of the land.” That sale, although not consigned in a public instrument or formal writing, is nevertheless valid and binding between petitioners and private respondents, for the time-honored rule

653

Art. 1434

CONTRACTS

is that even a verbal contract of sale or real estate produces legal effects between the parties.21 Although at the time said petitioner paid P1,000.00 as part payment of the purchase price on January 19, 1946, private respondents were not yet the owners of the lot, they became such owners on January 24, 1947, when a deed of sale was executed in their favor by the Villarin spouses. In the premises, Article 1434 of the Civil Code, which provides that “[w]hen 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,” is applicable.22 Thus, the payment by petitioner Nicanora Gabar Bucton of P1,000.00, on January 19, 1946, her second payment of P400.00 on May 2, 1948, and the compensation, up to amount of P100.00 (out of the P1,000.00 loan obtained by private respondents from petitioners on July 30, 1951), resulted in the full payment of the purchase price and the consequential acquisition by petitioners of ownership over one-half of the lot. Petitioners therefore became owners of the one-half portion of the lot in question by virtue of a sale which, though not evidenced by a formal deed, was nevertheless proved by both documentary and parole evidence. 2. The error of respondent Court of Appeals in holding that petitioners’ right of action had already prescribed stems from its belief that the action of petitioners is based on the receipt Exh. “A’’ which was executed way back on January 19, 1946, and, therefore, in the view of said appellate court, since petitioners’ action was filed on February 15, 1968, or after the lapse of twentytwo (22) years and twenty-six (26) days from the date of said document, the same is already barred according to the provisions of Article 1144 of the new Civil Code. The aforecited document (Exh. “A’’), as well as the other documents of similar import (Exh. “B” and Exh. “E”), are the receipts issued by private respondents to petitioners, evidencing payments by the latter of the purchase price of one-half of the lot.

21 Couto vs. Cortes, 8 Phil. 459, 460 (1907); Guerrero vs. Miguel, 10 Phil. 52, 53 (1908). 22 Llacer vs. Muñoz de Bustillo, et al., 12 Phil. 328, 334; Inquimboy vs. Paez Vda. de Cruz, 108 Phil. 1054, 1057; Castrillo, et al. vs. Court of Appeals, et al., March 31, 1964, 10 SCRA 549, 553; Estoque vs. Pajimula, L-24419, July 15, 1968, 24 SCRA 59, 62.

654

ESTOPPEL

Art. 1434

“The real and ultimate basis of petitioners’ action is their ownership of one-half of the lot coupled with their possession thereof, which entitles them to a conveyance of the property. In Sapto, et al. vs. Fabiana,23 this Court, speaking thru Mr. Justice J.B.L. Reyes, explained that under the circumstances no enforcement of the contract is needed, since the delivery of possession of the land sold had consummated the sale and transferred title to the purchaser, and that, actually, the action for conveyance is one to quiet title, i.e., to remove the cloud upon the appelee’s ownership by the refusal of the appellants to recognize the sale made by their predecessors. We held therein that “* * * it is an established rule of American Jurisprudence (made applicable in this jurisdiction by Art. 480 of the New Civil Code) that actions to quiet title to property in the possession of the plaintiff are imprescriptible. (44 Am. Jur., p. 47; Cooper vs. Rhea, 20 L.R.A. 930; Inland Empire Land Co. vs. Grant County, 138 Wash. 439, 245 Pac. 14.) “The prevailing rule is that the right of a plaintiff to have his title to land quieted, as against one who is asserting some adverse claim or lien thereon, is not barred while the plaintiff or his grantors remain in actual possession of the land, claiming to be owners thereof, the reason for this rule being that while the owner in fee continues liable to an action, proceeding, or suit upon the adverse claim he has a continuing right to the aid of a court of equity to ascertain and determine the nature of such claim and its effect on his title, or to assert any superior equity in his favor. He may wait until his possession is disturbed or his title in attacked before taking step to vindicate his right. But the rule that the statute of limitations is not available as a defense to an action to remove a cloud from title can only invoked by a complainant when he is in possession. One who claims property which is in the possession of another must, it seems, invoke his remedy within the statutory period.’ (44 Am. Jur., p. 47)’’ The doctrine was reiterated recently in Gallar vs. Husain, et al., where we ruled that by the delivery of the possession of the land, the sale was consummated and title was transferred to the appellee, that the action is actually not for specific performance, since all it seeks is to quiet title, to remove the cloud cast upon appellee’s ownership as a result of appellant’s refusal to recognize the sale made by his predecessor, and that as plaintiff-appellee is in possession of the land, and the action 23

103 Phil. 683, 686-687.

655

Arts. 1435-1439

CONTRACTS

is imprescriptible. Considering that the foregoing circumstances obtain in the present case, we hold that petitioner’s action has not prescribed. “WHEREFORE, the decision and resolution of respondent Court of Appeals appealed from are hereby reversed, and the judgment of the Court of First Instance of Misamis Oriental, Branch IV, in its Civil Case No. 004, is revived. Costs against private respondents.’’

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; (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. 656

TITLE V. — TRUST

1

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. Concept of Trusts. — Trust is the legal relationship between one person having an equitable ownership in a certain property and another person owning the legal title to such property.2 There are always three persons involved in the creation of a trust, whether created by intention of the parties or by operation of law. They are: first, the trustor, or the person who establishes the trust; second, the trustee, or the one in whom confidence is reposed as regards property for the benefit of another person; and third, the beneficiary, or the person for whose benefit the trust has been created.3 The object of the trust, on the other hand, is known as the trust res. The trust res must consist of property, actually in existence, in which the trustor has a transferable interest or title, although as a rule, it consists of any kind of transferable property, either realty or personalty, including undivided, future, or contingent interest therein.4

All provisions in this Title are new. 54 Am. Jur., Sec. 4, p. 21. 3 Art. 1440, Civil Code. 4 54 Am. Jur., Sec. 32, p. 44. 1 2

657

Art. 1441

CONTRACTS

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. Kinds of Trust. — Trusts are either express or implied. Express trusts are those created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law.5 Implied trusts may be either resulting or constructive. In Ramos vs. Ramos (61 SCRA 284), the Supreme Court adopted the following definitions: “Implied trusts are those which, without being expressed, are deducible from the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as matters of equity, independently of the particular intention of the parties.” (89 C.J.S. 724.) They are ordinarily subdivided into resulting and constructive trusts. (89 C.J.S. 722.) “A resulting trust is broadly defined as a trust which is raised or created by the act or construction of law, but in its more restricted sense it is a trust raised by implication of law and presumed always 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 or instrument of conveyance.” (89 C.J.S. 725.) Examples of resulting trusts are found in Articles 1448 to 1455 of the Civil Code. “On the other hand, a constructive trust is a trust “raised by construction of law, or arising by operation of law.” In a more restricted sense and as contradistinguished from a resulting trust, a constructive trust is “a trust not created by any words, either expressly or impliedly evincing a direct intention to create a trust, but by the construction of equity in order to satisfy the demands of justice. It does not arise by agreement or intention but by operation of law.” (89 C.J.S. 726-727.) “If a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a so-called constructive trust in favor of the defrauded party.” A constructive trust is not a trust in the technical sense. (See Art. 1456, Civil Code.)”

5

Art. 1441, Civil Code.

658

TRUST

Art. 1442

Idem; Express and implied trusts distinguished. — Express and implied trusts may be distinguished from each other as follows: (1) Express trust is one created by the intention of the trustor or of the parties, whereas an implied trust is one that comes into being by operation of law. (2) Express trusts are those created by the direct and positive acts of the parties, by some writing or deed or will or by words evidencing an intention to create a trust, whereas implied trusts are those which, without being expressed, are deducible from the nature of the transaction by operation of law as matters of equity, independently of the particular intention of the parties. (3) Thus, if the intention to establish a trust is clear, the trust is express; if the intent to establish a trust is to be taken from circumstances or other matters indicative of such intent, then the trust is implied. (4) An express trust concerning an immovable or any interest therein cannot be proved by parole evidence, whereas an implied trust concerning an immovable or any interest therein may be proved by parole evidence. (5) An action to enforce an express trust, so long as there is no express repudiation of the trust by the trustee and made known to the beneficiary, cannot be barred by laches or by extinctive prescription, whereas an action to enforce an implied trust, even when there is no express repudiation of the trust by the trustee and made known to the beneficiary, may be barred by laches or by extinctive prescription.6 Art. 1442. The principles of the general law of trusts, insofar as they are not in conflict with the Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted.

6 See Cuaycong vs. Cuaycong, 21 SCRA 1192; Fabian vs. Fabian, 22 SCRA 231. See also Arts. 1443, 1457, Civil Code.

659

CONTRACTS

CHAPTER 2 EXPRESS TRUSTS Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parole 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.

660

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 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. 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. Article Applied. — The above article is illustrated in the following problem asked in the 1959 Bar Examinations: Problem — “X’’ being unable to pay the purchase price of a house and lot for his residence has requested “Y,’’ and “Y’’ agreed to lend him the money under one condition, that the

661

Arts. 1451-1453

CONTRACTS

Certificate of Title be transferred to him, in Y’s own name for his protection and as security of the loan. Later on “Y’’ mortgaged the property to the bank without the knowledge of “X.’’ When the mortgage became due, “Y’’ did not redeem the mortgage and the property was advertised for sale. “X’’ retained you as his lawyer. What advise would you give your client and what legal ground provided by the Code would you assert to defend his rights? Give reasons. (1959 Bar Problem) Answer — It is clear that in the instant problem, the provision of Art. 1450 of the Civil Code is applicable. This article provides: “If the price of the 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.” It must be observed, however, that the mortgage of the property by “Y’’ to the bank is perfectly valid inas- much as the bank was not aware of any flaw or defect in the title or mode of acquisition of “Y’’ since the right of “X’’ has not been annotated in the Certificate of Title; in other words, the bank had acted in good faith. Consequently, the only way by which I would be able to help “X’’ would be to advice him to redeem the mortgaged property from the bank. After this is done, “X’’ can then institute an action to compel “Y’’ to reconvey the property to him pursuant to the provision of Art. 1450 of the Civil Code. In this action for reconveyance, the amount paid by “X’’ to the bank in redeeming the property can then be applied to the payment of his debt to “Y.’’ If there is an excess, he can recover the amount from “Y.’’

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 contemplated. 662

IMPLIED TRUSTS

Arts. 1454-1456

Art. 1454. If an absolute conveyance or 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. 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. Article Applied. — The most common application of the above article would be those cases where after the death of the decedent, some of the co-heirs will enter into an extrajudicial settlement or partition of the hereditary estate with preterition of the other coheirs, and subsequently, will secure original or transfer certificates of title in their names. In such a case, such co-heirs are considered trustees of an implied or constructive trust for the benefit of the other co-heirs who were omitted in the settlement or partition.1 Idem; Prescriptibility of actions to enforce trust. — Prior 1964, the question as to whether or not an action for reconveyance of real property based upon an implied trust resulting from fraud may be barred by the statute of limitations was unsettled. The majority of cases, however, supported the view that the action cannot be barred. Thus, where a brother, as administrator of the estate of his parents, took advantage of the absence of his sister and registered the properties adjudicated to his sister in his own name, in an action commenced by the sister twenty-nine years afterwards, it was held that the defense of prescription is clearly untenable. Public policy demands that a person guilty of fraud, or, at least, of breach of trust, should not be allowed to use a Torrens Title as a shield against the consequences of his wrongdoing.2 See Fabian vs. Fabian, 22 SCRA 231, and cases cited therein. Jacinto vs. Jacinto, 115 Phil. 363. To the same effect: Juan vs. Zuñiga, 114 Phil. 1163; Villaluz vs. Neme, 117 Phil. 25, and cases cited therein. 1 2

663

Arts. 1454-1456

CONTRACTS

Finally, on May 29, 1964, the Supreme Court in Gerona vs. De Guzman,3 in an excellently phrased decision penned by then Justice Concepcion, unequivocally reaffirmed the rule, overruling previous decisions, that “an action for reconveyance of real property based upon an implied trust resulting from fraud, may not be barred by the statute of limitations,” and further that “the action therefore may be filed x x x from the discovery of the fraud,’’ the discovery in that case being deemed to have taken place when new certificates of title were issued exclusively in the names of the defendants therein. This rule was subsequently reiterated in a long line of notable decisions. Idem; id. — Period of prescription. — What is the period of prescription for bringing an action for reconveyance based on the implied or constructive trust which is created in Article 1456 of the New Civil Code? It depends. Thus — 1. If the action for reconveyance involves the annulment of the voidable contract which became the basis for the fraudulent registration of the subject property, then the period of prescription is four years from the discovery of the fraud. This finds codal support in Art. 1391, par. 4, of the Civil Code, which declares that the action for annulment of contracts which are voidable by reason of mistake or fraud shall be brought within four years from the time of the discovery of the mistake or fraud. It also finds support in the cases of Gerona vs. De Guzman (11 SCRA 153), Fabian vs. Fabian (22 SCRA 231), Carantes vs. Court of Appeals (76 SCRA 514), Alarcon vs. Bidin (120 SCRA 390), and other cases. 2. If the action involves the declaration of the nullity or inexistence of a void or inexistent contract which became the basis for the fraudulent registration of the subject property, then the action is imprescriptible. This finds codal support in Art. 1410 of the Civil Code, which declares that the action or defense for the declaration of the inexistence of a contract does not prescribe. It also finds support in the case of Tongoy vs. Court of Appeals (123 SCRA 99). 3. If the action does not involve the annulment of a contract, but there was fraud in the registration of the subject property, then the period of prescription is ten years from the discovery of the fraud.

3

11 SCRA 153.

664

IMPLIED TRUSTS

Arts. 1454-1456

This finds codal support in No. (2) of Art. 1144 of the Civil Code, which declares that an action based upon an obligation created by law must be brought within ten years from the time the right of action accrues. It also finds support in the cases of Bueno vs. Reyes (27 SCRA 1179), Varsity Hills, Inc. vs. Navarro (43 SCRA 503), Escay vs. Court of Appeals (61 SCRA 369), Jaramil vs. Court of Appeals (78 SCRA 420), Vda. de Nacalaban vs. Court of Appeals (80 SCRA 428), Duque vs. Domingo (80 SCRA 654), and cases. 4. If the legitimate owner of the subject property which was fraudulently registered in the name of another had always been in possession thereof so that, as a consequence, the constructive notice rule cannot be applied, in reality the action for reconveyance is an action to quiet title; therefore, the action is imprescriptible. This finds support in the case of Caragay Layno vs. Court of Appeals (133 SCRA 718). Idem; Laches may bar action. — In Fabian vs. Fabian,4 the Supreme Court reiterated the rule laid down in Diaz vs. Goricho5 that laches may bar an action to enforce a constructive trust. In the latter case, the Court, speaking through Justice J.B.L. Reyes, declared: “Article 1456 of the new Civil Code, while not retroactive in character, merely expresses a rule already recognized by our courts prior to the Code’s promulgation. (see Gayondato vs. Insular Treasurer, 49 Phil. 244.) Appellants are, however, in error in believing that like express trust, such constructive trusts may not be barred by lapse of time. The American law on trusts has always maintained a distinction between express trusts created by the intention of the parties, and the implied or constructive trusts that are exclusively created by law, the latter not being trusts in their technical sense. (Gayondato vs. Insular Treasurer, supra.) The express trusts disable the trustee from acquiring for his own benefit the property committed to his management or custody, at least while he does not openly repudiate the trust, and makes such repudiation known to the beneficiary or cestui que trust. For this reason, the old Code of Civil Procedure (Act 190) declared that the rules on adverse

4 5

22 SCRA 231. 103 Phil. 264-265.

665

Arts. 1454-1456

CONTRACTS

possession does not apply to ‘continuing and subsisting’ (i.e., unrepudiated) trusts. But in constructive trusts, x x x the rule is that laches constitutes a bar to actions to enforce the trust, and repudiation is not required, unless there is a concealment of the facts giving rise to the trust (54 Am. Jur., Secs. 580, 581; 65 C.J., Secs. 956, 957; American Law Institute, Restatement of Trusts, Section 219; on Restitution, Section 179; Stianson vs. Stianson, 6 ALR 287; Claridad vs. Beñares, 97 Phil. 973.)’’

Idem; Acquisition of property by trustee through prescription. — In this jurisdiction, it is now settled that in constructive trusts, the trustee may acquire absolute ownership over the trust res by acquisitive prescription. Thus, where two of the four co-owners of a certain parcel of land which they had inherited from their parents, had been in adverse possession of the property since 1928 in the concept of owners, declaring the property for taxation purposes in their names in 1929, and in 1945, they subdivided the property into two equal parts, and two transfer certificates of title were issued separately in their names, in an action for reconveyance commenced by the preterited co-heirs in 1960, it was held that such action is not only barred by extinctive prescription and by laches, but a valid, full and complete title over the property has already vested in the defendants by acquisitive prescription.6 It must be observed that although acquisitive prescription in favor of the trustee is possible in both express and implied trusts, nevertheless, in the former, before absolute title can be vested in the trustee, the following requisites must concur: (1) The trustee must expressly repudiate the right of the beneficiary; (2) such act of repudiation must be brought to the knowledge of the beneficiary; (3) the evidence thereon must be clear and conclusive; and (4) expiration of the period prescribed by law.7 In implied trusts, however, express repudiation of the trust by the trustee is not required. All that is required is that he must set up a title which is adverse to that of the beneficiary. In other words, the normal requisites for extraordinary acquisitive prescription must be present.

Fabian vs. Fabian, supra. See Lagura vs. Levantino, 71 Phil. 566; Salinas vs. Tunson, 55 Phil. 729; Ramos vs. Ramos, 61 SCRA 284. 6 7

666

IMPLIED TRUSTS

Arts. 1454-1456

Idem; Illustrative cases. — The following digests of recent cases decided by the Supreme Court will serve to clarify some of the above-stated principles: Fabian vs. Fabian 22 SCRA 231 The land in question was acquired by Pablo Fabian in 1909. In 1928, Pablo died survived by four children, Esperanza, Benita I, Benita II, and Silvina. Later, in 1937, through a series of fraudulent acts, Silvina Fabian and Teodora Fabian, a niece of Pablo, were able to secure an original certificate of title in their name. In 1945, they subdivided the lot into two equal parts and as a result, two new transfer certificates of title were issued in their names. On July 18, 1960, the other heirs of Pablo Fabian brought an action against them for reconveyance on the ground of the existence of an implied or constructive trust. Defendants, however, interposed the defenses of laches, extinctive prescription, and acquisition of absolute ownership of the property by acquisitive prescription. From an order of dismissal of the complaint, plaintiffs have appealed. Held: As far as the defense of laches is concerned, appellants are in error in believing that like express trust, constructive trust may not be barred by lapse of time. The express trusts disable the trustee from acquiring for his own benefit the property committed to his management or custody, at least while he does not openly repudiate the trust, and make such repudiation known to the beneficiary. But in constructive trusts, the rule is that laches constitutes a bar to actions to enforce the trust, and repudiation is not required, unless there is a concealment of the facts giving rise to the trust. As far as defense of extinctive prescription is concerned, it is well-settled in this jurisdiction that an action for reconveyance of real property based upon a constructive or implied trust resulting from fraud may be barred by the statute of limitations. Upon the undisputed facts in the case at bar, not only had laches set when the appellants instituted their action for reconveyance in 1960, but their right to enforce the constructive trust had already prescribed. It logically follows from the above disquisition that acquisitive prescription has likewise operated to vest absolute title in the appellees, pursuant to the provisions of Section 41 of Act 190 which was then the law in force.

667

Arts. 1454-1456

CONTRACTS

Bueno, et al. vs. Reyes, et al. 27 SCRA 1179 The lot which is the subject matter of this litigation originally belonged to Jorge Bueno. When he died, the property descended by intestate succession to his three children, Brigida, Eugenia and Rufino. Subsequently, Brigida and Eugenia died. In 1936, by agreement among the heirs, Francisco Reyes, Eugenia’s husband, was entrusted with the job of filing the answer in the cadastral proceedings and in obtaining title to the property for and in behalf of the heirs of Jorge Bueno. Reyes filed the answer, claiming the lot as property belonging to himself and to his two brothers, Juan and Mateo. Subsequently, the lot was adjudicated in favor of the claimants, in whose names an original certificate of title was issued in 1939. In 1962, the heirs of Jorge Bueno, who had always been in possession of the property, discovered the fraud committed by Francisco Reyes. As a consequence, they brought this action for reconveyance of the lot to them. Defendants, however, interposed the defense or prescription of action which was reiterated in a motion to dismiss. The trial court a quo held that the action is predicated on the existence of an implied trust and that such action prescribes in ten years. Consequently, the case was dismissed. Plaintiffs appealed. The question now is — has the action prescribed? Held: While there are some decisions which hold that an action based upon a trust is imprescriptible, with better rule, as laid down by this Court in other decisions, is that prescription does supervene where the trust is merely an implied one. Upon the general proposition that an action for reconveyance such as the present is subject to prescription in ten years to the appellees and the court a quo are correct. The question here, however, is: from what time should the prescriptive period be counted? It should be remembered that the constructive trust arose by reason of the bad faith of Francisco Reyes, compounded by the connivance of his brothers. Consequently, the cause of action upon such trust must be deemed to have accrued only upon the discovery of such bad faith, or to put it more specifically, upon the discovery by the appellants that. Francisco Reyes, in violation of their agreement with him, had obtained registration of the disputed property in his own name and in the names of his brothers? It would not do to say that the cadastral proceeding itself, by virtue of its nature as a proceeding in rem, was constructive notice to the appellants, for as far as they were concerned the cadastral answer they had authorized Francisco

668

IMPLIED TRUSTS

Arts. 1454-1456

Reyes to file was not adverse to them; and neither he nor the appellees may invoke the constructive notice rule on the basis of their own breach of the authority thus given. On top of all these, it was the appellants and not the appellees who were in possession of the property as owners, continuously up to 1962, when for the first time the latter appeared upon the scene and tried to get such possession, thereby revealing to them the fact of the fraudulent registration. It would be more in keeping with justice, therefore, to afford the plaintiffs as well as the defendants the opportunity to lay their respective claims and defenses before the court in a full-blown litigation. Wherefore, the order appealed from is set aside and the case is remanded for further proceedings. De la Cerna, et al. vs. De la Cerna, et al. 72 SCRA 514 This is a direct appeal from an order of the lower court dismissing the complaint of plaintiffs for partition and reconveyance of property with damages on the ground that the action has already prescribed. The factual backdrop of the case is as follows: Narciso de la Cerna died in 1945. His widow and their two legitimate children subsequently executed a deed of extrajudicial partition, which they registered on September 14, 1946 in the Office of the Register of Deeds, wherein they stated that they are the only owners of the subject property and that one-half thereof is the share of the widow and the other onehalf is the share of the children. On the basis of such deed, a transfer certificate of title was issued to them. Twenty years later, plaintiffs, children of Narciso by a prior marriage, brought the instant action against defendants. Has their right of action prescribed? Held: His Honor committed no error in ruling that the action has already prescribed. It is idle to bother as to whether the action here is one founded exclusively on fraud which prescribed in four years or one based on constructive trust which is barred after ten years, there being no question that the appellees secured their title more than twenty years before the filing of the complaint, and it is from the date of the issuance of such title that the effective assertion of adverse title for purposes of the statute of limitations is counted. (Gerona vs. De Guzman, 11 SCRA 153.)

669

Arts. 1454-1456

CONTRACTS

Caragay-Layno vs. Court of Appeals 133 SCRA 718 Respondent Appellate Court, then the Court of Appeals, affirmed in toto the judgment of the former Court of First Instance of Pangasinan, Branch III, at Dagupan adjudging private respondent entitled to recover possession of a parcel of land and ordering petitioners, as defendants below, to vacate the premises. Petitioners, as paupers, now seek a reversal of that judgment. It was established by a relocation survey that the Disputed Portion is a 3,732 square-meter-area of a bigger parcel of sugar and coconut land (Lot No. 1, Psu-24206 [Case No. 44, GLRO Rec. No. 117]), with a total area of 8,752 square meters, situated at Calasiao, Pangasinan. The entire parcel is covered by Original Certificate of Title No. 63, and includes the adjoining Lots 2 and 3, issued on 11 September 1947 in the name of Mariano M. de Vera, who died in 1951 without issue. His intestate estate was administered first by his widow and later by her nephew, respondent Salvador Estrada. Petitioner, Juliana Caragay, and the decedent, Mariano de Vera, were first cousins, “both orphans, who lived together under one roof in the care of a common aunt.’’ As administrator, DE VERA’s widow filed in Special Proceedings No. 4058 of the former Court of First Instance of Pangasinan, Branch III, an inventory of all properties of deceased which included “a parcel of land in the poblacion of Calasiao, Pangasinan, containing an area of 5,417 square meters, more or less, and covered by Tax Declaration No. 12664.’’ Because of the discrepancy in area mentioned in the Inventory as 5,147 square meters (as filed by the widow) and that in the title as 8,752 square meters, ESTRADA to the Disputed Property and found that the northwestern portion, subsequently surveyed to be 3,732 square meters, was occupied by petitioners-spouses Juliana Caragay Layno and Benito Layno. ESTRADA demanded that they vacate the Disputed Portion since titles in the name of the deceased DE VERA, but petitioners refused claiming that the land belonged to them, and, before them, to JULIANA’s father Juan Caragay. ESTRADA then instituted suit against JULIANA for the recovery of the Disputed Portion (Civil Case No. D-2007), which she resisted, mainly on the ground that the Disputed Portion had been fraudulently or mistakenly included in OCT No. 63,

670

IMPLIED TRUSTS

Arts. 1454-1456

so that an implied or constructive trust existed in her favor. She then counterclaimed for reconveyance of property in the sense that title be issued in her favor. After hearing, the Trial Court rendered judgment ordering JULIANA to vacate the Disputed Portion. On appeal, respondent Appellate Court affirmed the Decision in toto. Before us, JULIANA takes issue with the following finding of respondent Court: “Although Section 102 of Act 496 allows a Petition to compel a trustee to reconvey a registered land to the cestui que trust (Severino vs. Severino, 44 Phil. 343; Escobar vs. Locsin 74 Phil. 86) this remedy is no longer available to Juliana Caragay. Mariano de Vera’s land Lot I, Psu24206, was registered on September 11, 1947 (Exhibit ‘C’) and it was only on March 28, 1967 when the defendants filed their original answer that Caragay sought the reconveyance to her of the 3,732 square meters. Thus, her claim for reconveyance based on implied or constructive trust has prescribed after 10 years. (Banaga vs. Soler, L-15717, June 30, 1961; JM Tuason and Co. vs. Magdangal, L-15539, Jan. 30, 1962; Alzona vs. Capunitan, 4 SCRA 450.) In other words, Mariano de Vera’s original Certificate of Title No. 63 (Exhibit ‘C’) has become indefeasible.” We are constrained to reverse. The evidence discloses that the Disputed Portion was originally possessed openly, continuously and uninterruptedly in the concept of an owner by Juan Caragay, the deceased father of JULIANA, and had been declared in his name under Tax Declaration No. 28694 beginning with the year 1921 (Exhibit “2C’’), later revised by Tax Declaration No. 2298 in 1951 (Exhibit “2-C’’). Upon the demise of her father in 1914, JULIANA adjudicated the property to herself as his sole heir in 1958 (Exhibit “4’’), and declared it in her name under Tax Declaration No. 22522 beginning with the year 1959 (Exhibit “2-A’’), later cancelled by TD No. 3539 in 1966 (Exhibit “2’’). Realty taxes were also religiously paid from 1938 to 1972 (Exhibit “3-A’’ to “3-H’’). Taking the previous possession of her father to her own, they had been in actual open, continuous and uninterrupted possession in the concept of owner for about forty-five (45) years, until said possession was distributed in 1966 when ESTRADA

671

Arts. 1454-1456

CONTRACTS

informed JULIANA that the Disputed Portion was registered in Mariano DE VERA’s name. To substantiate her claim of fraud in the inclusion of the Disputed Portion in OCT No. 63, JULIANA, an unlettered woman, declared that during his lifetime, DE VERA, her first cousin, and whom she regarded as a father as he was much older borrowed from her the Tax Declaration of her land purportedly to be used as collateral for his loan and sugar quota application; that relying on her cousin’s assurances, she acceded to his request and was made to sign some documents the contents of which she did not even know because of her ignorance, that she discovered the fraudulent inclusion of the Disputed Portion in OCT No. 63 only in 1966 when ESTRADA so informed her and sought to eject them. Of significance is the fact, disclosed by the evidence, that for twenty (20) years from the date of registration of title in 1947 up to 1967 when this suit for recovery of possession was instituted, neither the deceased DE VERA up to the time of his death in 1951, not his successors-in-interest, had taken steps to possess or lay adverse claim to the Disputed Portion. They may, therefore be said to be guilty of laches as would effectively detail their cause of action. Administrator ESTRADA took interest in recovering the said portion only when he noticed the discrepancy in areas in the inventory of property and in the title. Inasmuch as DE VERA has failed to assert any rights over the Disputed Portion during his lifetime, nor did his successorsin-interest possess it for a single moment; but that, JULIANA has been in actual, continuous and open possession thereof to the exclusion of all and sundry, the inescapable inference is, fraud having been unsubstantiated, that had been erroneously included in OCT No. 63. The mistake was confirmed by the fact that deducting 3,732 sq. ms., the area of the Disputed Portion from 8,752 sq.ms., the area of Lot 1 in OCT No. 63, the difference is 5,020 sq.ms., which closely approximates the area of 5,147 sq.ms., indicated in the Inventory of Property of DE VERA. In fact, the widow by limiting the area in said Inventory to only 5,147 sq.ms. the effect, recognized and admitted that the Disputed Portion of 3,132 sq.ms. did not form part of the decedent’s estate. The foregoing conclusion does not necessarily wreak havoc on the indefeasibility of a Torrens title. For, mere possession of a certificate of title under the Torrens System is not conclusive as to the holder’s true ownership of all the property described

672

IMPLIED TRUSTS

Arts. 1454-1456

therein for however does not by virtue of said certificate alone become the owner of the land illegally included. A land Registration Court has no jurisdiction to decree a lot to persons who have never asserted any right of ownership over it. “x x x Obviously then, the inclusion of said area in the title of Lot No. 8151 is void and of no effect for a land registration Court has no jurisdiction to decree a lot to persons who have put no claim in it and who have never asserted any right of ownership over it. The Land Registration Act as well as the Cadastral Act protects only the holders of a title in good faith and does not permit its provisions to be used as a shield for the commission of fraud, or that one should enrich himself at the expense of another. JULIANA, whose property has been wrongfully registered in the name of another, but which had not yet passed into the hands of third parties, can properly seek its reconveyance. “The remedy of the landowner whose property has been wrongfully or erroneously registered in another’s name is, after one year from the date of the decree, not to set aside the decree, but respecting the decree as incontrovertible and no longer open to review, to bring an ordinary action in the ordinary court of justice for reconveyance or, if the property has passed into the hands of an innocent purchaser for value, for damages. Prescription cannot be invoked against JULIANA for the reason that as lawful possessor and owner of the Disputed Portion, her cause of action for reconveyance which, in effect, seeks to quiet title to the property, fall within settled jurisprudence that an action to quiet title to property in one’s possession is imprescriptible, her undisturbed possession over a period of fifty-two (52) years gave her a continuing right to seek the aid of a Court of equity to determine the nature of the adverse claim of a third party and the effect of her own title. Besides, under the circumstances, JULIANA’s right to quiet title, to seek reconveyance, and to annul OCT No. 63 accrued only in 1966 when she was made aware of a claim adverse to her own. It was only then that the statutory period of prescription may be said to have commenced to run against her, following the pronouncement in Faja vs. Court of Appeals, supra, a case almost identical to this one. “x x x Inasmuch as it is alleged in paragraph 3 of Frial’s complaint, that Felipe Faja has been in possession of the property since 1845 up to present for the period of 30 years,

673

Arts. 1454-1456

CONTRACTS

her cause of action for reconveyance, which in effect seeks to quiet her title to the property, falls within that rule. If at all, the period of prescription began to run against Felipe Faja only from the time she was served with copy of the complaint in 1975 giving her notice that the property she was occupying was titled in the name of Indalecio Frial. There is settled jurisprudence that one who is in actual possession of a piece of land claiming to be owner thereof may wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right, the reason for the rule being, that his disturbed possession gives him a continuing right to seek the aid of a court of equity to ascertain and determine the nature of the adverse claim of a third party and its effect on his own title, which right can be claimed only by one who is in possession. No better situation can be conceived at the moment so as to apply this rule on equity than that of herein petitioners whose mother, Felipa Faja, was in possession of the litigated property for no less than 30 years and was suddenly confronted with a claim that the land she had been occupying and cultivating all these years, was titled in the name of a third person. We hold that in such a situation the right to quiet title to the property, to seek its reconveyance and annul any certificate of title covering it accrued only from the time the one in possession was made aware of a claim adverse to his own, and it is only then that the statutory period of prescription commences to run against such possessor.” WHEREFORE, the judgment under review is hereby REVERSED AND SET ASIDE, and another one entered ordering private respondent Salvador Estrada, as Administrator of the Estate of the Deceased, Mariano de Vera, because the segregation of the disputed portion of 3,732 square meters forming part of Lot No. 1, PSU-24206, Case No. 44, GLRO Rec. No. 117, presently occupied by petitioner Juliana CaragayLayno, and to reconvey the same to said petitioner. After the segregation shall have been accomplished, the Register of Deeds of Pangasinan is hereby ordered to issue a new certificate of title covering said 3,732 sq.m. portion in favor of petitioner, and another certificate of title in favor of the Estate of the deceased, Mariano de Vera covering the remaining portion of 5,052 square meters. No costs. SO ORDERED.

Even in the Bar Examinations, the subject of constructive trust has become popular. Thus, in 1972, the following problem was asked: 674

IMPLIED TRUSTS

Arts. 1454-1456

Problem — “X,’’ “Y’’ and “Z,’’ falsely representing that they were the only heirs of their deceased father Juan Reyes, executed an extrajudicial partition of the property of their deceased parent. The extrajudicial partition was registered and as a result thereof, the original certificate of title of their deceased parent was cancelled and a transfer certificate of title was issued to them. They subsequently sold 1/2 of the land to Pedro who registered the deed of conveyance, and secured a transfer certificate of title in his name. Fourteen years later, “A,’’ as a legitimate heir of the deceased Juan Reyes, upon discovering these acts of his brothers, filed an action to recover from “X,’’ “Y,’’ “Z’’ and Pedro his 1/4 pro indiviso share in said property. Can “A’’ recover? Decide with reasons. Answer — “A’’ cannot recover. It must be observed that “X,’’ “Y’’ and “Z’’ are actually trustees of an implied or constructive trust for the benefit of their co-heir “A” who was omitted in the extrajudicial settlement. This is so, because according to Art. 1456 of the Civil Code, 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. In the instant case, “A,’’ as a legitimate heir of the deceased Juan Reyes, had a perfect right to bring an action against his co-heirs for reconveyance of his 1/4 pro indiviso share in the property owned in common. It is different in the case of Pedro. The sale of 1/2 of the land to him by “X,’’ “Y’’ and “Z’’ is certainly valid because he is a purchaser in good faith and for value and because co-owners are given the right to sell their individual shares in the thing owned in common. (Art. 493, Civil Code.) However, the effect thereof is limited to the portion which may be alloted to the vendors upon the termination of the co-ownership. (Art 493, Civil Code.) Hence, such sale shall be respected. However, “A’s’’ right of action against “X,’’ “Y’’ and “Z’’ is now barred: (1) By extinctive prescription. Well-settled is the rule in this jurisdiction that an action for reconveyance of real property based upon a constructive trust resulting from fraud may be barred by prescription after ten years. The period is counted from the date the trustee set up a title adverse to that of the beneficiary. Normally, this would take place at the time the deed of extrajudicial settlement is registered and a new certificate of title is

675

Arts. 1454-1456

CONTRACTS

issued in the name of the trustee or trustees. The basis for this is that such registration constitutes a constructive notice to the whole world. (2) By laches, in constructive trusts, the rule is likewise settled that laches constitutes a bar to enforce the trust. All of the elements are present. There is conduct of the defendant giving rise to the situation of which complaint is made and for which the complaint seeks a remedy; the plaintiff, with knowledge or notice of such conduct, slept on his rights; the defendants had no knowledge or notice that the plaintiff would assert his right against them; and finally, defendants will suffer damage or injury if the complaint is not barred. Problem — “HH,’’ “II,’’ “JJ’’ inherited from their parents a large parcel of land. “HH’’ and “II’’ went abroad to reside in Canada. In their absence, “JJ’’ applied for the registration of the whole land in his name only. In due time, “JJ’’ obtained a Torrens Title for the land. When “HH’’ and “II’’ returned from Canada after seven years, they found out what “JJ’’ did and sued him for their respective shares. “JJ’’ contended that the decree of title can no longer be reviewed or changed because of the lapse of more than one year from its issuance. In whose favor would you decide? (1980 Bar Problem) Answer — My decision will be in favor of “HH’’ and “II.’’ In reality, the action commenced by plaintiffs against defendant is an action for reconveyance of their respective shares in the subject property based on the constructive trust recognized 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. Since the obligation is created by law, the action commenced by the beneficiaries against him shall be counted from the time of the discovery of the fraud. When did the plaintiffs discover the fraud. Under the constructive notice rule, they are deemed to have discovered the fraud as of the date the trustee set up in himself a title adverse to the title of the beneficiaries. Normally, this would be the date the trustee (“JJ’’) obtained his Torrens Title. Since the instant action was commenced seven years after the issuance of said Title, it is obvious that it was commenced in time. Problem — Explain the following concept of trust de son tort or otherwise known as constructive trust (2007 Bar Problem)

676

IMPLIED TRUSTS

Art. 1457

Answer — A constructive trust is a form of implied trust created by equity to meet the demands of justice. It arises contrary to intention against one who, by fraud, duress or mistake or breach of fiduciary duty or wrongful disposition of another’s property, obtains or holds the legal right to property which he is not entitled to under the law. (Huang vs. CA, G.R. No.108525, Sept. 13,1994). An example of constructive trust is when a 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,NCC).

Art. 1457. An implied trust may be proved by oral evidence. — oOo —

677

COMMENTS and JURISPRUDENCE on

OBLIGATIONS and CONTRACTS By DESIDERIO P. JURADO† Associate Justice, Court of Appeals Pre-Bar Reviewer, Civil Law, San Beda College, UP Law Center, Ateneo de Manila University, Far Eastern University, University of Santo Tomas, University of Manila, Manila Review Center; Professor, Civil Law Review, San Beda College, Far Eastern University, University of Santo Tomas, Lyceum; Lecturer, UP Law Center

TWELFTH REVISED EDITION 2010

Published & Distributed by

856 Nicanor Reyes, Sr. St. Tel. Nos. 736-05-67 • 735-13-64 1977 C.M. Recto Avenue Tel. Nos. 735-55-27 • 735-55-34 Manila, Philippines www.rexpublishing.com.ph i

Philippine Copyright, 2010 by

DESIDERIO P. JURADO† ISBN 978-971-23-5330-7 No portion of this book may be copied or reproduced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied in different electronic devices or in any other form, for distribution or sale, without the written permission of the author except brief passages in books, articles, reviews, legal papers, and judicial or other official proceedings with proper citation. Any copy of this book without the corresponding number and the signature of the author on this page either proceeds from an illegitimate source or is in possession of one who has no authority to dispose of the same. ALL RIGHTS RESERVED BY THE AUTHOR

No. ____________

ISBN 978-971-23-5330-7

9

789712 353307

Printed by

rexprintingcompany,inc. typography & creative lithography 84 P. Florentino St., Quezon City Tel. Nos. 712-41-01 ii • 712-41-08

To my beloved wife

NENA this work is affectionately dedicated.

iii

iv

PREFACE TO THE 2010 EDITION True to its categorization by Dr. Jovito Salonga more than forty-nine (49) years ago, our father’s book exemplifies the reality that, as put by Dr. Salonga : “ xxx the living law is not that simple, that above the array of words and phrases, there is an area of study that is real and fascinating, as involved as life, and as complicated as the social process of which the law is the chief agency of control.” This 2009 Revised Edition, again, is a testament to the living law; a law that continues to evolve and grow with life itself. It is a law that continues to thrive and flourish with life’s complexities. Indeed, there is wisdom in Dr. Salonga’s conclusion that “xxx law assumes stability only when it has not lost its capacity for growth.” This capacity for growth is possessed by the law on Obligations and Contracts. In closing this Preface, we again express our eternal and deepest gratitude to Dr. Salonga for the inspiring and beautiful Foreword, and to Mr. Juanito F. Fontelera, owner and publisher of the REX BOOK STORE, without whose support, this edition would not have been made possible.

QUEZON CITY , Philippines August 23, 2008

v

JUSTICE ROLAND B. JURADO Associate Justice, Sandiganbayan, Chairman, 5th Division; Former RTC Judge Branch 76, Malolos, Bulacan; Former MTC Judge, Branch 2, Malolos, Bulacan; Former Fourth Assistant City Prosecutor, Caloocan City; Former Professor of Law – FEU, UE, MLQU and SSC; BSC; Ll.B. (FEU) ATTY. ROSARIO JURADO-BENEDICTO Vice-President and Head, Bank of the Philippine Islands, Legal Services Division Partner, Benedicto, Verzosa, Burkley & Associate; Former Corporate Secretary/Assistant Corporate Secretary and Legal Officer of the Filinvest Group of Companies, and the Francisco V. del Rosario Group of Companies; Private Practitioner, Dizon, Paculdo, Jurado, Jurado, Vitug and Associates; Former Professor, F.E.U. School of Business; Former Professor of San Sebastian College of Law; A.B. and Ll.B. (U.P. Diliman) ATTY. RUDOLF PHILIP B. JURADO Private Practitioner, The Law Firm of R.P.B. Jurado; Former Partner, Culvera, Waytan & Jurado Law Offices; Former Trial Lawyer, Coronel Law Office; Professor, MLQU School of Law; Former Professor U.E. College of Law and Lyceum College of Law; B.S.C., Ll.B. (U.E.) ATTY. ROBERT B. JURADO Consultant, Housing and Urban Development and Coordinating Council (HUDCC); Private Practitioner; Former Director, Legislative Bills and Index Services, Senate of the Republic of the Philippines and HUDCC; Former Consultant to the Office of the Vice President of the Philippines; Former Trial Lawyer, Marbibi Law Office, Electrical Engineering (N.U.); Ll.B. (F.EU) and ATTY. LEONARD PEEJAY V. JURADO Junior Associate Angara Abello Concepcion Regala and Cruz Law Officers BSC LLB — San Beda College

vi

PREFACE TO THE 2002 EDITION We cannot help but read once again the Foreword that Dr. Jovito R. Salonga has written way back in 1959. Yes, it was written almost forty three years ago, but as we read it, we only realize too well how true and accurate every word he has written, more particularly when he said that: “x x x life is complex and real, that the law which essays to support and maintain a regime of ordered liberty, upholding basic values and reconciling demands and interests that overlap and conflict, should cope with its increasing complexities, that it cannot be inert but that it must thrive and flourish, since history has shown that law assumes stability only when it has not lost its capacity for growth. x x x The subject of Obligations and Contracts pervades the entire social structure. It has been recognized that no society can long endure without a workable, realistic system of liabilities. The field of contracts alone illustrates the vital function of law in a free society, where respect for the worth and dignity of the human personality demands that individual volition be afforded a wide area of latitude consistent with the demands of the social order. x x x’’ And as we write this Preface, the law on Obligations and Contracts continue to expand and pervade even our advancing technology, including electronic commerce. Yes, indeed, this is a living law. It is neither simple nor easy but is rather real and as involved as life. We are glad that as observed by Dr. Salonga this “book supplies an acute need for a manual that is well-grounded, comprehensive and balanced in treatment.’’ Thus, once again, we wish to extend our increasing gratitude to Dr. Salonga, to the Professors of Obligations and Contracts who have been prescribing this book as their official text, to our brother, RICHARD B. JURADO of the Philippine Senate who assisted us in the preparation of this book and to Rex Book Store. To all of you, thank you so much!!! vii

JUDGE ROLAND B. JURADO Judge, Regional Trial Court, Branch 76, Malolos, Bulacan; Former Judge, Municipal Trial Court, Branch 2, Malolos, Bulacan; Former Fourth Assistant City Prosecutor, Caloocan City; Former Legal Consultant, Metro Manila Commission Former Professor, San Sebastian College of Law; U.E. College of Law and M.L.Q.U. College of Law; — B.S.C., Ll.B. (F.E.U.) ATTY. ROSARIO B. JURADO-BENEDICTO Assistant Vice-President and Head, Documentation and Intellectual Property Rights, Department, Legal Services Division of the Bank of the Philippine Islands; Partner, Benedicto, Verzosa, Gealogo, Burkley and Associates; Former Corporate Secretary and Legal Officer of the Filinvest Group of Companies and the Francisco V. del Rosario Group of Companies; Former Professor, F.E.U. School of Business; Former Professor, San Sebastian College of Law; — A.B., Ll.B., (U.P. Diliman) ATTY. RUDOLF PHILIP B. JURADO Partner, Rudolf Philip B. Jurado Law Office, Legal Practitioner Former Partner, Cabrera, Waytan & Jurado Law Office; Former Trial Lawyer, Antonio P. Coronel Law Office; Professor, MLQU College of Law; Former Professor, University of the East College of Law; and Lyceum of the Philippines, College of Law; Former Executive Assistant, Court of Appeals; — B.S.C., Ll.B. (U.E.) and ATTY. ROBERT B. JURADO Chief Legal, Office of Senator Noli de Castro, Legal Practitioner Former Director, Legislative Bills and Index Services, Senate of the Republic of the Philippines; Trial Lawyer, Marbibi Law Office — B.S.E.E., Ll.B. (F.E.U.)

viii

PREFACE TO THE 1993 EDITION The recent decisions of the Supreme Court as well as the other developments in the field of Obligations and Contracts have truly supported the need to come out with a revised edition of this text. Thus, inspired with the memory of our father, the late JUSTICE DESIDERIO P. JURADO who so loved the study of law without question, coupled with the unceasing care of NENA (as was affectionately called by Papa) we humbly bring out this revised edition. We dare not end this Preface without expressing or reiterating our deepest gratitude to Dr. JOVITO R. SALONGA who wrote the beautiful foreword for this text, to the many Professors of Obligations and Contracts who continue to prescribe this book as their official text in the various law schools and universities, and finally to Mr. and Mrs. FONTELERA of Rex Book Store. Quezon City, Philippines December, 1992

JUDGE ROLAND B. JURADO (Judge, Municipal Trial Court, Branch 2, Malolos, Bulacan; Former Fourth Assistant City Prosecutor, Caloocan City; Former Legal Consultant, Metro Manila Commission Professor, San Sebastian College of Law; B.S.C., Ll.B. (F.E.U.) ATTY. ROSARIO B. JURADO-BENEDICTO (Manager, Legal Services Division, Bank of the Philippine Island; Partner, Ramirez, Bargas, Benedicto and Associates; Former Corporate Secretary and Legal Officer of the Filinvest Group of Companies and the Francisco V. del Rosario Group of Companies; ix

Former Professor, F.E.U. School of Business; A.B, Ll.B., U.P.) and ATTY. RUDOLF PHILIP B. JURADO (Trial Lawyer, CORONEL LAW OFFICE; Professor, Philippine School of Business Administration, Manila; Former Executive Assistant, Court of Appeals; LI.B., U.E.)

x

PREFACE It is with a sense of pride that we are bringing out once again a revised edition of this text on Obligations and Contracts. We would like to take advantage of this occasion to extend our gratitude to Dr. Jovito R. Salonga, who wrote the beautiful foreword more than twenty years ago, to Dean Florenz D. Regalado of the College of Law of San Beda, to former Dean Emilio dela Paz of Lyceum, to the many Professors of Obligations and Contracts who had been prescribing this work as their official text for almost thirty years, and, of course, to Rex Book Store without whose help and encouragement, material or otherwise, this book would not be a reality. D. P. JURADO

Manila July 20, 1987

xi

xii

FOREWORD For a number of years, there has been going on some kind of a debate as to the proper method of teaching and expounding a subject for students of law. To be sure, no concrete proposition has been drafted, no physical stage has been set. But the debate has been raging in colleges and universities in full, though quiet, intensity. On one side of this debate are those whose avowed mission it is to make law simple and simplified, reducing it to a set of easy, neat and elemental propositions, in the manner of one who promises health and beauty in six easy lessons; on the other side are those who would confront the student with the state of the law anywhere — simple in form but sometimes unmanageable in essence, in other respects involved in both style and content, assuming, when interrelated, uncertain dimensions. The consequence of this debate is easily recognizable: law students in the Philippines may be divided roughly into two classes, with some allowances for fence-sitters — those who desire and are satisfied with the easy method of teaching, uncomplicated and engagingly simple, dispensing nothing but settled principles of law as applied to safe and settled instances, and those students who, informed by the spirit of inquiry, see through this illusion of certainty, perceiving that the living law is not that simple, that above the array of words and phrases there is an area of study that is real and fascinating, as involved as life, and as complicated as the social process of which law is the chief agency of control. Text-writers of law books have been busy aligning themselves with one or the other side. On one side, we have books that have reduced the law to a simple matter of definitions, distinctions, and enumerations, with a convenient set of examples thrown in for good measure; on the other side, we have books that contain these and more, reminding us that life is complex and real, that the law which essays to support and maintain a regime of ordered liberty, upholding basic social values and reconciling demands and interests that overlap and conflict, should cope with its increasing complexities, xiii

that it cannot be inert but that it must thrive and flourish, since history has shown that law assumes stability only when it has not lost its capacity for growth. The book of Professor Desiderio P. Jurado is now involved in this debate, and it is well that it has made its appearance. The subject of Obligations and Contracts pervades the entire social structure. It has been recognized that no society can long endure without a workable, realistic system of liabilities. The field of contracts alone illustrates the vital function of law in a free society, where respect for the worth and dignity of the human demands that individual volition be afforded a wide area of latitude consistent with the demands of the social order. There is therefore more than enough room for works such as this, and in particular, Professor Jurado’s book supplies an acute need for a manual that is well-grounded, comprehensive, and balanced in treatment. It does not belong to the “easy’’ school. Professor Jurado has brought to this book the wealth of experience he has gained as a respected scholar and teacher of law; his years of courtroom practice are also visible all throughout. Undoubtedly many of his former students, now practicising lawyers in various places of the country, will find in these pages rich opportunities for looking back to those hours of earnest discussion in the classroom, where honest disagreement is honored and debate on tenuous points of law skilfully handled by the master. We who study and teach law may not agree with all the conclusions set forth in this book; Professor Jurado does not expect unquestioning assent from us on all points. But before we register our dissent it may be well for us to consider the validity and weight of his premises, for, indeed, this book deserves more than just a rereading. It is the product of a hard discipline — the discipline of fine, unselfish scholarship.

JOVITO R. SALONGA Dean, Institute of Law, Far Eastern University Manila, Oct. 1, 1959

xiv

CONTENTS BOOK IV OBLIGATIONS AND CONTRACTS Title I. — OBLIGATIONS Chapter 1 GENERAL PROVISIONS Page Article 1156 ................................................................................ Concept of Obligations ...................................................... Requisites of Obligations .................................................. Classification of Obligations ............................................. Art. 1157 ................................................................................... Sources of Obligations ....................................................... Art. 1158 ................................................................................... Obligations Arising from Law .......................................... Art. 1159 ................................................................................... Obligations Arising from Contracts ................................. Art. 1160 ................................................................................... Obligations Arising from Quasi-Contracts ...................... Art. 1161 ................................................................................... Obligations Arising from Criminal Offenses ................... Idem; Enforcement of civil liability ......................... Idem; id. Effect of acquittal ...................................... Idem; id. Effect of independent civil actions ........... Idem; id., id. Effect of failure to make reservation ........................................................ Removal of Reservation Requirement for Independent Civil Actions ............................... Art. 1162 ................................................................................... Obligations Arising from Quasi-Delicts ........................... xv

1 1 2 3 6 6 7 7 8 8 9 9 10 11 11 14 15 17 19 19 19

Idem; Persons liable ................................................. Idem; Requisites of liability ..................................... Idem; Quasi-delicts and crimes ................................ Idem; Scope of quasi-delicts ..................................... Idem; Character of remedy.......................................

20 21 21 21 23

Chapter 2 NATURE AND EFFECT OF OBLIGATIONS Art. 1163 ................................................................................... Art. 1164 ................................................................................... Art. 1165 ................................................................................... Art. 1166 ................................................................................... Obligations to Give ............................................................ Idem; Nature of right of creditor.............................. Idem; Rights of creditor in determinate obligations ........................................................ Idem; Rights of creditor in generic obligations ....... Idem; Obligations of debtor in determinate obligations ........................................................ Idem; Obligations of debtor in generic obligations ........................................................ Art. 1167 ................................................................................... Obligations to Do; Effects of Breach................................. Art. 1168 ................................................................................... Obligations Not to Do; Effects of Breach.......................... Art. 1169 ................................................................................... Art. 1170 ................................................................................... Art. 1171 ................................................................................... Art. 1172 ................................................................................... Art. 1173 ................................................................................... Breach of Obligations ........................................................ Voluntary Breach Through Default or Mora ................... Idem; Default in positive obligations ....................... Idem; id. When demand is not necessary ................ Idem; Default in negative obligations ..................... Idem; Default in reciprocal obligations ................... Idem; id. Effect of default ......................................... Voluntary Breach Through Fraud or Dolo ....................... Idem; Effect of fraud ................................................. Voluntary Breach Through Negligence or Culpa ............ Idem; Kinds of negligence ........................................ Idem; Negligence distinguished from fraud ............ xvi

42 42 42 42 43 43 45 46 47 50 52 52 54 54 55 56 56 56 56 57 57 58 59 61 61 62 62 64 64 65 67

Idem; Test or negligence........................................... Idem; Effects of negligence ....................................... Idem; id. Regulatory power of the courts ................ Idem; id.; id. Effect of good faith .............................. Idem; id.; id. Effect of bad faith................................ Idem; id.; id. Effect of contributory negligence ....... Idem; id.; id. Other circumstances ........................... Voluntary Breach Through Contravention of Tenor of Obligation .............................................................. Art. 1174 ................................................................................... Concept of Fortuitous Event ............................................. Classification ..................................................................... Effect Upon Obligation...................................................... Idem; Essential conditions ....................................... Idem; Exceptions....................................................... Art. 1175 ................................................................................... Usurious Transactions ...................................................... Art. 1176 ................................................................................... Extinguishment of Interests and Prior Installments ...... Art. 1177 ................................................................................... Remedies of Creditor to Protect Credit ............................ Idem; Exhaustion of debtor’s property .................... Idem; Accion subrogatoria ........................................ Idem; Accion pauliana .............................................. Art. 1178 ................................................................................... Transmissibility of Rights.................................................

68 70 71 71 72 72 74 74 74 74 75 76 88 96 101 101 102 102 103 103 103 104 105 105 105

Chapter 3 DIFFERENT KINDS OF OBLIGATIONS Section 1. — Pure and Conditional Obligations Art. 1179 ................................................................................... Art. 1180 ................................................................................... Pure Obligations ................................................................ Conditional Obligations .................................................... Idem; Classification of conditions ..................................... Art. 1181 ................................................................................... Suspensive and Resolutory Conditions ............................ Idem; Effects ............................................................. Art. 1182 ................................................................................... Potestative, Casual and Mixed Conditions ...................... Idem; Effect of potestative conditions...................... xvii

107 107 107 108 109 111 111 112 115 115 115

Idem; Effect of casual conditions ............................. Idem; Effect of mixed conditions .............................. Art. 1183 ................................................................................... Possible and Impossible Conditions ................................. Idem; Effects ............................................................. Art. 1184 ................................................................................... Art. 1185 ................................................................................... Positive and Negative Conditions .................................... Idem; Effects ............................................................. Art. 1186 ................................................................................... Constructive Fulfillment of Suspensive Conditions ........ Art. 1187 ................................................................................... Art. 1188 ................................................................................... Effect of Suspensive Conditions Before Fulfillment ........ Effect of Suspensive Conditions After Fulfillment .......... Idem; Retroactivity of effect ..................................... Idem; id. In obligations to give ................................. Idem; id. In obligations to do or not to do ................ Art. 1189 ................................................................................... Effect of Loss, Deterioration or Improvement ................. Idem; Losses .............................................................. Idem; Deteriorations................................................. Idem; Improvements................................................. Art. 1190 ................................................................................... Effect of Resolutory Conditions Before Fulfillment......... Effect of Resolutory Conditions After Fulfillment ........... Idem; Retroactivity of effect ..................................... Idem; Effect of loss, deterioration or improvement ................................................ Art. 1191 ................................................................................... Concept of Reciprocal Obligations .................................... Tacit Resolutory Condition ............................................... Idem; Necessity of judicial action ............................ Idem; Nature of Breach ............................................ Idem; Alternative remedies of injured party........... Idem; id. Damages to be awarded ............................ Idem; Judicial discretion to decree rescission ......... Idem; Effect of rescission .......................................... Idem; id. Effect upon third persons ......................... Art. 1192 ................................................................................... Effect of Breach by Both Parties ......................................

xviii

118 118 122 122 123 124 124 124 124 125 125 126 126 126 128 128 129 130 130 131 131 132 132 133 134 134 134 135 136 136 137 137 139 140 141 142 142 143 146 146

Section 2. — Obligations With a Period Art. 1193 ................................................................................... Concept of Term or Period ................................................ Idem; Distinguished from condition ........................ Classification of Term or Period ....................................... Effects of Term or Period .................................................. Idem; Effect of fortuitous event ............................... Art. 1194 ................................................................................... Art. 1195 ................................................................................... Effect of Advanced Payment or Delivery ......................... Art. 1196 ................................................................................... Benefit of Term or Period .................................................. Idem; Exception ........................................................ Art. 1197 ................................................................................... Judicial Term or Period .................................................... Idem; When court may fix term ............................... Idem; Nature of action .............................................. Idem; Effect of judicial period .................................. Art. 1198 ................................................................................... Extinguishment of Debtor’s Right to Period ....................

146 146 147 147 149 150 151 151 152 152 152 154 154 155 155 160 160 163 164

Section 3. — Alternative and Facultative Obligations Concept ........................................................................... Art. 1199 ................................................................................... Art. 1200 ................................................................................... Right of Choice in Alternative Obligations ...................... Idem; Limitations upon right of choice.................... Art. 1201 ................................................................................... When Choice Takes Effect ................................................ Idem; Effect upon obligation .................................... Art. 1202 ................................................................................... When Only One Prestation is Practicable ....................... Art. 1203 ................................................................................... When Choice is Rendered Impossible .............................. Art. 1204 ................................................................................... Art. 1205 ................................................................................... Effect of Loss of Objects of Obligation .............................. Idem; If right of choice belongs to the debtor .......... Idem; If right of choice belongs to creditor .............. Art. 1206 ................................................................................... Nature of Facultative Obligations .................................... xix

167 168 168 168 168 169 169 170 170 170 171 171 171 171 172 172 173 173 174

Idem; Distinguished from alternative obligations .. Idem; When substitution takes effect ...................... Idem; Effect of loss of substitute ..............................

174 175 175

Section 4. — Joint and Solidary Obligations Concept ........................................................................... Idem; Comparative jurisprudence ........................... Art. 1207 ................................................................................... Nature of Collective Obligations in General .................... Idem; Exceptions....................................................... Art. 1208 ................................................................................... Joint Divisible Obligations ............................................... Art. 1209 ................................................................................... Joint Indivisible Obligations ............................................ Idem; Effect of breach ............................................... Idem; Effect of insolvency of a debtor ...................... Idem; Interruption of period of prescription ........... Art. 1210 ................................................................................... Indivisibility and Solidarity .............................................. Art. 1211 ................................................................................... Kinds of Solidarity............................................................. Idem; Effect of active solidarity in general ............. Idem; Effect of passive solidarity in general ........... Idem; id. Distinguished from suretyship ................. Idem; Effect of varied conditions or periods ............ Art. 1212 ................................................................................... Effect of Beneficial and Prejudicial Acts .......................... Art. 1213 ................................................................................... Effect of Assignment of Rights ......................................... Art. 1214 ................................................................................... Effect of Demand By a Creditor........................................ Art. 1215 ................................................................................... Effect of Novation .............................................................. Effect of Compensation and Confusion ............................ Effect of Remission ............................................................ Effect of Payment to a Creditor ........................................ Art. 1216 ................................................................................... Effect of Demand Upon a Debtor...................................... Art. 1217 ................................................................................... Art. 1218 ................................................................................... Effect of Payment By a Debtor ......................................... Idem; Nature of right of debtor ................................

xx

176 176 178 178 179 181 181 184 184 185 185 186 187 187 187 187 188 188 188 190 195 195 196 196 196 196 197 197 199 199 201 201 201 204 205 205 206

Art. 1219 ................................................................................... Art. 1220 ................................................................................... Art. 1221 ................................................................................... Effect of Loss or Impossibility of Performance ................ Art. 1222 ................................................................................... Defenses Available to a Solidary Debtor ..........................

208 208 209 209 210 210

Section 5. — Divisible and Indivisible Obligations Concept ........................................................................... Relation to Divisibility or Indivisibility of Things ........... Art. 1223 ................................................................................... Art. 1224 ................................................................................... Effect of Divisible or Indivisible Obligations ................... Idem; Breach of joint indivisible obligations ........... Art. 1225 ................................................................................... Determination of Divisibility or Indivisibility ................. Idem; In obligations to give ...................................... Idem; In obligations to do ......................................... Idem; In obligations not to do ..................................

212 212 213 213 213 214 214 215 215 216 217

Section 6. — Obligations With a Penal Clause Concept ........................................................................... Purpose of Penalty............................................................. Kinds of Penalty ................................................................ Art. 1226 ................................................................................... Effect of Penalty, General Rule ........................................ Idem; Exceptions....................................................... Idem; Enforceability of penalty ................................ Art. 1227 ................................................................................... Limitation Upon Right of Debtor ..................................... Limitation Upon Right of Creditor ................................... Art. 1228 ................................................................................... Proof of Actual Damages ................................................... Art. 1229 ................................................................................... When Penalty May Be Reduced ....................................... Art. 1230 ................................................................................... Nullity of Obligation or Penalty; Effect ...........................

xxi

217 217 218 218 219 221 223 224 224 224 225 225 226 226 229 229

Chapter 4 EXTINGUISHMENT OF OBLIGATIONS General Provisions Art. 1231 ................................................................................... Modes of Extinguishing Obligations ................................

230 230

Section 1. — Payment or Performance Art. 1232 ................................................................................... Concept of Payment or Performance ................................ Art. 1233 ................................................................................... Art. 1234 ................................................................................... Art. 1235 ................................................................................... When Obligation is Understood Paid or Performed ........ Art. 1236 ................................................................................... Art. 1237 ................................................................................... Art. 1238 ................................................................................... Persons Who May Pay Obligation .................................... Idem; Payment by a third person ............................ Idem; id. Right of creditor ........................................ Idem; id. Rights of third person ............................... Idem; id.; id. Right of reimbursement ..................... Idem; id.; id. Right of subrogation ........................... Idem; id.; Gratuitous payments ............................... Art. 1239 ................................................................................... Capacity to Make Payment ............................................... Art. 1240 ................................................................................... To Whom Payment Must Be Made ................................... Idem; Persons authorized to receive payment ........ Idem; id. Payment to unauthorized persons ........... Idem; id. Exceptions ................................................. Art. 1241 ................................................................................... Payment to Incapacitated Persons ................................... Payment to Third Persons ................................................ Art. 1242 ................................................................................... Payment to Possessors of Credit ...................................... Art. 1243 ................................................................................... Payment After Judicial Order of Retention ..................... Art. 1244 ................................................................................... Art. 1245 ................................................................................... Art. 1246 ................................................................................... xxii

231 231 231 231 231 231 232 233 233 233 233 234 235 235 237 238 238 239 239 239 240 241 242 242 242 243 244 244 244 244 245 245 245

What Must Be Paid ........................................................... Idem; Effect of dation in payment ........................... Idem; Effect if object is generic ................................ Art. 1247 ................................................................................... Expenses of Payment ........................................................ Art. 1248 ................................................................................... Character of Payment ....................................................... Art. 1249 ................................................................................... Rule in Monetary Obligations........................................... Idem; Effect of Rep. Act Nos. 529 and 4100 ............ Idem; Meaning of legal tender ................................. Idem; Payments with Japanese military notes ....... Idem; Payments with emergency notes ................... Idem; Payments with negotiable paper ................... Idem; id. Exceptions ................................................. Art. 1250 ................................................................................... Effect of Extraordinary Inflation or Deflation ................. Idem; War-time obligations ...................................... Idem; id. The Ballantyne Schedule .......................... Idem; id.; id. Application .......................................... Art. 1251 ................................................................................... Place of Payment ...............................................................

245 246 246 247 247 247 247 248 248 249 251 251 253 253 260 261 261 263 264 265 267 267

Subsection 1. — Application of Payment Art. 1252 ................................................................................... Concept ........................................................................... Requisites .......................................................................... Idem; First requisite ................................................. Idem; Second requisite ............................................. Idem; Third requisite................................................ Idem; Fourth requisite ............................................. Right of Debtor to Make Application................................ Idem; Exception ........................................................ Idem; Time when right is exercised ......................... Art. 1253 ................................................................................... Limitation Upon Right to Apply Payment ....................... Art. 1254 ................................................................................... Legal Application of Payment........................................... Idem; When debts are not of same burden .............. Idem; When debts are of same burden ....................

xxiii

268 268 268 268 269 270 270 270 271 271 272 272 272 272 273 274

Subsection 2. — Payment of Cession Art. 1255 ................................................................................... Concept ........................................................................... Requisites .......................................................................... Kinds ........................................................................... Distinguished from Dation in Payment ........................... Effect ...........................................................................

275 275 275 275 275 276

Subsection 3. — Tender of Payment and Consignation Art. 1256 ................................................................................... Art. 1257 ................................................................................... Art. 1258 ................................................................................... Concept ........................................................................... Distinctions ........................................................................ General Requisites of Consignation ................................. Special Requisites of Consignation .................................. Idem; First requisite ................................................. Idem; Second requisite ............................................. Idem; id. Exceptions ................................................. Idem; id. Effect or valid tender of payment............. Idem; Third requisite................................................ Idem; Fourth requisite ............................................. Idem; Fifth requisite ................................................. Subject matter of Consignation ........................................ Art. 1259 ................................................................................... Expenses of Consignation ................................................. Art. 1260 ................................................................................... Art. 1261 ................................................................................... Effects of Consignation ..................................................... Idem; Effect of withdrawal .......................................

276 277 277 277 277 278 279 280 280 282 282 283 283 283 286 286 286 286 286 287 287

Section 2. — Loss of the Thing Due Concept ........................................................................... Art. 1262 ................................................................................... Effect of Loss in Determinate Obligations to Give .......... Idem; Effect of fortuitous event ............................... Idem; id. Exceptions ................................................. Art. 1263 ................................................................................... Effect of Loss in Generic Obligations to Give .................. Art. 1264 ................................................................................... Effect of Partial Loss ......................................................... xxiv

287 288 288 289 289 290 290 291 291

Art. 1265 ................................................................................... Rule If Thing is in Debtor’s Possession ............................ Art. 1266 ................................................................................... Effect of Impossibility of Performance in Obligations to do ................................................... Idem; Effect ............................................................... Idem; Effect in obligations not to do ........................ Art. 1267 ................................................................................... Effect of Relative Impossibility......................................... Art. 1268 ................................................................................... Rule If Obligation Arises from Criminal Offense ............ Art. 1269 ................................................................................... Effect of Extinguishment of Obligation............................

291 291 292 292 293 295 295 295 296 296 297 297

Section 3. — Condonation or Remission of the Debt Concept ........................................................................... Requisites .......................................................................... Kinds ........................................................................... Art. 1270 ................................................................................... Gratuitous Character of Remission .................................. Necessity of Acceptance By Debtor .................................. Applicability of Rules on Donations ................................. Idem; Extent of remission ........................................ Idem; Form of express remission ............................. Idem; Form of implied remission ............................. Art. 1271 ................................................................................... Art. 1272 ................................................................................... Effect of Delivery of Evidence of Credit to Debtor ........... Art. 1273 ................................................................................... Art. 1274 ................................................................................... Effect of Remission in General ......................................... Idem; Effect upon accessory obligations .................. Idem; id. Rule in pledge ............................................

298 298 298 299 299 299 300 300 301 303 303 303 304 305 305 305 305 305

Section 4. — Confusion or Merger of Rights Art. 1275 ................................................................................... Concept of Confusion ......................................................... Requisites .......................................................................... Kinds ........................................................................... Art. 1276 ................................................................................... Effect Upon Accessory Obligations ................................... Art. 1277 ................................................................................... xxv

306 306 306 306 307 308 308

Effect Upon Collective Obligations................................... Effect of Revocation of Confusion .....................................

308 309

Section 5. — Compensation Art. 1278 ................................................................................... Concept of Compensation.................................................. Idem; Distinguished from payment ......................... Idem; Distinguished from confusion ........................ Idem; Distinguished from counterclaim .................. Kinds of Compensation ..................................................... Art. 1279 ................................................................................... Requisites of Compensation.............................................. Idem; As to parties.................................................... Idem; id. Bound as principals .................................. Idem; As to objects .................................................... Idem; As to maturity ................................................ Idem; As to liquidation and demandability ............. Idem; As to claims of third persons ......................... Art. 1280 ................................................................................... Right of Guarantor to Set Up Compensation................... Art. 1281 ................................................................................... Art. 1282 ................................................................................... Voluntary Compensation .................................................. Art. 1283 ................................................................................... Judicial Compensation ...................................................... Art. 1284 ................................................................................... Rules in Case of Rescissible or Voidable Debts ............... Art. 1285 ................................................................................... Effect of Assignment of Rights ......................................... Idem; When compensation has taken place ............ Idem; When compensation has not taken place ...... Idem; id. With consent of debtor .............................. Idem; id. With knowledge, but without consent, of debtor ............................................................ Idem; id. Without knowledge of debtor.................... Art. 1286 ................................................................................... Art. 1287 ................................................................................... Art. 1288 ................................................................................... Debts Which Cannot Be Compensated ............................ Art. 1289 ................................................................................... Art. 1290 ................................................................................... Effect of Compensation ..................................................... Idem; When compensation takes effect ................... xxvi

309 309 310 310 311 311 312 312 313 315 316 317 317 318 318 318 319 319 319 319 319 320 320 320 320 321 321 321 322 322 323 323 323 323 324 324 324 325

Section 6. — Novation Art. 1291 ................................................................................... Concept of Novation .......................................................... Requisites .......................................................................... Kinds ........................................................................... Idem; Objective novation .......................................... Idem; id. Change of cause......................................... Idem; id. Change of object ........................................ Idem; id. Change of principal conditions ................. Art. 1292 ................................................................................... Form of Extinguishment ................................................... Idem; Express novation ............................................ Idem; Implied novation ............................................ Art. 1293 ................................................................................... Novation By Substitution of Debtor ................................. Idem; Necessity of creditor’s consent ....................... Idem; Effect of payment by new debtor ................... Art. 1294 ................................................................................... Art. 1295 ................................................................................... Effect of Nonpayment By New Debtor ............................. Idem; If substitution is by expromision ................... Idem; If substitution is by delegacion ...................... Art. 1296 ................................................................................... Effect Upon Accessory Obligations ................................... Art. 1297 ................................................................................... Art. 1298 ................................................................................... Effect If New and/or Old Obligations Are Void ............... Idem; Rule if old obligation is voidable ................... Art. 1299 ................................................................................... Effect If Old Obligation is Conditional............................. Art. 1300 ................................................................................... Novation By Subrogation .................................................. Art. 1301 ................................................................................... Conventional Subrogation ................................................ Art. 1302 ................................................................................... Legal Subrogation ............................................................. Art. 1303 ................................................................................... Art. 1304 ................................................................................... Effect of Total Subrogation ............................................... Effect of Partial Subrogation ............................................

xxvii

325 325 326 327 328 328 328 329 330 330 333 333 338 338 341 342 344 344 344 345 345 345 346 346 346 346 347 348 348 349 349 349 349 350 351 352 352 352 353

Title II. — CONTRACTS Chapter 1 GENERAL PROVISIONS Art. 1305 ................................................................................... Concept of Contracts ......................................................... Idem; Distinguished from other terms .................... The Basic Duties of Persons when entering into Contracts ........................................................... The duty of the Courts in Interpreting Contracts ........... Elements of Contracts ....................................................... Idem; Parties to a contract ....................................... Characteristics of Contracts ............................................. Life of Contracts ................................................................ Classification of Contracts ................................................ Art. 1306 ................................................................................... Right to Contract ............................................................... Idem; Limitations ..................................................... Idem; id. First limitation .......................................... Idem; id. Second limitation ...................................... Idem; id. Third limitation......................................... Idem; id. Fourth limitation ...................................... Idem; id. Fifth limitation .......................................... Compromise; Compromise Agreements; Effects .............. Art. 1307 ................................................................................... Nominate Contracts .......................................................... Innominate Contracts ....................................................... Art. 1308 ................................................................................... Art. 1309 ................................................................................... Art. 1310 ................................................................................... Mutuality of Contracts ...................................................... Art. 1311 ................................................................................... Relativity of Contracts ...................................................... Idem; Persons bound by contract ............................. Idem; id. Exceptions ................................................. Idem; Effect of contract on third persons ................ Idem; Stipulations in favor of third persons ........... Idem; id. Kinds .......................................................... Idem; id. Requisites .................................................. Idem; id. Test of beneficial stipulation .................... Art. 1312 ................................................................................... Contracts Creating Real Rights........................................ Art. 1313 ................................................................................... xxviii

354 354 354 356 356 357 357 358 359 359 361 361 362 362 363 363 364 364 370 371 372 372 373 374 374 374 378 379 379 380 381 382 383 383 384 388 388 389

Contracts In Fraud of Creditors ....................................... Art. 1314 ................................................................................... Interferences With Contractual Relations ....................... Idem; Requisites ....................................................... Art. 1315 ................................................................................... Art. 1316 ................................................................................... Perfection of Contracts ...................................................... Art. 1317 ................................................................................... Contracts in Name of Another ..........................................

389 389 389 390 391 392 392 393 393

Chapter 2 ESSENTIAL REQUISITES OF CONTRACTS General Provisions Art. 1318 ................................................................................... Requisites of Contracts in General...................................

396 396

Section 1. — Consent Art. 1319 ................................................................................... Concept of Consent ............................................................ Requisites of Consent ........................................................ When Conracts are Perfected ........................................... Manifestation of Consent .................................................. Idem; Character of offer and acceptance ................. Idem; id. Acceptance of complex offers .................... Idem; id. Acceptance by letter or telegram.............. Idem; id. Effect of constructive knowledge .............. Idem; id. Withdrawal of offer ................................... Idem; id. Withdrawal of acceptance......................... Art. 1320 ................................................................................... Form of Acceptance ........................................................... Art. 1321 ................................................................................... Art. 1322 ................................................................................... Art. 1323 ................................................................................... Effect of Death, Civil Interdiction, Insanity, or Insolvency ............................................................. Art. 1324 ................................................................................... Period for Acceptance: Options ......................................... Art. 1325 ................................................................................... Art. 1326 ................................................................................... Art. 1327 ................................................................................... Legal Capacity of Contracting Parties ............................. xxix

397 397 397 398 398 400 401 402 405 405 407 408 408 410 410 410 410 412 412 416 416 417 417

Idem; Incapacitated persons .................................... Idem; id. Unemancipated minors............................. Idem; id. Effect of misrepresentation ...................... Idem; id. Insane or demented persons ..................... Idem; id. Deaf-mutes ................................................ Idem; id. Other incapacitated persons..................... Art. 1328 ................................................................................... Art. 1329 ................................................................................... Disqualifications to Contract ............................................ Idem; Distinguished from incapacity to contract .... Art. 1330 ................................................................................... Vices of Consent ................................................................ Art. 1331 ................................................................................... Mistake ........................................................................... Idem; Mistakes which vitiate consent ..................... Idem; id. Mistake of fact ........................................... Art. 1332 ................................................................................... Rule Where a Party is Illiterate ....................................... Art. 1333 ................................................................................... Art. 1334 ................................................................................... Mistake of Law .................................................................. Art. 1335 ................................................................................... Art. 1336 ................................................................................... Violence and Intimidation ................................................ Idem; Requisites of violence ..................................... Idem; Requisites of intimidation.............................. Idem; id. Character of intimidation ......................... Idem; id. Distinguished from reluctant consent ..... Idem; id. Determination of degree of intimidation .................................................. Idem; id. Effect of just or legal threat...................... Art. 1337 ................................................................................... Undue Influence ................................................................ Idem; Undue influence which vitiates consent ....... Art. 1338 ................................................................................... Fraud ........................................................................... Idem; Kinds of fraud ................................................. Idem; Requisites ....................................................... Idem; id. Nature of fraud.......................................... Art. 1339 ................................................................................... Effect of Failure to Disclose Facts .................................... Art. 1340 ................................................................................... Effect of Exaggerations in Trade ...................................... xxx

417 418 418 421 423 423 425 425 425 425 428 428 429 429 429 430 432 432 434 434 434 435 436 436 436 436 436 437 441 442 442 443 443 444 444 444 445 445 447 447 447 447

Art. 1341 ................................................................................... Effect of Expression of Opinion ........................................ Art. 1342 ................................................................................... Effect of Misrepresentation By Third Persons ................ Art. 1343 ................................................................................... Art. 1344 ................................................................................... Magnitude of Fraud........................................................... Relation Between Fraud and Consent ............................. Art. 1345 ................................................................................... Art. 1346 ................................................................................... Simulation of Contracts .................................................... Idem; Effects ............................................................. Contracts of Adhesion .......................................................

448 448 449 449 450 450 451 451 454 454 454 454 455

Section 2. — Object of Contracts Concept of Object ............................................................... Art. 1347 ................................................................................... Art. 1348 ................................................................................... Art. 1349 ................................................................................... What May Be the Object of Contracts .............................. Idem; Appropriability and transmissibility ............ Idem; Existence of object .......................................... Idem; id. Things which have perished ..................... Idem; id. Future things ............................................ Idem; id. Rule with respect to future inheritance ... Idem; id. Exceptions ................................................. Idem; id. Impossible things or services ................... Idem; Licitness of object ........................................... Idem; Determinability of object ...............................

456 456 456 457 457 457 457 457 457 457 461 461 462 462

Section 3. — Cause of Contracts Art. 1350 ................................................................................... Art. 1351 ................................................................................... Concept of Cause ............................................................... Idem; Distinguished from consideration ................. Idem; Distinguished from object .............................. Idem; Distinguished from motives ........................... Cause in Onerous Contracts ............................................. Idem; Accessory contracts ........................................ Idem; Moral Obligations........................................... Cause in Remuneratory Contracts ................................... Cause in Contracts of Pure Beneficence .......................... xxxi

463 463 463 464 464 465 468 469 469 471 472

Art. 1352 ................................................................................... Art. 1353 ................................................................................... Art. 1354 ................................................................................... Art. 1355 ................................................................................... Essential Requisites of Cause........................................... Idem; Effect of lack of cause ..................................... Idem; Effect of unlawful cause ................................. Idem; Effect of false cause ........................................

472 472 472 472 472 472 475 478

Chapter 3 FORMS OF CONTRACTS Art. 1356 ................................................................................... Form of Contracts; General Rule...................................... Idem; Exceptions....................................................... Idem; id. Formalities for validity ............................. Idem; id. Formalities for enforceability ................... Form of Contracts Required By Law ................................ Art. 1357 ................................................................................... Art. 1358 ................................................................................... Formalities for Efficacy .....................................................

479 479 480 480 481 481 482 483 483

Chapter 4 REFORMATION OF INSTRUMENTS Art. 1359 ................................................................................... Doctrine of Reformation of Instruments .......................... Idem; Rationale of doctrine ...................................... Idem; Distinguished from annulment of contracts ....................................................... Art. 1360 ................................................................................... Art. 1361 ................................................................................... Art. 1362 ................................................................................... Art. 1363 ................................................................................... Art. 1364 ................................................................................... Art. 1365 ................................................................................... Art. 1366 ................................................................................... Art. 1367 ................................................................................... Art. 1368 ................................................................................... Art. 1369 ................................................................................... Contracts of Adhesion ....................................................... Contracts of Credit Cards .................................................

xxxii

487 487 488 488 489 489 489 489 489 489 490 490 490 490 490 491

Chapter 5 INTERPRETATION OF CONTRACTS Art. 1370 ................................................................................... Art. 1371 ................................................................................... Primacy of Intention of Parties ........................................ Idem; How to judge intention................................... Art. 1372 ................................................................................... Art. 1373 ................................................................................... Art. 1374 ................................................................................... Art. 1375 ................................................................................... Art. 1376 ................................................................................... Art. 1377 ................................................................................... Art. 1378 ................................................................................... Art. 1379 ...................................................................................

495 495 495 497 498 498 498 498 498 498 499 499

Chapter 6 RESCISSIBLE CONTRACTS Classes of Defective Contracts.......................................... Idem; Essential features .......................................... Art. 1380 ................................................................................... Rescissible Contracts in General ...................................... Idem; Characteristics ............................................... Idem; Concept of rescission ...................................... Idem; id. Distinguished from resolution .................. Idem; id. Distinguished from rescission by mutual consent ............................................ Art. 1381 ................................................................................... Art. 1382 ................................................................................... Contracts in Behalf of Ward ............................................. Contracts in Behalf of Absentees ..................................... Contracts in Fraud of Creditors ....................................... Contracts Referring to Things Under Litigation ............. Contracts By Insolvent...................................................... Other Rescissible Contracts.............................................. Art. 1383 ................................................................................... Subsidiary Character of Action ........................................ Parties Who May Institute Action.................................... Art. 1384 ................................................................................... Extent of Rescission .......................................................... Art. 1385 ................................................................................... Effect of Rescission in Case of Lesion .............................. xxxiii

500 501 502 502 503 503 503 503 505 506 506 506 508 509 509 510 511 511 511 512 512 513 513

Effect of Rescission Upon Third Persons ......................... Art. 1386 ................................................................................... Art. 1387 ................................................................................... Art. 1388 ................................................................................... Proof of Fraud .................................................................... Idem; Presumptions of fraud.................................... Idem; Badges of fraud............................................... Idem; id. Acquisition by third person in good faith ...................................................... Idem; id. Acquisition by third person in bad faith............................................................ Art. 1389 ................................................................................... Prescriptive Period ............................................................

513 517 517 517 517 518 526 528 529 529 529

Chapter 7 VOIDABLE CONTRACTS Voidable Contracts in General ......................................... Idem; Characteristics ............................................... Idem; Distinguished from rescissible contracts ...... Art. 1390 ................................................................................... Contracts Which Are Voidable ......................................... Art. 1391 ................................................................................... Prescriptive Period ............................................................ Art. 1392 ................................................................................... Art. 1393 ................................................................................... Art. 1394 ................................................................................... Art. 1395 ................................................................................... Art. 1396 ................................................................................... Concept of Ratification ...................................................... Requisites of Ratification .................................................. Forms of Ratification ......................................................... Effects of Ratification ........................................................ Art. 1397 ................................................................................... Who May Institute Action................................................. Art. 1398 ................................................................................... Art. 1399 ................................................................................... Effects of Annulment......................................................... Idem; Obligation of mutual restitution ................... Idem; id. Rule in case of incapacity ......................... Art. 1400 ................................................................................... Art. 1401 ................................................................................... Art. 1402 ................................................................................... xxxiv

531 531 532 533 533 539 539 546 546 546 546 547 547 547 548 548 548 548 552 552 552 552 553 554 554 555

Effect of Failure to Make Restitution............................... Idem; Where loss is due to fault of defendant ......... Idem; Where loss is due to fault of plaintiff ............ Idem; Where loss is due to fortuitous event ............

555 555 556 556

Chapter 8 UNENFORCEABLE CONTRACTS Unenforceable Contracts in General ................................ Idem; Classes ............................................................ Idem; Characteristics ............................................... Idem; Distinguished from rescissible contracts ...... Idem; Distinguished from voidable contracts ......... Art. 1403 ................................................................................... Contracts Without or in Excess of Authority ................... Contracts Infringing Statute of Frauds ........................... Idem; Purpose of Statute .......................................... Idem; Form required by Statute .............................. Idem; Effect of noncompliance with Statute ........... Idem; Contracts Covered by Statute ....................... Idem; Effect of Performance of Contract ................. Idem; Ratification ..................................................... Contracts Where Both Parties Are Incapacitated ........... Art. 1404 ................................................................................... Art. 1405 ................................................................................... Art. 1406 ................................................................................... Art. 1407 ................................................................................... Art. 1408 ...................................................................................

558 558 559 559 559 560 561 562 562 562 563 563 569 570 572 572 572 572 572 573

Chapter 9 VOID OR INEXISTENT CONTRACTS Void and Inexistent Contracts in General ....................... Idem; Distinguished from rescissible contracts ...... Idem; Distinguished from voidable contracts ......... Idem; Distinguished from unenforceable contracts ........................................................... Art. 1409 ................................................................................... Contracts Which Are Void or Inexistent .......................... Idem; Characteristics ............................................... Idem; Effects ............................................................. A void contract cannot be ratified..................................... xxxv

574 575 576 576 577 577 579 579 583

Art. 1410 ................................................................................... Imprescriptibility of Action or Defense ............................ Art. 1411 ................................................................................... Art. 1412 ................................................................................... Principle of In Pari Delicto ............................................... Idem; Effect if only one party is at fault.................. Idem; Exceptions....................................................... Art. 1413 ................................................................................... Recovery By Debtor of Usurious Interest ........................ Art. 1414 ................................................................................... Art. 1415 ................................................................................... Art. 1416 ................................................................................... Article Applied ................................................................... Art. 1417 ................................................................................... Art. 1418 ................................................................................... Art. 1419 ................................................................................... Art. 1420 ................................................................................... Article Applied ................................................................... Art. 1421 ................................................................................... Art. 1422 ...................................................................................

584 584 591 591 592 601 602 603 603 621 621 621 622 631 631 631 632 632 634 634

Title III. — NATURAL OBLIGATIONS Art. 1423 ................................................................................... Concept of Natural Obligations ........................................ Idem; Distinguished from civil obligations ............. Idem; Distinguished from moral obligations ........... Reasons for Regulations of Natural Obligations ............. Art. 1424 ................................................................................... Article Applied ................................................................... Art. 1425 ................................................................................... Art. 1426 ................................................................................... Art. 1427 ................................................................................... Art. 1428 ................................................................................... Art. 1429 ................................................................................... Art. 1430 ...................................................................................

635 635 635 636 636 637 637 637 638 638 638 638 638

Title IV. — ESTOPPEL Art. 1431 ................................................................................... Concept of Estoppel ........................................................... Art. 1432 ................................................................................... Art. 1433 ................................................................................... Kinds of Estoppel............................................................... xxxvi

639 639 639 639 639

Idem; Estoppel in pais .............................................. Idem; id. Estoppel by silence .................................... Idem; id. Estoppel by acceptance of benefits ........... Idem; Estoppel by deed or by record ........................ Idem; id. Estoppel by judgment ............................... Idem; Estoppel by laches .......................................... Idem; id. Basis .......................................................... Idem; id. Elements .................................................... Idem; id. Application ................................................ Idem; id. Laches distinguished from prescription....................................................... Art. 1434 ................................................................................... Article Applied ................................................................... Art. 1435 ................................................................................... Art. 1436 ................................................................................... Art. 1437 ................................................................................... Art. 1438 ................................................................................... Art. 1439 ...................................................................................

640 640 640 640 640 641 641 642 642 648 649 649 656 656 656 656 656

Title V. — TRUSTS Chapter 1 GENERAL PROVISIONS Art. 1440 ................................................................................... Concept of Trusts............................................................... Art. 1441 ................................................................................... Kinds of Trusts .................................................................. Idem; Express and implied trusts distinguished .... Art. 1442 ...................................................................................

657 657 658 658 659 659

Chapter 2 EXPRESS TRUSTS Art. 1443 Art. 1444 Art. 1445 Art. 1446

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

660 660 660 660

Chapter 3 IMPLIED TRUSTS Art. 1447 ................................................................................... xxxvii

661

Art. 1448 ................................................................................... Art. 1449 ................................................................................... Art. 1450 ................................................................................... Article Applied ................................................................... Art. 1451 ................................................................................... Art. 1452 ................................................................................... Art. 1453 ................................................................................... Art. 1454 ................................................................................... Art. 1455 ................................................................................... Art. 1456 ................................................................................... Article Applied ................................................................... Idem; Prescriptibility of actions to enforce trust .... Idem; id. Period of prescription ................................ Idem; Laches may bar action ................................... Idem; Acquisition of property by trustee through prescription ........................................ Idem; Illustrative cases ............................................ Art. 1457 ...................................................................................

xxxviii

661 661 661 661 662 662 662 663 663 663 663 663 664 665 666 667 677