Sta Maria Obligation Contracts Text and Cases

OBLIGATIONS AND CONTRACTS Text and Cases

By

MELENCIO S. STA. MARIA, JR. Ll.B. with Honors Ateneo de Manila School of Law; Ll.M. Boston University; Professor of Law in Obligations and Contracts Law, Persons and Family Relations Law, and Public International Law at the Ateneo De Manila School of Law; Bar Reviewer at the Ateneo De Manila School of Law; Holder: 1994, 1996, 1997, 1998, 1999, 2000 Ateneo Law Alumni Foundation Professorial Chair in Civil Law and the 1992 Sasakawa Professorial Chair in International Law; 1993 United Nations Fellow at the United Nations International Law Commission, Palais de Nation, Geneva, Switzerland; Law Practitioner.

SECOND EDITION 2003

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Philippine Copyright, 2003 by

MELENCIO S. STA. MARIA, JR.

ISBN 10: 971-23-3650-6 ISBN 13: 978-971-23-3650-8 No portion of this book may be copied or reproduced in books, pamphlets, outlines, 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 articles, reviews, legal paper, and judicial or other official proceedings. 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.

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NOT TO US, O LORD, NOT TO US, BUT TO THY NAME GIVE GLORY, FOR THE SAKE OF THY STEADFAST LOVE AND THY FAITHFULNESS!

PSALMS 115.1

THIS BOOK IS LOVINGLY DEDICATED TO MY MOTHER, FLORENCIA STA. MARIA AND MY FAMILY: AMPARITA, JOSEPH EMMANUEL, PATRICIA ANNE AND THERESE MARIAN

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ACKNOWLEDGMENT This edition is my project for the Ateneo de Manila Law Alumni Foundation Professorial Chair in Civil Law awarded to me for the years 1999 and 2000. This second edition was indeed long in coming. However, I have incorporated the significant jurisprudence in Obligations and Contracts which have affected the laws on the subject since 1997. I tried to maintain the simplicity of this book without necessarily sacrificing its value as a research material. The style is still the same as the first edition. I wish to thank Fr. Joaquin G. Bernas of the Society of Jesus (SJ) for his continued support of my professorship at the Ateneo de Manila College of Law. Also, my gratitude goes to Dean Cynthia Roxas-Del Castillo who was principally the one who encouraged me to take a more serious and scholarly approach to this complex field of law. I would not have even thought of coming out with the first edition had it not for her confidence in making me teach Obligations and Contracts in 1995. Likewise, to my former esteemed professor, Dean Eduardo De Los Angeles, I extend my sincerest gratitude for inviting me, way back in 1986, to teach at the Ateneo de Manila College of Law. I did not realize then that his invitation would have a profound effect on my life today. Aside from practicing law, teaching the law has indeed become a vocation. For volunteering to assist me, I am grateful also to a group of talented law students, namely: 1)

Ribonnette Rodriguez and Maricris Ang, who, when I learned of the unavailability of the encoded master file of the first edition, painstakingly and continuously went over the original unedited version of the first edition and made the necessary encodings to tally with the finished version of that first edition. Their assistance made the incorporations of the new matters in this second edition much easier;

2)

Evelyn Kho, Thelma Mundin, Eugene Kaw, Ma. Margarita Mallari, Vanessa Valdez, and Cristina Salvatierra who assisted me in the proofreading of this work. v

Finally, last but not the least, to my wife, Professor Amparita Sta. Maria also of the Ateneo De Manila College of Law, who has continued to be my principal critic in all my works, Iextend my dearest appreciation.

MELENCIO S. STA. MARIA, JR.

November 18, 2002 Quezon City

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PREFACE For the First Edition The objective of this volume is to give the reader a basic understanding of the law on prescription, civil obligations, contracts, natural obligations, estoppel, trusts, and quasi-contracts. In explaining them, I heavily relied on the rulings of the Supreme Court. I chose cases for their value in exemplifying the area of law under discussion, citing verbatim the relevant portions clarifying particular articles. For me, there can be no better source of enlightenment other than the opinions of the Supreme Court deciding actual relevant disputes on the said subject matters. Excerpts from the report of the 1947 Code Commission pointing out the reason for the modification or incorporation of certain provisions have also been quoted. I also relied on some treatises of foreign authorities as our law has been generally adopted from both the American and Spanish systems. Whenever necessary, I made hypothetical illustrations of the application of the law. I believe that a better understanding of the statute can be achieved by simple examples devoid of any legalistic language. The articles are discussed and explained continuously, whether lengthily or briefly, without any heading and sub-heading. Thus, the only guides in this book are the articles themselves. My purpose in doing this is twofold: first, to provide the reader with an undivided view of the explanation of the particular provision, and, second, for him to remember an important principle or rule, not because of any heading or sub-heading, but precisely on the basis of the particular provision dealing with it. Certainly, I am critically aware of the limitations of this approach. Thus, I have been very careful in presenting the discussions in the simplest form possible without sacrificing their exegetical content. Important rules requiring important explanations have been given proper emphasis at suitable length. I believe that this over-all style appropriately serves the objective of this edition. If there is any law designed to significantly unify and stabilize business, commercial and legal concerns, it is the law on obligations vii

and contracts. For if one is to transact business with other people, he definitely has to make and observe binding promises, predictable commitments, documentary formalities, important conditions, limited periods and prompt payments. Breaches and defaults also occur. All these entail legal consequences. There is, therefore, a need for a basic understanding of the legal principles of obligations and contracts. This work offers a helpful and fundamental starting point in searching for the right solutions. I wish to acknowledge, with my sincerest appreciation, the following for the valuable assistance extended to me in the preparation of this book: 1)

my alma mater, the ATENEO DE MANILA UNIVERSITY, for awarding to me the Ateneo Law Alumni Foundation Professorial Chair in Civil Law for school-years 1996-1997 and 1997-1998. This volume is my project for the professorial chair;

2)

my talented student, DOMINIQUE P. GALLEGO (Ateneo Law Class of ‘98), for patiently proofreading the part of this text dealing with the law on obligations; and

3)

my secretary, MATILDE DOLINA, for partly assisting me in the encoding and typing of this work.

Finally, I cannot end without expressing my profound gratitude to my wife, ATTY. AMPARITA S. STA. MARIA, who is teaching Legal Research and is currently the Thesis Director of the Juris Doctor (JD) Program at the Ateneo de Manila University School of Law. She assisted me in my research and patiently showed me how to maximize the use of my computer. Moreover, her enduring support and perceptive suggestions have always been a source of encouragement.

MELENCIO S. STA. MARIA, JR.

August 23, 1997 Quezon City, Metro Manila

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CONTENTS Title V. Prescription Chapter 1. General Provisions ........................................... Chapter 2. Prescription of Ownership and Other Real Rights ....................................................... Chapter 3. Prescription of Actions .....................................

1 18 44

BOOK IV. OBLIGATIONS AND CONTRACTS Title I. Obligations Chapter 1. General Provisions ........................................... Chapter 2. Nature and Effect of Obligations .................... Chapter 3. Different Kinds of Obligations ........................

68 75 103

Section 1. Pure and Conditional Obligations ............. Section 2. Obligations with a Period .......................... Section 3. Alternative Obligations .............................. Section 4. Joint and Solidary Obligations .................. Section 5. Divisible and Indivisible Obligations ........ Section 6. Obligations with a Penal Clause ...............

103 132 141 148 167 170

Chapter 4. Extinguishment of Obligations .......................

176

General Provisions ...........................................

176

Section 1. Payment or Performance ........................... Subsection 1. Application of Payments .......... Subsection 2. Payment By Cession ................. Subsection 3. Tender of Payment and Consignation ............................. Section 2. Loss of the Thing Due ................................ Section 3. Condonation or Remission of the Debt ..... Section 4. Confusion or Merger of Rights .................. Section 5. Compensation ............................................. Section 6. Novation ......................................................

179 207 212

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214 223 234 239 241 262

Title II. Contracts Chapter 1. General Provisions ........................................... Chapter 2. Essential Requisites of Contracts ...................

282 322

General Provisions ...........................................

322

Section 1. Consent ....................................................... Section 2. Object of Contracts ..................................... Section 3. Cause of Contracts .....................................

323 360 363

Chapter 3. Chapter 4. Chapter 5. Chapter 6. Chapter 7. Chapter 8. Chapter 9.

Forms of Contracts .......................................... Reformation of Instruments ............................ Interpretation of Contracts ............................. Rescissible Contracts ....................................... Voidable Contracts ........................................... Unenforceable Contracts ................................. Void and Inexistent Contracts ........................

372 379 388 417 432 448 471

Title III. Natural Obligations Title IV. Estoppel Title V. Trusts Chapter 1. General Provisions ........................................... Chapter 2. Express Trusts ................................................. Chapter 3. Implied Trusts ..................................................

501 505 507

Title XVII. Extra-Contractual Obligations Chapter 1. Quasi-Contracts ............................................... Section 1. Negotiorum Gestio ..................................... Section 2. Solutio Indebiti ........................................... Section 3. Other Quasi-Contracts ...............................

x

515 517 527 539

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1

PRESCRIPTION Chapter 1

GENERAL PROVISIONS Article 1106. By prescription, one acquires ownership and other real rights through the lapse of time in the manner and under the conditions laid down by law. In the same way, rights and actions are lost by prescription. (1930a) In Sinaon vs. Sorongon1 where the Supreme Court ruled that, in certain cases, an implied trust is subject to prescription, it stated that: prescription is rightly regarded as a statute of repose whose object is to suppress fraudulent and stale claims from springing up at great distances of time and surprising the parties or their representatives when the facts have become obscure from the lapse of time or the defective memory or death or removal of witnesses.

In Morales vs. Court of First Instance of Misamis Occidental2 where prescription was not allowed to apply to obtain ownership over a particular property due to the fact that the statutory period was not complied with, the Supreme Court discussed the difference between acquisitive and extinctive prescriptions, thus: There are two kinds of prescription provided in the Civil Code. One is acquisitive, i.e., the acquisition of a right by the lapse of time (Art. 1106, par. 1). Other names for acquisitive prescription are adverse possession and usucapcion. The other kind is extinctive prescription whereby rights and actions are lost by the lapse of time (Arts. 1106, par. 2 and 1139). Another name for extinctive prescription is limitation of action. G.R. No. L-59879, May 13, 1985, 136 SCRA 407. G.R. No. L-52278, May 29, 1980, 97 SCRA 872.

1 2

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Obligations and Contracts Text and Cases

Art. 1106

The differences between acquisitive and extinctive prescriptions are well-settled as follows: “Prescription was a statute of limitations. Whereas, usucapcion expressly ‘vests the property’ and raised a new title in the occupant, prescription did nothing more than bar the right of action. The concept most fundamental to a system of title by possession is that the relationship between the occupant and the land in terms of possession is capable of producing legal consequences. In other words, it is the possessor who is the actor. Under statute of limitations, however, one does not look at the act of the possessor but at the neglect of the owner. In the former, the important feature is the claimant in possession, and in the latter it is the owner out of possession which controls.” (Mont-gomery, Prescriptive Acquisition of Land Titles, XXVI, Philippine Law Journal, 353, 356-357 [1951])

Prescription however must be differentiated from the concept of laches which is known as the doctrine of stale demands which “is based upon grounds of public policy which requires, for the peace of society, and the discouragement of stale claims.”3 The following are the requisites of laches: (1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which com-plaint is made and for which the complaint seeks a remedy; (2) delay in asserting the complainant’s rights, the com-plainant 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 barred.4 Laches is different from the statute of limitations. Prescription is concerned with the fact of delay, whereas 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 is equity, whereas prescription applies at law. Prescription is based on fixed time, laches is not.5 Tijam vs. Sibonghanoy, G.R. No. L-21450, April 15, 1968, 32 SCRA 29. Abraham vs. Recto-Kasten, G.R. No. L-16741, January 31, 1962, 4 SCRA 298; Vergara vs. Vergara, G.R. No. L-17524, May 18, 1962, 5 SCRA 53; Custodio vs. Casiano, G.R. No. L-18977, December 27, 1963, 9 SCRA 841; Go Chi Gun, et al. vs. Go Cho, et al., 96 Phil. 622. 5 Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., G.R. No. L-21601, 3 4

Art. 1106

Prescription General Provisions

3

Laches applies independently of prescription, “so that laches has been successfully interposed even if a shorter time had elapsed”6 and the prescriptive period has not yet expired. Laches can also bar the filing or prosecution of a suit. In Z.E. Lotho, Inc. vs. Ice and Cold Storage,7 where plaintiff made no genuine efforts to stop the defendant from selling ice within his (plaintiff’s) franchise-area despite plaintiff’s knowledge since 1948 of the said violative practice, and where all of plaintiff’s material records were already lost by the time he filed the suit in 1957, thereby causing prejudice to the defendant as such loss made it more difficult for defendant to controvert the correctness of the damages sought by plaintiff, and where delay in the filing of the case only in 1957 and the failure of the plaintiff to forewarn the defendant as early as 1948 prevented the defendant from guarding against further liability for damages or at least minimize the same. The Supreme Court allowed the dismissal of the case on the ground of laches notwithstanding the fact that the practices of the defendant might, if proven, have been an invasion of plaintiff’s rights. The Supreme Court decided this case on the issue of laches, despite complainant’s contention that the complaint was within the prescriptive period of 10 years from 1948. The issue of prescription was corollarily and independently touched by the Supreme Court which also ruled that the action had prescribed as it should have been brought within four years from 1948 as the cause of action dealt with an “injury to the rights of the plaintiff.” Likewise in the case of Catholic Bishop of Balanga vs. Court of Appeals,8 where the alleged landowner questioned the donation of its representative to the donee who, after such donation, possessed the property peacefully and adversely for 49 years, the Supreme Court ruled that, although prescription does not apply to registered property, “a registered landowner may lose his right to recover the possession of his registered property by reason of laches.”9 Article 1107. Persons who are capable of acquiring property or rights by the other legal modes may acquire the same by means of prescription. December 17, 1966, 18 SCRA 1040. Z.E. Lotho, Inc. vs. Ice and Cold Storage Industries, G.R. No. L-16563, December 28, 1961, 3 SCRA 744. 7 Id. 8 G.R. No. 112549, November 14, 1996, 76 SCAD 148. 9 See also the following cases: Victoriano vs. Court of Appeals, 194 SCRA 19 (1991); Lola vs. Court of Appeals, 145 SCRA 439 (1986); Golloy vs. Court of Appeals, 173 SCRA 26; Bergado vs. Court of Appeals, 173 SCRA 500 (1989); Republic vs. Court of Appeals, 204 SCRA 160 (1991); Marcelino vs. Court of Appeals, 210 SCRA 444 (1992); De La Calzada-Cierras vs. Court of Appeals, 212 SCRA 390 (1992); Claverias vs. Quingco, 207 SCRA 66 (1992). 6

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Obligations and Contracts Text and Cases

Arts. 1107-1108

Minors and other incapacitated persons may acquire property or rights by prescription, either personally or through their parents, guardians or legal representatives. (1931a) Prescription is a mode of acquiring property or rights. A person who is of majority age and who is qualified to do all acts of civil life may acquire property by prescription. The acquisition of a minor who personally acquires property or rights without the assistance of his parents or guardian is annullable or voidable. However, when such minor comes of age, he may ratify the acquisition. If the acquisition of the minor is through his parents or guardian, the acquisition is completely valid. Emancipation takes place by the attainment of majority. Majority age commences at the age of eighteen years.10 Emancipation shall terminate parental authority over the person and property of the child who shall then be qualified and responsible for all acts of civil life, save the exceptions established by existing laws in special cases.11 Article 1108. Prescription, both acquisitive and extinctive, runs against: (1) Minors and other incapacitated persons who have parents, guardians or other legal representatives; (2) Absentees who have administrators, either appointed by them before their disappearance, or appointed by the courts; (3) Persons living abroad, who have managers or administrators;

(4) Juridical persons, except the State and its subdivisions.

Persons who are disqualified from administering their property have a right to claim damages from their legal representatives whose negligence has been the cause of prescription. (1932a) Prescription may run against minors and incapacitated persons who have parents, guardians or other legal representatives. Thus, if A Family Code of the Philippines, Executive Order No. 209, August 3, 1988, as amended by Republic Act 6809, Article 234. 11 Id., Article 236. 12 G.R. No. 29759, May 18, 1989, 173 SCRA 436. 13 Republic vs. Hernaez, G.R. No. L-24137, January 1970, 31 SCRA 219; 10

Art. 1108

Prescription General Provisions

5

is insane, prescription does not run against him. However, if he has a legal representative or a guardian who, under the law, is supposed to take care of his affairs during his insanity, prescription will apply. In Vda. De Alberto vs. Court of Appeals,12 an alleged illegitimate child, represented by his natural mother, filed an action for acknowledgment and partition more than four years after the agreement of partition of the surviving legitimate heirs was duly approved by the court. The Supreme Court ruled that the action filed by the illegitimate child should be dismissed on the ground of prescription considering that the prescriptive period for assailing a partition made by heirs of a deceased prescribes after four years from the time the partition was made. The Supreme Court likewise said that under Article 1108(1) of the Civil Code, the illegitimate child can not claim exemption from the effects of prescription. The illegitimate child still has a living parent, his mother, who in fact filed the complaint in the lower court for him, falls squarely under the said article. Prescription does not run against absentees. A person who is absent cannot manage his affairs as he can not go back to his domicile. However, if he leaves an administrator or the court appoints an administrator for him, prescription will run against him. If the absentee can go back to his domicile but he intentionally does not want to return, prescription will lie against him. Relevantly, according to Article 381 of the Civil Code: Article 381. When a person disappears from his domicile, his whereabouts being unknown, and without leaving an agent to administer his property, the judge, at the instance of an interested party, a relative, or a friend, may appoint a person to represent him in all that may be necessary. This same rule shall be observed when under similar circumstances the power conferred by the absentee has expired.

Prescription run against persons living abroad who have managers or administrators. If they do not have any manager or administrator, prescription will not run against them. However, it must be shown that they can not return to their domicile within the period when prescription should have run. Juridical persons are those endowed by law of the attributes of a natural person and hence can acquire and lose properties and rights. The State and its subdivisions however, acting in their sovereign capacity, cannot be the subject of prescription.13 Hence, in Republic vs. Grijaldo, G.R. No. L-20240, December 31, 1965, 15 SCRA 681; Republic

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Obligations and Contracts Text and Cases

Art. 1108

Republic vs. Philippine National Bank,14 where the Armed Forces of the Philippines as plaintiff filed a case for recovery of a sum of money which the defendant-bank negligently paid to unauthorized persons. The lower court dismissed the suit on the ground that the action had already prescribed. The Supreme Court ruled that: since the statute of limitations does not run against the State and it is neither alleged nor shown that plaintiff, in making the deposit of its funds in question with the defendant, did so other than an instrumentality of the Republic, the pleas of prescription cannot be maintained.

However, if the political subdivision is acting in its proprietary character, prescription will lie against it. Likewise, if the instrumentality of the government is not acting in a sovereign capacity, prescription will apply to such entity. In National Development Company vs. Tobia,15 where the plaintiff National Development Corporation, a government-owned and controlled corporation, filed a collection case which was dismissed on the ground that the claim had prescribed, the Supreme Court upheld the applicability of the rules on prescription by stating: x x x Plaintiff herein is neither the Government of the Republic nor a branch or subdivision thereof. It is true that the plaintiff is an instrumentality of such Government, but as this Court has held in the case of Associacion Cooperative de Credito Agricola de Miagao vs. Monteclaro (74 Phil. 281), “even the Agricultural and Industrial Bank, which is a government-owned and controlled corporation and which has been created to promote agriculture and industry on a larger scale than agricultural credit cooperative associations, cannot be said to exercise a sovereign function. It is, like all other corporations capitalized by the Government, a business corporation,” and, as such, its causes of action are subject to the statute of limitation. x x x

Article 1109. Prescription does not run between husband and wife, even though there be a separation of property agreed upon in the marriage settlements or by judicial decree.

Neither does prescription run between parents and

vs. Rodriguez, G.R. No. L-18967, January 31, 1966, 16 SCRA 53. 14 G.R. No. L-16485, January 30, 1965, 13 SCRA 24. 15 G.R. No. L-17467, April 23, 1963, 7 SCRA 692. 16 G.R. No. L-15088, January 31, 1961, 1 SCRA 384. 17 Executive Order No. 209 which took effect on August 3, 1988. 18 Id., Article 57.

Art. 1109

Prescription General Provisions

7

children, during the minority or insanity of the latter, and between guardian and ward during the continuance of the guardianship. (n) Marriage is a special contract of permanent union between a man and a woman. Generally, prescription does not apply to husband and wife unless the law otherwise provides. This is true even though there be a separation of property agreed upon in the marriage settlement or by judicial decree. Thus in Pacio vs. Billion,16 where a husband made a donation to his first wife and that, in order to resist the claim of the children of the said husband from his second wife, the children of the first wife contended that, though the donation was invalid, the first wife nevertheless acquired the same through acquisitive prescription considering that the void donation constituted a title and that the first wife possessed the property for about 29 years. The Supreme Court rejected such contention on the ground that there was no proof of an adverse possession on the part of the first wife. Moreover, under Article 1109 of the 1950 Civil Code “prescription by adverse possession cannot exist between husband and wife.” However, notwithstanding the provisions of the Civil Code, a law may validly provide that prescription applies between husband and wife. Thus, the Family Code of the Philippines17 provides that a case of legal separation between husband and wife must be filed within 5 years from the occurrence of the cause.18 For annulment, it is generally 5 years from the particular starting point provided by law, such as from the marriage ceremony if the ground is im-potency.19 No prescription lies between parent and child during the latter’s insanity or minority. The natural bond of filiation is the basis of this rule. Moreover, while the child is a minor, the parents are his natural guardians without the need of a court appointment. If the daughter or son has attained the age of majority and is not insane, prescription will apply. However, in special cases, the law may provide for a prescriptive period between parent and child. Thus, the Family Code of the Philippines provides that a husband may impugn the legitimacy of the child of her wife on grounds provided by law within one year, two years or three years from his knowledge of the birth of the child or its recording in the civil registry, depending on the residence of the husband and the place of birth of the child.20 Id., Article 47(5). Id., Article 170. 21 Article 484 of the 1950 Civil Code. 22 G.R. No. L-48889, May 11, 1989, 161 SCRA 307. 19 20

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Obligations and Contracts Text and Cases

Arts. 1110-1112

Due to the fiduciary relationship between the guardian and the ward, prescription will not lie during the period of guardianship. This is to give adequate remedy to the ward for the abuses of the guardian. Article 1110. Prescription, acquisitive and extinctive, runs in favor of, or against a married woman. (n) Whether married or unmarried, prescription runs in favor of or against a married woman. Article 1111. Prescription obtained by a co-proprietor or a co-owner shall benefit the others. (1933) There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons.21 Prescription obtained by a co-proprietor or a co-owner shall benefit the others. For example, A, B and C co-own a particular land and, by virtue of such co-ownership they all reside in the same. If B occupies, as a co-owner with A and C, a portion of land adjoining the co-owned property, and he adversely and publicly holds such adjacent portion of land continuously to the exclusion of all others who are not in the co-ownership for the required period of time, there can be a valid acquisition not only in his favor but also in favor of A and C even though they do not actually possess the said portion. Article 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future. Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired. (1935) The case of Development Bank of the Philippines vs. Adil22 is an illustrative case where the Supreme Court based its decision on, among others, Article 1112. The pertinent portions of the decision are as follows: On February 10, 1940 spouses Patricio Confesor and Jovita Villafuerte obtained an agricultural loan from the Agricultural and Industrial Bank (AIB), now the Development Bank of the Philippines (DBP), in the sum of P2,000.00, Philippine Currency, 23 24

G.R. No. L-36827, December 10, 1990, 192 SCRA 121. G.R. No. L-17821, November 29, 1963, 9 SCRA 557; Mateo vs. Moreno, G.R.

Art. 1112

Prescription General Provisions

as evidenced by a promissory note of said date whereby they bound themselves jointly and severally to pay the account in ten (10) equal yearly amortizations. As the obligation remained outstanding and unpaid even after the lapse of the aforesaid tenyear period, Confesor, who was by then a member of the Congress of the Philippines, executed a second promissory note on April 11, 1961 expressly acknowledging said loan and promising to pay the same on or before June 15, 1961. The new promissory note reads as follows — “I hereby promise to pay the amount covered by my promissory note on or before June 15, 1961. Upon my failure to do so, I hereby agree to the foreclosure of my mortgage. It is understood that if I can secure a certificate of indebtedness from the government of my back pay I will be allowed to pay the amount out of it.” Said spouses not having paid the obligation on the specified date, the DBP filed a complaint dated September 11, 1970 in the City Court of Iloilo City against the spouses for the payment of the loan. The right to prescription may be waived or renounced. Article 1112 of Civil Code provides: “Art. 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future. Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired.” There is no doubt that prescription has set in as to the first promissory note of February 10, 1940. However, when respondent Confesor executed the second promissory note on April 11, 1961 whereby he promised to pay the amount covered by the previous promissory note on or before June 15, 1961, and upon failure to do so, agreed to the foreclosure of the mortgage, said respondent thereby effectively and expressly renounced and waived his right to the prescription of the action covering the first promissory note.

This Court had ruled in a similar case that —

“x x x when a debt is already barred by prescription, it cannot be enforced by the creditor. But a new contract recognizing and assuming the prescribed debt would be valid and enforceable x x x.” No. L-21024, July 28, 1969, 28 SCRA 796.

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Obligations and Contracts Text and Cases



Art. 1113

Thus, it has been held that —

“Where, therefore, a party acknowledges the correctness of a debt and promises to pay it after the same has prescribed and with full knowledge of the prescription he thereby waives the benefit of prescription.” This is not a mere case of acknowledgment of a debt that has prescribed but a new promise to pay the debt. The consideration of the new promissory note is the pre-existing obligation under the first promissory note. The statutory limitation bars the remedy but does not discharge the debt. “A new express promise to pay a debt barred x x x take the case from the operation of the statute of limitations as this proceeds upon the ground that as a statutory limitation merely bars the remedy and does not discharge the debt, there is something more than a mere moral obligation to support a promise, to wit — a pre-existing debt which is a sufficient consideration constitutes, in fact, a new cause of action.” “x x x It is this new promise, either made in express terms or deduced from an acknowledgment as a legal implication, which is to be regarded as reanimating the old promise, or as imparting vitality to the remedy (which by lapse of time had become extinct) and thus enabling the creditor to recover upon his original contract.”

Article 1113. All things which are within the commerce of men are susceptible of prescription, unless otherwise provided. Property of the State or any of its subdivisions not patrimonial in character shall not be the object of prescription. (1936a) In Director of Forest Administration vs. Fernandez,23 where an application was filed for the registration of a particular forest and timber on the ground of prescription, the Supreme Court rejected such claim and stated that: it is axiomatic that forest lands of the public domain cannot be acquired by prescription, its possession however long cannot ripen into private ownership (Amunategui vs. Director of Forestry, 126 SCRA 69 [1983]; Bureau of Forestry vs. Court of Appeals, 153 SCRA 351 [1987]; Republic vs. Court of Appeals, 154 SCRA 476 [1987]). Forest land cannot be owned by private persons. It is not registerable whether the title is a Spanish title or a torrens title (Director of Lands vs. Court of Appeals, 133 SCRA 701 [1984]; Republic vs. Court of Appeals, 135 SCRA 156 [1985]; Vallanta vs. IAC, 151 SCRA 679 [1987]). A tax declaration secured over a land that is forested does not vest ownership to the declarant (Republic vs. Court of Appeals, 116 SCRA 505 [1982]).

Art. 1113

Prescription General Provisions

11

In Lovina vs. Moreno,24 it was likewise held that “the ownership of a navigable stream or of its bed is not acquired by prescription.” However in Republic vs. Court of Appeals,25 where a particular area adjacent to a bay, was at times covered by water due to rain and not due to the rising of the tide, the Supreme Court said that such area can be registered and can be subject to prescription, thus: Property, which includes parcels of land found in Philippine territory, is either of public dominion or of private ownership. Public lands, or those of public dominion, have been described as those which, under existing legislation are not the subject of private ownership, and are reserved for public purposes. The New Civil Code enumerates properties of public dominion in Articles 420 and 502 thereof.

Article 240 provides:



“The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character; (2) Those which belong to the State without being for public use, and are intended for some public service or for the development of the national wealth.”

Article 502 adds to the above enumeration, the following:



“(1) Rivers and their natural beds;

(2) Continuous or intermittent waters of springs and brooks running in their natural beds and the beds themselves; (3) Waters rising continuously or intermittently on lands of public dominion; (4) Lakes and lagoons formed by Nature on public lands and their beds; x x x

x x x

x x x”

The Director of Lands would like Us to believe that since a portion of the land sought to be registered is covered with water four to five months a year, the same is part of the lake bed of Laguna de Bay, or is at least, a foreshore land, which brings it within the enumeration in Art. 502 of the New Civil Code quoted above and therefore it cannot be the subject of registration. G.R. No. L-43105, August 31, 1984, 131 SCRA 532. G.R. No. L-70615, October 28, 1986, 145 SCRA 268. 27 See Development Bank of the Philippines vs. Ozarraga, G.R. No. L-16631, September 20, 1965. 28 See also Alvero vs. Reas, G.R. No. L-28337, September 30, 1970, 35 SCRA 210; 25 26

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Art. 1113

The extent of a lake bed is defined in Art. 74 of the Law of Waters of 1866, as follows: “The natural bed or basin of lakes, ponds, or pools, is the ground covered by their waters when at their highest ordinary depth.” The phrase “highest ordinary depth” in the above definition has been interpreted in the case of Government of P.I. vs. Colegio de San Jose, as the highest depth of the waters of Laguna de Bay during the dry season, such depth being the “regular, common, natural, which occurs always or most of the time during the year.” The foregoing interpretation was the focal point in the Court of Appeals decision sought to be reviewed. We see no reason to disturb the same. Laguna de Bay is a lake. While the waters of a lake are also subject to the same gravitational forces that cause the formation of tides in seas and oceans, this phenomenon is not a regular daily occurrence in the case of lakes. Thus, the alternation of high tides and low tides, which is an ordinary occurrence, could hardly account for the rise in the water level of the Laguna de Bay as observed four to five months a year during the rainy season. Rather, it is the rains which bring about the inundation of a portion of the land in question. Since the rise in the water level which causes the submersion of the land occurs during a shorter period (four to five months a year) than the level of the water at which the land is completely dry, the latter should be considered as the “highest ordinary depth” of Laguna de Bay. Therefore, the land sought to be registered is not part of the bed or basin of Laguna de Bay. Neither can it be considered as foreshore land. The Brief for the Petitioner Director of Lands cites an accurate definition of a foreshore land, to wit: “. . . that part of (the land) which is between high and low water and left dry by the flux and reflux of the tides x x x” “The strip of land that lies between the high and low water marks and that is alternately wet and dry according to the flow of the tide.” As aptly found by the Court a quo, the submersion in water of a portion of the land in question is due to the rains “falling directly on or flowing into Laguna de Bay from different sources.” Since the inundation of a portion of the land is not due to “flux and reflux of tides” it cannot be considered a foreshore land within the meaning of the authorities cited by petitioner Director of Lands. The land sought to be registered not being part of the bed or basin of Laguna de Bay, nor a foreshore land as claimed by the Director of Lands, is not a property of public dominion. However, the applicant must prove that he has a registerable

Art. 1113

Prescription General Provisions

title. This brings us to the second issue, which is whether or not applicant-private respondent has registerable title to the land. The purpose of land registration under the Torrens System is not the acquisition of lands but only the registration of title which applicant already possesses over the land. Registration under the Torrens Law was never intended to be a means of acquiring ownership. Applicant in this case asserts ownership over the parcel of land he seeks to register and traces the roots of his title to a public instrument of sale (Exh. G) in favor of his father from whom he inherited said land. In addition to this muniment of title, he presents a tax declaration (Exhs. F, G, H, I) covering the land since 1918 and as well as tax receipts (Exhs. J, J-1, J-2, J-3, J-4, K, K-1, K-2, K-3) dating back to 1948. While it is true that tax receipts are declarations of ownership, they become strong evidence of ownership acquired by prescription when accompanied by proof of actual possession of the property. The Court of Appeals found that the applicant and his father, have been in open, continuous, public, peaceful, exclusive and adverse possession of the disputed land for more than thirty (30) years, which began on April 19, 1909, when the land was acquired from a third person by purchase. The record does not show any circumstance to note which is sufficient enough to overthrow said findings of facts which is binding upon Us. Since applicant has been in possession of the subject parcel of the land in the concept of owner with just title and in good faith, his possession need only last for ten years in order for ordinary acquisitive prescription to set in. Applicant has more than satisfied this legal requirement. Hence, even if the land sought to be registered is public land as claimed by the petitioners, applicant remains to be entitled to a judicial confirmation of his imperfect title, since he has also satisfied the requirements of the Public Land Act (Commonwealth Act No. 141 as amended by Republic Act No. 1942). Sec. 48 of said Act enumerates as among the persons entitled to judicial confirmation of imperfect title, the following:

“(a)

xxx

(b) Those who, by themselves or through their predecessors-in-interest, have been in the open, continuous, exclusive, and notorious possession and occupation of agricultural lands of the public domain, under bona fide claim of ownership, for at least thirty years immediately preceding the filing of the application for confirmation of title. x x x” The claim of private oppositors, petitioners in G.R. No. L-43190, that they have reclaimed the land from the waters of Laguna de Bay and that they have possessed the same for more than twenty (20) years does not improve their position. In the first place, private persons cannot, by themselves reclaim land

13

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Art. 1113

from water bodies belonging to the public domain without proper permission from government authorities. Moreover, even if such reclamation had been authorized, the reclaimed land does not automatically belong to the party reclaiming the same, as they may still be subject to the terms of the authority earlier granted. Private oppositors-petitioners failed to show proper authority for the alleged reclamation, therefore their claimed title to the litigated parcel must fail. In addition to that, their alleged possession can never ripen into ownership. This is due to the fact that only possession acquired and enjoyed in the concept of owner can serve as the root of a title acquired by prescription. As correctly found by the appellate court, the private oppositorspetitioners entered into possession of the land with the permission of, and as tenants of, the applicant del Rio. The fact that some of them at one time or another, did not pay rent cannot be considered in their favor. Their use of the land and their non-payment of rentals thereon, were merely tolerated by the applicant and they cannot affect the character of the latter’s possession which has already ripened into ownership at the time of the filing of this application for registration. The applicant private-respondent having satisfactorily established his registerable title over the parcel of land described in his application, he is clearly entitled to register the said land in his favor.

Article 1114. Creditors and all other persons interested in making the prescription effective may avail themselves thereof notwithstanding the express or tacit renunciation by the debtor or proprietor. (1937) An illustration of this article is as follows: A is indebted to B in the amount of P50,000. C guarantees the said indebtedness and waives his benefit of excussion. This means that should A fail to pay B, B need not exhaust all remedies against A for collection before he could demand payment from C, the guarantor. In the event that the time within which to pay has already prescribed but A nevertheless waives the prescription such that B can still collect from him, and should A again fail to pay, thereby prompting B to demand payment from C, the guarantor, the latter can resist payment by invoking that the collection of the debt of A has already prescribed. C will not be prejudiced by the act of A in waiving the prescription. Article 1115. The provisions of the present Title are understood to be without prejudice to what in this Code or in special laws is established with respect to specific cases of prescription. (1938)

Arts. 1114-115

Prescription General Provisions

15

There are other provisions in the Civil Code which provide for prescriptive periods in specific cases. For example, Article 1391 provides that the prescriptive period for annulling a contract in case it is defective due to fraud perpetuated by one of the parties is four years from the time the fraud is discovered. This is true whether the contract is written or oral. Chapter Three of the present Title however, provides that an action on a written contract prescribes in 10 years and on an oral contract in 6 years. In this case, the prescriptive period in Article 1391 will apply. Article 1391 provides for a specific case on fraud. Other statutes likewise provide for certain prescriptive periods. In case of conflict between the period provided in this Title and the period provided in another portion of the Civil Code, the more specific provision will prevail. However, if different statutes are involved providing for different prescriptive periods, as well as the types of cause of action contemplated by them are apparently conflicting, they do not exclude each other from being availed of by the aggrieved parties. Thus, in Callanta vs. Carnation Philippines, Inc.,26 the Supreme Court ruled that, while a claim for money in labor cases prescribes in three years under the Labor Code, it will not bar the aggrieved party from availing of the four-year prescriptive period for “injury to the plaintiff” provided, under Article 1146 of the Civil Code, that the claim also arises from illegal dismissal which results to an injury to the plaintiff. Article 1116. Prescription already running before the effectivity of this Code shall be governed by laws previously in force; but if since the time this Code took effect the entire period herein required for prescription should elapse, the present Code shall be applicable, even though by the former laws a longer period might be required. (1939) The 1950 Civil Code took effect on August 30, 1950. Article 1116 is a transitory provision and the rules are as follows: 1) If the prescriptive period provided under the old law has already lapsed before the effectivity of the 1950 Civil Code, such prescriptive period shall apply;27 2) If the prescriptive period under the old law is still running upon the effectivity of the 1950 Civil Code which however provides for a different period for the same situation, the 1950 Civil Code shall prevail provided that such period counted from the effectivity of the 1950 Civil Code has already lapsed, although Ongsiaco vs. Dallo, G.R. No. L-27451, February 28, 1969, 27 SCRA 161; Joaquin vs. Cojuangco, G.R. No. L-18060, July 25, 1967, 20 SCRA 769; Laurel-Manila vs. Galvan,

16

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Art. 1116

under the old law the period has not yet lapsed. Thus, if under an old law previous to the effectivity of the Civil Code in 1950, X has thirty years within which to file a particular suit and by the time the 1950 Civil Code takes effect his remaining time, pursuant to the period provided by the old law, is only 12 years, he cannot file the case on the 12th or even on the 11th year if the 1950 Civil Code provides only 10 years as prescriptive period for exactly the same kind of case. This is so because by the 11th year or 12th year, the prescriptive period of 10 years counted from the effectivity of the 1950 Civil Code has already lapsed; 3) If the prescriptive period under the old law is still running upon the effectivity of the 1950 Civil Code and the remaining balance of such period since the effectivity of the 1950 Civil Code is shorter than that provided in the 1950 Civil Code for exactly the same situation, the old prescriptive period will apply. Thus, in the example given in No. 2, if the balance of the period which started under the old law is 12 years counted from the time of the effectivity of the 1950 Civil Code and the latter provides for 15 years as the prescriptive period for exactly the same case, the prescriptive period under the old law will prevail.28

G.R. No. L-23507, May 24, 1967, 20 SCRA 198; Carillo vs. De Paz, L-22601, October 28, 1966, 18 SCRA 467.

Art. 1116

Prescription General Provisions

17

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Obligations and Contracts Text and Cases

Chapter 2

PRESCRIPTION OF OWNERSHIP AND OTHER REAL RIGHTS Article 1117. Acquisitive prescription of dominion and other real rights may be ordinary or extraordinary. Ordinary acquisitive prescription requires possession of things in good faith and with just title for the time fixed by law. (1940a) Acquisitive prescription may be ordinary or extraordinary. Ordinary prescription requires uninterrupted possession for the required statutory period of years in good faith and with a just title. Extraordinary prescription likewise requires an uninterrupted possession for the statutory period of years but without need of just title and good faith on the part of the possessor. Godinez vs. Court of Appeals1 is an example of the application of acquisitive prescription, thus: This case is about the acquisition of land by prescription. Felix Bergado owned Lot 655 with an area of 11,001 square meters. It is located in Punta Rizal, Barrio Gunob, Opon, now Lapu-lapu City. It was inherited by his seven children named Tomas, Teodora, Ambrosia, Florencia, Aniceto, Macario and Vicente. Cadastral Judge Guillermo F. Pablo on January 31, 1929 ordered the registration of Lot 655 in the names of the seven sets of transferees, to each of whom he adjudicated a 1/6 share instead of 1/7. Because of that error and other clerical errors, no decree was issued nor did the adjudicatees obtain any Torrens title. The land remained unregistered. Two-sevenths of Lot 655, pertaining to Macario Bergado and Vicente Bergado, were transferred to Maximo Patalinhug G.R. No. L-46768, March 18, 1985, 135 SCRA 351.

1

18

Art. 1117

Prescription Prescription of Ownership and Other Real Rights

while the 5/7 share of the other five children were transferred in 1929 and 1930 to the spouses Domingo Magsumbol and Susana Magsumbol. Lot 655 was subdivided on January 30, 1934 with the approval of the Director of Lands, into Lot 655-A (5/7) and Lot 655-B (2/7). The Bergado heirs ceased to have possession of any portion of Lot 655 which was occupied by the Magsumbol spouses and Patalinhug. In the guardianship proceeding for the children of Miguel Magsumbol, who inherited Lot 655-A from Domingo, Sr., Judge Jose M. Mendoza adjudicated to Domingo, Jr. on October 30, 1962 said lot with an area of 7,344 square meters. Domingo, Jr. then sold Lot 655-A on November 2, 1962, to the brothers Mamerto and Lorenzo Igot for P10,000 (Exh. D or 2). The Igots continued the Magsumbols’ possession of Lot No. 655-A. On May 10, 1967, or 38 years after Judge Pablo rendered his decision, Judge Mendoza, the same judge who granted Lot 655A to Domingo Magsambol, Jr., at the instance of some Bergado heirs, corrected the clerical errors in Judge Pablo’s decision. As a result, a decree was issued regarding this matter. Finally on December 19, 1967, OCT No. 8 was issued for Lot 655. The land became registered land at last. In 1970 the Igot brothers sued some Bergado heirs for the reconveyance of Lot 655-A or 5/7 portion of Lot 655 which is covered by OCT No. 8. The trial court upheld their claim. The appellate Court, through Justice Gatmaitan, affirmed said decision. In its decision, the court ruled that the Magsumbols had acquired Lot 655-A by prescription under section 41 of the Code of Civil Procedure. The right was in turn, transmitted to the Igots. The petitioners herein, or defendants Godinez and Jayme, had only acquired a paper title in 1967 when they obtained OCT No. 8. The petitioners filed an appeal contending that the Appellate Court erred by not recognizing OCT No. 8 as indefeasible and by not considering the action of the Igots as barred by res judicata. The Supreme Court in its decision, held that the Appellate Court did not err in dismissing the claim of the petitioners for Lot 655-A which has been in the adverse, continuous, uninterrupted and notorious possession of the Magsumbols and the Igots, in the concept of owner for more than half a century. The laws as well as the canons of common sense favored the Igots. Thus, OCT No. 8 did not nullify the sales made by the five Bergado children to the Magsumbol spouses in 1929 and 1930.

19

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Obligations and Contracts Text and Cases

Art. 1118

Article 1118. Possession has to be in the concept of an owner, public, peaceful and uninterrupted. (1941) Possession must be in the concept of an owner. This means that the possessor asserts dominion on the property to the exclusion of all others. It must be an adverse possession.2 Thus, a mere lessee or a mere mortgagee does not hold the property in the concept of an owner. Also, possession of cash dividends by an agent on behalf of the owner, cannot be the subject of prescription, as there is no holding of the property in concepto de dueño.3

Thus, mere possession with a juridical title, such as, to exemplify, by a usufructuary, a trustee, a lessee, an agent or a pledgee, not being in the concept of an owner, cannot ripen into ownership by acquisitive prescription, unless the juridical relation is first expressly repudiated and such repudiation has been communicated to the other party. Acts of possessory character executed due to license or by mere tolerance of the owner would likewise be inadequate. Possession, to constitute a foundation of a prescriptive right, must be en concepto dueno, or, to use the common law equivalent of the term, that possession should be adverse, if not, such possessory acts, no matter how long, do not start the running of the period of prescription.4

In Ramirez vs. Court of Appeals5 where it was proven that the possessor of the property held the property by virtue of a contract of antichresis, the Supreme Court ruled thus: This court has on several occasions held that the antichretic creditor cannot ordinarily acquire by prescription the land surrendered to him by the debtor (Trillana vs. Manansala, et al., 96 Phil. 865; Valencia vs. Acala, 42 Phil. 177; Barreto vs. Barreto, 3 Phil. 234). The petitioners are not possessors in the concept of owners. Thus, their possession cannot serve as a title for acquiring dominion (See Art. 540, Civil Code).

In Republic vs. Court of Appeals,6 involving the possession of the United States Navy of a particular property for recreational purposes only, the Supreme Court rejected any contention for prescription to Cuayong vs. Benedicto, G.R. No. 9989, March 13, 1918, 37 Phil. 781. Harden vs. Harden, G.R. No. L-22174, July 21, 1967, 20 SCRA 706. 4 Marcelo, et al. vs. Court of Appeals, G.R. No. 131803, April 14, 1999, 105 SCAD 561, 305 SCRA 800. 5 G.R. No. L-38185, September 24, 1986, 144 SCRA 292. 2 3

Art. 1118

Prescription Prescription of Ownership and Other Real Rights

21

apply. The pertinent portions of the decision are as follows: The finding of respondent court revealed that, during the interim of 57 years from November 26, 1902 to December 17, 1959 (when the U.S. Navy possessed the area), the possessory rights of Baloy or his heirs were merely suspended and not lost by prescription, is supported by Exhibit “U,” a communication or letter No. 1108-63, dated June 24, 1963, which contains an official statement regarding the position of the Republic of the Philippines with regard to the status of the land in question. Said letter recognizes the fact that Domingo Baloy and/or his heirs, have been in continuous possession of said land since 1894 as attested by an “Informacion Possessoria” Title, which was granted by the Spanish Government. Hence, the disputed property is private land and this possession was only interrupted only by the occupation of the land by the U.S. Navy in 1945 for recreational purposes. However, the U.S. Navy eventually abandoned the premises. The heirs of the late Domingo P. Baloy, are presently in actual possession, and has been in possession since the abandonment by the U.S. Navy. A new recreation area is presently being used by the U.S. Navy personnel and such place is remote from the land in question. Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character of commodatum. It cannot therefore militate against the title of Domingo Baloy and his successors-in-interest. One’s ownership of a thing may be lost through prescription by reason of another’s possession, provided that such possession is under a claim of ownership, and not where the possession is only intended to be transient, as in the case of the U.S. Navy’s occupation of the land concerned, in which case the owner is not divested of his title, however, it cannot be exercised in the meantime.

In Ramos vs. Court of Appeals,7 the Supreme Court likewise ruled that acquisitive prescription has set in especially when the claimant has undertaken acts clearly showing his claim of ownership, thus: Even from the standpoint of acquisitive prescription, which seems to be more decisive, it appears too clear that private respondents have acquired title to the land in suit by virtue of possession in the concept of an owner. It is of record that private respondents have been in continuous possession of the litigated parcel of land since they bought the same in 1934. In addition to that they have been paying the real estate taxes due thereon and have declared said property in their name for taxation G.R. No. L-46145, November 26, 1986, 146 SCRA 15. G.R. No. L-52741, March 15, 1982, 112 SCRA 542.

6 7

22

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Art. 1118

purposes. As correctly ruled by the Appellate Court, that “while tax declaration and tax receipts are not necessarily evidence of title, they are considered as a strong evidence of possession for no one in his right mind would be paying taxes year after year for a property that is not in his actual possession.” The records of the case further disclose that petitioner’s complaint for reconveyance was filed in the lower court only on March 13, 1973, 39 years after the registration of the deed of absolute sale in favor of private respondents. The issuance of a certificate of title in their name exclusively on May 12, 1934, from which latter date petitioner’s cause of action, if any, is deemed to have commenced, since the registration of the aforesaid deed of sale in the Office of the Registry of Deeds constitutes a constructive notice to the whole world of its contents and all interests, legal and equitable, included therein. Since the prescriptive period in this case had already run since May 12, 1934 prior to the effectivity of the new Civil Code on August 30, 1950, there can be no doubt that the former laws on prescription applies, pursuant to Article 1116 of the Civil Code. Under Section 40 of the Code of Civil Procedure formerly in force, adverse possession ripened into ownership after the lapse of ten (10) years, good or bad faith of the possessor being immaterial for purposes of acquisitive prescription. In the like manner, an action to recover title or the possession of immovable property, prescribe in the same period of 10 years. The instant case, not having been filed within 10 years from the time the cause of action accrued on May 12, 1934, have already prescribed in 1944 because the complaint was filed only on March 13, 1973, about 39 years later. Consequently, the possession by the private respondents over the litigated property ripened into full ownership in 1944, ten years after May 12, 1934, when their possession which was actual, open, public and continuous, under a claim of title exclusive of any other right and adverse to all other claims, commenced.

Possession must be public. This means that there must be a notorious holding of the property known to the community. It must not be of a surreptitious character because it must be in the concept of an owner. It must likewise be peaceful in that, for the period of years required by law for acquisitive prescription to apply, there must be no valid interference from others claiming or asserting their rights to the property. It must likewise be uninterrupted. This is defined in the subsequent sections. Article 1119. Acts of possessory character executed in virtue of license or by mere tolerance of the owner shall not be

Art. 1119

Prescription Prescription of Ownership and Other Real Rights

23

available for the purposes of possession. (1942) The fact that the possessor holds the property by virtue of the consent of the owner shows that such possessor acknowledges that somebody else owns the property. Possession by tolerance therefore does not imply an assertion of ownership,8 and thus produces no effect with respect to possession or prescription.9 In Coronado vs. Court of Appeals,10 where the statutory period for ordinary acquisitive prescription passed, the Supreme Court rejected the application of prescription because the possession was merely one of tolerance. Pertinently, the Supreme Court said: As found by the respondent appellate court, Monterola never claimed ownership over the property in question. As a matter of fact, one of the deeds of donation executed by Monterola in favor of Leonida Coronado acknowledged that the boundary owner of the property conveyed to her is JUANA. This is precisely the reason why during the lifetime of the late Dalmacio Monterola, JUANA had always been allowed to enter and reap the benefits or the produce of the said property. It was only after the death of said Monterola in 1970 that Leonida Coronado prohibited JUANA from entering it (Ibid., p. 18). Even assuming arguendo that Monterola was indeed in continuous possession of the said property for over ten years since 1934, said possession is insufficient to constitute the fundamental basis of the prescription. Possession, under the Civil Code, to constitute the foundation of a prescriptive right, must be possession under claim of title (en concepto de dueño), or through the use of common law equivalent to the term, it must be adverse. Acts of possessory character performed by one who holds by mere tolerance of the owner are clearly not en concepto de dueño, and such possessory acts, no matter how long so continued, do not start the running of the period of pres-cription (Manila Electric Company v. Intermediate Appellate Court, G.R. No. 71393, June 28, 1989). In this case, Monterola, as found by the respondent appellate court as well as the lower court, never categorically claimed ownership over the property in question, much less his possession thereof en concepto de dueño. Accordingly, he could not have acquired said property by acquisitive prescription.

8Article 1120. Possession is interrupted for the purposes of Ordoñez vs. Court of Appeals, G.R. No. 84046, July 30, 1990, 188 SCRA 109. Manila Electric Company vs. Intermediate Appellate Court, G.R. No. L-71393, June 28, 1989, 174 SCRA 313. 10 G.R. No. L-78778, December 3, 1990, 191 SCRA 814. 9

24

Obligations and Contracts Text and Cases

Arts. 1120-1122

prescription, naturally or civilly. (1943) Possession must be uninterrupted. This means that there must be continuity in the holding of the property. An uninterrupted possession strengthens the adverse right of the possessor. Possession can however be interrupted naturally or civilly. Article 1121. Possession is naturally interrupted when through any cause it should cease for more than one year. The old possession is not revived if a new possession should be exercised by the same adverse claimant. (1944a) Article 1122. If the natural interruption is for only one year or less, the time elapsed shall be counted in favor of the prescription. (n) For example, A is in possession of an unregistered property in the concept of an owner in good faith and with a just title. The land is formerly owned by B. The property is sold in a public auction to satisfy B’s indebtedness from the government. A is the successful bidder. The document evidencing the title has not yet been finished and registered with the Government. A however is already in possession for a period of 4 years. Z appears and claims that the property is his. Z requests A to vacate the premises so that he will not be entangled in a possible suit. To avoid complications, A left the place. It turns out however, that Z is a defrauder, and it is M who has previously bought the property from B before A made his purchase. Upon learning that Z is a defrauder, A returns to the property after two years. He stays there for another 7 years. M now claims the property and requests A to leave the place. A cannot invoke acquisitive prescription. While he may have possession of the property for a total period of 11 years, it is interrupted. When he left the property for two years, his subsequent possession of seven years cannot be added to his previous four years. In effect, the period which is material for purposes of prescription is the subsequent 7 years. Obviously, said seven-year period have not yet complied with the 10-year period required by law for ordinary acquisitive prescription. However, if the interruption is not two years but only one year or less, acquisitive prescription will have already set in, in favor of A because the law clearly provides that if the natural interruption is for only one year or less, the time elapsed shall be counted in favor of the prescription.

Article 1123. Civil interruption is produced by judicial

Arts. 1123-1124

Prescription Prescription of Ownership and Other Real Rights

25

summons to the possessor. (1945a) Article 1124. Judicial summons shall be deemed not to have been issued and shall not give rise to interruption:

(1) If it should be void for lack of legal solemnities;

(2) If the plaintiff should desist from the complaint or should allow the proceedings to lapse;

(3) If the possessor should be absolved from the complaint.

In all these cases, the period of the interruption shall be counted for the prescription. (1946a) It is not the filing of the complaint in court which interrupts the possession. It is interrupted upon receipt of the possessor of the judicial summons after the filing of the complaint. When the possessor receives the judicial summons and the copy of the complaint, it is only during that time that jurisdiction is acquired by the court of the person of the possessor and it is at that time that possession is interrupted. However there are instances provided by law that judicial summons shall be deemed not to have been issued, thereby not giving rise to interruption. The first case is when the judicial summons is void for lack of legal solemnities. Hence, if the judicial summons as well as the copy of the complaint have been served by a person not authorized by the court, it shall be deemed as not issued, thereby allowing the possession to run uninterrupted. Second is when the plaintiff should desist from the complaint or should allow the proceedings to lapse. Desistance from the complaint by the plaintiff means voluntarily having the case dismissed, while allowing the proceeding to lapse clearly manifests the lack of interest to prosecute the case. In both cases, the possessor should not be prejudiced. There will be no interruption. Third is when the possessor is absolved from the complaint. Absolution means that the complaint have not been fully substantiated to support any adverse claim by the complainant and therefore this should not prejudice the possessor who must always be presumed to be in good faith. Article 1125. Any express or tacit recognition which the possessor may make of the owner’s right also interrupts possession. (1948)

26

Obligations and Contracts Text and Cases

Art. 1125

Express or tacit recognition interrupts the possession because possession must always be in the concept of an owner to the exclusion of all others. Hence, one cannot consider himself possessing a property adversely in the concept of an owner if he recognizes somebody else as having a superior right as an owner. Thus in Corpus vs. Padilla,11 the Supreme Court ruled that one cannot recognize the right of another and at the same time claim adverse possession which can ripen to ownership, thru acquisitive prescription. For prescription to set in, the possession must be adverse, continuous, public and to the exclusion of all.

Similarly, in Diñoso vs. Court of Appeals,12 where the seller and the buyer executed a contract of sale in April 6, 1940 giving the seller the right to repurchase the property on or before April 6, 1950 and where the buyer immediately took possession of the property, the Supreme Court, in resolving the issue of whether or not acquisitive prescription can be availed of by the buyer, agreed with the Court of Appeals’ decision stating: that the possession of petitioner Dinoso under the sale a retro did not actually become hostile or adverse until the expiration of the redemption period, since until then he recognized the superior right of the vendor to oust him, and his claim of ownership was not absolute. Authorities are to the effect that — “Where the sale is subject to the owner’s right of redemption, the purchaser’s possession has been held in subordination to the title of the owner prior to the expiration of the redemption period, although it may become hostile thereafter.” (2 C.J.S. P. 664, Sec. 113; Morse vs. Seibold, 35 N.W. 471). It was incumbent upon the petitioner to show when his vendor’s right of redemption expired, and that he had held adversely for ten years thereafter. In truth, his own deed (Exhibit “1”) recites that Feria’s right of repurchase would expire only on 6 April 1950, so that the present suit for recovery have begun, in 1952, well within the prescriptive period.

Article 1126. Against a title recorded in the Registry of Property, ordinary prescription of ownership or real rights shall not take place to the prejudice of a third person, except in virtue of another title also recorded; and the time shall begin 11 12

G.R. Nos. L-18099 and L-18136, July 31, 1962, 5 SCRA 814. G.R. No. L-17738, April 22, 1963, 7 SCRA 666.

Art. 1126

Prescription Prescription of Ownership and Other Real Rights

27

to run from the recording of the latter. As to lands registered under the Land Registration Act, the provisions of that special law shall govern. (1949a) In Dimayuga vs. Court of Appeals,13 where the deceased spouses acquired a thirteen-hectare homestead, registered under the Torrens System in 1928. The illegitimate children claimed one-half of the same on the ground that they acquired it by acquisitive prescription having been in the property since 1948, the Supreme Court rejected such contention by stating: That contention is devoid of merit. It may be morally plausible but it is legally indefensible. No portion of the homestead, a registered land, may be acquired by prescription. “No title to registered land in derogation to that of the registered owner shall be acquired by prescription or adverse possession.” (Sec. 46, Act No. 496; Sec. 47, Property Registration Decree, P.D. No. 1529; Art. 1126, Civil Code)

In Reyes vs. Court of Appeals,14 where the registered property was acquired through a forged document by the petitioner, and where such petitioner claimed acquisitive prescription against the heirs of the original owners, the Supreme Court said: Moreover, this Court agrees with the private respondents that there can be no acquisitive prescription considering that the parcel of land in dispute is titled property, i.e., titled in the name of the late Bernardino Reyes, the father of both the petitioner Florentino and the private respondents. This fact, petitioners do not deny. Hence, even if they allege adverse possession that would ripen into ownership due to acquisitive prescription, their title cannot defeat the real rights of private respondents who stepped into the shoes, as it were, of their father as successors-in-interest. As it is, petitioners cannot even claim adverse possession as they admit that the private respondents likewise resided and continue to reside on the subject property.

However, although prescription will not apply to registered property, the doctrine of laches is applicable. Laches is the rule of in effectivity of stale demands. In Catholic Bishop of Balanga vs. Court of Appeals,15 where the petitioner donated registered property to a person who, including his successors-in-interest, took possession of the same adversely, continuously, publicly and peacefully for forty 13 14

G.R. No. L-148433, April 30, 1984, 129 SCRA 110. G.R. No. L-110207, July 11, 1996, 72 SCAD 126, 258 SCRA 651.

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Obligations and Contracts Text and Cases

Art. 1126

nine (49) years, and where, thereafter, the petitioner filed a case to recover the property contending that the donation is invalid, the Supreme Court, despite the fact the property was registered, rejected the assertion of imprescriptibility of registered property and decided against the petitioner on the ground that it was guilty of laches. The Supreme Court pertinently ruled: The time honored rule (on laches) anchored on public policy is that relief will be denied to a litigant whose claim or demand has become “stale” or who has acquiesced for an unreasonable length of time, or who has not been vigilant or who has slept on his right either by negligence, folly or inattention. In other words, public policy requires, for the peace of society, the discouragement of claims grown stale for non-assertion; thus laches is an impediment to the assertion or enforcement of a right which has become, under the circumstances, inequitable or unfair to permit. xxx

xxx

xxx

In this case, the petitioner filed its complaint in court only after forty-nine (49) years had lapsed since the donation in its behalf of the subject property to private respondent’s predecessor-in-interest. There is nary an explanation for the long delay in the filing by petitioner of the complaint in the case at bench, and that inaction for an unreasonable and unexplained length of time constitutes laches. As such, petitioner cannot claim nullity of the donation as an excuse to avoid the consequences of its own unjustified inaction and as a basis for the assertion of a right on which they had slept for so long. xxx

xxx

xxx

Finally, we agree with the respondent Court of Appeals that, while petitioner is admittedly still the registered owner of the donated property, and jurisprudence is settled as to the imprescriptibility and indefeasibility of a Torrens Title, there is equally an abundance of cases in the annals of our jurisprudence where we categorically ruled that a registered landowner may lose his right to recover the possession of his registered property by reason of laches.

Article 1127. The good faith of the possessor consists in the reasonable belief that the person from whom he received the thing was the owner thereof, and could transmit his ownership. (1950a)

15

G.R. No. 112549, November 14, 1996, 76 SCAD 148.

Arts. 1127-1128

Prescription Prescription of Ownership and Other Real Rights

29

Article 1128. The conditions of good faith required for possession in Articles 526, 527, 528 and 529 of this Code are likewise necessary for the determination of good faith in the prescription of ownership and other real rights. (1951) The following provisions of the 1950 Civil Code on possession shall likewise be necessary in determining good faith on matters of prescription: Article 526. He is deemed a possessor in good faith who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it. He is deemed a possessor in bad faith who possesses in any case contrary to the foregoing. Mistake upon a doubtful or difficult question of law may be the basis of good faith. Article 527. Good faith is always presumed, and upon him who alleges bad faith on the part of a possessor rests the burden of proof. Article 528. Possession acquired in good faith does not lose this character except in the case and from the moment facts exist which show that the possessor is not unaware that he possesses the thing improperly or wrongfully. Article 529. It is presumed that possession continues to be enjoyed in the same character in which it was acquired, until the contrary is proved.

In Negrete vs. Court of First Instance of Marinduque,16 where a person claimed a particular property by virtue of ordinary acquisitive prescription of ten years based on a deed of sale which he knew involved a different property, the Supreme Court rejected the same on the ground that, aside from the period required by law, there must also be good faith and just title in the possession which was not present in the case, thus: The crucial issue therefore is whether the deed of sale executed by Tito Oriendo on August 30, 1954 in favor of the late Igmedio Maderazo could be considered as a valid basis for good faith and as a just title, in order to justify the acquisition of the disputed parcel of about 9 hectares by ordinary prescription thru adverse possession of only 10 years. 16

The law defines a possessor in good faith as one who is G.R. No. L-31267, November 24, 1972, 48 SCRA 113.

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Arts. 1127-1128

not aware of any flaw in his title or mode of acquisition; and conversely, one who is aware of such flaw is a possessor in bad faith (Art. 526, Civil Code of the Philippines). WE ruled that “the essence of the bona fides or good faith, therefore, lies in the honest belief in the validity of one’s right, ignorance of a superior claim, and absence of intention to overreach another.” A deed of sale, to constitute a just title and to generate good faith for the ordinary acquisitive prescription of ten (10) years, should refer to the same parcel of land, which is adversely possessed. In the case at bar, the deed of sale in favor of the deceased Igmedio Maderazo covers a parcel of land patently different from the disputed land owned by plaintiff-appellant as to area, location, and boundary owners. xxx

xxx

xxx

Hence, defendant-appellee Catalino Maderazo, along with his late father Igmedio Maderazo, could not claim good faith in occupying said land of plaintiff-appellant on the basis of the said instrument of sale. If said appellee’s position were to be sustained, it would be easy for anyone to acquire ownership of an untitled land belonging to another person by adverse possession of only ten (10) years on the basis of a document of sale covering a distinct parcel executed by a person who is a stranger to the land. This could not have been intended by the legislature; because forged deeds of conveyance could be conveniently interposed to oust the true owner from a land by adverse possession of only ten (10) years. To spawn such a monstrosity in the law was never contemplated by the statute, which is designed to engender social quietude.

In Reyes vs. Court of Appeals (Ninth Division),17 the Supreme Court ruled that knowingly using a forged document to base one’s just title for purposes of acquisitive prescription is an act of bad faith, thus: With respect to the second assignment of error, petitioners contend that even assuming that there was forgery, they have become absolute owners of the subject property by virtue of acquisitive prescription citing Articles 1117 and 1134 of the Civil Code as follows: “Art. 1117. Acquisitive prescription of dominion and other real rights may be ordinary or extraordinary. Ordinary acquisitive prescription requires possession of things in good faith and with just title for the time fixed by law. 17

G.R. No. L-110207, July 11, 1996, 72 SCAD 126, 258 SCRA 651.

Arts. 1127-1128

xxx

Prescription Prescription of Ownership and Other Real Rights

xxx

31

xxx

Art. 1134. Ownership and other real rights over immovable property are acquired by ordinary prescription through possession of ten years. By virtue of said articles, they claim that they have been possessors of the contested parcel of land in good faith, for ten years and with a just title for the period required by law. This Court is not impressed with this argument. Petitioners cannot justify their ownership and possession of the subject parcel of land since they could not meet the requisites provided by the provisions they have cited. Regarding the requirement of good faith, the first paragraph of Article 526 states, thus: “He is deemed a possessor in good faith who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it.” From the above-cited provision, petitioners could not have been possessors in good faith of the subject parcel of land considering the finding that at the very inception they forged the Deed of Extrajudicial Partition and Settlement which they claim to be the basis for their just title. Having forged the Deed and simulated the signatures of private respondents, petitioners, in fact, are in bad faith. The forged Deed containing private respondents’ simulated signatures is a nullity and cannot serve as a just title. Moreover, this Court agrees with the private respondents that there can be no acquisitive prescription considering that the parcel of land in dispute is titled property, i.e., titled in the name of the late Bernardino Reyes, the father of both petitioner Florentino and the private respondents. This fact, the petitioners do not deny. Hence, even if they allege adverse possession that should ripen into ownership due to acquisitive prescription, their title cannot defeat the real rights of the private respondents who stepped into the shoes, as it were, of their father as successors-in-interest. As it is, petitioners cannot even claim adverse possession as they have admitted that the private respondents likewise resided and continue to reside on the subject property.

Good faith cannot likewise be invoked if the claimant has actual or constructive notice of the legal and valid rights of possession of another during the prescriptive period. Thus in Magtira vs. Court of Appeals,18 the Supreme Court allowed prescription because the claimant had constructive notice of the possession of another, thus:

Additionally, acquisitive prescription operates to bar any

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Arts. 1129-1131

action by SOFIA. From the date of the filing of the Affidavit for Consolidation of Ownership by ZACARIAS with the Register of Deeds on August 23, 1945 up to the date of the filing of the complaint by SOFIA on June 18, 1956, or for almost eleven (11) years, ZACARIAS enjoyed an uninterrupted, adverse, public and peaceful possession of the litigated property in the concept of owner, which under Article 1134 of the Civil Code ripened into ownership by ordinary prescription through possession of at least ten years. Contrary to SOFIA’s claim, the period of prescription should be reckoned not merely from the time when she allegedly came to know of the claim of ownership of ZACARIAS during the cadastral survey in 1955, but from the date of registration of the Affidavit for Consolidation with the Register of Deeds because registration of an instrument in the Office of the Register of Deeds constitutes constructive notice to the whole world.

Article 1129. For the purposes of prescription, there is just title when the adverse claimant came into possession of the property through one of the modes recognized by law for the acquisition of ownership or other real rights, but the grantor was not the owner or could not transmit any right. (n) Article 1130. The title for prescription must be true and valid. (1953) Article 1131. For the purposes of prescription, just title must be proved; it is never presumed. (1954a) In Doliendo vs. Biarnesa,19 where a person bought property in a valid public auction , took and continued possession of the property thereafter for more than ten years, and where, prior to the sale made in the public auction, there was a first purchaser of the property previous to the death of the original owner, the Supreme Court ruled that the person who bought the property at the public auction already acquired the property by acquisitive prescription as he was able to show by concrete evidence the holding of such public auction from which he based his just title. Pertinently, the Supreme Court said: Counsel for the plaintiff contended that since he had purchased the land in question prior to the alleged sale at public auction, the commissioner had no lawful authority to include it in the list of property of the vendor which could be subjected to the payment of his debts, and that the sale, therefore, was invalid and of no effect; also insisted that a prescriptive title could not 18

G.R. No. L-27547, March 31, 1980, 96 SCRA 680.

Arts. 1129-1131

Prescription Prescription of Ownership and Other Real Rights

33

be based on such transaction because the title for prescription must be valid and true. We think that this contention is based on a misconception of the scope and effect of the provisions of the code as applied to “ordinary prescription.” It is evident that by a “true and valid title” in this connection we are not to understand “a title which of itself is sufficient to transfer the ownership without the neces-sity of the lapse of the prescriptive period;” and we accept the opinion of a learned Spanish law writer who holds that the “titulo verdadero y valido” as used in this article of the code prescribes a “titulo colorado” and not merely “putative,” a “titulo colorado” being one “which a person has when he buys a thing, in good faith, from one whom he believes to be the owner,” and a “titulo putativo” being one “which is supposed to have preceded the acquisition of a thing, although in fact it did not, as might happen when one is in possession of a thing in the belief that it had been bequeathed to him.” (Viso, Derecho Civil, Parte Segunda, page 541). Hence, even should it be prove that the land in question was not lawfully included in the list of property subject to the payment of debts, x x x still the defendant’s title by prescription must be sustained, since it is clear that the sale at public auction did in fact take place, that the transaction was in good faith, and that the defendant bought the land from one whom he believed to have the right to sell.

In Solis vs. Court of Appeals,20 where the Supreme Court, in rejecting the contention of the petitioners that a donacion propter nuptias was not sufficient to create or establish the just title of the possessors of the land as donees, ruled: This contention of the petitioners is not meritorious. Suffice it to state that even a void donation may be the basis of a claim of ownership which may ripen into title by prescription (Pensador vs. Pensador, 47 Phil. 959, 961). It is the essence of the statute of limitations that, whether the party has a right to the possession or not, if he entered under the claim of such right and remained in possession for the period (ten years) named in the statute of limitations, the right of action of the plaintiff who has the better title is barred by that adverse possession. The right given by the statute of limitations does not depend upon, and has no necessary connection, (with) the validity of the claim under which the possession is held. x x x. (Vda. De Lima vs. Tio, L-27181, April 30, 1970, citing Conspecto vs. Fruto, 129 US 182 [1889]). The “just title” required for acquisitive prescription to set in is not “titulo verdadero y valido” — or such title which by itself isG.R. sufficient to transfer ownership necessity of letting the 19 No. L-2765, December 27, 1906,without 7 Phil. 232. 20 21

G.R. Nos. 46753-54, August 25, 1989, 176 SCRA 678. G.R. No. L-23232, June 17, 1970, 33 SCRA 479.

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Art. 1132

prescriptive period elapse but only “titulo colorado” — or such title where, although there was a mode of transferring ownership, still something is wrong because the grantor is not the owner (See Doliendo vs. Biarnesa, 7 Phil. 232).

Article 1132. The ownership of movables prescribes through uninterrupted possession for four years in good faith. The ownership of personal property also prescribes through uninterrupted possession for eight years, without need of any other condition. With regard to the right of the owner to recover personal property lost or of which he has been illegally deprived, as well as with respect to movables acquired in a public sale, fair, or market, or from a merchant’s store the provisions of Articles 559 and 1505 of this Code shall be observed. (1955a) The period for ordinary acquisitive prescription for movables is four years coupled with good faith. Possession must likewise be in the concept of an owner, adverse, public and uninterrupted. For extraordinary prescription, a period of eight years is required without need of any other condition. In Dira vs. Tanega,21 where an active partner conducted himself as the absolute owner of the printing equipment of the partnership after the delinquent partner ignored the demand to pay his obligations, and where such active partner also assumed ownership of the shares of stock pledged by the delinquent partner in connection with his obligations, and where such delinquent partner filed a case for accounting of the partnership only after 14 years from the time the active partner conducted himself as owner of the shares and equipment of the partnership, the Supreme Court rejected the claim of the delinquent partner that a trust relationship existed between him and the active partner by stating that the latter had already acquired the movables by acquisitive prescription, to wit: x x x In bad faith or in good faith, after eight years of actual adverse possession, appellee acquired clear ownership of appellant’s share by acquisitive prescription. According to Art. 1132 of the Civil Code, “The ownership of personal property also prescribes through uninterrupted possession for eight years, without need of any other condition.” So, appellee became the undisputed owner of appellant’s share since 1955 or six years before this action was filed and since said year, the allegation of trusteeship had already lost any basis whatsoever. x x x 22

G.R. No. 90356, March 18, 1991, 195 SCRA 355.

Art. 1132

Prescription Prescription of Ownership and Other Real Rights

35

The law likewise provides that, with regard to the right of the owner to recover personal property lost or of which he has been illegally deprived, as well as with respect to movables acquired in a public sale, fair or market, or from a merchant’s store the provisions of Articles 559 and 1505 of this Code shall be observed. Article 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same. If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. Article 1505. Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.

Nothing in this Title, however, shall affect:

(1) The provisions of any factors’ acts, recording laws, or any other provisions of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction; (3) Purchases made in a merchant’s store, or in fairs, or markets, in accordance with the Code of Commerce and special laws.

Article 1133. Movables possessed through a crime can never be acquired through prescription by the offender. (1956a) No one must benefit from an evil act. Hence, if A stole B’s car, A cannot acquire title to it even if the prescriptive period have already lapsed and even if B did not make a demand for the return of the car. This is true in ordinary and extraordinary prescriptions. In Tan vs. Court of Appeals,22 where the petitioner claimed that, through bad faith and fraud, he was led to assign his shares of stocks in 1977 to three corporate entities, and where the case to reconvey the same was filed only in 1987, the Supreme Court ruled that the action was barred by prescription by stating, among others, that Article 1133 did not apply, thus:

x x x Where, however, the thing was acquired through a

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Arts. 1133-1134

crime, the offender can not acquire ownership by prescription under Article 1133, which we quote: Art. 1133. Movables possessed through a crime can never be acquired through prescription by the offender. Please note that under the above Article, the benefits of prescription are denied to the offender; nonetheless, if the thing was in the meanwhile passed to a subsequent holder, pres-cription begins to run (four or eight years, depending on the existence of good faith) x x x. It is difficult to say, in this regard, that the petitioners’ action is after all, imprescriptible pursuant to the provisions of Article 1133 of the Civil Code, governing actions to recover loss by means of a crime. For one thing, the complaint was not brought upon this theory. For another, there is nothing there that suggests that the loss of the shares was indeed made possible by a criminal act, other than simple bad faith and probably abuse of right.

Article 1134. Ownership and other rights over immovable property are acquired by ordinary prescription through possession of ten years. (1957a) Only 10 years of possession by the adverse claimant are needed for ordinary acquisitive prescription. The possession, however, must be by virtue of a just and valid title, in the concept of an owner, uninterrupted, adverse, and public. Article 1135. In case the adverse claimant possesses by mistake an area greater, or less, than that expressed in his title, prescription shall be based on the possession. (n) The extent of property subject to the prescription shall be the one actually possessed or held by the claimant regardless of the size indicated or described in the title. For instance, it has been ruled that when one sells or buys real property — a piece of land, for example — one sells or buys the property as he sees it, in its actual setting and in its physical metes and bounds, and not by the mere lot number assigned to it in the certificate of title.23

Article 1136. Possession in wartime, when the civil courts are not open, shall not be counted in favor of the adverse claimant. (n) Atilano vs. Atilano, G.R. No. the L-22487, 21, 1969, SCRA 231. During wartime where civilMay courts are 28 closed, there is no way by which any person claiming title over a certain property can 23

Arts. 1135-1137

Prescription Prescription of Ownership and Other Real Rights

37

file a case to recover the same from the person in adverse possession of the property. Hence, the possession of the adverse claimant during that time shall not be counted. However, it must be observed that the civil courts must be closed. Therefore, even if there is war but the civil courts are functioning, the possession of the adverse claimant may be counted in his favor. Article 1137. Ownership and other real rights over immovables also prescribe through uninterrupted adverse possession thereof for thirty years, without need of title or of good faith. (1959a) In Parcotilo vs. Parcotilo24 where a person had adverse possession of a particular land by virtue of an invalid will for thirty years, the Supreme Court ruled that extraordinary prescription had set in thus: We agree with the trial court that even if the document Exh. “1-a” was not executed with all the requisites of a valid will or of a valid donation mortis causa the said document supplied the basis for the claim of ownership by the defendant Demetrio Parcotilo of the two parcels of land in question after the death of the spouses. The ownership by Demetrio Parcotilo, coupled with his open, continuous and adverse possession for a period of thirtyeight years had ripened into a title by prescription (Pensader vs. Pensader, 47 Phil. 959, 961) x x x. Even the provisions of Article 1137 of the New Civil Code on extraordinary prescription through uninterrupted adverse possession for thirty years, regardless of whether there was title or good faith, uphold the right of the defendant Pablo Parcotilo as owner through adverse possession in this present case.

In the case of Heirs of Celso Amarante vs. Court of Appeals25 where it was shown that, even previous to the war, a person occupied a particular alienable public land where he planted various coconut trees, mango trees and bamboo trees and that his grandchildren and descendants continued occupying the place until the trees were already 70 years of age, the Supreme Court ruled that acquisitive prescription had already set in, to wit: We should consider next the character of the rights held by petitioners in respect of Lot 1236. The testimony of Celso Amarante showed that in 1974, the coconut trees planted by petitioners and their predecessors-in-interest were already 24 25

G.R. No. L-17249, November 28, 1964, 12 SCRA 435. G.R. No. L-76386, May 21, 1990, 185 SCRA 585.

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Art. 1137

approximately seventy (70) years of age. The mango trees had trunks with circumferences of about three (3) arm lengths; indicating once more that those trees were old. Thus, it was clearly shown that Malonis Infiel had begun occupying Lot No. 1236 a very long time ago. When the possession of Malonis Infiel of the land is tacked on to that of petitioners, there is no question that that possession exceeded thirty (30) years which is the period for extraordinary prescription provided for in Article 1137 of the Civil Code. More importantly, there is Section 48(b) of Commonwealth Act No. 141, as amended by Republic Act No. 1942, otherwise known as the Public Land Act, which provides as follows: “Section 48. The following described citizens of Philippines occupying lands of public domain or claiming to own any such land or an interest therein, but whose titles have not been perfected or completed, may apply to the Court of First Instance of the province where the land is located for con-firmation of their claims and the issuance of a certi-ficate of title thereof, under the Land Registration Act, to wit: xxx

xxx

xxx

(b) Those who by themselves or through their predecessors in interest have been in open, continuous, exclusive and notorious possession and occupation of agricultural lands of the public domain, under a bona fide claim of acquisition of ownership, for at least thirty years immediately preceding the filing of the application for confirmation of the title except when prevented by war or force majeure. These shall be conclusively presumed to have per-formed all the conditions essential to a Government grant, and shall be entitled to a certificate of title under the provisions of this Chapter.” There is no question that petitioners, at the time they were forcibly driven off the Sitio Campulay parcel of land, had through their possession and that of their predecessors-in-interest have complied with the requirements of long continued (at least 30 years), bona fide, open, exclusive and notorious possession and occupation of Lot 1236 which was of course, originally agricultural land of the public domain. As such, they have become owners of Lot 1236 even before formal confirmation of their title under Section 48(b) of the Public Land Act. In Director of Lands vs. Intermediate Appellate Court, et al., the Supreme Court, in overruling the earlier case of Manila Electric Company vs. Castro 26

G.R. No. L-76564, May 25, 1990, 185 SCRA 693.

Art. 1137

Prescription Prescription of Ownership and Other Real Rights

39

Bartolome, et al., said: “Nothing can more clearly demonstrate the logical inevitability of considering possession of public land which is of the character and duration prescribed by statute as the equivalent of an express grant from the State than the dictum of the statute itself that the possessor(s) ‘x x x shall be conclusively presumed to have performed all the conditions essential to a Government grant and shall be entitled to a certificate of title x x x.’ No proof being admissible to overcome a conclusive presumption, confirmation proceedings would, in truth, be little more than a formality, at the most limited to ascertaining whe-ther the possession claimed is of the required character and length of time; and registration there-under would not confer title, but simply recognize a title already vested. The proceedings would not originally convert the land from public to private land, but only confirm such a conversion already effected by operation of law from the moment the required period of possession became complete. As was so well put in Cariño, ‘x x x (T)here are indi-cations that registration was expected from all, but none sufficient to show that, for want of it, ownership actually gained would be lost. The effect of the proof, wherever made, was not to confer title, but simply to establish it, as already conferred by the decree, if not by earlier law. xxx

xxx

xxx

The court, in the light of the foregoing, is of the view, and so holds, that the majority ruling in Meralco must be reconsidered and no longer deemed to be binding precedent. The correct rule, as enunciated in the line of cases already referred to, is that alienable public land held by a possessor, personally or through his predecessors-in-interest, openly continuously for the prescribed statutory period (30 years under The Public Land Act, as amended) is converted to private property by the mere lapse or completion of said period, ipso jure.”

Article 1138. In the computation of time necessary for prescription the following rules shall be observed: (1) The present possessor may complete the period necessary for prescription by tacking his possession to that of his grantor or predecessor in interest;

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Art. 1138

(2) It is presumed that the present possessor who was also the possessor at a previous time, has continued to be in possession during the intervening time, unless there is proof to the contrary; (3) The first day shall be excluded and the last day included. (1960a) The first rule provides that the present possessor may complete the period necessary for prescription by tacking his possession to that of his grantor or predecessor in interest. The words “grantor” and “predecessor in interest” connote a transfer in a manner provided by law of property from one person to another. Thus, if A donated to B a property which was previously in the possession of B for 8 years, A can make use of the said 8 years for purposes of prescription. Hence, if A already was in possession of the property for three years, the period of his possession may be considered to have been for 11 years already. For purposes of ordinary acquisitive prescription, he has already complied with the statutory period. Also, in South City Homes, Inc. vs. Republic,26 where a possessor of a strip of land designated as Lot No. 5005 claimed the same despite the fact that such land was not transferred to him when he bought two adjacent lands, Lot No. 2381 and Lot No. 2386-A, and where he claimed that his possession should be tacked in with the possession of the previous possessors, the Supreme Court rejected such contention and said: But the more telling consideration, as the Court sees it, is this. By the testimony of the two witnesses, the petitioner obviously meant to tack the possession of the two lots by the previous owners to its own possession. There was no need for this because the petitioner acquired ownership of Lot No. 2381 by assignment and Lot No. 2386-A by purchase; and such ownership includes the right of possession. The petitioner is not claiming prescriptive rights to these two lots, which have previously been registered in the name of the transferors. The lot he is claiming by prescription is Lot No. 5005, which he did not acquire from the owner of the two other lots, or from any previous private registered owner of the lot, as there was none. Neither of the owners of Lots No. 2381 nor 2386-A, in their respective deeds, transferred Lot No. 5005 to the petitioner; as already explained, Lot No. 5005 was not part of either of the two lots. The petitioner merely occupied the disputed strip of land believing it to be included in the two lots it had acquired from Koo Jun Eng and the Garcia spouses. However, even if it be conceded that the previous owners of the other two lots possessed the

Art. 1138

Prescription Prescription of Ownership and Other Real Rights

disputed lot, their possession cannot be tacked to the possession of the petitioner. The simple reason is that the possession of the said lot was not and could not have been transferred to the petitioner when it acquired Lots Nos. 2381 and 2386-A because these two lots did not include the third lot.

Article 1138 of the Civil Code provides that — (1) The present possessor may complete the period necessary for prescription by tacking his possession to that of his grantor or predecessor-ininterest. x x x

However, tacking possession is allowed only when there is a privity of contract or relationship between the previous and present possessors. In the absence of such privity, the possession of the new occupant should be counted only from the time it actually began and cannot be lengthened by connecting it with the possession of the former possessors. Thus, it has been held: The deed, in itself, creates no privity as to land outside it calls. Nor is privity created by the bare taking of possession of land previously occupied by the grantor. It is therefore the rule, although sharply limited, that a deed does not of itself create privity between the grantor and the grantee as to land not described in the deed but occupied by the grantor in connection therewith, although the grantee enters into possession of the land not described and uses it in connection with that conveyed. Where a grantor conveys a specific piece of property, the grantee may not tack onto the period of his holding an additional piece of property the period of his grantor’s occupancy thereof to make up the statutory period. His grantor did not convey such property or his interest therein, and there is no privity. It is said, in Hanlon vs. Ten Hove, supra, that this rule is not harsh, the court using the following language: “If A purchases and by adverse possession obtains title to an adjoining 40 acres, it would hardly be contended that a conveyance by him of the 40 acquired by deed, would carry with it the title to the 40 acres acquired by adverse possession. So if A acquires by deed 40 acres and obtains an adjoining strip 2 rods wide or some interest in it, his conveyance of the 40 acquired by deed does not carry with it his

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Art. 1138

interest in the adjoining strip. If the sole defense here was that of adverse possession, we would be obliged to hold that it have not been made out.” It should also be noted that, according to Article 1135 of the Civil Code: In case the adverse claimant possesses by mistake an area greater or less, than that expressed in this title, prescription shall be based on the possession. This possession, following the above-quoted rulings, should be limited only to that of the successor-in-interest; and in the case of the herein petitioner, it should begin from 1981 when it acquired the two adjacent lots and occupied as well the lot in question thinking it to be part of the other two. It follows that when the application for registration of the lot in the name of the petitioner was filed in 1983, the applicant have been in the possession of the property for less than three years. This was far too short of the prescriptive period required for acquisition of immovable property, which is ten years if the possession is in good faith and thirty years if in bad faith, or if the land is public.

The second rule provides the presumption that the present possessor who was also the possessor at a previous time, have continued to be in possession during the intervening time, unless there is proof to the contrary. A presumption proceeds from a set of facts. For the presumption provided in this rule to exist, there must be a prior showing of the fact that the person presently possessing the property was also the one in possession of the same property before the intervening time. Hence, if a person was in possession of the property in 1997 and it was shown that he was also in possession of the property in 1988, it shall be presumed that he was in possession from 1989 to 1996. However, this presumption can be destroyed if evidence can be adduced to show that he was not in possession during the interval. The third rule provides that the first day shall be excluded and the last day included. For example, if a person possessed the property on January 1, 1980 up to January 15, 1990, the counting of the prescriptive period shall start on January 2, 1980 up to January 15, 1990.

Art. 1138

Prescription Prescription of Ownership and Other Real Rights

43

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Obligations and Contracts Text and Cases

Chapter 3

PRESCRIPTION OF ACTIONS Article 1139. Actions prescribe by the mere lapse of time fixed by law. (1961) The law fixes the time within which an action may be filed. If the period prescribed by law lapses, the action cannot be filed anymore. The set of provisions dealing with prescription of actions is known as the Statute of Limitations. Article 1140. Actions to recover movables shall prescribe eight years from the time the possession thereof is lost, unless the possessor has acquired the ownership by prescription for a less period, according to Article 1132, and without prejudice to the provisions of Articles 559, 1505, and 1133. (1962a) For example, a person can recover lost personal or movable property which he claims belong to him within a period of eight years. However, if all the requisites of an ordinary acquisitive prescription of movable property are present, the possessor of the same becomes the owner of the movable property after only four years uninterrupted possession in good faith. In Tan vs. Court of Appeals,1 where the petitioner claimed that, through bad faith and fraud, he was led to assign his shares of stocks in 1977 to three corporate entities and where the case to reconvey the same was filed only in 1987, the Supreme Court ruled that the action had already prescribed, thus: The next question is whether or not any action for reconveyance has nevertheless prescribed, on the bases of provisions governing reconveyance. The rule anent prescription on recovery of movables (shares of stock in this case) is expressed in Article 1140 of the Civil Code, which we quote: G.R. No. 90356, March 18, 1991, 195 SCRA 355.

1

44

Art. 1140

Prescription Prescription of Actions

“Art. 1140. Actions to recover movables shall prescribe eight years from the time the possession thereof is lost, unless the possessor had acquired the ownership by prescription for a less period, according to Article 1132, and without prejudice to the provisions of Articles 559, 1505 and 1133.” As it provides, Article 1140 is subject to the provisions of Articles 1132 and 1133 of the Code, governing acquisitive prescription, in relation to Articles 559 and 1505 thereof. Under Article 1132. “Art. 1132. The ownership of movables prescribes through uninterrupted possession for four years in good faith. The ownership of personal property also prescribes through uninterrupted possession for eight years, without need of any other condition. With regard to the right of the owner to recover personal property lost or of which he has been illegally deprived, as well as with respect to movables acquired in a public sale, fair, or market, or from a merchant’s store the provisions of Articles 559 and 1505 of this Code shall be observed.” Acquisitive prescription sets in after uninterrupted possession of four years, provided there is good faith, and upon the lapse of eight years, if bad faith is present. Where, however, the thing was acquired through a crime, the offender cannot acquire ownership by prescription under Article 1133, which we quote: “Art. 1133. Movables possessed through a crime can never be acquired through prescription by the offender.” Please note that under the above Article, the benefits of prescription are denied to the offender; nonetheless, if the thing has meanwhile passed to a subsequent holder, prescription begins to run (four or eight years, depending on the existence of good faith). For purposes of extinctive prescription vis-a-vis movables, we therefore understand the periods to be:

1.

Four years, if the possessor is in good faith;

2. Eight years in all other cases, except where the loss was due to a crime in which case, the offender cannot acquire the movable by prescription, and an action to recover it from him is imprescriptible. It is evident, for purposes of the complaint in question, that the petitioners had at most eight years within which to pursue a

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Obligations and Contracts Text and Cases

Art. 1140

reconveyance, reckoned from the loss of the shares in 1977, when the petitioner Vicente Tan executed the various agreements in which he conveyed the same in favor of the Executive Consultants, Inc., Orobel Property Management, Inc., and Antolum Trading Corporation. We are hard put to say, in this regard, that the petitioners’ action is after all, imprescriptible pursuant to the provisions of Article 1133 of the Civil Code, governing actions to recover loss by means of a crime. For one thing, the complaint was not brought upon this theory. For another, there is nothing there that suggests that the loss of the shares was indeed made possible by a criminal act, other than simple bad faith and probably abuse of right.

In Dira vs. Tanega,2 where a partner took possession of the shares of a co-partner who refused to pay his obligations and participate in the partnership prompting the possessing-partner to conduct himself publicly, openly, and adversely as the absolute owner from 1947 up to 1961 of the shares pledged by the delinquent partner and of the assets of the partnership, and where the delinquent partner contended that a trust relationship was created between him and the other partner, the Supreme Court ruled that such delinquent partner can no longer file a case to claim the shares because such action had already prescribed. The Supreme Court pertinently ruled: x x x In bad faith or in good faith, after eight years of actual adverse possession, appellee acquired clear ownership of appellant’s share by acquisitive prescription. According to Article 1132 of the Civil Code, “the ownership of personal property also prescribes through uninterrupted possession for eight years, without need of any other condition.” So, appellee became undisputed owner of appellant’s share since 1955 or six years before this action was filed and since said year the allegation of trusteeship had already lost any basis whatsoever. Under Article 1140 of the same Code, “Actions to recover movables shall prescribe eight years from the time the possession thereof is lost, unless the possessor has acquired the ownership by prescription for a less period” or for an equal period, in which latter case, the right to sue prescribes together with the title.

The action shall likewise be without prejudice to the provisions of Articles 559, 1505, and 1133. These articles provide: Article 559. The possession of movable property acquired in good faith is equivalent to title. Nevertheless, one who has G.R. No. L-23232, June 17, 1979, 33 SCRA 479.

2

Art. 1141

Prescription Prescription of Actions

47

lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same. If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. Article 1505. Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.

Nothing in this Title, however, shall affect:

(1) The provisions of any factors’ acts, recording laws, or any other provisions of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction; (3) Purchases made in a merchant’s store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. Article 1133. Movables possessed through a crime can never be acquired through prescription by the offender.

Article 1141. Real actions over immovables prescribe after thirty years. This provision is without prejudice to what is established for the acquisition of ownership and other real rights by prescription. (1963) The prescriptive period in connection with immovables is thirty years. However if within the thirty-year period, all the requisites for ordinary acquisitive prescription are already present in favor of the possessor, then the possessor shall be considered the owner of the property after 10 years of uninterrupted, adverse, public possession of the property in the concept of an owner in good faith. In extraordinary acquisitive prescription, if the immovable property is adversely in the possession of the possessor for thirty years, the right to sue prescribes with the acquisition of the title.

48

Obligations and Contracts Text and Cases

Arts. 1142-1143

Article 1142. A mortgage action prescribes after ten years. (1964a) A mortgage is an accessory contract. It is constituted to secure a debt so that if the debtor fails to pay the principal obligation, the creditor can foreclose on the mortgage by selling the same in a public sale or bidding and the proceeds thereof are used to pay off the principal debt and interest if any. If there is any deficiency, the creditor can still go against the principal debtor to collect such deficiency. In Development Bank of the Philippines vs. Tomeldan3 where the creditor, after extra-judicially foreclosing the property of the debtor on September 15, 1967, filed on March 14, 1977 a civil case to claim the deficiency, the Supreme Court rejected the contention that the action had prescribed considering that the prescriptive period was 10 years from the time the cause of action accrued which was on September 16, 1967, to wit: A suit for the recovery of the deficiency after the foreclosure of a mortgage is in the nature of a mortgage action because its purpose is precisely to enforce the mortgage contract. Such being the case, Article 1142 of the Civil Code is likewise applicable to the instant case. Said provision reads: “Art. 1142. A mortgage action prescribes after ten years.”

Article 1143. The following rights, among others specified elsewhere in this Code, are not extinguished by prescription:

(1) To demand a right of way, regulated in Article 649;

(2) To bring an action to abate a public or private nuisance. (n) Aside from the right to demand a right of way regulated in Article 649 and the right to bring an action to abate a public or private nuisance, there are certain actions which do not prescribe such as an action to declare a contract null and void,4 an action to quiet title initiated by the person having possession of the property,5 and an action to partition a property among co-heirs.6 Prescription does not supervene when the trust is merely an implied one7 unless expressly G.R. No. 51269, November 17, 1980, 101 SCRA 741; See also Caltex vs. Intermediate Appellate Court, G.R. No. 74730, August 25, 1989, 176 SCRA 741. 4 Bonanga vs. Soler, G.R. No. L-15717, June 30, 1961, 2 SCRA 755; Ras vs. Sua, G.R. No. L-23303, September 25, 1968, 25 SCRA 153; Garanciang vs. Garanciang, G.R. No. L-22351, May 21, 1969, 28 SCRA 229. 3

Art. 1144

Prescription Prescription of Actions

49

repudiated by the trustee. Article 1144. The following actions must be brought within ten years from the time the right of action accrues:

(1) Upon a written contract;

(2)



(3) Upon a judgment. (n)

Upon an obligation created by law;



For a contract to fall under this article, the agreement must be in writing. For example, a purchaser of a real estate evidenced by a written contract of sale may file a case for delivery of the property to him. Barring the applicability of laches, the purchaser has ten years within which to file the case for delivery. The cause of action on a written contract accrues when a breach or violation thereof occurs.8 In Espanol vs. Philippine Veterans Administration9 where the pension of a veteran’s widow, which was received by her pursuant to Republic Act No. 65, was cancelled on November 1, 1951 by the Philippine Veterans Administration (PVA) on the basis of a doubtful administrative policy which however was struck down as invalid on June 27, 1973 by the Supreme Court in another case, and where the said widow, on February 25, 1974 filed a complaint against the PVA for the collection of the said pension, the Supreme Court rejected the contention of the PVA that the action had prescribed by thus ruling: The contention of appellant PVA that the action of appellee Maria U. Espanol to compel the restoration of her monthly pension and that of her children, effective from the date of cancellation on November 1, 1951, has already prescribed, inasmuch as the same was filed more that 10 years from the date of cancellation, is without merit. Article 1144 of the New Civil Code provides that actions based on an obligation created by law shall be brought within 10 years from the time the right of action accrues. It is important to reckon the date, when the right of action accrues, as the same is the beginning for counting the 10-year prescriptive period. Gallar vs. Husain, G.R. No. L-20954, May 24 1967, 20 SCRA 186. Gerona vs. De Guzman, G.R. No. L-19060, May 26, 1964, 11 SCRA 153. 7 Bueno vs. Reyes, G.R. No. L-22587, April 28, 1969, 27 SCRA 1179. 8 Lim Tay vs. Court of Appeals, G.R. No. 126891, August 5, 1998, 97 SCAD 103, 293 SCRA 634. 9 G.R. No. L-44616, June 29, 1985, 137 SCRA 314. 5 6

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Obligations and Contracts Text and Cases

Art. 1144

The right of action accrues when there exists a cause of action, which consists of three elements, namely: a) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; b) an obligation on the part of such defendant to respect such right; and c) an act or omission on the part of such defendant violative of the right of the plaintiff. x x x It is only when the last element occurs or takes place that it can be said in law that a cause of action has arisen. x x x The appellee cannot be said to have a cause of action, in compelling the appellant to continue paying her monthly pension on November 1, 1951, because appellant’s act of cancellation, being pursuant to an administrative policy, cannot be considered a violation of appellee’s right to receive her monthly pension. x xxx It is only when this Court declared invalid the questioned administrative policy in the Del Mar vs. Philippine Veterans Administration, x x x, promulgated on June 27, 1973, can the appellee be said to have a cause of action to compel appellant to resume her monthly pension; because it is at that point in time, when the presumption of legality of the questioned administrative policy had been rebutted and thus it can be said with certainty that appellant’s act was in violation of appellee’s right to receive her monthly pension. The 10-year prescriptive period, therefore, should be counted from June 27, 1973 when the case of Del Mar vs. The Philippine Veterans Administration, x x x, was promulgated, and not from November 1, 1951, the date of the cancellation by appellant of appellee’s pension. The action of appellee, which was brought on February 25, 1974, is therefore well within the 10-year prescriptive period.

In Huang vs. Court of Appeals,10 the Supreme Court ruled that an implied trust, whether a constructive or resulting trust, is normally not subject to prescription. However, if the trustee openly and adversely repudiates the trust, it is only from that time when prescription can set in. The Supreme Court said: The prescriptive period is ten (10) years from the repudiation of the trust. It is ten (10) years because just as a resulting trust is an offspring of the law, so is the corresponding obligation to convey the property and the title thereto to the true owner. In this context, and vis-a-vis prescription, Art. 1144 of the New Civil Code, which is the law applicable provides: “The following actions must be brought within 10 years from the time the right of action accrues: (a) Upon a written contract; (b) Upon obligations 10

G.R. No. L-108525, September 13, 1994, 55 SCAD 289, 236 SCRA 420.

Art. 1145

Prescription Prescription of Actions

51

created by law; (c) Upon a judgment.” Thus, the reckoning point is repudiation of the trust by the trustee because from that moment his possession becomes adverse, which in the present case gave rise to a cause of action by Dolores against the Huang spouses. However, before the period of prescription may start, it must be shown that: (a) the trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the cestui que trust; and (c) the evidence thereon is clear and conclusive.

Article 1145. The following actions must be commenced within six years:

(1) Upon an oral contract;



(2) Upon a quasi-contract. (n)

An action based on an oral contract must be commenced within six years from the time the cause of action accrues. For example, A orally borrowed P2,000 from B to be paid on June 1, 1997 and B failed to pay on such date despite demand from A. A has six years from June 1, 1997 to file the case for collection against B. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contracts to the end that no one shall be unjustly enriched or benefited at the expense of another.11 Quasicontracts are governed by Book IV, Title XVII, Chapter 1 of the 1950 Civil Code. One quasi-contract provided in the Civil Code is solutio indebiti. This occurs if something is received when there is no right to demand it, and it has been unduly delivered through mistake, thereby giving rise to the obligation to return what has been unduly received.12 In Municipality of Opon vs. Caltex,13 where a taxpayer mistakenly paid an amount which is not due, the Supreme Court, citing Gonzalo Puyat & Sons vs. City of Manila,14 ruled that the prescriptive period was six years as it is a quasi-contract of solutio indebiti under the Civil Code. Article 1146. The following actions must be instituted within four years: Article 2142 of the 1950 Civil Code. Article 2154 of the 1950 Civil Code. 13 G.R. No. L-21853, February 26, 1968, 22 SCRA 755. 14 G.R. No. L-17447, April 30, 1963, 7 Phil. 970. 11 12

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Obligations and Contracts Text and Cases



(1) Upon an injury to the rights of the plaintiff;



(2) Upon quasi-delict. (n)

Art. 1146

In Virgilio Callanta vs. Carnation Phil., Inc.,15 an employee was unjustly and illegally dismissed by his employer. He filed a case with the National Labor Relations Commissions (NLRC) for illegal dismissal, reinstatement and for back wages three years, one month and five days from the time he was illegally dismissed. The NLRC dismissed the case on the ground that it had prescribed pursuant to the Labor Code which provided that such claim should be filed within 3 years. The Supreme Court overruled the NLRC because the prescriptive period is four years as the case involved “injury to the rights of the plaintiff,” thus: As this Court stated in Bondoc vs. People’s Bank and Trust Co., when a person has no property, his job may possibly be his only possession or means of livelihood, hence he should be protected against any arbitrary and unjust deprivation of his job. Unemployment, said the Court in Almira vs. B.F. Goodrich Philippines, brings ‘untold hardships and sorrows on those dependent on the wage earners.’ The misery and pain attendant on the loss of jobs thus could be avoided if there be acceptance of the view that under all circumstances of this case, petitioners should not be deprived of their means of livelihood. It is a principle in American jurisprudence, which undoubtedly, is well-recognized in this jurisdiction that one’s employment, profession, trade or calling is a “property right,” and the wrongful interference therewith is an actionable wrong. The right is considered to be property within the protection of a constitutional guaranty of due process of law. Clearly then, when one is arbitrarily and unjustly deprived of his job or means of livelihood, the action instituted to contest the legality of one’s dismissal from employment constitutes, in essence, an action predicated “upon injury to the rights of the plaintiff,” as contemplated under Art. 1146 of the New Civil Code, which must be brought within four [4] years. In the instant case, the action for illegal dismissal was filed by petitioners on July 5, 1982, or three [3] years, one [1] month and five [5] days after the alleged effectivity dated of his dismissal on June 1, 1979 which is well-within the four [4]-year prescriptive period under Article 1146 of the New Civil Code. x x x

More so, in the instant case, where the delay in filing the

G.R. No. L-70615, October 28, 1986, 145 SCRA 268; See also Nemenzo vs. Sabillano, G.R. No. L-20977, September 7, 1968, 25 SCRA 1. 15

Art. 1146

Prescription Prescription of Actions

53

case was with justifiable cause. The threat to petitioner that he would be charged with estafa if he filed a complaint for illegal dismissal, which private respondent did after all on June 22, 1981, justifies the delayed filing of the action for illegal dismissal with the Regional Office No. X, MOLE on July 5, 1982. Laches will not in that sense strengthen the cause of private respondent. Besides, it is deemed waived as it was never alleged before the Labor Arbiter nor the NLRC.

Article 2176 of the Civil Code provides that “whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called quasi-delict.” Quasi-delict is governed by Book IV, Title XVII, Chapter 2 of the 1950 Civil Code. An example of a quasi-delict is the fault or negligence resulting in the liability of manufacturers and processors of foodstuffs, drinks, toilet articles and similar goods. They shall be liable for death or injuries caused by any noxious or harmful substances used, although no contractual relations exists between them and the consumer.16 In Coca-Cola Bottlers Philippines, Inc. vs. Court of Appeals17 where a complaint filed on May 7, 1990 makes reference to the reckless and negligent manufacture of “adulterated food items intended to be sold for public consumption” in that the soft drinks sold to the private respondent “contained fiber-like matter and other foreign substances or particles” causing damage to the private respondent’s business when he sold sometime in August 1989 the soft drinks to students who suffered sickness, the Supreme Court rejected the contention of the petitioner that the action had prescribed on the ground that the prescriptive period to file such action was six months from the delivery of the thing sold pursuant to Article 1571 of the Civil Code, and ruled that the allegations in the complaint clearly established a quasi-delict which prescribes in four (4) years pursuant to Article 1146 of the New Civil Code. In the case of Diocosa vs. Sarabia,18 the Supreme Court held that: an action based on quasi-delict is governed by Article 1150 of the Civil Code as to the question of when the prescriptive period of four years shall begin to run, that is, “from the day (the action) may be brought,” which means from the day the quasi-delict occurred or was committed.

In Kramer, Jr. vs. Court of Appeals,19 it was held that an action 16

Article 2187 of the 1950 Civil Code. G.R. No. L-110295, October 18, 1993, 45 SCAD 390, 227 SCRA 292. 18 G.R. No. L-10542, July 31, 1958, cited in Capuno vs. Pepsi Cola Bottling Company, G.R. No. L-19331, April 30, 1965, 13 SCRA 658; See also Corpuz vs. Paje, G.R. No. L-26737, July 31, 1969, 28 SCRA 1062. 17

54

Obligations and Contracts Text and Cases

Art. 1147

for damages based on quasi-delict resulting from the collision of two vessels has a prescriptive period of four years from the day of the collision and the aggrieved party need not wait for a determination by an administrative body like a Board of Marine Inquiry, that the collision was caused by the fault or negligence of the other party before he can file an action for damages. x x x Immediately after the collision the aggrieved party can seek relief from the courts by alleging such negligence or fault of the owners, agents or personnel of the other vessel.

In Allied Banking Corporation vs. Court of Appeals,20 where in his third-party complaint filed on June 17, 1987, the debtor alleged that “by reason of the tortious interference by the Central Bank with the affairs of GENBANK, private respondent was prevented from performing his obligation under the loan such that he should not be held liable,” and where the “tortious interference” referred to was the Central Bank’s ordering GENBANK on March 25, 1980 to desist from doing business, the Supreme Court ruled that such third party complaint was barred by prescription, because quasi-delicts prescribe after four years from the time the cause of action accrues, which in this case was on March 25, 1980. Article 1147. The following actions must be filed within one year:

(1) For forcible entry and detainer;



(2) For defamation. (n)

In Vda. De Borromeo vs. Pogoy,21 the Supreme Court explained that the prescriptive period for forcible entry and detainer is long enough to comply with prerequisites provided by law for the filing of such case, thus: Unable to secure a reconsideration of said order, petitioner came to this court through this petition for certiorari. In both his comment and memorandum, private respondent admitted not having availed himself of the barangay conciliation process, but justified such omission by citing paragraph 4, Section 6 of PD 1508 which allows the direct filing of an action in court where the same may otherwise be barred by the Statute of Limitations, G.R. No. L-83542, October 13, 1989, 178 SCRA 518; see also Paulan vs. Sarabia, G.R. No. L-10542, July 31, 1952. 20 G.R. No. 85868, October 13, 1989, 178 SCRA 526. 21 G.R. No. L-63277, November 29, 1983, 126 SCRA 217. 19

Art. 1148

Prescription Prescription of Actions

55

as applying to the case at bar. The excuse advanced by private respondent is unsatisfactory. Under Article 1147 of the Civil Code, the period for filing actions for forcible entry and detainer is one year, and this period is counted from demand to vacate the premises. In the case at bar, the letter-demand was dated August 28, 1982, while the complaint for ejectment was filed in court on September 16, 1982. Between these two dates, less than a month had elapsed, thereby leaving at least eleven (11) full months of the prescriptive period provided for in Article 1147 of the Civil Code. Under the procedure outlined in Section 4 of PD 1508, the time needed for the conciliation proceeding before the Barangay Chairman and the Pangkat should take no more than 60 days. Giving private respondent nine (9) months ample time indeed — within which to bring his case before the proper court should conciliation efforts fail. Thus, it cannot be truthfully asserted, as private respondent would want us to believe, that his case would be barred by the Statute of Limitations if he had to course his action to the Barangay Lupon.

Article 1148. The limitations of action mentioned in Articles 1140 to 1142, and 1144 to 1147 are without prejudice to those specified in other parts of this Code, in the Code of Commerce, and in special laws. (n) The phrase “without prejudice” means that, in proper cases, the prescriptive period in this chapter may be availed of notwithstanding other special provisions in other parts of the Civil Code, in the Code of Commerce and in special laws. Thus, in the case of Virgilio Callanta vs. Carnation Phil., Inc.,22 the Supreme Court applied Article 1146 even though the claim falls under the prescriptive period provided for in the Labor Code because the illegal and unlawful dismissal suffered by the plaintiff in the said case falls within the ambit of “injury to the rights of the plaintiff,” thus: Even on the assumption that an action for illegal dismissal falls under the category of “offense” or “money claims” under Articles 291 and 292, Labor Code, which provide for a three-year prescriptive period, still a strict application of said provisions will not destroy the enforcement of fundamental rights of the employees. As a statutory provision on limitation of actions, Articles 291 and 292 go to matters of remedy and not to the destruction of fundamental rights. As a general rule, a statute of limitation extinguishes the remedy only. Although the remedy 22

G.R. No. L-70615, October 28, 1986, 145 SCRA 286.

56

Obligations and Contracts Text and Cases

Arts. 1149-1150

to enforce a right may be barred, that right may be enforced by some other available remedy which is not barred.

Article 1149. All other actions whose periods are not fixed in this Code or in other laws must be brought within five years from the time the right of action accrues. (n) Article 1150. The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise, shall be counted from the day they may be brought. (1969) In Tolentino vs. Court of Appeals,23 the present spouse of a divorced man filed an action in 1971 against the former spouse to prevent the latter from using the surname of the husband. The present spouse knew since 1951 that the former spouse had been using the surname of the husband. The lower court issued a decision in favor of the present spouse but the Supreme Court reversed the decision on the ground, among others, that the action had prescribed. Pertinently, the Supreme Court said: The petitioner’s contention that her cause of action is imprescriptible is without merit. In fact, it is contradictory to her own claim. The petitioner insists that the use by respondent Consuelo David of the surname Tolentino is a continuing actionable wrong and states that every use of the surname constitutes a new crime. The contention cannot be countenanced because the use of a surname by a divorced wife for a purpose not criminal in nature is certainly not a crime. The rule on prescription in civil cases such as the case at bar is different. Art. 1150 of the Civil Code provides: “The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise, shall be counted from the day they may be brought.” All actions, unless an exception is provided, have a prescriptive period. Unless the law makes an action imprescriptible, it is subject to bar by prescription and the period of prescription is five (5) years from the time the right of action accrues when no other period is prescribed by law (Civil Code, Art. 1149). The Civil Code provides for some rights which are not extinguished by prescription but an action as in the case before us is not among them. Neither is there a special law providing for imprescriptibility. Moreover, the mere fact that the supposed violation of the petitioner’s right may be a continuous one does not change the 23

G.R. No. L-41427, June 10, 1988, 162 SCRA 66.

Arts. 1151-1152

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57

principle that the moment the breach of right or duty occurs, the right of action accrues and the action from that moment can be legally instituted (Soriano vs. Sternberg, 41 Phil. 210). The respondent Court of Appeals, on the other hand, is of the opinion that the period of prescription should be four (4) years, since it appears to be an action based on quasi-delict. Whatever the period, it cannot be denied that the action has long prescribed whether the cause accrued on April 21, 1945 when the petitioner and Arturo Tolentino got married, or on August 30, 1950, when the present Civil Code took effect, or in 1951 when Constancia Tolentino came to know of the fact that Consuelo David was still using the surname Tolentino. It is the legal possibility of bringing the action which determines the starting point for the computation of the period of prescription (Espanol v. Phil. Veterans Administration, 137 SCRA 314). The petitioner should have brought legal action immediately against the private respondent after she gained knowledge of the use by the private respondent of the surname of her former husband. The action was brought only in November 23, 1971 with only verbal demands in between and an action to reconstitute the divorce case. The petitioner should have filed her complaint at once when it became evident that the private respondent would not accede to her demands instead of waiting for twenty (20) years. As aptly stated by the Court of Appeals, “where the plaintiff fails to go to the court within the prescriptive period, he loses his cause, but not because the defendant had acquired ownership by adverse possession over his name but because the plaintiff’s cause of action had lapsed thru the statute of limitations.”

Article 1151. The time for the prescription of actions which have for their object the enforcement of obligations to pay principal with interest or annuity runs from the last payment of the annuity or of the interest. (1970a) Article 1152. The period for prescription of actions to demand the fulfillment of obligations declared by a judgment commences from the time the judgment became final. (1971) It is only when the judgment becomes final that the same can be effectively enforced. Hence, the prescriptive period is not counted from the time the judgment was rendered but from the time it became final.24 In Philippine National Bank vs. Bondoc,25 the Supreme Court stated that “the purpose of the revival of judgment is to give a creditor a new right of enforcement from the date of revival” and “the rule seeks to protect judgment creditors from wily and unscrupulous debtors who, in order to evade attachment and execution, cunningly

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conceal their assets and wait until the statute of limitations set in.” Article 1153. The period for prescription of actions to demand accounting runs from the day the persons who should render the same cease in their functions. The period for the action arising from the result of the accounting runs from the date when said result was recognized by agreement of the interested parties. (1972) In Dira vs. Tanega26 where one of the partners demanded payment of the accountabilities of another partner who ignored such demand, and where the demanding partner, since 1947 and after having been ignored by the other partner, managed, operated and administered the affairs and assets of the partnership not as a partner but as absolute owner of the same without any participation from the delinquent partner, the Supreme Court ruled that the action filed on February 10, 1961 by the delinquent partner-appellant against the other partner-appellee for an accounting of his share in the partnership had already prescribed, thus: Under these circumstances, it would be giving premium to inaction and indifference to still hold that appellant could sue appellee, almost fourteen years after the latter, with prior notice to the former, had openly and publicly taken over exclusive control of the partnership business as if it were his own and only a little short of ten years after the expiration of the stipulated term of the partnership. His claims for salaries accrued after each month they were unpaid. Whether we assume that these claims lost basis in 1947 when appellee took over the business of the printing press and the newspaper or in 1951, upon the expiration of the term of the agreements, by all standards, these claims had already prescribed when the present suit was filed. On the other hand, under Article 1153 of the Civil Code, a demand for “accounting runs from the day the persons who should render the same ceases in their functions,” which in this case was in 1947, when the appellee began to operate the business as exclusively his own. Again, inasmuch as the longest period in the chapter on prescription of the Civil Code is ten years, it is evident that appellant’s action for accounting is already barred. The same is true with the claim for rentals and recovery of proportional ownership of the printing equipment and accessories, as to which, Philippine National Bank (PNB) vs. Monroy, G.R. No. L-19374, June 30, 1964, 11 SCRA 433. 25 G.R. No. L-20236, July 30, 1965, 14 SCRA 770. 26 G.R. No. L-23232, June 17, 1970, 33 SCRA 479. 24

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appellant’s period to bring his actions accrued also in 1947, fourteen years before this suit was filed.

Article 1154. The period during which the obligee was prevented by a fortuitous event from enforcing his right is not reckoned against him. (n) In Provident Savings Bank vs. Court of Appeals,27 a loan was granted to debtors by a bank collateralized by their properties. Thereafter the bank was placed under receivership in 1972 and prohibited by the Monetary Board from transacting business including the foreclosure of properties. For failure of the debtors to pay, the bank informed the debtors that the property might be sold at public auction. This was not done because the debtors promised to pay. However the debtors sold the property to a purchaser who assumed the mortgage. In 1981, the receivership was lifted. Subsequently, the purchaser informed the bank that he is a judgment creditor of the original debtors, that the property was sold to him, and that he was willing to pay the indebtedness to release the mortgage. In rejecting the notion that the foreclosure of the mortgage might have already prescribed, the Supreme Court ruled: Having arrived at the conclusion that a foreclosure is part of a bank’s business activity which could not have been pursued by the receiver then because of the circumstances discussed in the Central Bank case, we are thus convinced that the prescriptive period was legally interrupted by fuerza mayor in 1972 on account of the prohibition imposed by the Monetary Board against petitioner from transacting business, until the directive of the Board against petitioner from transacting business was nullified in 1981. Indeed, the period during which the obligee was prevented by a caso fortuito from enforcing his right is not reckoned against him (Article 1154, New Civil Code). When prescription is interrupted, all the benefits acquired so far from the possession cease and when prescription starts anew, it will be entirely a new one. This concept should not be equated with suspension where the past period after prescription is resumed (4 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., pp. 18-19). Consequently, when the closure of petitioner was set aside in 1981, the period of ten years within which to foreclose under Article 1142 of the New Civil Code began to run again and, therefore, the action filed on August 21, 1986 to compel petitioner to release the mortgage 27

G.R. No. L-97218, May 17, 1993, 222 SCRA 125.

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carried with it the mistaken notion that petitioner’s own suit for foreclosure had prescribed. What exacerbates the situation is the letter of private respondent requesting the petitioner on August 6, 1986 that private respondent be allowed to pay the loan secured by the mortgage as a result of the Deed of Sale executed by the Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo). In point of law, this written communication is synonymous to an express acknowledgment of the obligation and had the effect of interrupting the period of prescription for the second time (Article 1155, New Civil Code; Osmeña vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino, supra at p. 50). And this piece of document necessarily estops private respondent from setting up prescription vis-a-vis his unfounded supposition that acknowledgment of the debt is of no moment because the right of petitioner to foreclose had long prescribed in 1977 (p. 13, Petition; p. 7, Comment; pp. 19 and 58, Rollo).

In Tan vs. Court of Appeals28 where, during the Marcos Regime, the petitioner was arrested and detained for various offenses, and where he sold his shares in a particular bank in 1977 and sought to recover them by filing a suit for reconveyance only in 1987, the Supreme Court ruled that the action had already prescribed and rejected his claim of legal standing based on fortuitous event, thus: We cannot accept the petitioners’ contention that the period during which authoritarian rule was in force had interrupted prescription and that the same began to run only on February 25, 1986, when the Aquino government took over. It is true that under Article 1154: “Article 1154. The period during which the obligee was prevented by fortuitous event from enforcing his right is not reckoned against him.” Fortuitous events have the effect of tolling the period of prescription. However, we can not say, as a universal rule, that the period from September 21, 1972 through February 25, 1986 involves a force majeure. Plainly, we can not box in the “dictatorial” period within the term without distinction, and without, by necessity, suspending all liabilities, however demandable, incurred during that period, including perhaps those ordered by this Court to be paid. While this Court is cognizant of acts of the last regime, especially political acts, that might have indeed precluded the enforcement of liability against that regime and its minions, the Court is not inclined to make quite a 28

G.R. No. 90365, March 18, 1991, 195 SCRA 355.

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sweeping pronouncement, considering especially the unsettling effects such a pronouncement is likely to bring about. It is our opinion that claims should be taken on a case-to-case basis. This selective rule is compelled, among others, by the fact that not all those imprisoned or detained by the past dictatorship were true political oppositionists, or, for that matter, innocent of any crime or wrongdoing. Indeed, not a few of them were manipulators and scoundrels. The petitioner Vicente Tan claims that from June 1974 through December, 1977, he was under detention; that sometime in August, 1977, the Central Bank lodged six criminal cases against him, along with several others, with Military Commission No. 5 in connection with alleged violation of the Central Bank Act, falsification of documents, and estafa, that while in detention, he was made to execute various agreements in which he conveyed the shares of stock in question; and that “[u]nder the foregoing factual setting . . . it would be foolhardy on the part of petitioners to institute . . . [any] action for reconveyance . . .” The records show, however, that although under detention, Vicente Tan:

1.

Commenced, in July, 1976, Civil Case No. 103359 of the defunct Court of First Instance of Manila, to mandatorily enjoin the Central Bank as receiver of Continental Bank, to takeover from ‘NISA’ the control and management and assets of Vicente Tan and his affiliate corporations;



2.

Was ably represented by competent counsel, Atty. Norberto Quisimbing, throughout;



3.

Filed with this Court a petition to stop the trial of the criminal cases pending against him with the Military Commission No. 5 and succeeded in obtaining a temporary restraining order.

On top of those facts above-mentioned, he: 1.

Asked the Court of First Instance to order the Central Bank to proceed to rehabilitate Continental Bank by extending to it such emergency loans and advances as may be needed for its rehabilitation . . .

2.

Wrote, on July 15, 1977, the Central Bank expressing his approval in the reopening and rehabilitation of Continental Bank.

We are, therefore, convinced, from Vicente Tan’s very behavior, that detention was not an impediment to a judicial challenge, and the fact of the matter was that he was successful

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in obtaining judicial assistance. Under these circumstances, we can not declare detention, or authoritarian rule for that matter, as a fortuitous event insofar as he was concerned, that interrupted prescription. To be sure, there is nothing in the petition which would remotely suggest, assuming that Vicente Tan could not have freely and intelligently acted during the period of martial rule, that his co-petitioners Victan & Company, Inc., Transworld Investment Corporation, First International Investment Company, Inc., Far East Petroleum & Minerals Corporation, and Philcontrust International Corporation, could not have similarly acted during the martial law regime and shortly thereafter. As far as they are therefore concerned, the Court has even better reason to invoke prescription because none of them acted and none now claims that it could not have acted.

Article 1155. The prescription of actions is interrupted when they are filed before the court, when there is a written extra-judicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor. (1973a) In Ledesma vs. Court of Appeals,29 the Supreme Court had occasion to explain the effect on the prescriptive period of an extrajudicial demand, an acknowledgment of a debt by the debtor, and the filing of a case in court. The case is as follows: Petitioner had filed a motion for reconsideration of the Court’s resolution of March 24, 1993 which denied his petition for review on certiorari for failure to sufficiently show that respondent Court of Appeals had committed any reversible error in its questioned judgment. On August 21, 1980, private respondent Rizal Commercial Banking Corporation filed Civil Case No. 38287 in the then Court of First Instance of Rizal against petitioner to enforce the terms of Trust Receipt Agreement No. 7389 executed by them on April 1, 1974 but which petitioner had failed to comply with. As summons could not be served on the latter, said case was dismissed without prejudice on March 3, 1981. On December 2, 1988, private respondent bank instituted Civil Case No. 88-2572 in the Regional Trial Court of Makati, Metro Manila, Branch 133, against petitioner on the same cause of action and subject matter. Petitioner’s motion to dismiss on the ground of prescription was denied and judgment was rendered in favor of private 29

G.R. No. L-106646, June 30, 1993, 42 SCAD 975, 224 SCRA 175.

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respondent by the court a quo ordering petitioner to pay private respondent P168,000.00 with interest thereon at 12% per annum from December 2, 1988 until full payment of the obligation, P16,800.00 as attorney’s fees, and costs of suit. Said judgment was affirmed by respondent Court in CA-G.R. CV No. 2906 in its decision promulgated on January 7, 1992, and petitioner’s motion for reconsideration thereof was denied in a resolution dated August 6, 1992. Petitioner’s petition for review on certiorari of the said judgment was denied in our aforesaid resolution, hence its present motion for reconsideration, dated May 5, 1993. Contending that the second action filed by private respondent bank had already prescribed, petitioner invokes the rulings in Vda. de Nator, et al. vs. Court of Industrial Relations, et al. and Fulton Insurance Co. vs. Manila Railroad Co., et al., and invites us “to give a second look at the apparently conflicting or divergent jurisprudence.” Article 1155 of the Civil Code provides that the prescription of an action, involving in the present case the 10-year prescriptive period for filing an action on a written contract under Article 1144(1) of the Code, is interrupted by: (a) the filing of an action, (b) a written extrajudicial demand by the creditor, and (c) a written acknowledgment of the debt by the debtor. The effects of the last two instances have already been decided by this Court, the rationale therein should necessarily apply to the first. The matter of the interruption of the prescriptive period by reason of a written extra-judicial demand by the creditor was decided in Overseas of Manila vs. Geraldez, et al., in this wise: “x x x. The interruption of the prescriptive period by written extra-judicial demand means that the said period would commence anew from the receipt of the demand. That is the correct meaning of interruption as distinguished from mere suspension or tolling of the prescriptive period.

xxx

“A written extrajudicial demand wipes out the period that has already elapsed and starts anew the prescriptive period. x x x.

xxx

“That the same view to the meaning of interruption was adopted in Florendo vs. Organo, 90 Phil. 483, where it was ruled that the interruption of the ten-year prescriptive period through a judicial demand means that the full period of prescription commenced to run anew upon the cessation of the suspension. When prescription is interrupted by a judicial demand, the full time for the prescription must be reckoned from the cessation of

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the interruption. x x x.” The interruption of the prescriptive period by reason of a written acknowledgment of the debt by the debtor was dealt with in Philippine National Railways vs. National Labor Relations Commission, et al., thus: “Article 1155 of the Civil Code provides that the prescription of actions is interrupted inter alia, when there is any written acknowledgment of the debt by the debtor.” This simply means that the period of prescription, when interrupted by such a written acknowledgment, begins to run anew; and whatever time of limitation might have already elapsed from the accrual of the cause of action is thereby negated and rendered inefficacious. x xx “x x x. The effect of the interruption spoken of in Article 1155 is to renew the obligation, to make prescription run again from the date of the interruption. x x x” Based on the aforecited cases, Article 1155 has twice been interpreted to mean that upon the cessation of the suspension of the prescriptive period, the full period of prescription commences to run again. Petitioner, on the other hand, insists that in case of the filing of an action the prescriptive period is merely tolled and continues to run again, with only the balance of the remaining period available for the filing of another action. This postulation of petitioner, if we are to adopt it, would result in an absurdity wherein Article 1155 would be interrupted in two different ways, i.e., the prescriptive period interrupted in case of an extrajudicial demand and a written acknowledgment of a debt, but it is merely tolled where an action is filed in court.

In Vda. de Nator, it was held that:

“x x x The filing of the case with the CFI arrested the period of prescription (Art. 1155, NCC), and the interruption of said period lasted until the time that the dismissal for lack of jurisdiction became final. When prescription is interrupted by a judicial demand, the full time for the prescription must be reckoned from the cessation of the interruption’ x x x. The whole period during which the case had been pending cannot be counted for arriving at the prescriptive period. In other words, the running of the period of prescription in this particular case was interrupted on August 6, 1953, when the case in the CFI was filed and began to run again on August 30, 1958, when the same Court had dismissed the case. As the complaint was filed with the CIR on December 5, 1959, the action had not yet prescribed.” This case obviously appears to have made conflicting statements since it proceeds upon a certain premise but arrives at a different conclusion. Hence, we cannot agree that the statements

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therein sufficiently support the thesis of petitioner. The case of Fulton Insurance Company is not clear either on the matter of the interruption of the prescriptive period where an action is filed in court. It was there held that: “There are two school(s) of thought as to the legal effect of the cessation of the interruption by an intervening action upon the period of prescription. There is the view expressed and perhaps, not without reasons, that the full period of prescription should start to run anew, reckoned from the date of the cessation of the interruption. The contrary view is, that the cessation of the interruption merely tolls the running of the remaining period of prescription, deducting from the full period thereof the time that has already elapsed prior to the filing of the intervening action. Nevertheless, all discussion on this point is academic; considered in the light of either view, We find that the second action is not barred.” In the aforesaid case, the defendant therein moved for the dismissal of the second case alleging that the filing of the first case neither tolled nor interrupted the running of the pres-criptive period. This Court ruled that the filing of the first action interrupted the running of the period, and then declared that at any rate, the second action was filed within the balance of the period remaining. It concluded that the issue of whether the filing of the action merely tolled or it actually interrupted the running of the prescriptive period was moot and academic because, in either case, the second action was still filed within the prescriptive period. Consequently, the Fulton case cannot also sustain the thesis of petitioner. On the foregoing considerations, we are convinced and so hold that the correct interpretations of Article 1155 of the Civil Code are reflected in and furnished by the doctrinal pronouncements in Overseas Bank of Manila and Philippine National Railways Company, not only because they are later in point of time but because the issue is squarely resolved in a decisive and logical manner therein. Petitioner’s submission would result in a bifurcated interpretation of Article 1155, aside from the irrational conclusion that a judicial action itself cannot produce the same result on the prescriptive period as a mere extra-judicial demand or an acknowledgment of the debt. Accordingly, petitioner having failed to adduce any cogent reason or substantial argument to warrant a reconsideration of our resolution of March 24, 1993, the present motion is hereby DENIED with FINALITY.

In Cabrera vs. Tiano30 where the sale of the real property was made on July 2, 1947 and where the action was filed on June 20, 1957

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but the summons to the defendant was only served to him on July 2, 1957, the Supreme Court rejected the contention that the action had already prescribed to wit: When the sale of the property took place on July 2, 1947, the ten (10)-year period within which to file the action had not yet elapsed on June 20, 1957, when the complaint was presented. While it is true that the sale in question had taken place before the effectivity of the new Civil Code and the law then on matter of prescription was Act No. 190, said law, however, contained no specific provision on the interruption of the prescriptive period; and the established rule then, as it is the rule now, is that the commencement of the suit prior to the expiration of the applicable limitation period, interrupts the running of the statute, as to all parties to the action (34 Am. Jur., Sec. 247, pp. 202-203; Peralta, et al. vs. Alipio, G.R. No. L-8273, Oct. 24, 1955). The fact that summons was only served on defendant on July 2, 1957, which incidentally and/or coincidentally was the end of the ten (10)-year period, is of no moment, since civil actions are deemed commenced from the date of the filing and docketing of the complaint with the Clerk of Court, without taking into account the issuance and service of summons (Sotelo vs. Dizon, et al., 67 Phil. 573). The contention that the period was not interrupted until after defendant received the summons is, therefore, without legal basis.

In the case of Olympia International, Inc. vs. Court of Appeals,31 the Supreme Court pertinently ruled that: it is equally important to note that the right to file a new action in this case has long prescribed, for while a civil action stops the running of the statute of prescription or limitation, its dismissal or voluntary abandonment by the plaintiff leaves the parties in exactly the same position as though no action had been commenced at all. The commencement of an action, by reason of its dismissal or abandonment, takes no time out of the period of prescription.

In Philippine National Bank vs. Osete,32 the Supreme Court ruled that under Article 1155 not all acts of acknowledgment of a debt interrupt prescription. To produce such effect, the acknowledgment must be “written” so that payment, if not coupled with a communication signed by the payor, would not interrupt the running of the period of 30

G.R. No. L-17299, July 31, 1963, 8 SCRA 542.

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67

prescription.

In Ramos vs. Condez,33 where the defendant on June 25, 1952 sold to the plaintiff a particular land and where the same defendant on November 10, 1956, upon demand by the plaintiff, recognized the sale and promised to deliver the property, the Supreme Court rejected the contention that the filing of the case had already prescribed by ruling: Under Article 1144 of the Civil Code (new), an action upon a written contract “x x x must be brought within 10 years from the time the cause of action accrues.” There is no denying that, in the instant case, the plaintiffs’ cause of action, under the deed of absolute sale, Annex A, has accrued on June 25, 1952, but in view of defendants’ letter, dated November 10, 1956, acknowledging the validity of the deed of absolute sale and promising to comply with their commitments as embodied in the deed of sale that they will deliver the land which they have sold to the plaintiffs, the running of the period of limitation of action was interrupted on that date, November 10, 1956. Considering that the action was filed on May 22, 1963, evidently, the cause of action has not prescribed, because it was filed within the period of limitation of actions (Article 1155, New Civil Code).

G.R. No. L-43235, December 20, 1989, 180 SCRA 353. G.R. No. L-24997, July 18, 1968, 24 SCRA 63. 33 G.R. No. L-22072, August 30, 1967, 20 SCRA 1146. 31 32

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BOOK IV

OBLIGATIONS AND CONTRACTS Title I. — OBLIGATIONS Chapter 1

GENERAL PROVISIONS Article 1156. An obligation is a juridical necessity to give, to do or not to do. (n) An obligation is a “legal bond whereby constraint is laid upon a person or group of persons to act or forbear on behalf of another person or group of persons.”1 In Ang Yu Asuncion vs. Court of Appeals,2 the Supreme Court spelled out the requirements for the existence of an obligation, thus: The obligation is constituted upon the concurrence of the essential elements thereof, viz.: (a) The vinculum juris or juridical tie which is the efficient cause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation or con-duct, required to be observed (to give, to do or not to do); and (c) subjectpersons who, viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor) subjects.

The word “persons” in this sense is understood as comprehending both natural and juridical persons. The prestations are to give, to do and not to do.

Article 1157. Obligations arise from:



(1) Law;

William F. Elliot, Commentaries on the Law of Contracts, Volume 1, 1913 edition, Indianapolis, The Bobbs-Merrill Company, page 6, citing Anson Cont. 5, 23. 2 G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602. 1

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(2) Contracts;



(3) Quasi-Contracts;



(4) Acts or omissions punished by law; and



(5) Quasi-delicts. (1089a)

69

The enumeration of the sources of obligation under this particular article is exclusive3 which means that there can be no other sources of obligations other than those enumerated in the article. 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. x x x 4

Article 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. (1090) Among the sources of obligation, the law is the most important one. It does not depend upon the will of the parties. It is imposed by the state and is generally imbued with some public policy considerations. Being thus imposed, the basis of the obligation must be clear. It cannot be presumed. Hence, the payment of taxes must be specifically directed by our tax statutes. Also, parents and children are obliged to support each other as mandated by the provisions of the Family Code of the Philippines.5 The importance of law as a source of obligation is highlighted by the legal principle that existing law enters into and forms part of a valid contract without need for the parties expressly making reference thereto.6 A contract is understood to incorporate therein the provision or provisions of law specifying the obligations of the parties under the contract.7

Sagrado Orden vs. Nacoco, G.R. No. L-3756, June 30, 1952, 91 Phil. 503; Navales vs. Rios, G.R. No. 3489, September 7, 1907, 8 Phil. 508. 4 Article 1423 of the 1950 Civil Code. 5 Article 195 of Executive Order No. 209 which took effect on August 3, 1988. 6 Lakas ng Manggagawang Makabayan (LMM) vs. Abiera, G.R. No. L-29474, 3

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Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a) Contracts are another source of obligations. As defined in our law, 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.8 The statutory definition is not really accurate as contracts may likewise involve more than two persons “whereby a right is acquired by at least one of them to an act or acts, or to forbearance, on the part of other or others.”9 A contract may likewise involve mutual and reciprocal obligations and duties between and among the parties. In characterizing the contract as having the force of law between the parties,10 the law stresses the obligatory nature of a binding and valid agreement. Like the law, the wilfull non-fulfillment of the provisions of a contract may involve sanctions. The parties voluntarily impose upon themselves the performance of certain duties and obligations which, in the event of breach or wilfull non-performance, can prejudice the other party or parties. Whatever stipulations, clauses, terms and conditions are included in a contract, as long as they are not contrary to law, morals, good customs, public policy or public order, such contract is the law between the parties.11 In Perla Compania de Seguros, Inc. vs. Court of Appeals,12 the insurance contract between the parties stipulated that the insurer’s liability for all damages arising out of death or bodily injury sustained by one person was limited to Twelve Thousand Pesos (P12,000); and it was likewise stipulated that before the insured enters into a contract with December 19, 1970, 31 SCRA 329; Boman Environmental Development Corporation vs. Court of Appeals, G.R. No. L-77860, November 22, 1988, 167 SCRA 540. 7 Commissioner of Internal Revenue vs. United Lines Company, G.R. No. L-16850, May 20, 1962, 5 SCRA 175. 8 Article 1305 of the New Civil Code. 9 William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913 edition, Indianapolis, The Bobbs-Merrill Company, page 2, citing Anson Cont. 9. 10 Lazo vs. Republic Surety & Insurance Co., G.R. No. L-27365, January 30, 1970, 31 SCRA 329; Herrera vs. Petrophil Corporation, G.R. L-48349, December 29, 1986, 146 SCRA 385; Chua Peng Hian vs. Court of Appeals, G.R. No. L-60015, December 19, 1984, 133 SCRA 572. 11 Gaw vs. Intermediate Appellate Court, G.R. No. 70451, March 24, 1993, 220 SCRA 405; Pe vs. Court of Appeals, G.R. No. 74781, March 13, 1991, 195 SCRA 137; Intestate Estate of Ricardo P. Presbitero, Sr. vs. Court of Appeals, G.R. No. 102432, January 21, 1993, 217 SCRA 372. 12 G.R. No. 78860, May 28, 1990, 185 SCRA 741. 13 Romero vs. Court of Appeals, G.R. No. 107207, November 23, 1995, 65 SCAD

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the injured party, the written express consent of the insurer was first to be obtained. The Supreme Court, in ruling that the lower court could not change the import or extent of the liability of the insurer as indicated in the insurance contract, stated, thus: Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in this case. Thus, it was error on the part of the trial and appellate courts to have disregarded the stipulations of the parties and to have substituted their own interpretation of the insurance policy. In Philippine American and General Insurance Co., Inc. vs. Mutuc, we ruled that contracts which are the private laws of the contracting parties should be fulfilled according to the literal sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of the contracting parties, for contracts are obligatory, no matter what form they may be, whenever the essential requirements for their validity are present.

From the moment the contract is perfected, the parties are bound not only to fulfill what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and the law.13 Article 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book. (n) Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of the other.14 A good example of an obligation arising from a quasi-contract is the obligation to return what has been obtained by mistake (solutio indebiti). Among others, the Civil Code provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.15 There are other instances of quasi-contract provided for in Chapter 1, Title XVII of the Civil Code, specifically from Article 2144 up to Article 2175. Article 1161. Civil Obligations arising from criminal offenses shall be governed by the penal laws, subject to the 621, 250 SCRA 223. 14 Article 2142 of the 1950 Civil Code. 15 Article 2154 of the 1950 Civil Code. 16 Article 100 of the Revised Penal Code.

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Art. 1161

provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages. (1092a) Civil liability attaches to any individual who is found to be criminally liable.16 A person who commits a crime may be penalized by incarceration or payment of a fine or both. The punishment is meted out because such person has conceptually offended the State — a criminal offense of whatever nature constructively disturbs the peace and order of society. However, it cannot be denied that the victim of a crime is usually an individual, a natural person who must be compensated for his injury. For this purpose, civil damages may be awarded to him. Article 1161 subjects the awarding of damages to the following: 1) Article 2176 of the Civil Code provides that “whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done.” However, under Article 2177, the plaintiff shall not be entitled to recover damages twice for the same act or omission of the defendant even if the negligence may constitute an entirely different cause of action. 2) Articles 19 to 36 of the New Civil Code are the provisions on Human Relations. Generally, these are the provisions which give a person or persons causes of action for filing damage suits. The relevant provisions are as follows: Article 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. Upon motion of the defendant, the court may require the plaintiff to file a bond to answer for damages in case the complaint should be found to be malicious. 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. Article 30. When a separate civil action is brought to demand civil liability arising from a criminal offense, and no criminal proceedings are instituted during the pendency of the civil case, a preponderance of evidence shall likewise be sufficient to prove the act complained of. G.R. No. Article 33. June In cases of defamation, L-29900, 28, 1974, 57 SCRA 618. fraud, and physical injuries, a civil action for damages, entirely separate and distinct

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73

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 a preponderance of evidence. Article 34. When a member of a city or municipal police force refuses or fails to render aid or protection to any person in case of danger to life or property, such peace officer shall be primarily liable for damages, and the city or municipality shall be subsidiarily responsible therefor. The civil action herein recognized shall be independent of any criminal proceedings, and a preponderance of evidence shall suffice to support such action. Aside from the above provisions, Article 32 likewise provides, in substance, that whoever violates the enumerated constitutional rights of an individual enumerated in the said article shall be liable for damages. It likewise provides that: “x x x whether or not the defendant’s act or omission constitute a criminal offense, the aggrieved party has a right to commence an entirely separate and distinct civil action for damages, and for other relief. Such civil action shall proceed independently of any criminal prosecution (if the latter be instituted), and may be proved by preponderance of evi-dence. The indemnity shall include moral damages. Exemplary damages may also be adjudicated. The responsibility herein set forth is not demandable from a judge unless his act or omission constitutes a violation of the Penal Code or other penal statute.” 3) Title XVIII of the Civil Code refers to the rules governing damages. However other rules laid down in other laws shall likewise apply insofar as they are not inconsistent with the Civil Code.

Article 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws. (1093a) Quasi-delict has a statutory definition in the 1950 Civil Code. Article 2176 of Chapter 2, Title XVII provides that: whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter.

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Obligations and Contracts Text and Cases

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Chapter 2

NATURE AND EFFECT OF OBLIGATIONS Article 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. (1094a) This article involves the prestation “to give.” The word “something” connotes a determinate object which is definite, known, and has already been distinctly decided and particularly specified as the matter to be given from among the same things belonging to the same kind. Hence, for example, if the object is a computer, it does not involve any kind of computer but a very particular computer such as the computer with serial number 7777. Once the determinate thing becomes the specified object of the prestation, the person who has the duty to give, must take care of it in order that it can be delivered to the recipient in good condition. The phrase characterising the kind of diligence required in the situation is “the proper diligence of a good father of a family.” The reference point is “the father” because it is a commonly-accepted notion that a father will always do everything to take care of his concerns. If the law or contract does not state the diligence which is supposed to be observed in the performance of an obligation, that which is expected of a good father of a family is required.1 The law, however, states that the kind of diligence required can vary if either “the law or the stipulation of the parties requires another standard of care.” In case of a contrary stipulation of the parties, such stipulation should not be one contemplating a relinquishment or waiver of the most ordinary diligence. An example where the law requires another standard of care is that which involves common carriers. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.2 Common Article 1173 of the 1950 Civil Code.

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Obligations and Contracts Text and Cases

Art. 1164

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 the circumstances of each case.3 Article 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. (1095) This article involves the prestation “to give.” After the right to deliver the object of the prestation has arisen in favor of the creditor but prior to the delivery of the same, there is no real right enforceable or binding against the whole world over the object and its fruits in favor of the person to whom the same should be given. The acquisition of a real right means that such right can be enforceable against the whole world and will prejudice anybody claiming the same object of the prestation. The real right only accrues when the thing or object of the prestation is delivered to the creditor. He only has a personal right over the same if it is enforceable only against the debtor who is under an obligation to give. This means that the personal right of the creditor can be defeated by a third person in good faith who has innocently acquired the property prior to the scheduled delivery regardless of whether or not such third person acquired the property after the right to the delivery of the thing has accrued in favor of the creditor. In this case, however, the aggrieved creditor can go against the debtor for damages as the debtor should have known that the fruits should have been delivered to the creditor alone. A personal right is the power of one person to demand of another, as a definite passive subject, the fulfillment of a prestation to give, to do, or not to do. On the other hand, a real right is the power belonging to a person over a specific thing, without a passive subject individually determined, against whom such right may be personally exercised.4

For example, on February 1, 1990, A buys a mango orchard from X to be delivered on March 1, 1990. On the latter date, A shall have the right to the fruits of the mango orchard. If the property is delivered Article 1732 of the 1950 Civil Code. Article 1733 of the 1950 Civil Code. 4 Adorable vs. Court of Appeals, G.R. No. 119466, November 25, 1999, 116 SCAD 189, 319 SCRA 200. 5 Article 1170 of the 1950 Civil Code. 2 3

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only on April 1, 1990, A can nevertheless ask that the fruits accruing since March 1, 1990 be likewise delivered to him. X cannot resist by saying that he is entitled to the fruits before the actual delivery on April 1, 1990. If, however, X sells the fruits on March 20, 1990 to B who does not know the previous sale to A and who immediately takes possession of the fruits, B shall have a better right over the said fruits. Considering that there is no delivery of the property to A on March 20, 1990, A has no real right over the said property at that time binding upon the whole world. A’s remedy is to seek damages from X in connection with the fruits. If however, the mango orchard has already been delivered, A already has a real right binding upon the whole world. If X sells to B the fruits after delivery to A, A can recover from B who in turn can seek damages from X. Article 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. (1096) This provision involves the prestation “to give.” The object of the prestation can either be determinate or generic. A generic object can be any object belonging to the same kind. In the event that there is non-delivery of a generic thing, the creditor may have it accomplished or delivered in any reasonable and legal way charging all expenses in connection with such fulfillment to the debtor. The creditor can ask a third party to deliver the same thing of the same kind with all the expenses charged to the debtor. In case of non-delivery of a determinate thing, the remedy is to file an action to compel the debtor to make the delivery. This action is called specific performance. If the debtor is guilty of fraud, negligence, delay or contravention in the performance of the obligation, the creditor can likewise seek damages against the debtor.5 A fortuitous event is an event which “could not be foreseen, or which though foreseen, were inevitable.”6 As a general rule, a debtor is relieved from his obligation “to give” if the object of such prestation is lost through a fortuitous event. The last paragraph of Article 1165

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Obligations and Contracts Text and Cases

Arts. 1166-1168

however provides that a fortuitous event will not excuse the obligor from his obligation in two cases namely: 1) if the obligor delays; and 2) if he has promised to deliver the same thing to two or more persons who do not have the same interest. In both cases, the obligor will be liable for damages or will be bound to replace the lost object of the prestation in cases when the obligee agrees to the replacement. Article 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. (1097a) This article still deals with the prestation “to give.” The principal always includes it accessories and accessions which the law likewise gives to the creditor as part of what he should receive. Article 1167. If the person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligations. Furthermore, it may be decreed that what has been poorly done be undone. (1098) Article 1168. When the obligation consists in not doing and the obligor does what has been forbidden, it shall also be undone at his expense. (1099a) The articles deal with the obligations “to do” and “not to do.” The creditor can ask any third person to perform the obligation due from the debtor should the latter fail to do the same. The debtor will be liable for all expenses in connection with the performance or fulfillment of the obligation undertaken by the third person. The words “at his cost” imply both the right to have somebody else perform the obligation and the right to charge the expenses thereof to the debtor. With respect to the situation wherein the debtor poorly undertook the obligation, the creditor has the right to have everything be undone at the expense of the debtor. The reason for this rule is to prevent the debtor from taking his obligation lightly. He must exercise due diligence and prudence to see to it that the prestation is properly performed. In case the prestation is for the debtor not to do a particular act or service and he nevertheless performs it, it shall likewise be undone at his own expense. Article 1174 of the 1950 Civil Code. G.R. No. 27454, April 30, 1970, 32 SCRA 547.

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In Chaves vs. Gonzales7 where the repairer of a typewriter, upon demand of the owner, returned the typewriter with missing parts and without having it repaired, and where the owner had another company fix the typewriter, the Supreme Court ruled that the original repairer can be held liable not only for the missing parts but also for the cost of the execution of the obligation of repairing the typewriter by another company, thus: Because the plaintiff appealed directly to the Supreme Court and the appellee did not interpose any appeal, the facts, as found by the trial court, are now conclusive and non-reviewable. The appealed judgment states that the plaintiff delivered to the defendant x x x a portable typewriter for routine cleaning and servicing; that the defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff; that the defendant merely gave assurances, but failed to comply with the same; and that after getting exasperated with the delay of the repair of the typewriter, the plaintiff went to the house of the defendant and asked for its return, which was done. The inferences derivable from these findings of fact are that the appellant and the appellee had a perfected contract for cleaning and servicing a typewriter; that they intended that the defendant was to finish it at some future time although such time was not specified; and that such time had passed without the work having been accomplished for the defendant returned the typewriter cannibalized and unrepaired, which itself is a breach of his obligation, without demanding that he be given more time to finish the job, or compensation for the work he had already done. The time for compliance having evidently expired, and there being a breach of contract by non-perfor-mance, it was academic for the plaintiff to have first petitioned the court to fix a period for the performance of the contract before filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually admitted non-performance of the contract by returning the typewriter that he was obliged to repair in a non-working condition, with essential parts missing. The fixing of a period would thus be a mere formality and would serve no purpose than to delay (Cf. Tigla, et al. vs. Manila Railroad Co., 98 Phil. 181). It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair the typewriter but returned it “in shambles,” according to the appealed decision. For such contravention, as appellant contends, he is liable under Article 1167 of the Civil Code, jam quot, for the cost of Rizal Commercial Banking Corporation vs. Court of Appeals, G.R. No. 133107,

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Obligations and Contracts Text and Cases

Art. 1169

the execution of the obligation in a poor manner. The cost of the execution of the obligation in this case should be the cost of the labor or service expended in the repair of the typewriter, which is in the amount of P58.75 because the obligation or contract was to repair it. In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code, for the cost of the missing parts, in the amount of P31.10, for in his obligation to repair the typewriter he was bound, but failed or neglected to return it in the same condition it was when he received it.

Article 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. 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 de- clares;

(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. (1100a) Delay or default can be committed by the debtor in which case it is known as mora solvendi. If it is committed by the creditor, it is known as mora accipiendi. In the latter case, the debtor can consign whatever is due to the creditor in court if the circumstances warrant. Delay in the performance of the obligation, however, must be either malicious or negligent.8 Hence, if the delay was only due to inadvertence without any malice or negligent, the obligor will not be held liable under Article 1170.9 For an obligation to become due, there must generally be a demand. Default generally begins from the moment the creditor demands the performance of the obligation. Without such demand,

Art. 1169

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81

judicial or extra-judicial, the effects of default will not arise. 10 Commencement of a suit is a sufficient demand.11 Consequently, an obligor is liable for damages for the delay not from the time the object of the prestation is to be delivered but from the time of extra-judicial or judicial demand.12 Also, Article 1169 is applicable only when the obligation is to do something other than the payment of money.13 In obligations for the payment of money, Article 2209 shall apply which provides that 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, which is six percent per annum.

Hence, in case of obligation for the payment of sum of money, the interest replaces the damages. However, the rule is still the same in that default occurs only after judicial or extra-judicial demand. If the contract stipulates from what time interest will be counted, said stipulated time controls, and, therefore interest is payable from such time and not from the date of filing of the complaint.14 If the contract involving a sum of money does not stipulate any interest and/or the time when it will be counted, interest will run only from the time of judicial or extra-judicial demand. It must be noted however that, for a party to be able to file a suit to compel the other party to perform his obligation, the law does not make, as a prerequisite, that extra-judicial demand must be made first on such other party prior to the filing of the suit.15 An action or suit can be filed at anytime after the non-compliance of the other party of his obligation because the cause of action of the aggrieved party will always start from such time. However, damages or interest shall start to run only after judicial or extra-judicial demand. Hence, if the obligation were due on March 1, 1998, the aggrieved party can March 25, 1999, 105 SCAD 233, 305 SCRA 449. 9 Ibid. 10 Rose Packing Company, Inc. vs. Court of Appeals, G.R. No. L-33084, November 14, 1988, 167 SCRA 309. 11 Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD 209, 288 SCRA 422. 12 National Marketing Corporation vs. Federation of United Namarco Distributors, Inc., G.R. No. L-22578, 49 SCRA 238. 13 Picson vs. Picson, G.R. No. L-29139, November 15, 1974, 61 SCRA 67. 14 Firestone Tire & Rubber Co. (P.I.) vs. Delgado, G.R. No. L-11162, December 4, 1958, 104 Phil. 920. 15 See Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD 209, 288 SCRA 422.

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Art. 1169

file suit for specific performance immediately after March 1, 1998. If, without any extra-judicial demand on the obligor, the action or suit against the obligor was filed on April 15, 1998, damages will be counted or reckoned not from March 1, 1998 but from April 15, 1998, which was the time when judicial demand was made. If extra-judicial demand however was made on March 15, 1998, damages shall be counted not from March 1, 1998 but from March 15, 1998. There are two cases where an extra-judicial demand should first be made prior to the filing of a civil suit. These are in ejectment cases and in consignment cases. Hence, before a lessor can eject a lessee, the lessor must first make an extra-judicial demand for the lessee to vacate before filing the suit for ejectment. If there is no extra-judicial demand, the ejectment suit will be dismissed. In consignment cases, the debtor must first make an extra-judicial demand for the creditor to accept payment of the obligation. If the creditor unjustifiably refuses to accept payment, the debtor can now consign the amount in court for purposes of extinguishing the obligation. If there is no extra-judicial demand, the consignment case will be dismissed unless tender of payment prior to consignment need not be made pursuant to law. When the law uses the phrase “in delay” what it really means is “in default.” In SSS vs. Moonwalk Development and Housing Corporation,16 the Supreme Court had occasion to explain the concept of default, to wit: But mere delinquency in payment does not necessarily mean delay in the legal concept. To be in default “x x x is different from mere delay in the grammatical sense, because it involves the beginning of a special condition or status which has its own peculiar effects or results.” In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially and extrajudicially. Default generally begins from the moment the creditor demands the performance of the obligation.

Demand however is not necessary in three cases provided in Article 1169. The first case is when the obligation or the law expressly so declares. Hence, a promissory note providing that payment shall be made on a particular date without the necessity of demand makes the 16 17

G.R. No. 73345, April 7, 1993, 221 SCRA 119. Collector of Internal Revenue vs. Yuseco, L-12518, October 28, 1961, 3 SCRA

313. 18

E.E.E., Inc. vs. Hanson, 318 N.W. 2d 101 (N.D. 1982).

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debtor in default upon his failure to pay on the particular date. Also, the law expressly declares that taxes to be paid to the government should be paid on a particular date. Taxes, being the chief source of revenue for the Government to keep it running, must be paid immediately and without delay.17 The second case when demand is not necessary is when time is of the essence in a particular contract. Delay constitutes a material breach of the contract where time is of the essence.18 In stock market transactions made in the stock exchange, time is of the essence such that there is no need of demand before the delivery of the shares of stock ought to be made by the seller. Also, if a contract stipulates that a particular and special car is to be delivered to the obligee to be used specially and solely for a particular parade at a particular time, such as an exhibit in a one-day car fair to be held on a particular date, there is no need for demand because the manufacturer of the said car knows that had it not been for the time when the car would be exhibited, the obligee would not have ordered the special car. In the case of Barzaga vs. Court of Appeals19 where a contract was entered into for the delivery of materials on December 22, 1990 in time for the construction of a niche of the aggrieved party’s wife who expressly wished that she be buried before Christmas day, and where, despite knowing this timetable and having been paid for the materials, the supplier failed to make the delivery despite pleas and earnest follow-ups by the widower, the Supreme Court ruled that time is of the essence of such contract and the supplier should be liable for the delay and the breach, thus: The appellate court appears to have belittled petitioner’s submission that under the prevailing circumstances time was of the essence in the delivery of the materials to the grave site. However, we find petitioner’s assertion to be anchored on solid ground. The niche had to be constructed at the very least on the twenty-second of December considering that it would take about two (2) days to finish the job if the interment was to take place on the twenty-fourth of the month. Respondent’s delay in the delivery of the construction materials wasted so much time that construction of the tomb could start only on the twenty-third. It could not be ready for the scheduled burial of petitioner’s wife. This undoubtedly prolonged the wake, in addition to the fact that work at the cemetery had to be put off on Christmas day.

This case is clearly one of non-performance of a reciprocal

G.R. No. 115129, February 12, 1997, 79 SCAD 378. Article 1198 of the 1950 Civil Code. 21 Vermen Realty Development vs. Court of Appeals, G.R. No. 101762, July 6, 1993, 43 SCAD 369, 224 SCRA 549. 19 20

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obligation. In their contract of purchase and sale, petitioner had already complied fully with what was required of him as purchaser, i.e., the payment of the purchase price of P2,110.00. It was incumbent upon respondent to immediately fulfill his obligation to deliver the goods otherwise delay would attach.

The third case when demand is unnecessary is when it would be useless, as when the obligor has rendered it beyond his power to perform. For example, a debtor promised to constitute his house as a collateral for a particular loan which is payable at a particular date but before he can make the mortgage, he donates the house to his friend, demand from the creditor to constitute the house as a collateral is useless. In this case, his obligation becomes immediately demandable considering that he loses his right to the period within which to pay the loan.20 Reciprocal obligations are those created and established at the same time, out of the same cause and which results in a mutual relationship of creditor and debtor between the parties.21 In reciprocal obligations, the performance of one is conditioned upon the simultaneous fulfillment of the other.22 In reciprocal obligations, the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract.23 A contract of loan, for example, is not a unilateral contract but one which involves reciprocal obligations — the obli-gation or promise of each party is the consideration for that of the other. The promise of the borrower to pay is the consideration for the obligation of the bank to furnish the loan.24 A contract of lease and a contract of sale are likewise agreements involving reciprocal obligations. In reciprocal obligations, where one of the parties to a contract does not perform the undertaking which he is bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the other party. For failure of the other party to assume and perform the obligation imposed upon him, the other party does not incur in delay.25 In Binalbagan Tech., Inc. vs. Court of Appeals26 where the buyer was not able to take possession of the property, which he bought from the seller, for eight years because, Abaya vs. Standard Vacuum Oil Co., G.R. No. L-9511, August 30, 1957, 101 Phil. 1262. 23 Songcua vs. Intermediate Appellate Court, G.R. No. 75096, October 23, 1990, 191 SCRA 28. 24 Rose Packing Company, Inc. vs. Court of Appeals, G.R. No. 33084, November 14, 1988, 167 SCRA 309; Penacio vs. Ruaya, G.R. No. L-28102, December 14, 1981, 110 SCRA 46. 22

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through no fault of the seller, a third party-claimant, through a court order, evicted the buyer from the said place but which judicial decree of eviction was later reversed by the court allowing the buyer to retake possession of the property, the Supreme Court held that the seller cannot rescind the contract for failure of the buyer to pay the balance of the purchase price during the said eight-year period, thus: x x x petitioner was evicted from the subject subdivision lots in 1974 by virtue of a court order in Civil Case No. 293 and reinstated to the possession thereof only in 1982. During the period, therefore, from 1974 to 1982, seller private respondent Angelina Echaus’ warranty against eviction given to buyer petitioner was breached though, admittedly, through no fault of her own. It follows that during the period, 1974 to 1982, private respondent Echaus was not in a legal position to demand compliance of the prestation of petitioner to pay the price of said subdivision lots. In short, her right to demand payment was suspended during that period, 1974-1982.

In Agcaoili vs. Government Service Insurance System,27 the GSIS and Agcaoili entered into a contract of sale of a government housing unit on the condition that Agcaoili should occupy the same within three days from receipt of the notice. Failure to immediately occupy contractually allowed the GSIS to terminate the contract. Agcaoili, upon receipt of the notice, immediately went to the place and found a house in a state of incompleteness that civilized occupation was not possible; ceiling, stairs, double walling, lighting facilities, water connection, bathroom, toilet, kitchen, drainage, were inexistent. The buyer paid the first monthly installment but refused to make further payments until and unless the GSIS completed the housing unit. GSIS cancelled the award and required Agcaoili to vacate the premises. The Supreme Court, in ruling that the GSIS had no right to rescind the sale ruled, thus: x x x It was, to be sure, the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the purpose contemplated, in other words, to deliver the house subject of the contract in a reasonably livable Agustin vs. Court of Appeals, G.R. No. 84751, June 6, 1990, 186 SCRA 375; Boysaw, et al. vs. Interphil Promoters, Inc., G.R. No. L-22590, March 20, 1987, 148 SCRA 635; Abaya vs. Standard Vacuum Oil, 101 Phil. 1262. 26 G.R. No. L-100594, March 10, 1993, 219 SCRA 777 27 G.R. No. L-30056, August 30, 1988, 165 SCRA 1. 28 G.R. No. 117190, January 2, 1997, 77 SCAD 647. 29 Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24; South Eastern College, Inc. vs. Court of Appeals, G.R. No. 126389, July 10, 1998, 96 SCAD 25

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state. This it failed to do. It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of the sale. Under the circumstance there can hardly be any doubt that the house contemplated was one that could be occupied for purposes of residence in reasonable comfort and convenience. There would be no sense to require the awardee to immediately occupy and live in a shell of a house, a structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does, that this was what was intended by the parties, since the contract did not clearly impose upon it the obligation to deliver a habitable house, is to advocate an absurdity, the creation of an unfair situation. By any objective interpretation of its terms, the contract can only be understood as imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for his undertaking to pay the stipulated price. Since the GSIS did not fulfill that obligation, and was not willing to put the house in habitable state, it cannot invoke Agcaoili’s suspension of payment of amortizations as cause to cancel the contract between them. It is axiomatic “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.”

In Tanguilig vs. Court of Appeals28 where the petitioner and the respondent entered into a contract for the construction of a windmill for a consideration of P60,000 with a one-year guaranty, and where, after completion, the petitioner sued the respondent for non-payment of the balance of the construction price but the respondent did not pay because the windmill collapsed due to the defects in the construction, the Supreme Court ruled: Finally, petitioner’s argument that private respondent was already in default in the payment of his outstanding balance of P15,000.00 and hence should bear his own loss, is untenable. 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 (Article 1169). When the windmill failed to function properly it became incumbent upon petitioner to institute the proper repairs in accordance with the guaranty stated in the contract. Thus, respondent cannot be said to have incurred in delay; instead, it is petitioner who should bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this point that if a person obliged to do something fails to do it, the same shall be executed at his cost.

WHEREFORE, the appealed decision is MODIFIED.

1136, 292 SCRA 422.

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Respondent VICENTE HERCE, JR. is directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest at the legal rate from the date of the filing of the complaint. In return, petitioner is ordered to “reconstruct subject defective windmill system, in accordance with the one-year guaranty” and to complete the same within three (3) months from the finality of this decision.

Article 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. (1100a) Obligations must be complied with so as not to prejudice persons who are directly interested therein. The law specifically provides that damages can be awarded to any person who may have been prejudiced in the performance of the obligation as a result of fraud, negligence, delay or contravention of the tenor of the obligation. Significantly, if any of these four bases of liability co-exist with a fortuitous event or aggravates the loss caused by a fortuitous event, the obligor cannot be excused from being liable on his obligation.29 In Barzaga vs. Court of Appeals,30 where before dying, the wife of the petitioner (husband) specifically requested the latter that she be buried before Christmas day, and where the said husband, complying with the said request after the wife’s death, went to the hardware of the respondent to order the materials to build the niche and told the latter that the same should arrive by eight o’clock on December 22, 1990 since his hired workers were already at the burial site and time was of the essence, and where the respondent, after having received payment of the materials from the petitioner, did not deliver the materials for two-and-a-half days despite repeated and earnest pleas from the petitioner prompting the latter to just order from another supplier the materials, the Supreme Court sustained the award of damages in favor of the petitioner specially when, as in this case, time is of the essence of the contract, to wit: We sustain the trial court. An assiduous scrutiny of the record convinces us that respondent Angelito Alviar was negligent and incurred in delay in the performance of his contractual obligation. This sufficiently entitles petitioner Ignacio Barzaga G.R. No. 115129, February 12, 1997, 79 SCAD 378. Corliss vs. Manila Railroad Company, G.R. No. L-21291, March 28, 1969, 27 SCRA 674. 32 Id. 30 31

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to be indemnified for the damage he suffered as a consequence of delay or a contractual breach. The law expressly provides that those who in the performance of their obligation are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for damages. xxx

xxx

xxx

We therefore sustain the award of moral damages. It cannot be denied that petitioner and his family suffered wounded feelings, mental anguish and serious anxiety while keeping watch on Christmas day over the remains of their loved one who could not be laid to rest on the date she herself had chosen. There is no gainsaying the inexpressible pain and sorrow Ignacio Barzaga and his family bore at that moment caused no less by the ineptitude, cavalier behavior and bad faith of respondent and his employees in the performance of an obligation voluntarily entered into. We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude of the employees of respondent over which he exercised supervisory authority indicates gross negligence in the fulfillment of his business obligations. Respondent Alviar and his employees should have exercised fairness and good judgment in dealing with peti- tioner who was then grieving over the loss of his wife. Instead of commiserating with him, respondent and his employees contributed to petitioner’s anguish by causing him to bear the agony resulting from his inability to fulfill his wife’s dying wish.

Article 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) When a party complies with or performs his obligation fraudulently, he is liable for damages. Thus, if A bought a car from B worth P50,000 and, after delivery of the car by B, A paid B counterfeit money on due date, A shall be liable for damages. If, in the contract of sale, A and B stipulated that any fraudulent act by another in the performance of his obligation shall not be a ground for the aggrieved party to file a suit against the other for fraud is a void stipulation. By express provision of law, such waiver is void. The dolo or fraud which is committed to induce a party to enter into a contract, thereby making the agreement annullable is not the one contemplated by Article 1171. The dolo or fraud under Article 1171 necessarily involves a valid agreement but, in the performance of the same, fraud is committed. Article 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

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the circumstances. (1103) Article 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. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) Article 1173 gives a statutory definition of negligence. In essence, negligence is the want of care required by the circum-stances.31 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.32 Pursuant to Article 1172 therefore, liability can be regu-lated by the courts depending on the circumstances. As a general rule, negligence must always be proven. In Syquia vs. Court of Appeals,33 where the personnel of the memorial park company, with the consent of the latter, bore a hole on the grave of the deceased during a rainy day to prevent the vault from falling, consequently preventing the earth from caving in and filling-up the grave, and where such hole made possible the entry of more water and soil than was natural had there been no hole, the Supreme Court, taking into consideration the attendant circumstances, ruled that the memorial company was not negligent and said: The law defines negligence as 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.” In the absence of stipulation or legal provision providing the contrary, the diligence to be observed in the performance of the obligation is that which is expected of a good father of a family. The circumstances surrounding the commission of the assailed act — boring of the hole — negate the allegation of negligence. The reason for the hole was explained by Henry Flores, Interment Foreman, who said that: Q.

It has been established in this particular case

G.R. No. 98695, January 27, 1993, 217 SCRA 624. G.R. No. 126152, September 28, 1999, 113 SCAD 115, 315 SCRA 309. 35 G.R. No. L-25414, July 30, 1971, 40 SCRA 144. 33 34

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that a certain Vicente Juan Syquia was interred on July 25, 1978 at the Parañaque Cemetery of the Manila Memorial Park Cemetery, Inc., will you please tell the Hon. Court what or whether you have participation in connection with said internment (sic)? A. A day before Juan (sic) Syquia was buried our personnel dug a grave. After digging the next morning a vault was taken and placed in the grave and when the vault was placed on the grave a hole was placed on the vault so that water could come into the vault because it was raining heavily then because the vault has no hole the vault will float and the grave would be filled with water and the digging it was raining heavily then because the vault has no hole the vault would caved (sic) in and fill up the grave. Except for the foreman’s opinion that the concrete vault may float should there be a heavy rainfall, from the above-mentioned explanation, private respondent has exercised the diligence of a good father of a family in preventing the accumu-lation of water inside the vault which would have resulted in the caving in of earth around the grave filling the same with earth.

In Philippine National Bank vs. Court of Appeals34 where the bank negligently dishonoured the check of its depositor, the Supreme Court said: This Court has ruled that a bank is under obligation to treat the accounts of its depositors with meticulous care whether such account consists only of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the per-formance of every kind of obligation is demandable. While petitioner’s negligence in this case may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to private respondent Lily S. Pujol for which she is entitled to recover reasonable moral damages. In the case of Leopoldo Araneta vs. Bank of America35 held that it can hardly be possible that a customer’s check can be wrongfully refused payment without some impeachment of his credit which must in fact be an actual injury, although he cannot, from the nature of the case, furnish independent and distinct proof thereof. Damages are not intended to enrich the complainant at the expense of the defendant, and there is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own 36

G.R. No. 108245, November 25, 1994, 56 SCAD 812, 238 SCRA 397.

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peculiar facts. The yardstick should be that it is not palpably and scandalously excessive. In this case, the award of P100,000.00 is reasonable considering the reputation and social standing of private respondent Pujol and applying our rulings in similar cases involving banks’ negligence with regard to the accounts of their depositors. The award of attorney’s fees in the amount of P20,000 is proper for respondent Pujol was compelled to litigate to protect her interest.

The law likewise provides that when negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. In Samson vs. Court of Appeals,36 the Supreme Court, in discussing bad faith, said: Bad faith is essentially a state of mind affirmatively operating with furtive design or with some motive of ill-will. It does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. Bad faith is thus synonymous with fraud and involves a design to mislead or deceive another, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive.

Hence, considering that bad faith is synonymous with fraud, Article 1171 shall apply if negligence concurs with bad faith. Accordingly, pursuant to Article 2201, second paragraph, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which, could not be foreseen, or which, though foreseen, were inevitable. (1105a) The general rule is that “no one should be held to account for fortuitous cases”37 which are those situations that could not be foreseen, or which though foreseen, were inevitable. An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented.38 In Nakpil vs. Court of Appeals,39 the Supreme Court again reiterated the elements for an event to be considered fortuitous, to Lawyers Cooperative Publishing Company vs. Tabora, G.R. No. L-21263, 13 SCRA 762; Dioquino vs. Laureano, G.R. No. L-25906, May 28, 1970; Crame Sy Panco vs. Gonzaga, 10 Phil. 646; Keep vs. Chan Gioco, 14 Phil. 5 (1909); Novo & Co. vs. 37

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wit: To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an “act of God,” the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must either be unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury.40 Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in damage, the obligor cannot escape liability. The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God.41 Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned.42

In Tanguilig vs. Court of Appeals43 where the contractor resisted liability in connection with the destruction of a windmill which he built by invoking that the collapse of the windmill was due to a typhoon which is a fortuitous event, the Supreme Court rejected such defense by ruling that the elements in the Nakpil case were not present and stated: Ainsworth, 26 Phil. 380 (1913). 1 Corpus Juris 1174. Nakpil vs. Court of Appeals, October 3, 1986, 144 SCRA 596; Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24. 40 Vasquez vs. Court of Appeals, G.R. No. L-42926, September 1985, 138 SCRA 553; Estrada vs. Consolacion, G.R. No. L-40948, June 29, 1976, 71 SCRA 523; Austria vs. Court of Appeals, 39 SCRA 527; Republic vs. Luzon Stevedoring, G.R. No. L-21749, September 29, 1967, 21 SCRA 279; Lasam vs. Smith, G.R. No. L-21749, September 29, 1967, 45 Phil. 657. 38 39

Art. 1174

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Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event. Interestingly, the evidence does not disclose that there was actually a typhoon on the day the windmill collapsed. Petitioner merely stated that there was a “strong wind.” But a strong wind in this case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong wind should be present in places where windmills are constructed, otherwise the windmills will not turn. The appellate court correctly observed that “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 the appellee.” It emphasized that respondent had in his favor the presumption that “things have happened according to the ordinary course of nature and the ordinary habits of life.” This presumption has not been rebutted by petitioner.

In Sia vs. Court of Appeals44 where the bank failed to notify its client of the flooding of its safety deposit box containing the said client’s valuable stamp collection resulting in the destruction of the said collection, and where the said bank already had two previous experiences of the flooding of the said safety deposit box located inside the bank that was guarded twenty-four hours a day, the Supreme Court reversed the ruling of the Court of Appeals in not holding the bank for damages on the basis of fortuitous event and held that the bank was negligent, to wit: SBTC’s negligence aggravated the injury or damage to the petitioner which resulted from the loss or destruction of the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforemen-tioned fourth characteristic of a fortuitous event is absent and Article 1170 of the Civil Code thus comes to the succor of the petitioner. The destruction or loss 1 Corpus Juris 1174-1175. Fish & Elective Co. vs. Phil. Motors, G.R. No. L-32611, November 3, 1930, 55 Phil. 129; Tucker vs. Milan, 49 O.G. 4379; Limpangco & Sons vs. Yangco Steamship Co., 34 Phil. 594; Lasam vs. Smith, 45 Phil. 657. 43 G.R. No. 117190, January 2, 1997, 77 SCAD 647. 44 Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24. 45 G.R. No. L-25906, May 28, 1970, 33 SCRA 65; Roman Catholic Bishop of Jaro vs. De la Peña, 26 Phil. 144 (1913); Lasam vs. Smith, 445 Phil. 657 (1924); Yap Kim 41 42

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of the stamp collection which was, in the language of the trial court, the “product of 27 years of patience and diligence caused the petitioner pecuniary loss;” hence, he must be compensated.

In Dioquino vs. Laureano45 where the sudden and unexpected throwing of stone directed at the car of the plaintiff causing damage to the said car was considered a fortuitous event, the Supreme Court explained the concept of this exculpating occurrence, thus: Its basis, as Justice Moreland stressed, is the Roman law principle major casus est, cui humna infirmis reistere no potest. Authorites of repute are in agreement, more specifically con-cerning an obligation arising from contract that some extraordinary circumstance independent of the will of the obligor, or of his employees, is an essential element of a caso fortuito. If it could be shown that such indeed was the case, liability is ruled out. There is no requirement of diligence beyond what human care and foresight can provide.

In Victorias Planters Association, Inc. vs. Victorias Milling Co.46 where the contract between the parties stipulated that, in the event of a fortuitous event, the period provided in the contract for the delivery of certain products shall be suspended, the Supreme Court ruled that the period of time (6 years) when the contract was suspended can not be deducted from the term of the contract because, to add the said years upon the resumption of the contract would in effect be an extension of the contract. More particularly, the Supreme Court said: Fortuitous event relieves the obligor from fulfilling a contractual obligation. x x x The seventh paragraph of Annex “C” x x x where the parties stipulated 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 those 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. In order that the central, herein appellant, may be entitled to demand from the other parties the fulfillment of their part in the contracts, the latter must have been able to perform it but failed or refused to

Chuan vs. Tiaoqui, 31 Phil. 433 (1655); University of Sto. Tomas vs. Descals, 38 Phil. 267 (1918); Lizares vs. Hernaez, 40 Phil. 981 (1920); Garcia vs. Escudero, 43 Phil. 437 (1922); Milan vs. Rio y Olabarrieta, 45 Phil. 718 (1924); Obejara vs. Iga Sy, 76 Phil. 580 (1946); Gillaco vs. Manila Railroad Co., 97 Phil. 884. 46 G.R. No. L-6648, July 25, 1955, 97 Phil. 318. 47 G.R. No. 119729, January 21, 1997, 71 SCAD 146. 48 Ponce de Leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571,

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do so and not when they were prevented by force majeure such as war. 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. Nemo tenetur ad impossibilia. The obligee not being entitled to demand from the obligors the performance of the latter’s part of the contracts under those circumstances cannot later on demand its fulfillment. The performance of what the law has written off cannot be demanded and required. The prayer that the plaintiffs be compelled to deliver sugar cane to the appellant for six more years to make up for what they failed to deliver during those trying years, the fulfillment of which was impossible, if granted, would in effect be an extension of the term of the contracts entered into by and between the parties.

In Ace-Agro Development Corporation vs. Court of Appeals,47 where the petitioner was engaged by the private respondent to clean its bottles and repair wooden shells inside its plant from January 1, 1990 up to December 31, 1990, and where, because of the burning on April 25, 1990 of the said plant, the work of the petitioner was suspended for a certain period of time, thereby prompting the petitioner to seek an extension of the contract period to compensate for the suspension and refusing to work without such extension despite notification from the private respondent for the resumption of the contract on November 7, 1990, the Supreme Court ruled against such extension and said: Nor was petitioner justified in refusing to resume work on November 7 when it was again notified by petitioner to work. Although it cited the pending labor case as reason for turning down private respondent’s offer, it would appear that the real reason for petitioner’s refusal was the fact that the term of the contract was expiring in two months and its request for an extension was not granted. But as the appellate court correctly ruled, the suspension of work under the contract was brought about by force majeure. Therefore, the period during which work was suspended did not justify an extension of the term of the contract. For the fact is that the contract was subject to a resolutory period which relieved the parties of their respective obligations but did not stop the running of the period of their contract.



When the object of the prestation is generic, like the payment of

December 18, 1970, 36 SCRA 289.

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a sum of money as a consequence of a loan contract, the debtor cannot avail of the benefit of a fortuitous event even if the object for which the loaned money is used, such as the construction of a factory, is wiped out by a typhoon.48 Also, even if there is a fortuitous event, a person can still be held responsible for the performance of his obligation if the law, or the stipulation of the parties, or when the nature of the obligation so requires. The law can provide that, even if there is a fortuitous event, the obligor can still be liable. An example of this is the third para-graph of Article 1165 which provides 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 delivery. Also, Article 1268 provides that 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. Article 552 of Book II on property of the Civil Code pertinently provides that a possessor in bad faith shall be liable for deterioration or loss in every case, even if caused by a fortuitous event. In the liquidation of the conjugal partnership of gains, Article 129(6) of the Family Code of the Philippines49 likewise provides that, unless the owner had been indemnified from whatever source, the loss or deterioration of movables used for the benefit of the family, belonging to either spouse, even due to fortuitous event, shall be paid to said spouse from the conjugal funds, if any. In the same vein, the bailee in commodatum50 is liable for the loss of the thing, even if it should be through a fortuitous event in the following cases: a) if he devotes the thing to any purpose different from that for which it was loaned; b) if he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; c) if the thing loaned has been delivered with appraisal of its value unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; d) if he lends or leases the thing to a third person who is not a member of his household; or e) if, being able to save either the thing borrowed or his own thing, he chose to save the latter. Interestingly also, Article 1919 of the Civil Code on deposits provides that if the depositary by Executive Order No. 209 as amended. This law took effect on August 3, 1988. Article 1935 of the 1950 Civil Code provides that a bailee in commodatum is one who acquires the use of the thing loaned but not its fruits; if any compensation is 49 50

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force majeure or government order loses the thing and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor. When the parties declare that they shall be liable even for loss due to a fortuitous event, they shall be so liable. An example would be a contract providing that the obligor shall, within 10 days, deliver a particular transistor with serial number 1234 and shall be liable even if the transistor shall be destroyed by an Act of God for the value of the same. When the nature of the obligation requires the assumption of risk, the person obliged to perform the obligation shall likewise not be excused should a fortuitous event occur. In Republic vs. Luzon Stevedoring,51 by a towed barge, which usually traversed the Pasig river passing the Nagtahan bridge, rammed against one of the wooden piles of the bridge, smashing the posts and causing the bridge to list. The accident occurred at a time when the river was swollen and the current swift on account of heavy downpour in Manila. The barge owner contended that it should not be held liable for the damage on the bridge as such damage was caused by fortuitous event or force majeure. The Supreme Court rejected such contention by ruling, thus: The appellant stresses the precautions taken by it on the day in question: that it assigned two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the task the more competent and experienced among its patrons, had the towlines, engines and equipment double-checked and inspected; that it instructed its patrons to take extra precautions; and concludes that it had done all it was called to do, and that the accident, therefore, should be held due to force majeure or fortuitous event. These very precautions, however, completely destroy the appellant’s defense. For caso fortuito or force majeure (which in law are identical in so far as they exempt an obligor from liability) by definition, are extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which, though foreseen, were inevitable (Article 1174, Civil Code of the Philippines). It is therefore not enough that the event should 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 to be paid by him who acquires the use, the contract ceases to be a commodatum. 51 G.R. No. L-21749, September 29, 1967, 21 SCRA 279. 52 G.R. No. L-16477, May 31, 1961, 2 SCRA 549. 53 Adorable vs. Court of Appeals, G.R. No. 119466, November 25, 1999, 116 SCAD

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foresee the happening is not impossiblity to foresee the same: “un hecho no constituye caso fortuito por la sola circumstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del presento ofensor” (Peirano Facio, Responsabilidad Extra-contractual, p. 465; Mazeaud, Trait de la Responsibilite Civil, Vol. 2, sec. 1569). The very measure adopted by appellant prove that the possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito. Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the perils posed by the swollen stream and its swift current, voluntarily entered into a situation involving obvious danger; it therefore assumed the risk, and cannot shed responsibility merely because the precautions it adopted turned out to be insufficient. Hence, the lower court committed no error in holding it negligent in not suspending operations and in holding it liable for the damages caused. It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located. Even if true, these circumstances would merely emphasize the need of even higher degree of care on appellant’s part in the situation involved in the present case. The appellant whose barge and tugs travel up and down the river everyday, could not safely ignore the danger posed by these allegedly improper constructions that had been erected and, in place, for years.

Article 1175. Usurious transactions shall be governed by special laws. Article 1175 in itself does not prohibit usurious contracts. However, it specifically provides that it shall be governed by special laws. A special law may either prohibit usurious interest, allow it, or merely put a ceiling as to what can be the highest interest that can be legally imposed. Article 1176. The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. (1110a)

A presumption must always arise from a fact or a set of facts.

189, 319 SCRA 200.

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To have probative value, the creation of the presumption must be provided by law. If the facts are proven, then the presumption as a matter of law will attach and will hold as true unless and until it is rebutted. Thus, if an obligation consists in the payment of principal and interest, the payment of the principal without reservation is the fact that will give rise to the presumption that the interest on the principal has already been paid. This is so because, in ordinary business transactions, interest is normally paid first. The burden of proof to show that the interest has not been paid shifts to the creditor. Consequently, the presumption can be rebutted by strong evidence to the contrary. For instance, it can be shown that the payment of the principal was made because the debtor requested the creditor to apply the payment to the principal first. Another presumption created by law is in connection with a sale in installment. The payment of the later installment shall give rise to the presumption that prior installments have already been paid. The later installment however must clearly indicate that indeed it is the latest installment. In Manila Trading & Supply Co. vs. Medina52 where, in a purchase by installment, the obligor presented numerous receipts which were found by the court as partly spurious and partly genuine, and where the obligor maintained that, even if some receipts were found to be spurious, the receipts found to be genuine were allegedly made in January, 1957 after the issuance of the spurious receipts and therefore the presumption that the prior installments were already paid should be considered, the Supreme Court rejected this contention by ruling: Appellant avers that the genuine receipts dated January, 1957 raise the presumption that prior installments were paid. This might be true if such receipts recited that they were issued for the installments corresponding to the month of January, 1957; but nowhere does that fact appear. And even if such recital had been made, the resulting presumption would only be prima facie, and the evidence before us is clear that the payments made do not correspond to the installments falling due on the dates of the genuine receipts.

Article 1177. The creditors, after having pursued the property in the possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111)

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Art. 1177

The law protects the creditors. The nature of a civil obligation is that it is demandable and enforceable in a court of law. Since an obligor is either bound by the prestation to give or to do, the creditor is given by law all possible remedies to enforce such obligations. Hence, the creditor, after exhausting all means to satisfy his claim, is given the opportunity to bring all actions which the obligor can institute against his own debtors to protect and satisfy his claims against the said obligor. Thus the following successive measures must be taken by a creditor before he may bering an action for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution; (2) exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana).53

However, this right is not absolute as the creditor cannot bring those which are inherent in the person of the obligor. Hence, the creditor cannot file an action on behalf of the obligor to claim support from the latter’s parents and to satisfy the indebtedness from the money obtained by way of support from the parents. This claim for support is very personal to the obligor which therefore cannot be brought by the creditor. Article 1381(1) which provides that a contract entered into by the debtor is rescissible if it were made in fraud of creditors when the latter cannot in any other manner collect the claim due them is another remedy. It has also been held in Adorable vs. Court of Appeals54 that unless a debtor acted in fraud of his creditor, the creditor has no right to rescind a sale made by the debtor to someone on the mere ground that such sale will prejudice the creditor’s rights in collecting later on from the debtor. The creditor’s right against the debtor is only a personal right to receive payment for the loan; it is not a real right over the lot subject of the deed of sale transferring the debtor’s property. Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. ( 1112)

Generally, rights growing out of an obligation are transmissible.

54

G.R. No. 119466, November 25, 1999, 116 SCAD 189, 319 SCRA 200.

Art. 1178

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Thus, the transferee of a Children’s Educational Insurance Plan, originally obtained by the transferor, acquires all the rights of the said transferor under the said plan. Hence, the transferee can avail of the various financial bonuses provided by the plan in the event that the child of the transferee graduates with distinction if such right is provided for in the contract. However, the person who transmits the right cannot transfer greater rights than he himself has by virtue of the obligation. Conversely, the person to whom the rights are transmitted can have no greater interest than that possessed by the transmitter at the time of transmission of the rights. The rights of the transferee do not rise higher than the transferor. Hence, if the transferor has no right to encumber a property within a certain period of time, the transferee has no such right as well. If the transferor has no right to earn interest from money he is keeping for a principal, a transferee obtains no such right. The transmissibility of rights may be limited, or altogether prohibited by stipulation of the parties. Thus, it can be stipulated in a contract that the assignment of any or all the rights provided by such contract is prohibited. A less prohibitive provision is one which disallows such transfer of rights unless with the express consent of one of the parties to the contract. Likewise, no transmission can be made of a particular right if the personal qualifications or circumstances of the transferor is a material ingredient attendant in the obligation. Hence, an author who specializes in horror stories written in a very distinct and peculiar style and who has been engaged by a publisher to write his (the author’s) kind of horror stories for his magazine cannot transmit his rights arising from such obligation to anybody else. Transmission must likewise be subject to pertinent laws. Hence if the law prohibits the alienation of homesteads within five years from the issuance by the government of the patent,55 any transmission of rights of dominion over the same within the prohibitory period shall be void.

55

Artales vs. Urbi, G.R. No. L-29421, January 30, 1971, 37 SCRA 395.

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Art. 1178

103

Chapter 3

DIFFERENT KINDS OF OBLIGATIONS SECTION 1. — Pure and Conditional Obligations Article 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. (1113) A pure obligation is an unqualified obligation which is demandable immediately. It is an obligation whose performance does not depend upon a future or uncertain event, or past event unknown to the parties. In Pay vs. Vda. De Palanca1 where the debtor issued a promissory note to the creditor to pay a sum of money payable upon receipt of a particular sum of money from the estate of a certain deceased person or upon demand, and where the case for collection on the basis of said note was filed 15 years after the execution of the promissory note, the Supreme Court ruled that, since the prescriptive period for filing the action based on a written document was 10 years and considering that the promissory note’s payment constituted a pure obligation and therefore demandable at once, the action to collect could no longer prosper. The Supreme Court pertinently stated: From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of his credit could be realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca presumptively as one of the heirs, or, as expressed therein, “upon demand.” There is nothing in the record that would indicate whether or not the first alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen years after the execution of the promissory note on January 30, 1952, John D. Calamari and Joseph M. Perillo, The Law of Contracts, Third Edition 1987, Page 438, West Publishing Co. St. Paul, Minnesota. 3 Gaite vs. Fonacier, G.R. No. L-11827, 103 2 SCRA 831. 2

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Art. 1179

this petition was filed. The defense interposed was prescription. Its merit is rather obvious. Article 1179 of the Civil Code provides: “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.” This used to be Article 1113 of the Spanish Civil Code of 1889. As far back as Floriano vs. Delgado, a 1908 decision, it has been applied according to its express language. The well-known Spanish commentator, Manresa, on this point, states: “Dejando, con acierto, el caracter mas teorico y grafico del acto, o sea la perfeccion de este, see fija, para determinar el concepto de la obigacion pura, en el distintivo de esta, y que es consecuencia de aquel: la exigibilidad immediata. The obligation being due and demandable, it would appear that the filing of the suit after fifteen years was much too late. x x x.

A conditional obligation is exactly the reverse of a pure obligation. A condition is an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises or which discharges a duty of performance that has already arisen.2 In conditional obligations, the performance depends upon a future or uncertain event or upon a past event unknown to the parties. What characterizes a conditional obligation is the fact that its efficacy or obligatory force is subordinated to the happening of a future or uncertain event.3 A resolutory condition is also demandable at once. This is because once the condition is established and acknowledged, the right immediately exists and therefore the obligation concomitant to the right can be demanded at once. However, once the future or uncertain event happens which constitutes the condition, it operates to discharge the obligation. The obligation is resolved or extinguished by operation of law but such resolution can be made effective at some later date if the parties so stipulate in their contract, such as when the parties stipulate that resolution becomes effective only from the date written notice thereof is sent.4 An example of a contract with a resolutory condition is when the contract provides that a purchaser can obtain a refund of their money for as long as the government continues to allow refunds of such a character. In such case, the purchaser can immediately demand the performance of the obligation for the seller to Bañez vs. Court of Appeals, G.R. No. L-30351, September 11, 1974, 59 SCRA

4

15. Songcuan vs. Intermediate Appellate Court, G.R. No. L-75096, October 23, 1990, 191 SCRA 28. 6 Central Philippine University vs. Court of Appeals, G.R. No. 112127, July 17, 5

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refund the money. However, if the purchaser does not do anything and once the government comes up with a law disallowing such a refund, then the obligation to refund on the part of the seller is extinguished. Also, it has been likewise held by the Supreme Court that, in case a contract involves a reciprocal obliga-tion, the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract.5 Likewise, when a person donates land to another on the condition that the latter would build upon the land a school, the condition im-posed was not a condition precedent or a suspensive condition but a resolutory one. It is not correct to say that the schoolhouse had to be constructed before the donation became effective, that is, before the donee could become the owner of the land, other-wise, it would be invading the property rights of the donor. The donation had to be valid before the fulfillment of the condition. If there was no fulfillment or compliance with the condition, x x x the donation may now be revoked and all rights which the donee may have acquired under it shall be deemed lost and extinguished.6

A suspensive condition is not demandable at once. It can be demanded only upon the happening of the future or unknown event or a past event unknown to the parties, which constitutes the condition. A suspensive condition gives rise to the performance of the obligation. If the condition does not take place, the parties would stand as if the conditional obligation had never existed.7 An example of a contract which provides a positive suspensive condition is a “contract to sell” where, in a purchase of property in installment, it is expressly provided in the contract that title remains vested on the seller until after the last payment of the installment is made by the buyer.8 Prior to the last payment, the purchaser has yet no title to the property. However, once the future event, which is the payment of the last installment, occurs, the obligation of the seller to execute the final deed of sale and to transfer title to the property, arises.9 It is from that time that the purchaser can demand transfer of the title. In a contract to sell where the ownership or title is retained by the seller and is not to SCAD pass until theSCRA full payment the price, such payment being 1995, 63 72, 246 511; Parksofvs. Province of Tarlac, G.R. No. L-24190, July 13, 1926, 49 Phil. 142. 7 Gaite vs. Fonacier, G.R. No. L-11827, 2 SCRA 831. 8 Coronel vs. Court of Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141. 9 Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., G.R. No. L-25885, 46 SCRA 381, 43 SCRA 93. 10 Roque vs. Lapuz, G.R. No. L-32811, March 31, 1980, 96 SCRA 741. 11 Coronel vs. Court of Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141. 12 Id., Page 10.

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Art. 1179

a positive suspensive condition and failure of which is not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force.10

A “contract to sell” and a “conditional contract of sale,” though both involving a suspensive condition, are different from each other. In Coronel vs. Court of Appeals,11 the Supreme Court said that, in a contract to sell, the consent or meeting of the minds relative to the transfer of ownership in exchange for the price is not present because the seller expressly reserves the transfer of title to the prospective buyer until the happening of the suspensive condition. There is only a promise to sell upon the happening of the suspensive condition. While in a conditional contract of sale, “where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition,”12 there is already consent, “although it is conditioned upon the happening of a contingent event which may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract is abated.”13 However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by operation of law without any further act having to be performed by the seller. In a contract to sell, upon fulfillment of the suspensive condition which is the full payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of sale. x x x x x x It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject property is sold by the owner not to the party the seller contracted with, but to a third person, as in the case at bench. In a contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfill-ment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and Id. Id., Pages 10-11. 15 G.R. No. 48194, March 15, 1990, 183 SCRA 171. 16 John D. Calamari and Joseph M. Perillo, The Law of Contracts, Third Edition 1987, Page 439, West Publishing Company, St. Paul Minnesota, citing Internatio 13 14

Art. 1179

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the prospective buyer cannot seek the relief of re-conveyance of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect on the ownership title per se, but the latter, of course, may be sued for damages by the intending buyer. In a contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes absolute and this will definitely affect the seller’s title thereto. In fact, if there had been previous delivery of the subject property, the seller’s ownership or title to the property is automatically transferred to the buyer such that the seller will no longer have any title to transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such defect in the seller’s title, or at least was charged with the obligation to discover such defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer’s title. In case a title is issued to the second buyer, the first buyer may seek reconveyance of the property subject of the sale.14

Another example of an obligation with a suspensive condition is when an obligor promises to give an obligee a book if it rains the next day which is uncertain event. The obligor’s obligation arises once it really rains the next day as the happening of the condition gives rise to the obligation to give the book. In Javier vs. Court of Appeals15 where, in consideration of certain rights to a timber license, the obligor undertook to pay the sum of P30,000 to the obligee as soon as the additional area for forest concession has been obtained by the obligee and approved by the government, the Supreme Court said that the obligor was not liable under the said deed of assignment as it involves the non-happening of a suspensive condition, to wit: As to the alleged nullity of the agreement dated February 28, 1966, we agree with petitioner that they cannot be held liable therein. The efficacy of said deed of assignment is subject to the condition that the application of private respondent for an additional area for forest concession be approved by the Bureau of Forestry. Since private respondent did not obtain that approval, said deed produces no effect. 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.

Rotterdam, Inc. vs. River Brand Ice Mills, Inc., 259 F.2d 137 (2nd Cir. 1958), certiorari denied 358 U.S. 946, 79 S.Ct. 352, 3 L. Ed.2d 352 (1959); Ross vs. Harding, 64 Wn.2d

108

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Arts. 1180-1181

Article 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of Article 1197. (n) The debtor is usually the passive subject of the prestation because he is the one who can be compelled to give or do the prestation. The creditor is the active subject because he is the one who can compel performance. When the debtor binds himself to pay when his means permit him to do so, the law presumes that the debtor really intends to satisfy his obligation. The only problem is that the creditor is left to speculate when the satisfaction of the obligation or, more particularly, the payment will occur as the payment depends principally on the debtor. Hence, payment, in so far as the creditor is concerned, could be an uncertain event. By way of balancing the presumed intention of the debtor to really make payment and the interest of the creditor to be paid, the law classifies this condition as a period which is presumed to have been established for the benefit of both the creditor and the debtor. To achieve this balance, Article 1197 is made to apply. It provides that the parties may ask the court to fix the duration of the period within which the payment is to be made especially when the period depends upon the will of the debtor. Article 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (1114) This particular provision merely generally provides what a condition, whether suspensive or resolutory, can do to the existence or extinguishment of a right. A suspensive condition is also called a condition precedent while a resolutory condition is also known as a condition subsequent. A condition precedent is an act or event, other than a lapse of time, which must exist or occur before a duty to perform a promised performance arises.16 If the condition does not occur and is not excused, the promised performance need not be rendered.17 A condition subsequent is an event, the existence of which, by agreement of the parties, operates to discharge a duty of performance that has arisen.18

231, 391 P.2d 398, 261 P.2d 394 (1953); Restatement, Contracts 250(a). 17 Id., Page 439.

Art. 1182

Obligations Different Kinds of Obligations Sec. 1 — Pure and Conditional Obligations

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Article 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. (1115) The phrase “when fulfillment of a condition” connotes a suspensive character of the prestation. There is the expectation of the existence or accomplishment of a duty to give or to render some service in the future. If this fulfillment depends upon the sole will of the debtor, then it is essentially a condition because whether the debtor will or will not fulfill the obligation is a future and uncertain event. This condition is known as a potestative suspensive condition, which is void. In Lao Lim vs. Court of Appeals,19 the Supreme Court considers as void a stipulation providing that the lease contract shall subsist “for as long as the defendant needed the premises and can meet and pay said increases” considering that such provision x x x is a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise a suspensive condition because the renewal of the said lease, which gives rise to a new lease depends upon said condition. It should be noted that a renewal constitutes a new contract of lease although with the same terms and conditions as those in the expired lease. It should also not be overlooked that the said condition is not resolutory in nature because it is not a condition that terminates the lease contract. The lease contract is for a definite period of three (3) years upon the expiration of which the lease automatically terminates. The invalidity of a condition in a lease contract similar to the one at bar has been resolved in Encarnacion vs. Baldomar, et al. (77 Phil. 470 [1946]), where we ruled that in an action for ejectment, the defense interposed by the lessees that the contract of lease authorized them to continue occupying the premises as long as they paid the rents is untenable, because it would give to the lessees the sole power to determine whether the lease should continue or not. As stated therein, “if this defense were to be allowed, so long as the defendants elected to continue the lease Id., Page 441. G.R. No. 87047, October 31, 1990, 191 SCRA 150. 20 Id., Pages 234-235; Osmeña vs. Rama, G.R. No. L-4437, September 9, 1909, 14 Phil. 99. 21 G.R. No. L-5003, June 27, 1953, 93 Phil. 383. 22 Taylor vs. Uy Tieng Piao, G.R. No. 16109, October 2, 1922, 43 Phil. 873. 23 Id.; Rustan Pulp & Paper Mills, Inc. vs. IAC, G.R. No. 70789, October 19, 1992, 18 19

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Art. 1182

by continuing the payment of rentals, the owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue, the lessees would effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of rentals. This of course is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3rd ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100).”

In this Lao Lim case, it must be observed that the birth of the new lease contract (the renewed lease) also depends upon the sole will of the lessee. Hence, according to Article 1308, this is likewise prohibited and may make the whole contract invalid. However, if the potestative condition is imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself.20 Thus, in Trillana vs. Quezon College,21 where the full payment of the shares in a certain school was to be made only after the obligor had harvested fish (“babayaran kong lahat pagkatapos na ako ay makapaghuli ng isda”), the Supreme Court likewise held that the condition was solely dependent on obligor and therefore void. Moreover, it was a condition imposed upon the birth or creation of the obligation, in that the obligation to pay would only arise or exist after harvesting of fish, thereby voiding not only the condition but also the whole obligation. This was a suspensive condition facultative as to the debtor22 contemplated in Article 1182. However, a condition at once facultative and resolutory may be valid even though the condition is made to depend upon the will of the obligor.23 For example, if a person promises to put in the possession of his friend a house while he (the giver) is abroad but requires that the house be returned to his possession in the event that he returns to the Philippines, the condition is valid as it is resolutory in nature. When the potestative condition is imposed on the fulfillment of the obligation, the condition alone is voided but not the obligation. This can be seen in the case of Osmeña vs. Ramos,24 where the Supreme Court held that, in the following provision of a promissory note, the potestative condition is void but the whole obligation to pay still subsists:25

On this date, I hereby promise, in the presence of two

214 SCRA 665. 24 G.R. No. 4437, September 9, 1909, 14 Phil. 99. 25 This was the explanation given when this case was compared by the Supreme Court with the case of Trillana vs. Quezon Colleges, 93 Phil. 383 in the latter case. 26 G.R. No. 117009, October 11, 1995, 64 SCAD 962. 27 G.R. No. L-4433, May 29, 1953, 93 Phil. 218; See also Angeles vs. Court of

Art. 1182

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111

witnesses that, if the house of strong material in which I live in Paguing is sold, I will pay my indebtedness to Don Tomas Osmeña as set forth in this document.

In Security Bank and Trust Company vs. Court of Appeals,26 where a contractor spent more than the cost construction as contemplated in the contract and whose application for the adjustment of the contract price was not acted upon by the owner on the ground that there was no “mutual agreement of both parties” pursuant to the contractual provision which stated: “If, at anytime prior to the completion of the work to be performed hereunder, increase in prices of construction materials and/or labor supervene through no fault on the part of the contractor whatsoever, or any act of the government and its instrumentalities which directly or indirectly affects the increase of the cost of the project, OWNER shall equitably make the appropriate adjustment on mutual agreement of both parties.”

The Supreme Court ruled against Security Bank and Trust Company and required it to pay and fulfill its obligation to the contractor on the ground, among others, that the above-mentioned provision violates Article 1182. The Supreme Court said: “In the present case, the mutual agreement, the absence of which petitioner bank relies upon to support its non-liability for the increased construction cost, is in effect a condition dependent on the petitioner bank’s will, since respondent would naturally and logically give consent to such an agreement which would allow him recovery of the increased cost.”

In the event that the condition is declared void but the obligation is still valid, should the obligation be declared pure and unconditional? This is the exact query answered in the negative by the Supreme Court in Patente vs. Omega.27 In the said case, the Supreme Court ruled that, in converting it into a pure and demandable obligation, an arrangement might be enforced which is not within the contemplation of the parties. Hence, according to the Supreme Court, the best solution is to consider the parties as having intended a period within which the valid obligation is to be complied such that the creditor should ask the court to fix a period for compliance. Appeals, G.R. No. 111821, November 8, 1993. 28 Hermosa vs. Longara, 49 Official Gazette 4287, October 1953. 29 G.R. No. 107207, November 23, 1995, 65 SCAD 621, 250 SCRA 223. 30 G.R. No. 107112, February 24, 1994, 48 SCAD 539, 230 SCRA 351.

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Art. 1182

Mixed obligations are those which depend not only upon the will of the debtor but also upon chance and some other factors.28 In Romero vs. Court of Appeals29 where the contract stipulates that the downpayment made by the buyer to the seller regarding the sale of a property shall be returned in the event that the seller “shall not be able to remove the squatters from the property” within 60 days from the execution of the contract, the Supreme Court held that such provision is not a potestative void condition but a “mixed” condition dependent not on the will of the vendor alone but also of third persons like the squatters and government agencies and personnel concerned.

In Naga Telephone Co., Inc. vs. Court of Appeals30 where the petitioner and the respondent stipulated that the petitioner can use the electrical posts of the respondent for as long as it needed the post but the contract can nevertheless be terminated should the respondent stop operations, the Supreme Court, on the issue of whether the condition is potestative or casual, ruled: x x x A potestative condition is a condition, the fulfillment of which depends upon the sole will of the debtor, in which case, the conditional obligation is void. Based on this definition, respondent court’s finding that the provision in the contract, to wit: “(a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for the electric light posts of the party of the second part (private respondent) x x x” is a potestative condition, is correct. However, it must have overlooked the other conditions in the same provision, to wit: “x x x it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part (private respondent) is forced to stop, abandoned (sic) its operation as a public service and it becomes necessary to remove the electric light post (sic);”

G.R. No. L-58286, May 16, 1983, 122 SCRA 280. Taylor vs. Uy Tieng Piao and Tan Liuan, 43 Phil. 873. 33 Ibid. 34 G.R. No. 96053, March 3, 1993, 219 SCRA 480; see also Coronel vs. Court of Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141. 31 32

Art. 1183

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which are casual conditions since they depend on chance, hazard, or the will of a third person. In sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard, or the will of a third person, which do not invalidate the aforementioned provision. x x x

A resolutory condition that depends upon the will of a third person is not void. Thus in Ducusin vs. Court of Appeals31 where the lease contract provides that “the term of the contract shall be on a month-to-month basis commencing on February 19, 1975 until terminated by mutual agreement or terminated by the lessor on the ground that his children need the premises for their own use,” the Supreme ruled in favor of the validity of such resolutory condition stating that the lease will terminate when the lessor’s children need the premises for their own use considering that the happening of the condition is not dependent solely on the will of the lessor but rather the happening of the condition depended upon the will of third persons — the lessor’s children. Article 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a) Conditions, which are impossible, render the obligation dependent upon them legally ineffective. It is very clear from the law that it is not only the condition which is annulled but the whole obligation itself. Thus, an obligation to give money as a loan only if it snows in the Philippines destroys the efficacy of the prestation. The condition annuls the prestation. This is also true in case the condition is against good customs, public policy or is prohibited by law. Also, an impossible thing can never be done. Hence, to make as a condition the doing of an impossible thing is a useless stipulation which should be considered as not having been agreed upon. The whole obligation which involves an impossible condition can be annulled. Article 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as 35

Article 1187 of the 1950 Civil Code.

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Arts. 1184-1185

the time expires or if it has become indubitable that the event will not take place. (1117) This article deals with the existence of an obligation as soon as the condition happens at a particular time and it is extinguished should the condition not happen within the said period. Hence, if the condition is the election of Mr. X as president on or before 1998 and the prestation is the giving of a particular car and the effect is the extinguishment of the obligation when the time expire, then once Mr. X becomes the president prior to 1998 or on 1998, the obligor has to give the car. If Mr. X does become president on or before 1998, then the car should be given. The same situation applies if there is doubt that the event will occur in the given time. Hence, in the same example, if Mr. X dies before he even files his candidacy, it is clear that his becoming president will not happen anymore on or before 1988. This will immediately extinguish the obligation to give the car. Article 1185. The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. (1118) This article deals with the effectivity of an obligation in case the condition does not happen at a particular time. Again, if the condition is the election of Mr. X as president on or before 1998 and the prestation is the giving of a particular car and the effect is the effectivity of the obligation when the condition does not happen, then once Mr. X does not become the president prior to 1998 or on 1998, the obligor has to give the car. If Mr. X becomes president on or before 1998, then the car should not be given. The same situation applies if the event will not occur in the given time. Hence, in the same example, if Mr. X dies before he even files his candidacy, it is clear that his becoming president will not happen anymore on or before 1998. This will immediately give rise to the obligation to give the car. The second paragraph talks of a condition which has no time fixed. For example, the condition is simply the non-election of Mr. X. If the law provides that elections are to be held on August 1998 and August 1998 passes without Mr. X being elected, the condition is deemed fulfilled.

Art. 1186

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Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119) The good faith-obligation of the parties includes an implied term on the part of the said parties not to impede, hinder, obtruct or prevent the fulfillment of the obligation.32 In the event that these preventive acts are undertaken, they constitute a breach of the contract and therefore are unwarranted and unlawful.33 If the obligor voluntarily prevents the fulfillment of the condition in an obligation, the law states that the obligation shall be deemed fulfilled. This is known as constructive fulfillment. A conditional obligation states that the obligor will give to a school a brand new computer if the school will donate its old computer to charity. In the event that the obligor destroys the old computer, the condition will be considered as having been fulfilled and he is now bound to deliver the new computer to the school. In Tayag vs. Court of Appeals34 where, as a condition of a contract of sale of real property, the buyer was required to pay the balance of a particular loan which was collateralized by the property subject of the sale so that the said property can be delivered to him and where the vendors prematurely paid the loan, thereby preventing the buyer to fulfill the condition, the Supreme Court upheld the ruling of the lower court when the latter applied Article 1186, to wit: Insofar as the third item of the contract is concerned, it may be recalled that respondent court applied Article 1186 of the Civil Code on constructive fulfillment which petitioners claim should not have been appreciated because they are the obligees while the proviso in point speaks of the obligor. But, petitioner must concede that in a reciprocal obligation like a contract of purchase (Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p. 201), both parties are mutually obligors and also obligees (4 Padilla, supra, at p. 197), and any of the contracting parties may, upon non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors to respect the stipulation in permitting the private respondent to assume the loan with the Philippine Veterans Bank Article 562 of the 1950 Civil Code. G.R. No. 7506, October 23, 1990, 191 SCRA 28. 38 G.R. No. 95641, September 22, 1994, 55 SCAD 478, 236 SCRA 643. 39 Spouses Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001. 40 Spouses Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001; Ocampo 36 37

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which petitioners impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full payment of the balance x x x.

Article 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 the interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. (1120) In resolutory conditions, the fulfillment of the event extinguishes the obligation. Hence, retroactivity in this case is not relevant. However, in suspensive conditions, the efficacy of the obligation is merely suspended or held in abeyance until the condition is fulfilled. Article 1187 therefore applies only to obligations subject to a suspensive condition. When the suspensive condition occurs, the effect of a conditional obligation “to give” retroacts to the day of the constitution of the obligation. Hence, if, on February 1996, an obligor promises to give an obligee a specific car in the event it rains on the first Saturday of June 1996 and it does rain on the said day, the obligee is entitled to the accessories of the said car as of February 1996, the day the obligation has been constituted. Hence, the obligor is duty bound to take care not only of the car but also its accessories from the time the obligation has been constituted. In the event that the car is chosen as a special car in a competition and wins a prize sometime during the period beginning from the time the obligation has been constituted up to the time the condition is fulfilled, the prize obtained by the obligor shall belong to the said obligor. This is so because the law also provides that, if the obligation is unilateral, the debtor or obligor 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 is different.

When the obligation imposes reciprocal prestations upon the

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parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. Hence, if Juan promises to give a mango orchard to Pedro, on the one hand, and Pedro promises to give Juan P50,000 and both obligations shall take effect only if it rains on the first Saturday of June, any fruit of the mango orchard and any interest on the money shall mutually compensate each other. Hence, Juan will not get the interest on the money, and Pedro will not get the fruits of the orchard once the condition is fulfilled, even though technically their right to the fruits and interest retroacts to the date the obligation has been constituted. In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. Article 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition. (1121a) It is always in the interest of the creditor to have the prestation complied with for his benefit. Non-compliance may cause him serious damage. Hence, to prevent this eventuality, the law allows the creditor to protect his interest even if the condition in a conditional obligation has not yet been fulfilled. Thus, a creditor can file an injunction suit to stop the debtor from alienating his property which is supposed to be given to the creditor once a particular condition is fulfilled. On the other hand, if, prior to the happening of the event constituting the suspensive condition, the debtor, by mistake, pays the creditor, the debtor can recover because the obligation is not yet due and demandable. Indeed, the condition may never even be fulfilled and the debtor would never have been liable after all. Article 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,

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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. (1122)

Prior to the fulfillment of the suspensive condition, anything could happen to the object of the prestation. For example, the object may be lost. The law importantly provides 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. Hence, if during the pendency of the suspensive condition, the car which is the object of the prestation is hit by a bomb and gets totally destroyed, it can be considered as having perished. If the car has been discovered to have historical value and has been retrieved by the government as a national treasure and the government has prohibited the sale of the car, then it goes out of commerce. If the car is transported from Mindanao to Luzon by ship, and the ship has been lost at sea and it cannot be found, it may be said to have disappeared in such a way that its existence is unknown or it cannot be recovered. If the thing is lost, the existence or extinguishment of the obligation depends on whether or not the loss occurred due to the fault of the debtor. If the thing is lost without the fault of the debtor, the obligation is extinguished unless of course the thing to be given is not determinate but generic. If the determinate thing is lost through the fault of the debtor, he shall be liable for damages. While the suspensive condition is yet unfulfilled, the obligation has not yet arisen and the determinate thing is usually still in the possession or control of the debtor. While in the possession of the debtor, the thing may deteriorate. If it deteriorates without the fault

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of the debtor, any impairment is to be borne by the creditor. If the deterioration is caused by the debtor, the creditor can choose between rescission of the obligation and its fulfillment, with damages in either case. The option is given to the creditor because, while the object might have deteriorated, it might still be useful to the creditor and therefore there is no need to rescind the contract. The creditor could still ask for fulfillment but he should be paid damages on account of the deterioration caused by the debtor. However, if the object has deteriorated so badly that the creditor does not see any more use for the object, he could choose to rescind the obligation plus damages. Hence, if during the pendency of the suspensive condition, the debtor uses the car, which he is supposed to give to the creditor upon the happening of a certain condition, in a car-racing event seriously causing its deterioration, the creditor can seek rescission of the obligation and damages in the amount equivalent to the deterioration of the car. If, however, the creditor believes that he can still make use of the car, the creditor can seek fulfillment with damages. It must be emphasized, however, that the choice of the remedies to be pursued, whether rescission plus damages or fulfillment plus damages, belongs to the creditor regardless of the degree of deterioration caused by the debtor. Thus even if the object, through the fault of the debtor, deteriorated but the same can still be used, the creditor can still choose rescission plus damages. The debtor cannot say that the remedy chosen by the creditor should have been fulfillment plus damages because the deterioration did not fully diminish the usefulness of the object. The reverse situation is also true, if the object deteriorated so badly seriously diminishing the usefulness of the car, the creditor can still choose fulfillment plus damages and not rescission plus damages. However, if the deterioration caused by the debtor is so grave that the object goes out of commerce, it can be considered lost and the creditor can seek damages from the debtor. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor. This is so because once the condition is fulfilled, the effects of the conditional obligation shall retroact to the day of the constitution of the obligation.35 If it is improved at the expense of the debtor, his only right would be that of a usufructuary. A usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance unless the title constituting it or the law otherwise provides.36

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Article 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return. As for obligations to do and not to do, the provisions of the second paragraph of Article 1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123) Once a resolutory condition is fulfilled, the obligation is extinguished. There must be restitution of what has been obtained. Hence, if the conditional obligation states that the obligor shall continue having possession over a particular car provided that he will not bet in the lottery and the obligor bets in the lottery, the right of the obligor to the possession of the car is extinguished. At the same time the obligation of the obligee to allow the obligor the possession of the car is extinguished also. The obligor should return the car. While the resolutory condition has not yet been fulfilled and the car is destroyed without the fault of the obligor, the obligation to return is extinguished. If the car is lost through the fault of the debtor, he shall be liable for damages. If the car deteriorates without the fault of the obligor, the impairment is to be borne by the creditor. If the car deteriorates through the fault of the obligor, the obligee may choose between the rescission of the obligation and its ful-fillment, with indemnity for damages in either case. If the car is im-proved by its nature, or by time, the improvement shall inure to the benefit of the obligee. Lastly, if the car improves at the expense of the debtor, he shall have no other right than that granted to the usufructuary. In obligations to do and not to do, the court shall determine the effect of the extinguishment of the obligation. Article 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. vs. Court of Appeals, 52 SCAD 610, 233 SCRA 551. 41 Deiparine, Jr. vs. Court of Appeals, G.R. No. 96643, April 23, 1993, 221 SCRA

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The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124) In Songcua vs. IAC, the Supreme Court37 said that, in reciprocal obligations, the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other to rescind the contract. In the case of Areola vs. Court of Appeals,38 the Supreme Court described the nature of a reciprocal obligation to wit: Reciprocal obligations are those which arise from the same cause and in which each party is both a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other.

Hence, in a contract of sale for example, the non-payment of the balance of the purchase price by the buyer violates the very essence of reciprocity in the contract of sale, a violation that conse-quently gives rise to the seller’s right to rescind the contract in accordance with law.39 Under Article 1191, in case of non-compliance, the aggrieved party has an implied power to rescind or, more properly, to resolve the contract. More appropriately, the termination of the obligation under Article 1191 is resolution and not rescission. Nevertheless, resolution and rescission under this article have been used inter-changeably. To rescind does not merely mean to terminate a contract and to release the parties from further obligations to each other, but, more importantly, it means to abrogate the contract from the beginning and to restore the parties to their relative positions as if no contract has been made. As such, to rescind in a significant sense “is to declare the contract void at its inception and to put an end to it as though it never was.”40 Rescission or resolution under Article 1191 is predicated on the breach of faith by any of the parties to a contract that violates the 503; Universal Food Corporation vs. Court of Appeals, G.R. No. L-29155, May 13, 1970, 33 SCRA 1.

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reciprocity between them.41 There could be no rescission if there is no breach of faith. Thus, if, after the properties subject of the contract were already transferred to the buyer, the said buyer cancelled the deeds of sale on the valid ground that there was a negation of the cause of the contract as the properties purchased turned out to be unsuitable for the purpose for which they were acquired without the fault of the seller, the cancellation made by the buyer was not rescission or resolution under Article 1191 as there was clearly no breach of faith on the part of any party. The seller dutifully complied with his obligation to deliver the properties. Neither did the buyer suffer injury directly as a result of such delivery by the seller. It was simply the negation of the cause of the contract that prompted the cancellation of the same.42 The power to rescind however is not absolute and must be based on a serious or substantial breach of an obligation as to defeat the object of the parties in making the agreement.43 A mere casual breach does not justify rescission of the contract.44 Thus in Philippine Amusement Enterprises, Inc. vs. Natividad45 where the lessee of an automatic phonograph, known as jukebox, sought the rescission of the contract of lease of the said machine on the ground, among others, that “there were times” when the machine did not work, the Supreme Court rejected the rescission stating: 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. The defendants asked the plaintiff to retrieve its phonograph, claiming that there were times when the coins dropped into the slot would get stuck, resulting in its failure to play the desired music. But apart from this bare statement, there is nothing in the evidence which shows the frequency with which the jukebox failed to function properly. The expression “there are times” connotes occasional failure of the phonograph to operate, not frequent enough to render it unsuitable and unserviceable. As a matter of fact, there is not even a claim that, as a result of unsatisfactory performance thereof, the income therefrom dropped to such a level that the defendants could not even pay the plaintiff its guaranteed share of P50 a week. On the contrary, Uy vs. Court of Appeals, G.R. No. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69. 43 Massive Construction, Inc., et al. vs. Intermediate Appellate Court, G.R. Nos. 70310-11, June 1, 1993, 223 SCRA 1; Philippine Amusement Enterprises, Inc. vs. Natividad, 21 SCRA 284 (1967); Tan vs. Court of Appeals, 175 SCRA 656 (1989). 44 Franco-Jacinto vs. Kaparaz, G.R. No. L-81158, May 22, 1992, 209 SCRA 246. 45 G.R. No. L-21876, September 29, 1967, 21 SCRA 284. 46 G.R. No. 80479, July 28, 1989, 175 SCRA 656. 47 Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001. 42

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the evidence (Stipulation of Facts, Annexes, J, K, L, M, N and O) shows that, during the period complained of, the operation of the jukebox was quite profitable to both parties.

In Tan vs. Court of Appeals,46 where the seller failed to clear the lot for a few days and failed to cause the cancellation of the mortgage lien on the property on the date set for the execution of the deed of sale, despite having already done everything to effect the cancellation, and where it was the bank which delayed the cancel-lation (which cancellation nevertheless was effected 12 days after the supposed date of execution), and where there was also a failure to obtain the approval of the Secretary of Natural Resources on time, the Supreme Court rejected the prayer for rescission based on the said failures by stating: A thorough review of the records clearly indicates that private respondents had substantially complied with their undertaking of clearing the title to the property which has a total land area of 886 square meters. It must be pointed out that the subject lot consists of private land, with an area of 548 square meters, covered by TCT No. T-13826 and of a portion of the public land which has been awarded to the private respondents under Townsite Sales Application No. 7-676-A. While TCT No. T-13826 was subject to a mortgage in favor of DBP. Private respondents, upon receipt of the earnest money paid by petitioner, utilized the same to settle its obligations with DBP thus enabling them to secure a cancellation of the existing mortgage, which was duly noted in the title to the property [See Original Records, p. 94]. It is a settled principle of law that rescission will not be permitted for a slight or casual breach of the contract but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement [Universal Food Corporation vs. Court of Appeals, G.R. No. L-29155, May 13, 1970, 33 SCRA 1; Philippine Amusement Enterprises, Inc. vs. Natividad, supra; Roque vs. Lapuz, G.R. No. L-32811, March 31, 1990, 96 SCRA 741]. A court, in determining whether rescission is warranted, must exercise its discretion judiciously considering that the question of whether a breach of a contract is substantial depends upon the attendant circumstances [Corpus vs. Alikpala, et al., G.R. Nos. L-23720 and L-23707, January 17, 1968, 22 SCRA 104]. Sonf Fo & Co. vs. Hawaiian-Philippines Co., 47 Phil. 821. Zepeda vs. Court of Appeals, 216 SCRA 293. 50 Tan vs. Court of Appeals, G.R. No. L-80479, July 28, 1989, 175 SCRA 656. 51 Froilan vs. Pan Oriental Shipping Co., G.R. No. L-11897, October 31, 1964. 52 Areola vs. Court of Appeals, G.R. No. 95641, September 22, 1994, 55 SCAD 478, 236 SCRA 643. 48 49

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In this case, as to the lot covered by TCT No. T-13826, it is true that as of June 25, 1984, the date set for the execution of the final deed of sale, the mortgage lien in favor of DBP annotated in the title has not yet been cancelled as it took DBP some time in processing the papers relative thereto. However, just a few days after, or on July 12, 1984, the cancellation of the DBP mortgage was entered by the Register of Deeds and duly noted on the title. Time not being of the essence in the agreement, a slight delay on the part of the private respondents in the performance of their obligation, is not sufficient ground for the resolution of the agreement [Biando and Espanto vs. Embestro and Bardaje, 105 Phil. 1164 (1959)], more so when the delay was not totally attributable to them. As to the notice of levy and execution annotated on TCT No. T-13826, a request to lift the same had already been filed with the Register of Deeds and duly noted on the title [Original Records, p. 95]. The fact that said notice had not yet been cancelled by the Register of Deeds as of June 25, 1984 cannot prejudice the sellers who must be deemed to have substantially complied with their obligation. The rule in this jurisdiction is that where the fulfillment of the condition (in a conditional obligation) does not depend on the will of the obligor, but on that of a third person, the obligor’s part of the contract is com-plied with if he does all that is in his power and it then becomes incumbent upon the other contracting party to comply with the terms of the contract [Article 1182, Civil Code; Smith Bell and Co. vs. Sotelo Matti, 44 Phil. 874 (1922)]. On the other hand, private respondents’ interest in the public land used as a driveway can likewise be conveyed to petitioner although no title has yet been issued in the name of Visitacion Singson. Such portion of the public land has long been awarded to Singson in 1972 and payment of the purchase price thereof has already been completed as of July 17, 1984. The fact that the consent of the Secretary of Agriculture and Natural Resources to the sale of the property to petitioner has not yet been secured cannot be considered a substantial breach of private respondents’ obligation under the contract of sale. In Juanico and Barredo vs. American Land Commercial Co., Inc., et al. [97 Phil. 221 (1955)], this Court had ruled that the prior approval of the Secretary of Agriculture and Natural Resources is required only in cases of sale and encumbrance of the public land during the pendency of the application by the purchaser and before his compliance with the requirements of the law. x x x

Since, the land in question had already been awarded to

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private respondents since 1972 and all the requirements of the law for the purchase of public land were subsequently complied with, private respondents, as owners of said property, can properly convey title thereto to petitioner.

In Velarde vs. Court of Appeals,47 the Supreme Court rejected the contention of the debtor that his slight delay of one month in paying the obligation was merely a casual breach. The Supreme Court said that while a delay of 20 days,48 one week49 or even a month may indeed be casual provided that time was not of the essence, the totality of the whole case showed that, aside from the delay, the debtor, in showing his willingness to pay the obligation, imposed upon the creditor preconditions for the payment. The Supreme Court said that, in effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable under the contract of sale. These pre-conditions left the creditor with no other legal option but to validly have the contract rescinded. The rescission therefore was proper. This implied power to rescind can only be enforced through court action,50 in the absence of stipulation to the contrary.51 The decision of the court is the revocatory act of rescission. The remedy in case of non-compliance with the obligation is either fulfillment or rescission, with the payment of damages in either case. In Areola vs. Court of Appeals52 where the insurance company contended that the insured, in successfully seeking the enforcement of an erroneously canceled insurance policy by seeking the rein-statement of the same, in effect chose the fulfillment of the obligation, thereby barring him from further seeking damages, the Supreme Court ruled thus: Under the law governing reciprocal obligations, particularly the second paragraph of Article 1191, the injured party, petitioner-insured in this case, is given a choice between fulfillment or rescission of the obligation in case one of the obligors, such as respondent insurance company, fails to comply with what is incumbent upon him. However, said article entitles the injured party to payment of damages, regardless of whether he demands fulfillment or rescission of the obligation. Untenable then is respondent insurance company’s argument, namely that reinstatement being equivalent to fulfillment of its obligation divests petitioner-insured of a rightful claim for payment of G.R. No. L-39378, August 28, 1984, 131 SCRA 439. G.R. No. L-39778, September 13, 1985, 138 SCRA 536. 55 De Luna vs. Abrigo, G.R. No. 57455, January 18, 1990, 181 SCRA 150; Froilan 53 54

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damages. Such a claim finds no support in our laws on obligations and contracts.

The injured party may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. In Ayson Simon vs. Adamos,53 the buyer of certain lots filed a case against the seller for delivery of the same. However, a case was previously filed by the heirs of the deceased original owner against the seller for delivery of the same properties to them. The heirs won and the properties were reconveyed to them. In the other case, the buyer also won against the seller. However, the delivery of the properties to the winning buyer had become impossible considering that the properties were already validly in the possession of the heirs who won in the previous case. Hence, the buyer filed another suit for rescission and damages against the seller. The Supreme Court held that the course of action undertaken by the buyer in filing a rescission case with damages against the seller was correct as fulfillment of the contract had become an impossibility in accordance with Article 1191 of the Civil Code. In Siy vs. Court of Appeals,54 the Supreme Court said that the law however does not authorize the injured party to rescind the obligation and at the same time seek its partial fulfillment under the guise of recovering damages. Thus, in the Siy case, the Supreme Court disallowed the recovery of penalty charges stipulated in the contract which was sought to be rescinded. The power to rescind need not be implied in all cases. It can be expressly stipulated in the contract. The law does not prohibit parties from entering into an agreement providing that the violation of the terms of the contract shall cause the cancellation, termination or rescission thereof even without court intervention.55 The stipulation is in the nature of a facultative resolutory condition which in many cases has been upheld by the courts.56 Also, notice must always be given to the defaulter before rescission can take effect.57 Also in University of the Philippines vs. De Los Angeles,58 the Supreme Court made a further explanation of the consequences of this express unilateral extra-judicial stipulation to rescind, to wit: Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known

vs. Pan Oriental Shipping, et al., L-11879, October 31, 1964, 12 SCRA 276; Torralba vs. De los Angeles, 96 SCRA 69; Luzon Brokerage Co., Inc. vs. Maritime Building Co., 43 SCRA 93, 86 SCRA 305; Lopez vs. Commissioner of Customs, 37 SCRA 327; UP vs. De los Angeles, 35 SCRA 102; Ponce Enrile vs. Court of Appeals, 29 SCRA 504; Taylor vs. Uy Tieng Piao, 43 Phil. 873.

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to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extra-judicial steps to protect its interest. Otherwise, the party injured by the other’s breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203).

In De Luna vs. Abrigo,59 the Supreme Court further said that judicial intervention is necessary not for purposes of obtaining a judicial determination rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention, but in order to determine whether or not the rescission was proper. Otherwise stated, if there is a stipulation granting the right of rescission on the part of the aggrieved party and he or she validly rescinds the contract pursuant to such express grant, any court decision adjudging the propriety of the rescission extra-judicially made is not the revocatory act of rescission but merely declaratory or an affirmation of the revoca-tion.

In case of an implied power of rescission which has been

Ponce Enrile vs. Court of Appeals, 29 SCRA 504. Jison vs. Court of Appeals, G.R. No. L-45349, August 15, 1988, 164 SCRA 339. 58 G.R. No. L-28602, September 29, 1970, 35 SCRA 102. 59 G.R. No. 57455, January 18, 1990, 181 SCRA 150. 60 G.R. No. L-37976, July 16, 1985, 137 SCRA 563. 61 G.R. No. L-112127, July 17, 1995, 63 SCAD 72, 246 SCRA 511. 62 Co vs. Court of Appeals, G.R. No. 112330, August 17, 1999, 110 SCAD 886, 312 SCRA 528. 63 G.R. No. 120820, August 1, 2000, 131 SCAD 68, 337 SCRA 67. 64 Palay, Inc. vs. Clave, G.R. No. L-56076, September 21, 1983, 124 SCRA 638. 65 G.R. No. L-45349, August 15, 1988, 164 SCRA 339. 56 57

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exercised, the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. In Roman vs. Court of Appeals,60 the contract stipulated that the buyer shall pay the purchase price within 60 days from receipt of the notice that the properties have already been titled. Notice was accordingly sent on October 11, 1958. Payment however was not made. An action was filed for rescission. The buyer claimed that he was not given notice and prayed for a period within which to pay. The Supreme Court did not allow the granting of the period by saying thus: Moreover, there would be no “just cause,” a requirement in Article 1191, for fixing a period. After institution of the action against him, what Roman should have done, which he did not do, was to pay Sarangaya within 60 days after service of summons. It would not have been just to grant him an extension of more than six (6) years, from October 11, 1958 to January 9, 1965, to comply with his 60-day obligation.

Also in Central Philippine University vs. Court of Appeals61 where the donee failed to comply with the resolutory conditions provided in the deed of donation, the Supreme Court ruled that there was no just cause for the fixing of a period considering that more than a reasonable period of fifty (50) years had already been allowed the donee to avail of the opportunity to comply with the condition even if the conditions were burdensome. According to the Supreme Court, the fixing of a period would be a mere technicality and formality and would serve no purpose than to delay or lead to an unnecessary and expensive multiplication of suits. In case a valid rescission is made, it creates an obligation to return the things which were the object of the contract. Thus, rescission can only be made when the one who demands rescission can return whatever he or she may be obliged to restore. Rescission is designed to restore the parties in their former situations. If however, one of the parties has already paid the price pursuant to the contract but has not yet received what should be delivered to him under the contract, he has nothing to restore but is entitled to the return of what he or she has paid, for such is the consequence of rescission which is to restore the parties to their former position.62 If the contract involved is a contract to sell and not a contract of sale and the seller is given the unilateral right to terminate the contract in case of non-payment of the purchase price, the G.R. Nos. L-17859-9, July 18, 1962, 5 SCRA 581; Price, Inc. vs. Court of Appeals, G.R. Nos. L-17865-6, July 18, 1962. 66

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termination is not a rescission under Article 1191 but an enforcement of the contract. In Santos vs. Court of Appeals,63 the Supreme Court explained the difference thus, In a contract to sell, title remains with the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a positive suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. This is entirely different from the situation in a contract of sale, where non-payment of the price is a negative resolutory condition. The effects in law are not identical. In a contract of sale, the vendor had lost ownership of the thing sold and cannot recover it, unless the contract of sale is rescinded and set aside. In a contract to sell, however, the vendor remains the owner for as long as the vendee has not complied fully with the condition of paying the purchase price. If the vendor, should eject the vendee for failure to meet the condition precedent, he is enforcing the contract and not rescinding it.

Also, in the case of Palay, Inc. vs. Clave64 where the parties entered into a contract to sell a parcel of land where it was expressly stipulated that the seller “shall have the right to declare this contract canceled and of no effect without notice” to the buyer in case the latter fails to pay his installment, and where the seller did indeed cancel the contract without notice upon failure of the buyer to pay the installment, the Supreme Court invalidated the cancellation on the ground that there was no notice sent to the defaulter informing him of the termination. Hence, the provision allowing cancellation “without notice” was disregarded by the Supreme Court. With respect to the importance of making a notice of cancellation regarding real estate sold in installment, the Supreme Court in Jison vs. Court of Appeals65 said: The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6552 entitled “An Act to Provide Protection to Buyers of Real Estate on Installment Payments” which took effect on September 14, 1972, when it specifically provided:

Sec. 3(b) x x x the actual cancellation of the contract shall

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take place thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer.

Article 1192. In case both parties have committed a breach of the obligation, the liability of the first shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n) If the violation can be traced to the parties and both of them committed the breach, this article penalizes the first violator only if, in fact or by evidence, such first violator can be determined. The subsequent violator will not be held liable. However the liability of the first violator shall be equitably tempered by the court as the injury to the other party-violator might not have been so great had it not for the subsequent infraction of such other party-violator. The law however states that if it cannot be determined which of the parties first violated the contract, the obligation shall be deemed extinguished, and each shall bear his own damages. In Camus vs. Price, Inc.66 where, on the one hand, the lessor did not comply with his obligation to increase the elevation of the low portion of the lot and erect thereon a concrete wall topped with barbed wire and, on the other hand, the lessee did not comply with his obligation to cover the building with insurance, and where it cannot be determined with definiteness who of the parties committed the first infraction of the terms of the contract, the Supreme Court said: x x x Under the circumstances, the conclusion of the Court of Appeals, that the parties are actually in pari delicto, must be sustained, and the contract deemed extinguished, with the parties suffering their respective losses.

Art. 1192

Obligations Different Kinds of Obligations Sec. 1 — Pure and Conditional Obligations

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SECTION 2. — Obligations with a Period Article 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. (1125a) A period designates a particular time which is certain to happen as the moment when the obligation will either be effective or be extinguished. If it gives rise to the effectivity of the obligation, it is a suspensive period. If it extinguishes, it is a resolutory one. An example of an obligation with a suspensive period is, if on December 1, 1997, one promises to sing at another’s nightclub starting March 1, 1998. While the obligation is constituted at a much earlier date, its effectivity only commences on a certain future period of time, namely on March 1, 1998. In Gaite vs. Fonacier,1 where the contract provided that the balance of the purchase price “will be paid from and out of the first letter of credit covering the first shipment of iron ores and/ or the first amount derived from the local sale of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or successors-in-interest,” the Supreme Court ruled that the stipulation is not a suspensive condition but a suspensive period by saying: The words of the contract express no contingency in the buyer’s obligation to pay: “The balance of Sixty-Five Thousand Pesos (P65,000) will be paid out of the first letter of credit covering the first shipment of iron ore x x x etc. There is no uncertainty that the payment will have to be made sooner or later; what is G.R. No. L-11827, July 31, 1961, 2 SCRA 831.

1

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Arts. 1194-1195

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133

undetermined is merely the exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its maturity or demandability is deferred.

On the other hand if one promises to sing at another’s nightclub as soon as the contract is signed on December 1, 1997 up to March 1, 1998, a resolutory period exists because the obligation to sing can be demanded at once by the obligee but the obligation shall be extinguished on a day certain which is on March 1, 1998. A period may refer to a 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, it is a condition. Thus, if an obligor commits to deliver imme-diately a particular special candy to his sister’s 6-year-old son when the said son’s temporary front tooth naturally falls off, it is not known when the temporary tooth will fall-off or be removed but it is certain to happen. In this case, the “condition” refers to a period. However, if the stipulation is that the candy will be given when he passes the entrance examination at the Ateneo Grade School, a condition exists because the event is not certain to happen, hence, it is to be governed by the rules on conditional obligations provided by the Civil Code. Article 1194. In case of loss, deterioration, or improvement of the thing before the arrival of the day certain, the rules in Article 1189 shall be observed. (n) Article 1189 provides the rules in case there is loss, deterioration or improvement of the thing which is the object of the prestation during the pendency of the condition suspending the efficacy of an obligation to give. The said rules apply also to obligations subject to a suspensive period and to a resolutory period. Article 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered with the fruits and interests. (1126a) In a suspensive period, the obligation to give or to pay will not take effect upon the arrival of the period. Hence, the creditor has no right to obtain the thing or to be paid until the arrival of the period unless the debtor and the creditor, with full knowledge of the period, decide to give and accept the thing to be delivered or the payment.

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Otherwise, the debtor has the right to recover what he has given or paid with fruits and interest. Hence, if John, on October 1, 1997, promises to deliver to Jane a Mango orchard on December 1, 1997, and, on November 1, 1997, John delivers the Mango orchard believing that it is due and demandable on that date, he can recover what he has delivered together with fruits and interest. Prior to December 1, 1997, Jane obviously has no right to possess the Mango orchard. However, if Jane is in the possession of the mango orchard by December 1, 1997, John can only recover the fruits and interest accruing from the time he delivered the property up to December 1, 1997. Article 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other. (1127) In Fernandez vs. Court of Appeals2 involving a contract of lease which was clearly a reciprocal contract, the Supreme Court said: the period of the lease must be deemed to have been agreed upon for the benefit of both parties, absent any language showing that the term was deliberately set for the benefit of the lessee or lessor alone. We are not aware of any presumption in law that the term of the lease is designed for the benefit of the lessee alone.

In Abesamis vs. Woodcraft Works, Inc.3 where the contract provided that the appellant shall make the shipment “before the end of July, but will not commence earlier than April with the option to make partial shipment depending on the availability of logs and vessels,” the Supreme Court, in deciding who was to bear the loss as a result of the typhoon in a contract for the delivery of logs, ruled that the quoted provision provides a period and stated: appellee maintains that due to the failure of appellant to send a vessel to Dolores, Samar, the storm on May 5, 1951 swept away almost all the logs then awaiting shipment, amounting to 410,000 board feet, valued at P73,537.77. On this point it should be noted that under the contract, shipment was to be made before the end of July 1951, but not to commence earlier than April of the same year. The obligation between the parties was a reciprocal one, appellant to furnish the vessel and appellee to furnish the logs. It G.R. No. 80231, October 18, 1988, 166 SCRA 577. G.R. No. 18916, November 28, 1969, 30 SCRA 372.

2 3

Art. 1197

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was also an obligation with a term, which obviously was intended for the benefit of both parties, the period having been agreed upon in order to avoid the stormy weather in Dolores, Samar, during the months of January to March. The obligation being reciprocal and with a period, neither party could demand performance nor incur in delay before the expiration of the period. Consequently, when the typhoon struck on May 5, 1951 there was yet no delay on the part of appellant, and the corresponding loss must be shouldered by the appellee.

However, the benefit of the period may be waived by the person in whose favor it was constituted. Hence, in the Abesamis case where delivery of some portions of the shipment was promised to be made on July 31, 1951, the obligor informed the obligee that he will make an earlier delivery of these subject portions of the shipment on July 25, 1951. The obligor failed to make the delivery on the said earlier date and he was made to bear the loss for the portion of the shipment to be made on the said date.4 Article 1197. If the obligation does not fix a period but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (1128a) In Gregorio Araneta, Inc. vs. Phil. Sugar Estates Development Co., Ltd.5 where a two-year period fixed by the lower court for the obligor to fulfill its obligation was struck down as arbitrary, the Supreme Court said: It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that “the obligation does not fix a period” (or that the period is made to depend upon the will of the debtor),” but from the nature and the circumstances it can be inferred that a period was intended” (Article 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to the second step, and decide what Id., Pages 378-379. G.R. No. L-22558, May 31, 1967, 20 SCRA 330.

4 5

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period was “probably contemplated by the parties (Do., par. 3). So that, ultimately the Court can not fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. As the record stands, the trial court appears to have pulled the two-year period set in its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code. In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described therein was occupied by squatters, because the fact is expressly mentioned therein (Rec. on Appeals, Petitioner’s Appendix B, pp. 12-13). As the parties must have known that they could not take the law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The conclusion is thus forced that the parties must have intended to defer the performance of the obligations under the contract until the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc. The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance. It follows that there is no justification in law for setting the date of performance at any other time than that of the eviction of the squatters occupying the land in question; and in not so doing, both the trial court and the Court of Appeals committed reversible error. It is not denied that the case against one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in this case was rendered.

In Radiowealth Finance Company vs. Del Rosario,6 it was contended by the debtors-respondents that, since the creditorpetitioner allowed them to apply their promotion services for its financing business as payment of the promissory note, the date for the payment of installment in the promissory note was left in blank, thereby signifying that, before their debt was to become due, the court should first fix a period of payment considering that the pay-ment was dependent upon the sole will of the debtors-respondents. The Supreme Court rejected this contention and said: G.R. No. 138739, July 6, 2000, 129 SCAD 527, 335 SCRA 288.

6

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This contention is untenable. The act of leaving blank the due date of the first installment did not necessarily mean that the debtors were allowed to pay as and when they could. If this was the intention of the parties, they should have so indicated in the Promissory Note. However, it did not reflect any such intention. On the contrary, the Note expressly stipulated that the debt should be amortized monthly in installments of P11,579 for twelve consecutive months. While the specific date on which each installment would be due was left blank, the Note clearly provided that each installment should be payable each month. Furthermore, it also provided for an acceleration clause and a late payment penalty, both of which showed the intention of the parties that the installments would be paid at a definite date. Had they intended that the debtors could pay as and when they could, there would have been no need for these two clauses. Verily, the contemporaneous and subsequent acts of the parties manifest their intention and knowledge that the monthly installments would be due and demandable each month. In this case, the conclusion that the installments had already become due and demandable is bolstered by the fact that respondent started paying installments on the Promissory Note even if the checks were dishonored by their drawee bank. We are convinced neither by their avowals that the obligation had not yet matured nor by their claim that a period for payment should be fixed by a court. Convincingly, the petitioner has established not only a cause of action against the respondents, but also a due and demandable obligation. The obligation of the respondents had matured and they clearly defaulted when their checks bounced. Per acceleration clause, the whole debt became due one month (April 2, 1991) after the date of the Note because the check representing their installment bounced.

The very last sentence of Article 1197 states that “once fixed by the courts, the period cannot be changed by them.” The objective of this is precisely to put a sense of definiteness in an otherwise highly ambiguous situation and to finally put the parties in a position where their obligations are predictable. Article 1198. The debtor shall lose every right to make use of the period: (1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt: (2) When he does not furnish to the creditor the guaranties or securities which he has promised;

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(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. (1129a) The law provides five instances when the debtor loses every right to the period whether the period has been contracted for the benefit of the debtor alone or of both the debtor and the creditor. The first one is when after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt. Hence, if a debtor has been given up to January 8, 1996 to pay his obligation and he becomes insolvent, the creditor need not wait up to January 8, 1996 to demand payment. However, if the debtor has asked a third person to guarantee his debt or if the debtor puts up his house as collateral for the debt, he will again have the benefit of the period. Insolvency here need not be judicially declared. By putting up the guarantee or the collateral, the interest of the creditor is safeguarded as he will have other means to satisfy his claim. The second instance is when he does not furnish the creditor the guaranties or securities which he has promised. The guaranties and securities will further protect the interest of the creditor. Usually, in the event the debtor fails to pay the creditor and the latter has exhausted all avenues to satisfy his claim against the debtor without any favorable result, the creditor can turn to the guarantor for payment. If the guarantor has committed himself solidarily, the creditor can even go against the guarantor immediately without need of going against the principal debtor. Securities can take the form of real-estate mortgages or pledges. Hence, if the loan is collateralized through the mortgage of a house and the debtor does not pay, the mortgage will be foreclosed, and the house will be sold in a public bidding and a sufficient amount of the proceeds to satisfy the indebtedness of the debtor will go to the creditor. The third instance is when, by his own acts, the debtor impairs said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory. In Gaite vs. Fonacier7 where the payment of the obligation was secured by two surety bonds:

Art. 1198

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one coming from a mining company and some of its stockholders as sureties and the other one from a bonding company, and where the obligor was obliged to pay the indebtedness from the time it received the proceeds of the sale of iron ore, the Supreme Court ruled that the obligor in this case lost its right to the period by saying: We agree with the court below that the appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving payment of the balance of P65,000.00, because of their failure to renew the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding company’s undertaking on December 8, 1955 substantially reduced the security of the vendor’s rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit “A”). xxx Appellants’ failure to renew or extend the surety company’s bond upon its expiration plainly impaired the securities given to the creditor (appellee Gaite), unless immediately renewed or replaced. There is no merit in appellants’ argument that Gaite’s acceptance of the surety company’s bond with full knowledge that on its face it would automatically expire within one year was a waiver of the renewal after the expiration date. No such waiver could have been intended, for Gaite stood to lose and had nothing to gain barely; and if there was any, it could be rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety company’s bond expired on December 8, 1955. But in the latter case the defendants-appellants’ obligation to pay became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit “A.”

It must be noted that, in this third instance, the debtor loses the benefit of the period even if the guaranties or securities disappear through a fortuitous event unless new ones equally satisfactory are immediately given. Hence, if the house used as collateral is hit by lightning, the debtor will still lose the right to the period unless he gives another house of the same quality as collateral. The fourth instance is when the debtor violates any undertaking, in consideration of which the creditor agreed to the period. Thus, if the debtor persuaded the creditor to allow him to pay his indebtedness on March 7, 1998 instead of on January 30, 1998 7 G.R. No. L-11827, July 31, 1961, 2 SCRA 830. and the creditor agrees because the debtor, who is a singer, promises

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the creditor that he (the debtor) will sing in his nightclub for three consecutive nights for only half his talent fee, and the debtor fails to sing as promised, the debtor loses his right to the period. The creditor can immediately demand payment of the obligation. In Allen vs. Province of Albay,8 the Supreme Court ruled that, if through the act of the owner in a construction contract, the contractor has been or will be prevented from finishing the works on the contractual completion date, the owner shall be deemed to have waived the time limit or the period and the contractor is bound only to finish the construction within a reasonable time, and if there are liquidated damages provided for in the contract in case of delay, a claim for such damages cannot be sustained; and neither could the liquidated damages be restored to be made applicable to an unreasonable length of time. The fifth instance is when the debtor attempts to abscond. If the debtor attempts to flee from his obligations, or to move away to evade payment of his indebtedness, the debt can be demanded from him immediately. Otherwise, if the debtor absconds, he may not be heard of again and the creditor cannot effectively collect his credit.



8

G.R. No. 11433, December 20, 1916, 35 Phil. 826.

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SECTION 3. — Alternative Obligations Article 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131) Under the Civil Code, there are only three prestations namely: to give, to do and not to do. Strictly speaking therefore, when the Code speaks of different prestations, it refers only to these three prestations. Hence, technically speaking, a person who is bound to give either a house, a car or a truck has only one prestation which is “to give.” But a person who is obliged to either deliver a house or to paint a picture has two prestations, namely: “to give” and “to do.” It appears however that the phrase “different prestations” in the law refers to both the strict sense and the loose sense of the word “prestation.” Partial performance of the different prestations cannot be considered fulfillment of the obligation and therefore cannot be done unless the creditor accepts such partial performance as complete performance. Hence, if the obligor or debtor can either give a house and a car or paint two murals for the satisfaction of his obligation, he cannot give the car and one mural. The creditor cannot even be compelled to accept such kind of satisfaction. It will be considered an incomplete satisfaction which is not acceptable. The debtor must make a choice and when he does, it should either be the delivery of the house and car or the painting of two murals. The obligation will not be satisfied through partial fulfillment of several prestations. If all but one of the alternatives become legally impossible to fulfill, the obligation will cease to be alternative. Thus, in a case where a loan was payable in Philippine Peso or in United States Dollars, the alternative obligation ceased to exist when, at the time the amount became due during the Japanese Occupation, payment in United States Dollars was prohibited.1

Article 1200. The right of choice belongs to the debtor, 1

Legardo vs. Miailhe, 88 Phil. 637.

141

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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. (1132) The debtor or the obligor is the passive subject in an obligation. He, not the creditor, is the one obliged to give, to do or not to do. Hence, the choice is given to him by law. Any doubt as to whom the choice is given must always be interpreted in favor of the debtor. Only by an express grant of choice can a creditor have the right to choose which prestation is to be performed. 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. Hence, if for the accomplishment of the obligation, the debtor can either give a car, fly to the moon, or not join the army, he has all the three prestations as alternatives, namely: to give, to do and not to do. The first and the last alter-natives are possible and lawful while the second, which is to fly to the moon, is impossible. The debtor therefore has no right to choose this second alternative. If he is allowed to do so, then the obligation can never be fulfilled. If the alternatives are: to give opium, to sing a song or not to join the navy, the first alternative is clearly unlawful and therefore the debtor has no right to choose this prestation. If the alternative prestations in a modeling contract are: to deliver the dresses, to act as model or to engage in prostitution, not only is the last alternative illegal but it could not have been the object of the prestation. Article 1201. The choice shall produce no effect except from the time it has been communicated. (1133) The creditor is always entitled to be notified of the choice. Communication to the creditor gives effect to the choice. The manner by which the communication is made can vary provided that it clearly conveys the unmistakable choice of the debtor. When the alternatives are all possible, lawful or consistent with the object of the obligation, the creditor has no right to oppose the choice. He must accept the chosen alternative. However, if some of the prestations are impossible, unlawful or which could not have been the object of the obligation, the creditor can relay his objection to the same so that the debtor will know, but, in any event, the debtor has no right to choose such proscribed alterna-tives.2 Article 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only

Arts. 1202-1203

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one is practicable. (1134) Majority of the choices must be practicable. Otherwise, there will be no use to the various alternative prestations given. It must be noted however that whether only one, some, or a majority are practicable is generally irrelevant to the rights of the creditor. It is generally the debtor’s choice which prevails. If only one is practicable, the creditor has no right to complain about such situation because such affects only the debtor who will lose his right of choice. The creditor has no choice but to accept this single practicable choice provided that it is not unlawful or inconsistent with the object of the obligation. It must be noted that the law uses the word “practicable.” Practicable means capable of being done, or simply feasible.3 If the choices are either impossible, unlawful or which could not have been the object of the obligation, not only does the debtor have no right to choose them but it is also not practicable to undertake them. However, prestations that are not “practicable” may also include lawful and possible prestations but, because of some special attendant circumstances which do not necessarily make them unlawful or impossible, they cannot be done. Hence, if the debtor has the following alternatives: to kiss a highly contagious leper, to sing a song, or not to pay taxes, it is clear that the last alternative is not only impracticable but also unlawful. The first alternative, although not unlawful and not impossible, is nevertheless not practicable because to do so will endanger the debtor’s health. In this case therefore, the debtor loses his right of choice because only one prestation is practicable which is to sing. Article 1203. If through the creditor’s acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. (n) A debtor cannot perpetually be held liable for obligations the satisfaction or compliance of which the creditor himself prevents the debtor from fulfilling. If the debtor has three alternatives namely: to give a particular car, to sing at a particular night club, or not to resign from his job, and the creditor burns the particular nightclub where he should sing, the debtor has effectively been prevented from making a choice from the three alternatives, due to the fault of the creditor. See Ong Guan Can vs. Century Insurance Company, 46 Phil. 492. The New Lexicon Webster’s Dictionary of the English Language, 1987 edition, Page 787. 2 3

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Art. 1204

In this case, the debtor can ask for the rescission of the contract with damages. If, despite, the act of the creditor, the debtor still wants to maintain the contract, said debtor can make his selection from the remaining choices. Article 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible. Damages other than the value of the last thing or service may also be awarded. (1135a) It must be pointed out that the debtor will not be liable in any way for reducing the alternatives from three to two alternatives, provided what remains are lawful, practicable, possible or consistent with the object of the obligation. Likewise, the debtor will not even be liable for converting his alternative obligation to a simple one where there is only one lawful and possible prestation. The debtor may even cause the loss of the thing, or render the service impossible. When the debtor is responsible for losing or rendering impossible all his alternative prestations, the creditor is entitled to damages. Hence, if the debtor has the following alternative prestations: to give a car worth P50,000 or to paint a portrait in a special canvass worth P25,000, he will be liable for damages to the creditor if he (the debtor) willfully destroys the car and willfully destroys the special canvass where the portrait is to be painted, thereby rendering both alternatives impossible. If the special canvass were first destroyed and thereafter the car, the damages to be paid to the creditor will be the value of said car which is P50,000. This is so because, had the car not been destroyed, the debtor could have delivered the car, being the only remaining choice. This is pursuant to the law which provides that the indemnity shall be fixed, taking as a basis the value of the last thing which disappeared, or that of the service which last become impossible. Also damages other than the value of the last thing or service may also be awarded.

Article 1205. When the choice has been expressly given to

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the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. Until then the responsibility of the debtor shall be governed by the following rules: (1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists; (2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages; (3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages. The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should become impossible. (1136a) When the choice is given to the creditor, the conferment of such right must always be express. Once the choice of the creditor has been communicated to the debtor, the obligation ceases to be alternative. Thus, if the debtor has three alternative prestations: to give a car, to give a truck or to give a boat, once he receives the selection of the creditor, he (the debtor) is bound to deliver the choice properly. He is 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. Prior to the selection of the creditor, the law provides three rules governing the responsibility of the debtor. First, if one of the things is lost through a fortuitous event, the debtor shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists. If the car, the truck and the boat were lost because of a fortuitous event, the obligation is extinguished. If only the car were lost, then the creditor has a choice between the truck and the boat. If only the boat remains, then the obligation becomes a simple one and the

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Art. 1206

creditor can demand the delivery of the same. Second, if the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages. If the debtor destroys the car, the creditor still has three choices, the truck, the boat or the price of the car. In addition, the creditor shall be entitled to damages regardless of which alternative he chooses. Third, if all the things are lost through the fault of the debtor, the choice of the creditor shall fall upon the price of any one of them, also with indemnity for damages. If the car, the truck and the boat were all lost through the fault of the debtor, the creditor still has three choices namely: the price of the car, the price of the truck or the price of the boat. No matter what he chooses, the creditor shall be entitled to 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. Article 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. (n) This particular provision deals with a facultative-alternative obligation. For example, if the debtor is obliged to give a car, such prestation is the principal obligation. It becomes facultative if, in lieu of the car, he can undertake another prestation like the painting of a mural. Undertaking the substitute prestation however is not mandatory in the event that the principal prestation is not performed as the creditor only agrees that it may be given as a substitute. If the substitute however is given, the creditor cannot refuse it unless it is unlawful. However, there is nothing to prevent the parties from agreeing that the giving of the substitute prestation is mandatory in the event the principal obligation cannot be performed. In the event that the substitute is lost through the negligence of the debtor, it does not affect the principal obligation and hence the debtor will not be liable. If there is bad faith on the part of the

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debtor, it will depend on the situation. If the substitute prestation was one of the main reasons which induced the creditor to enter into the contract with the debtor, but the latter did not really intend to constitute it as a substitute, this could be an act of fraud on the part of the debtor, which could make the whole contract voidable. For example, a debtor negotiates with a creditor in order to let him (the debtor) pay the obligation by giving a boat to the creditor instead of a particular car which is preferred by the creditor. The creditor resists but, eventually, he agrees on the promise of the debtor to give not only one but two cars of the same type, which the debtor represents as owned by him, as substitute prestation in the event that the principal prestation is not performed. Here, the creditor would not have agreed to the contract without this substitute prestation. After the signing of the contract and before the fulfillment of the main prestation, the creditor learns that the debtor does not own the cars. The act of the debtor may constitute fraud and the whole contract may be annulled. If the creditor does not make any move to annul the contract and accepts the giving of the boat as satisfaction of the obligation, he can no longer assail the contract as his acceptance cured the defect of said voidable contract. However, if the promise to the creditor relative to the two substitute cars does not constitute the reason for which the creditor entered into the contract, the debtor would not be liable for his bad faith if the principal obligation can still be performed. Once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud.

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SECTION 4. — Joint and Solidary Obligations Article 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 solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a) A solidary obligation implies a situation where there are debts or obligations incurred by two or more debtors in favor of two or more creditors, and giving anyone, some or all of the creditors the right to demand from anyone, some or all of the debtors the satisfaction of the total obligation and not merely the share of each debtor in the debts or obligations. A solidary obligation exists only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. A surety for example binds himself to pay the obligation of the debtor when it becomes due. He becomes a solidary debtor in that the creditor need not go against the principal debtor first before he (the creditor) can collect from the surety. The creditor can immediately go against the surety for the whole amount of the indebtedness or for such amount as the surety was made liable by contract.1 A surety, who is solidarily liable, is therefore an insurer of the debt.2 A surety is different from a guarantor who can be required to pay the indebtedness of the principal debtor only after the creditor has unsuccessfully exhausted all means to collect from the debtor. A guarantor therefore is subsidiarily liable for the debt of the debtor. He is not even jointly liable. A guarantor insures the solvency of the debtor.3 However, by stipulation of the parties, the guarantor can make himself solidarily liable for the indebtedness. In Sesbreño vs. Court of Appeals,4 Delta Motors Promissory Republic of the Philippines vs. Court of Appeals, G.R. No. 103073, March 13,

1

2001. Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD 209, 288 SCRA 422. 3 Ibid. 2

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Note No. 2731 in the amount of P307,933.33 issued in favor of Philfinance by Delta was assigned to Sesbreño as security for the payment of the indebtedness of Philfinance to Sesbreño. The said note was placed in the custody of Pilipinas Bank which informed Sesbreño via a “Denominated Custodian Receipt” (DCR) No. 10805 that it had possession of the promissory note and that “upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you.” The Supreme Court rejected the claim that the said statement implied that the bank became a solidary debtor with Philfinance and Delta. The Supreme Court said that: we found nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or at any other time. x x x The solidary liability that petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred. Under Article 1207 of the Civil Code, “there is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.” The record exhibits no express assumption of solidary liability visa-vis petitioner, on the part of Pilipinas. Petitioner has not pointed us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.

Also in the case of Philippine National Bank vs. Sta. Maria5 where the principal, in a special power of attorney, merely empowered his agent to borrow money and to deliver mortgages of real estate to the creditor and where the said agent indeed borrowed money but executed a mortgage not on the account of his principal but in his own name, the Supreme Court, applying Article 1207 of the Civil Code, rejected the lower court’s decision stating that the liability of the principal and the agent on the mortgage was joint and several because in the special power of attorney the principal did not grant the agent the authority to bind her solidarily with him on any loan he might secure thereunder.

The stipulation of the parties can expressly provide for solidary G.R. No. 89252, May 24, 1993, 222 SCRA 466. G.R. No. L-24765, August 29, 1969, 29 SCRA 303.

4 5

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Art. 1207

liability. In Pacific Banking Corp. vs. Intermediate Appellate Court,6 the document was denominated as a “Guarantor’s Undertaking” but the provision therein stated that the guarantor jointly and severally shall pay the bank any and all indebtedness of the principal debtor. The Supreme Court stated that since the undertaking expressly stipulated the joint and several obligation of the debtor, the nature of the obligation was clearly solidary. In Ronquillo vs. Court of Appeals,7 the Supreme Court said that an agreement to be “individually and jointly liable” indicates solidary liability and it further made the following explanation: The term “individually” has the same meaning as “collectively,” “separately,” “distinctly,” “respectively” or “severally.” An agreement to be “individually liable” undoubtedly creates a several obligation and a “several obligation” is one by which one individual binds himself to perform the whole obligation.

The phrases “juntos o separadamente” and “mancomun o insolidum” likewise denote a solidary obligation.8 Also the phrase “jointly and severally guaranteed,” though using the word “guaranteed,” nevertheless indicates a solidary obligation.9 Also, where the contract reads “I promise.” Or “I hereby bind myself,” and is signed by two or more promisors, it has been held to impose a joint and several liability. The same has been held true of a promissory note which read “I promise to pay” and signed by one person at the bottom, and by another on the back thereof. An agreement between three creditors of a bankrupt, that it should have a third of any dividend paid on a claim filed by two of the debtors, has been held joint and several contract. Such expressions as “we or either of us,” or “we jointly and severally promise” usually give rise to a joint and several obligation.10

It must be noted that, in the aforequoted wordings of the above promissory notes, the debtors who were referred merely as “I” were not identified in the body or content of the document itself. Hence, the signatories must be considered to have acknowledged that the “I” in the document was referring to each of them individually. Hence, the obligation is solidary. However, if the phrase “I promise to pay” were G.R. No. 72275, November 13, 1991, 203 SCRA 496. G.R. No. L-55138, September 28, 1984, 132 SCRA 274. 8 Parot vs. Gemora, 7 Phil. 94. 9 Rubio vs. Court of Appeals, G.R. No. L-50911, March 12, 1986, 141 SCRA 488. 10 William F. Elliott, Commentaries on the Law on Contracts, Volume II, 1913 edition, The Bobbs-Merrill Company, Indianapolis, pages 747-748. 11 Article 1370 of the 1950 Civil Code. 6 7

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worded differently in that it identified the particular person referred to as “I,” then, for obvious reasons, even if there were a number of signatures in the promissory note, it is clear that the others cannot be held liable as joint and solidary debtors because only one person as identified expressly in the promissory note made the promise to pay. They cannot even be held liable as joint debtors. It is only the person identified as the “I” who will be liable and the others should and must only be treated as witnesses. Hence, if the promissory note reads “I, Mr. X, of legal age and residing in Quezon City promises to pay Mr. J the amount of P1,000 on or before January 1, 2003” and if in this promissory note the signatures of Mr. X (the debtor) and Mr. J (the creditor) appear, and, at the lower portion of this document, the signatures of Mr. M and Mr. N appear, it can never be presumed that Mr. M and Mr. N also signed as solidary debtor or creditor. This is so because, First, the law does not make such a presumption. Second, there is no fact in the wording of the document from where such a presumption could arise. Third, which is the most obvious and important reason, the names of the only debtor and the only creditor were exactly identified in the body of the document. The promissory note is indeed very clear and leaves no doubt that only Mr. X is the debtor and Mr. J the creditor. As Mr. X was identified in the body of the document immediately preceding the word “I” and he signed it, then the promise to pay contained in the document must mean his promise alone and nobody else’s. The law provides that if the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.11 Fourth, it would have been so easy to expressly identify and indicate in writing Mr. M and Mr. N as either debtor or creditor also, whether joint or solidary, in the body of the promissory note if that were the intention of the parties. The absence of any reference to Mr. M and Mr. N as debtor or creditor also negates any obligation on their part. Indeed, if at all, the intent of the parties was to be detected from the document itself. The naming of Mr. X as the sole debtor and Mr. J as the sole creditor in the body of the promissory note leaves no doubt that it is only Mr. X who was intended to be the only debtor and Mr. J as the only creditor. Fifth, even the nature of the obligation which is a simple loan does not give rise to a solidary obligation. Sixth, in affixing their signatures, Mr. X, Mr. J, Mr. M and Mr. N must have read the clear and express written content of the contract that Mr. X is liable as debtor and only Mr. J is the creditor and therefore they 12

Section 9, Rule 130 of the Rules of Court; Gaw vs. IAC, G.R. No. 70451, March

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Art. 1207

are now estopped from claiming any other debtor or creditor. Once the terms of an agreement have been reduced into writing, it is deemed to contain all the terms agreed upon by the parties and no evidence of such terms other than the contents of the written agreement shall be admissible.12 Accordingly, Mr. M and Mr. N should be treated as mere witnesses in the promissory note especially because to have witnesses in a promissory note is usually done in ordinary business transactions particularly where the creditors are banking institutions and professional lenders. However, even if the parties stipulated in their contract that the obligation of the obligor is joint and solidary but such contract was superseded by a judicial decision arising from the said contract between the parties judicially declaring the obligation to be merely joint, the said decision must be enforced in a joint manner.13 Also, if a decision does not state that the obligation of the judgment debtors is solidary, the writ of execution enforcing such a decision cannot be implemented in a solidary manner among the judgment debtors.14 The law can likewise provide for a solidary nature of the obligation. Thus, the last paragraphs of Articles 94 and 121 of the Family Code of the Philippines15 provide that, except for certain specified exceptions, if the absolute community or conjugal property is insufficient to cover the liabilities for which the absolute community of property or the conjugal partnership of gains is liable, the spouses shall generally be solidarily liable for the unpaid balance with their separate properties. If the property arrangement of the spouses is the separation of property regime, Article 145 of the Family Code provides that the liability of the spouses to creditors for family expenses shall be solidary. In case of inheritance, Article 927 of the Civil Code provides that if two or more heirs take possession of the estate (of the deceased), they shall be solidarily liable for the loss or destruction of a thing devised or bequeathed, even though only one of them should have been negligent. Article 1824 of the Civil Code also provides that all partners are solidarily liable with the partnership for everything chargeable to the partnership in cases provided in Articles 1822 and 1823 of the Civil Code.16 In Article 1894 of the Civil Code, two or more agents may agree to bind themselves solidarily and, under 24, 1993, 220 SCRA 405. 13 Oriental Philippines Company vs. Abeto, 60 Phil. 723. 14 Industrial Management International Development Corporation vs. National Labor Relations Commission, G.R. No. 101723, May 11, 2000, 126 SCAD 283, 331 SCRA 640. 15 Executive Order No. 209 as amended which took effect on August 3, 1988. 16 Article 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-

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Article 1895, if solidarity has been agreed upon, each of the agents is responsible for the non-fulfillment of the agency, and for the fault or negligence of his fellow agents, except in the latter case when the fellow agents acted beyond the scope of their authority. With respect to bailees in commodatum, Article 1945 provides that when there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. In the quasi-contract known as negotiorum gestio, Article 2146 pertinently provides that the responsibility of two or more officious managers shall be solidary, unless the management was assumed to save the thing or business from imminent danger. Article 2157 provides that the responsibilities of two or more payees, when there is payment of what is not due, is solidary. Article 2194 provides that the responsibility of two or more persons who are liable for quasi-delict is solidary. Solidary obligations shall likewise exist if the nature of the obligation requires it. It has been opined that some provisions in the Preliminary Title, Chapter 2 on Human Relations of the Civil Code, particularly Articles 19 to 22,17 though not expressly providing for solidary liability, nevertheless should give rise to solidary obligations if violated by two or more persons.18 Article 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed

partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. (n) Article 1823. The partnership is bound to make good the loss: (1) Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and (2) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. (n) 17 Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. Article 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for damages. Article 22. Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just cause or legal ground, shall return the same to him. 18 Civil Code of the Philippines, Volume IV by Tolentino, 1991 edition, Pages 221 to 222.

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Art. 1208

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. (1138a) The presumption of the law is that an obligation is always joint. Thus, in Un Pak Leung vs. Negorra,19 the Supreme Court said that in the absence of a finding of facts that the defendants made themselves individually liable for the debt incurred, they were each liable only for one-half of said amount. The joint debtors are obliged to pay only their share in the indebtedness while the creditors can only claim their share in the credit. It is only when the law or the nature or the wording of the obligation clearly provides for solidary liability will the obligation be such. Hence, unless there is no specification as to their proportionate share in the credit or in the debt, the creditors and debtors in a joint obligation shall be entitled or shall make payment in equal proportions. Hence, if A and B are indebted to C and D for P1,000, C can collect from A and B P250 each. D can likewise collect from A and B P250 each. However, if, in the said P1,000 obligation, A owes only 1/3 of such indebtedness and B owes 2/3 of the same while creditor C owns 1/5 of the credit and D owns 4/5 of the same, the creditors and the debtors shall collect and pay only in proportion to what they own and owe, as the case may be. Thus A is obliged to pay C only P66.67 and D only P266.67. This is so because A owes only 1/3 of P1,000 which is P333.33. C and D can collect only from that share of A. Considering that the obligation is joint and since C only owns 1/5 of P333.33, he can only collect P66.67 from A and since D owns 4/5 of P333.33, he can only collect P266.67 from A. On the other hand, B is obliged to pay P133.33 to C and to D only P533.33. Following the same principle, B only owes 2/3 of the P1,000 indebtedness which is P666.67. C and D can collect only from that share of B. Considering that the obligation is joint and since C only owns 1/5 of P666.67, he can only collect P133.33 from B. In the same vein, since D owns 4/5 of P666.67, he can only collect P533.33 from B. Article 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 G.R. No. 3128, December 19, 1907, 9 Phil. 381. Article 1224 of the Civil Code. 21 Id. 19 20

Arts. 1209-1210

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debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139) If the division of the obligation is impossible and the obligation is joint, the creditors must act collectively. Thus, if the joint obligation is to give a house to 3 creditors, one of the creditors cannot undertake an act which will prejudice the others. For example, a waiver of the obligation cannot be made by anyone of the creditors unless such waiving-creditor has been authorized by the others to undertake such act. If there is no such authority and a waiver is to be made, all the creditors must waive the obligation. If there are three debtors obliged to give a single house, all of the debtors must be sued if they renege on their obligation. If one of the three debtors refuses to deliver the house, the obligation will be converted into a claim for damages. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with the undertaking.20 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 the value of the service in which the obligation consists.21 Thus, if the house is worth P150,000, the creditors can file a case for damages against the three debtors in the amount of P150,000. Each of the debtors will be liable for P50,000. However, the debtor who refuses to deliver or who is, in effect, responsible for the suit by the creditor may be liable for additional damages. Those who did not refuse or who were willing shall not contribute to the indemnity beyond the corresponding portion of the price of the thing. Considering that the obligation is joint and each debtor is responsible to pay only such amount corresponding to his share, the debtors shall not be responsible for the share of a debtor who is insolvent. Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. (n) Solidarity and indivisibility of an obligation are not synonymous. Solidary obligation refers to the nature of the obligation attaching to the obligor and obligee while indivisibility refers to the nature of the object of the prestation. 22 Article 1211. Solidarity may exist although the creditors 23

G.R. No. 93010, August 30, 1990, 189 SCRA 325. Guerrero vs. Court of Appeals, G.R. No. L-22366, October 30, 1969, 29 SCRA

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Arts. 1211-1212

and the debtors may not be bound in the same manner and by the same periods and conditions. (1140) Since a solidary obligation refers to the nature of the obligation attached to the parties themselves, it can exist even if the creditors and debtors may not be bound in the same manner and by the same periods and conditions. Hence, if A, B and C are solidarily indebted to D in the amount of P15,000, D can collect from anyone of the debtors the whole amount of the indebtedness. If A is required to pay only on August 1, 1997, B only on May 1, 1998 and C immediately, the creditor D can collect from anyone of them the whole amount of P15,000 at the time when the periods imposed on the particular debtors have been fulfilled. However, if D demands payment from C on January 6, 1997, he can pay only P5,000 which pertains to his share considering that the liability of A and B has not yet matured. On August 2, 1997, creditor D can still demand payment of the balance from C who can legally pay only P5,000 representing A’s share considering that B’s liability has not yet matured. Article 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. (114a) In Quiombing vs. Court of Appeals,22 only one of the solidary creditors filed a suit for collection against the solidary debtors. The debtors moved for the dismissal of the suit on the ground that the other solidary creditor should have been included in the case. The Supreme Court rejected the dismissal of the suit invoking Article 1212 and stated that recovery of the contract price was surely a useful act and can be done even by one solidary creditor. Moreover, the Supreme Court also said that the question as to who should sue on a solidary obligation for the collection of the price was a personal issue between the solidary creditors, and it did not matter who as between them filed the complaint because the solidary debtors were liable to either of the two as solidary creditors, for the full amount of the debt. The satisfaction of a judgment obtained against them by one solidary creditor will discharge their obligation to the other solidary creditor and vice versa. Inclusion therefore in the case of the other solidary creditor would have been a useless formality. Also, if one of the solidary creditors makes an extra-judicial demand for the debtor to pay, this will benefit also the other creditors 791.

Arts. 1213-1214

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as the demand will effectively make the prescriptive period for the fulfillment of the obligation run anew. The solidary creditor however should not do anything which may be prejudicial to the other solidary creditors. For example, if the solidary obligation has become due and the debtor decides to make complete payment to one of the solidary creditors, such solidary creditor must accept payment. Non-acceptance is clearly prejudicial to the other solidary creditors, as it would lead to a delay or default on the part of the creditors for which said creditors may be liable. Also, if one of the solidary creditors remits the obligation in favor of one of the solidary debtors, the whole obligation is extinguished. This is prejudicial to the other solidary creditors because they could not anymore collect from any of the solidary debtors what should be due them. The fact that these other solidary creditors were prejudiced will not invalidate the extinguishment of the obligation. Their remedy is to collect their share of the indebtedness from the solidary creditor who made the remission. They can likewise ask for damages for what ever they may have lost as a result of the remission, such as interest which should have been earned had it not for the remission. Article 1213. A solidary creditor cannot assign his rights without the consent of the others. (n) Ideally, the relationship between and among solidary creditors is one of mutual trust. With this trust, each solidary creditor will be confident that his solidary co-creditors will only act for the good of all the solidary creditors, and that they will not act to prejudice others. Hence, to preserve as much as possible this confidence, a solidary creditor cannot assign his rights without the consent of the others. Article 1214. The debtors may pay any one of the solidary creditors; but if any demand, judicial or extra-judicial, has been made by one of them, payment should be made to him. (1142a) Anyone of the solidary creditors may accept full performance of the obligation. However, if one of the solidary creditors makes the demand, whether judicially or extra-judicially, payment must be made to such solidary creditor. Consequently, once a court case has been filed by one solidary creditor, the debtor cannot pay the other solidary creditor who is not included in the case. There are authorities to the effect that, if payment is made to the other creditors who are not included in the suit or who did not make a demand, the payment

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Obligations and Contracts Text and Cases

Art. 1214

shall not be considered as valid. This is based on the conceptual view that, as soon as one of the creditors make the demand, the mutual representation of the creditors with respect to each other, which is the basis of a solidary obligation, momentarily ceases, and therefore the debtor must only pay the one who, at the moment of demand, seeks the full payment of the obligation. If the judicial case is terminated with the demanding-creditor accepting partial payment with a reservation as to the balance or, if after extra-judicial demand, the demandingcreditor accepts partial payment with reservation as to the balance, the other creditors can now again seek payment from the debtor. The creditors’ mutual representation will again exist. The interpretation or application of the law making invalid the payment to the non-demanding creditors should be abandoned. The better rule is to make payment to the other non-demanding creditors valid. It must be noted that Article 1214 does not by itself expressly make invalid or void payment to the other non-demanding creditors. It is remarkably silent on this point. Accordingly, the provision must be interpreted in the light of what would be most beneficial to all the solidary creditors pursuant to Article 1212 which states that any of the solidary creditors can do whatever is beneficial to the others. Hence, while the law states “payment should be made to him” referring to the demanding creditor, this must not be applied in a mandatory and narrow manner but, rather, it must be inter-preted merely as giving a preference to the demanding-creditor without necessarily curtailing the rights of the other creditors to be paid or the right of the debtor to pay the other creditors their rightful due. By allowing the debtor to pay the other creditors, it will better serve the purpose of the law as to the solidarity and fulfillment of the obligation. If payment is made in full to the non-demanding creditors, then the share of the demanding-creditor will be given to him. If payment is made to fulfill the obligation of the non-demanding creditors only, then the claim of the demanding-creditor as to the whole obligation must necessarily be adjusted to reflect only his remaining share. In both cases, the other non-demanding creditors, in accepting the payment, clearly did something beneficial to all creditors including the demanding creditor. The demanding creditor will not be prejudiced because the case for collection pending in court will not necessarily be dismissed as it will still go on for purposes of satisfying any interest, damages or attorney’s fees also being claimed by the demanding-creditor, unless he waives all of them. Also, if what the demanding creditor undertook is an extra-judicial demand, payment to the non-demanding creditors will even facilitate the fulfillment of the obligation and ultimately the

Art. 1215

Obligations Different Kinds of Obligations Sec. 4 — Joint and Solidary Obligations

159

satisfaction of his share. Applying Article 1214 in this manner will also be consistent with Article 1222 which provides that 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. Article 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143) Novation is basically the change of creditors, debtors or the principal condition of the contract. The novation must however be clear to release the solidary obligation of the debtors.23 Compensation takes place when two persons, in their own right, are creditors and debtors of each other. Confusion is the merger of the characters of creditor and debtor in the same person. Remission is the condonation of an obligation. Novation, compensation, confusion and remission are modes of extinguishing an obligation. If A, B and C are solidary debtors of D, E and F in the amount of P1,500 and thereafter A informs D that he is recommending X to pay the debt provided that A is released from the obligation, and X and D agrees to the change, there is a novation in the person of A, one of the debtors. Because of this novation, not only A’s obligation, but also B’s and C’s are extinguished. In the same example, if instead of novation, A becomes the creditor of D also in the amount of P1,500, and said amount is also due, there is compensation between A and D. The compensation extinguishes not only the obligation of A but also that of B and C. Likewise, in the same example, if D issues a promissory note to X in the amount of P1,500 and X endorses it to A who endorses it to D, there is a merger of the persons of the creditor and the debtor. Consequently, the debt of is extinguished. The debt has been extinguished because of creditor D without creditors E and F being benefited. So as not to 24 25

G.R. No. L-32425, November 21, 1984, 133 SCRA 317. G.R. No. L-22366, October 30, 1969, 29 SCRA 791.

160

Obligations and Contracts Text and Cases

Art. 1216

prejudice the other solidary creditors (namely: E and F), D must pay each of them P500. This should be the case because the law clearly provides that the creditor who may have executed any of these acts of novation, compensation, merger or confusion, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. Article 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. (1144a) In Imperial Insurance, Inc. vs. David,24 the husband and the wife bound themselves jointly and severally in favor of the obligee for a sum of money and when the husband died, the obligee demanded payment from the wife who resisted payment, claiming that the obligee’s claim is barred by its failure to file a claim in the intestate proceeding of the deceased husband. The Supreme Court ruled that the obligee can properly claim from the wife as the nature of the obligation is solidary and further said: x x x Under the law and well settled jurisprudence, when the obligation is a solidary one, the creditor may bring his action in toto against any of the debtors obligated in solidum. Thus, if husband and wife bound themselves jointly and severally, in case of his death her liability is independent of and separate from her husband’s; she may be sued for the whole debt and it would be error to hold that the claim against her as well as the claim against her husband should be made in the decedent’s estate (Agcaoili vs. Vda. De Agcaoili, 90 Phil. 97). In the case at bar, appellant signed a joint and several obligation with her husband in favor of herein appellee; as a consequence, the latter may demand from either of them the whole obligation. As distinguished from a joint obligation where each of the debtor is liable only for a proportionate part of the debt and the creditor is entitled only to a proportionate part of the credit, in a solidary obligation the creditor may enforce the entire obligation against one of the debtors. “Where the obligation assumed by several persons is joint and several, each of the debtors is answerable for the whole obligation with the right to seek contribution from his co-debtors.” (Philippine International Surety Co. vs. Gonzales, 3 SCRA 391) 26

G.R. No. 96405, June 26, 1996, 71 SCAD 287, 257 SCRA 578.

Art. 1216

Obligations Different Kinds of Obligations Sec. 4 — Joint and Solidary Obligations

161

And, in Manila Surety and Fidelity Co., Inc. vs. Villarama, et al., 107 Phil. 891, this Court ruled that the Rules of Court provide the procedure should the creditor desire to go against the deceased debtor, “but there is nothing in the said provision making compliance with such procedure a condition precedent before an ordinary action against the surviving solidary debtors, should the creditor choose to demand payment from the latter, could be entertained to the extent that failure to observe the same would deprive the court jurisdiction to take cognizance of the action against the surviving debtors. Upon the other hand, the Civil Code expressly allows the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously. Hence, there is nothing improper in the creditor’s filing of an action against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement of the estate of the deceased debtor wherein his claim could be filed.”

In Guerrero vs. Court of Appeals,25 the creditor filed a suit against one of the solidary debtors. The suit was compromised without novating the solidary debt. The said solidary debtor defaulted in making payment, resulting in the creditor demanding payment from the other solidary debtor. The Supreme Court rejected the contention of the other solidary debtor that there was already a waiver by the creditor to go against him considering that he already compromised the case with his other solidary debtor, to wit: We fail to see any incompatibility between the two obligations that would sustain the defense of novation. The fact that in the compromise agreement and subsequently in the execution sale, ALTO chose first to realize its credit from Robles, did not imply waiver of its right to proceed against any of the solidary debtors or some or all of them simultaneously, and the demand made against one of them is not an obstacle to demands which may subsequently be directed against the others so long as the debt or any part of it remains outstanding and unpaid.

The solidary creditor has a right not to accept partial payment from the solidary debtors. However, if he does accept partial payment from some of them, this will not prevent him from demanding or claiming from the others who have not actually paid. In Inciong, Jr. vs. Court of Appeals,26 the Supreme Court ruled that if a claim from one of the solidary debtors has been dismissed by a court on grounds other than the extinguishment of the whole obligation or that the claim has prescribed, it does not necessarily mean that the solidary Dimayuga vs. Philippine Commercial Bank, G.R. No. 42542, August 5, 1991, 200 SCRA 143; Philippine National Bank vs. Independent Planters Association, Inc., 27

162

Obligations and Contracts Text and Cases

Art. 1217

indebtedness cannot be claimed against the other solidary debtors who were not impleaded in the case or against those who were impleaded but whose liability was found by the court as proper. Article 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 the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a) The choice is left to the solidary creditor to determine against whom he will enforce payment.27 If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. Thus, if A, B and C are solidarily indebted to D for P1,500 to be paid on March 1, 1997 and A, B and C offer to pay D on the due date, D may choose from whom to accept. If D accepts payment from one of the solidary debtors, let’s say A, the obligation shall be completely extinguished. Having paid the whole P1,500, A has the right to claim P500 from B and another P500 C, which are their respective shares in the indebtedness. If A paid interest on the indebtedness, B and C must likewise share in the payment of the interest. However, the law also says that if payment is made before the debt is due, no interest for the intervening period may be demanded. Hence, if A pays the indebtedness on February 1, 1997, no interest can be claimed by A for the period beginning February 1, 1997 up to March 1, 1997, the due date of the obligation. In the event that C cannot pay his share because he is insolvent, his share shall be borne by A and B in proportion to the debt of each. Hence, A and B share shall share in C’s obligation of P500. A shall be G.R. No. L-28046, May 16, 1983, 122 SCRA 113. 28 Article 1106 of the 1950 Civil Code. 29 Article 1139 of the 1950 Civil Code. 30 Article 1144 of the 1950 Civil Code.

Art. 1218

Obligations Different Kinds of Obligations Sec. 4 — Joint and Solidary Obligations

163

liable for P250 and B shall also be liable for P250. Considering that A, in effect, initially shouldered C’s obligation of P500 when A paid the whole obligation in full in favor of D, A can ask reimbursement of P250 from B. Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (n) By prescription, one acquires ownership and other real rights through the lapse of time in the manner and under the conditions laid down by law. In the same way, rights and actions are lost by prescription.28 Actions prescribe by mere lapse of time fixed by the law.29 The prescriptive periods for filing an action for different causes of action are contained in different parts of the Civil Code but the main provisions are from Article 1139 up to Article 1155. For example, an action based on a written agreement must be brought within 10 years from the time the cause of action accrues.30 Hence, if A and B, solidary debtors pursuant to a written loan agreement, are bound to pay the creditor on May 2, 1997 and on the said date the creditor makes a demand on them, but does not collect until after 12 years from the demand, the claim clearly has prescribed. However, if A pays the creditor despite prescription of the claim, B can refuse to pay A his share in the indebtedness because technically the debt has prescribed. Article 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a) Article 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n) The consequences of remission in favor of anyone of the solidary debtors depend upon the time when the remission was in fact given by the creditor. For example, A, B and C are solidary debtors of D in the amount of P1,500. A persuades D to condone the debt. This remission

164

Obligations and Contracts Text and Cases

Arts. 1219-1221

extinguishes the whole obligation and benefits not only A but also B and C. A therefore cannot collect P500 each from B and C as he (A) never paid anything to D. However, if C, after the debt becomes due, pays the whole indebtedness and A, after such payment made by C, convinces D to condone the debt, the said condonation or remission has no effect because by the time the remission was made, D’s credit has already been extinguished. C can still claim from A, the latter’s share of the indebtedness. It must be pointed out that, in so far as Article 1219 is concerned, it is applicable only when there is one creditor. If there are many solidary creditors involved, remission of the debt by one of the said creditors without the consent of the others will constitute an act which is prejudicial to the other solidary creditors and therefore, according to Article 1212, cannot be done. If the remission is done, the solidary creditor who made the remission shall be liable for the share which the other creditors should receive and also for damages which the other solidary creditors may suffer as a result of the remission. For example, if A, B and C are solidary creditors of X in the amount of P1,500 payable on December 30, 2001 with an interest of 15% per annum, and B remitted or condoned the debt on April 1, 2001 just one day after it was incurred, B shall be liable to A in the amount of P500 and to C in the amount of P500 also plus damages equivalent to the interest which A and C would have gotten had the obligation not been condoned and had it been paid on December 30, 2001. Article 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. (1147a) The solidary debtors will be relieved from their obligation if the thing is lost or the prestation becomes impossible without their fault. However, if anyone of them is at fault or if there is previous delay on the part of anyone of the solidary debtors before the loss or

Art. 1222

Obligations Different Kinds of Obligations Sec. 4 — Joint and Solidary Obligations

165

impossibility of the prestation due to fortuitous event, all the solidary debtors will still be held liable. If A, B, and C are solidarily bound to deliver to G a computer with serial number 7777 on January 3, 1997 and before such date arrives, the said computer is hit by lightning without the negligence or fault on the part of the solidary debtors, the obligation is extinguished. If on January 3, 1997, G demands delivery from A and the computer is not delivered and the computer is subsequently hit by lightning, all of them shall be solidarily liable to pay the price, damages and interest. B and C however have the right to claim against A for the damages they have suffered since A should have delivered the computer, or at least informed B and C of the demand. Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a) While the whole debt may be collected from one of the solidary debtors, he can nevertheless pay less than the whole amount of indebtedness to the creditor in the event that there are defenses he can set up. He may set up defenses personal to him or to his co-debtor with respect to the whole obligation or to only a part thereof which pertains to the respective share(s) of the co-debtor(s) in the obligation. Also, defenses relative to the nature of the obligation can be set up. Thus if A, B, and C are indebted to G in the amount of P1,500 but B shall only pay if he passes the bar examination for lawyers in 1996 and C shall pay only on January 2, 1997, and A when he reaches the age of 18, and if G sues B in 1996 after he passes the bar, B can set up the defense that C’s obligation is subject to a period which has not yet arrived, and also the defense that A’s contract is voidable considering that he was a minor at the time he (A) contracted the solidary obligation. If B is successful in claiming said defenses, he will nevertheless pay the amount of P500 which pertains to his share because there is no impediment in collecting the same from him.

166

Obligations and Contracts Text and Cases

Art. 1222

167

SECTION 5. — Divisible and Indivisible Obligations Article 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. (1149) The nature and effect of obligations are very much different from and do not affect the divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor. Article 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists. (1150) Joint debtors are only bound to perform their respective portion in a particular indebtedness. Their obligation can be divisible, in which case it is so easy to demand from each joint obligor payment of his respective share of the obligation. However, if the obligation is indivisible, each debtor must coordinate with the rest of the debtors for the fulfillment of the obligation. Thus, if A, B and C are jointly bound to deliver a computer worth P30,000 to D and the latter, on due date, demands payment from them, all of them must fulfill the obligation. If A and B are ready to deliver but C, for no justifiable reason, refuses to deliver, said debtors’ joint obligation is converted into a claim for damages on the part of the aggrieved creditor. The creditor can file a case against all the debtors for the amount of the computer which is P30,000. He can likewise demand for damages he suffered due to the non-delivery of the computer, such as exemplary damages, moral damages, or attorney’s fees. A and B however should not be held liable for these other damages as they were willing to 167

168

Obligations and Contracts Text and Cases

Art. 1225

deliver the computer. It will only be C who should shoulder these other damages. Article 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a) An obligation which is not susceptible of partial performance is generally an indivisible obligation. Thus, an obligation to give a house or a car is an indivisible obligation. A contract stipulating that an actor has to sing and dance simultaneously, is also indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things, which by their nature are susceptible of partial performance, it shall be divisible. However, the parties themselves may stipulate whether or not the object or service shall, for purposes of their contract, divisible or indivisible. The wording of the contract therefore will be very material to show the characterization of the obligation. In the case of Government vs. CFI1 where the compromise agreement stated, among others, that the work was to be done in stages to be determined by the City Engineer, that the contractor was to advance the necessary amount needed for each stage of the work to be reimbursed by the Pasay City Government, and that the contractor was to furnish in favor of the Pasay City Government a new performance bond in the amount required by law and regulations in proportion to the remaining value or cost of the unfinished work of the construction per approved plans and specifications, the Supreme Court said that the provisions in the compromise agreement read G.R. No. L-32162, September 28, 1984, 132 SCRA 156.

1

Art. 1225

Obligations Different Kinds of Obligations Sec. 5 — Divisible and Indivisible Obligations

169

together clearly show a divisible obligation. The Supreme Court further said that: What is crucial in sub-paragraph B of paragraph 1 of the compromise agreement are the words “in proportion.” If the parties really intended the legal rate of 20% performance bond to refer to the whole unfinished work, then the provisions should have required the plaintiff contractor to submit and file a new performance bond to cover the remaining value/cost of the unfinished work of the construction. Using the words in proportion then significantly changed the meaning of the paragraph to ultimately mean a performance bond equal to 20% of the next stage of the work to be done.

The law also provides that, in obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case.

170

Obligations and Contracts Text and Cases

SECTION 6. — Obligations with a Penal Clause Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) In SSS vs. Moonwalk,1 the Supreme Court upheld the decision of the Court of Appeals in stating that, if the principal obligation has been complied with, the penal clause has lost its efficacy or applicability, and the Supreme Court adopted the Court of Appeal’s explanation including the definition quoted by the latter from Spanish authorities that a penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled (3 Castan, Eighth Edition, Page 118).

The application of the penal clause may be governed by the stipulation of the parties. Hence, if there is nothing stipulated as to how it shall be applied, then the law will come in: the penalty shall substitute the indemnity for damages and the payment of interest in case of non-compliance. However, in certain foreign jurisdictions (United Kingdom, Australia, New Zealand and some states in the United States), a penalty is different from liquidated damages in that, in the former, there is need of proof of loss, but in the latter, payment may be made without proof of loss. In the Philippines however, the G.R. No. L-73345, April 7, 1993, 221 SCRA 119.

1

170

Art. 1227

Obligations Different Kinds of Obligations Sec. 6 — Obligations with a Penal Clause

171

Supreme Court, in Lambert vs. Fox,2 stated that: there is no difference between a penalty and liquidated damages, so far as legal results are concerned. Whatever difference exist 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.

Imposition of the liquidated for breach of contract, such as in a building contract, bars any award for additional damages at large for the same breach.3 If the parties stipulate that the award of the penalty pursuant to the penalty clause shall not constitute a bar to the recovery of other damages, and in the payment of interest, then it shall be so. The penalty is clearly an onerous and harsh stipulation providing for increased liability for the purpose of highlighting the mandatory and important character of an obligation which should be fulfilled. The penalty clause may be in any form which is determined or liquidated. In any event however, 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 the Civil Code. An obligor is in delay only upon judicial or extra-judicial demand unless legally excused as provided by law.4 Hence, the penalty may be claimed only when there is demand, whether judicial or extra-judicial, unless the law, the stipulation of the parties or the nature of the contract (time is of the essence) otherwise demands. Article 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

26 Phil. 588. Navarro vs. Mallari, 45 Phil 242. 4 Article 1169 of the Civil Code; SSS vs. Moonwalk, G.R. No. L-73345, April 7, 1993, 221 SCRA 119. 5 Id., Page 127. 2 3

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Obligations and Contracts Text and Cases

Art. 1228

without his fault, the penalty may be enforced. (1153a) The payment of the penalty is merely an accessory obligation. It is not the principal obligation. Hence, the debtor cannot merely substitute the performance of the principal obligation by the mere payment of the penalty. However, the parties can stipulate otherwise. Likewise the creditor cannot demand fulfillment of the obligation and payment of the penalty at the same time. Once the obligation has been complied with and extinguished, the penal clause has lost its raison d’etre.5 Nevertheless, the parties can stipulate in their contract that payment of the penalty, and satisfaction of the obligation can be demanded at the same time. In the event that the creditor demands fulfillment of the obligation and the same has become impossible without his fault, the penalty may be enforced. For example, A is to deliver a particular computer to B on March 7, 1997. It was stipulated that in the event he fails to deliver on time, he shall be liable for liquidated damages in the amount of P200,000. B demands delivery of the particular computer on the due date but A fails to deliver. Thereafter, the computer is hit by lightning after his default. B can demand payment of the P200,000 penalty. Article 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n) Normally, because the particular penalty in the penalty clause is already specified and hence liquidated, there is no need to prove actual damages. The person is mandated to pay the amount or perform the penalty specified in the agreement of the parties for as long as there is irregular or no compliance with the principal obliga-tion regardless of whether or not the person seeking it suffers damages.6 In Allen vs. Province of Albay,7 the Supreme Court ruled that, if through the act of the owner in a construction contract, the contractor has been or will be prevented from finishing the works on the contractual completion date, the owner shall be deemed to have waived the time limit or the period and the contractor is bound Lambert vs. Fox, G.R. No. L-7991, January 29, 1914, 26 Phil. 588; Manila Racing Club vs. Manila Jockey Club, G.R. No. L-46533, October 28, 1939, 69 Phil. 55; Palacios vs. Municipality, G.R. No. 1598, November 30, 1908, 12 Phil. 140. 7 G.R. No. 11433, December 20, 1916, 35 Phil. 826. 8 State Investment House vs. Court of Appeals, G.R. No. 112590, July 12, 2001, 6

Art. 1229

Obligations Different Kinds of Obligations Sec. 6 — Obligations with a Penal Clause

173

only to finish the construction within a reasonable time, and if there are liquidated damages provided for in the contract in case of delay, a claim for such damages cannot be sustained; and neither could the liquidated damages be restored to be made applicable to an unreasonable length of time. Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) A contract is a source of obligation. It is the law between the parties. Hence, “neither the law nor the courts will extricate a party from an unwise or undesirable contract he or she entered into with all the required formalities and with full awareness of its consequences.”8 One exception to this rule however is the matter of penalties. If the penalty provision is unconscionable, the court may temper, reduce or, in some cases, delete it.9 In Barons Marketing Corp. vs. Court of Appeals,10 the Court reduced the 25% penalty charge to cover the attorney’s fees and collection fees, which was in addition to the 12% annual interest, to 10% for being manifestly exorbitant. Likewise in Palmares vs. Court of Appeals,11 the Court eliminated altogether the payment of the penalty charge of 3% per month for being excessive and unwarranted under the circumstances. It ruled in that case: Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3%) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended — that is, to punish the obligor — will have been sufficiently served by the effects of compounded interest. Under the exceptional cir-cumstances in the case at bar, e.g., the original amount loaned was only P15,000; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular 151 SCAD 411; Development Bank of the Philippines vs. Court of Appeals, G.R. No. 137557, October 30, 2000, 137 SCAD 361, 344 SCRA 492; Opulencia vs. Court of Appeals, 96 SCAD 793, 293 SCRA 385. 9 Spouses Solangon vs. Salazar, G.R. No. 125944, June 29, 2001. 10 91 SCAD 509, 286 SCRA 96. 11 93 SCAD 209, 288 SCRA 422. 12 G.R. No. L-45349, August 15, 1988, 164 SCRA 339.

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Art. 1229

compensatory interest, the penalty interest stipulated in the parties’ promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether.

In Jison vs. Court of Appeals,12 the obligor, in a sale of land, was clearly liable to pay penalty charges. The Supreme Court reduced from P47,312.64 to P23,656.32 the penalty imposed by the Court of Appeals. The Supreme Court said: While the resolution of the contract and the forfeiture of the amounts already paid are valid and binding upon petitioners, the Court is convinced that the forfeiture of the amount of P47,312.64, although it includes the accumulated fines for petitioners’ failure to construct a house as required by the contract, it is clearly iniquitous considering that the contract price is only P55,000.00. The forfeiture of fifty percent (50%) of the amount already paid, or P23,656.32, appears to be a fair settlement. In arriving at this amount the Court gives weight to the fact that although petitioners have been delinquent in paying their amortizations several times to the prejudice of private respondent, with the cancellation of the contract, the possession of the lot reverts to private respondent who is free to resell it to another. x x x The Court’s decision to reduce the amount forfeited finds support in the Civil Code. As stated in paragraph 3 of the contract, in case the contract is cancelled, the amounts already paid shall be forfeited in favor of the vendor as liquidated damages. The Code provides that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable [Art. 2227]. Further, 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 vs. 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, the 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, 13

Pamintuan vs. Court of Appeals, 94 SCRA 556.

Art. 1230

Obligations Different Kinds of Obligations Sec. 6 — Obligations with a Penal Clause

175

where the indemnity provided for is essentially a mere penalty having for its principal object the enforcement of compliance with the contract . . . [Laureano v. 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.

If the penalty clause, which is construed against the one enforcing it,13 is so unconscionable that its enforcement, in effect, constitutes an undue deprivation or confiscation of the property of the obligor, the courts can strike it down as an invalid one.14 Article 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. The penal clause, being merely an accessory obligation, does not invalidate the principal obligation in the event that such penal clause is void or without effect. Being merely accessory to enforce the main obligation, such penal clause could never exist if the main obligation does not exist.15 Hence, the nullity of the principal obligation carries with it that of the penal clause.

14 15

Ibarra vs. Aveyro, 37 Phil. 273. SSS vs. Moonwalk, G.R. No. L-73345, April 7, 1993, 221 SCRA 119.

176

Obligations and Contracts Text and Cases

Chapter 4

EXTINGUISHMENT OF OBLIGATIONS General Provisions

Article 1231. Obligations are extinguished:



(1) By payment or performance;



(2) By the loss of the thing due;



(3) By the condonation or remission of the debt;



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



(5) By compensation;



(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a) Obligations are extinguished through a number of ways. The above provision enumerates the modes provided in the Civil Code. As to the fulfillment of a resolutory condition and rescission based on breach of trust, these have been taken up in Chapter 3, Book IV, Title I of the Civil Code. Prescription is generally provided for from Articles 1106 up to 1155 of the Civil Code but there are other provisions on prescription spread out in other parts of the Civil Code such as in Persons and Family Relations, Donations, Property, and Wills and Succession. Annulment of Contracts is principally discussed in Chapter 7, Title II, Book IV of the Civil Code. Death of a party, however, does not extinguish an obligation unless the obligation is personal in nature or intransmissible. Hence, the lessor’s heirs who inherit the leased property from the deceased lessor cannot set up the claim that the obligation to allow the property under the lease contract in the possession of the lessee has been 176

Art. 1231

Obligations Extinguishment of Obligations

177

extinguished by the death of the lessor, and therefore, being the new owners of the property, they can now eject the lessee. In such a case, death of a party does not excuse non-performance of a contract which involves a property right, and the rights and obligations thereunder pass to the personal representatives of the deceased. Similarly, nonperformance is not excused by the death of the party when the other party has a property interest in the subject matter of the contract.1

When a person commits a crime and when civil liability arises from the commission of the said crime as its only basis, the death of the offender generally extinguishes the crime which, in turn, extinguishes the civil liability. Stated differently, where the civil liability does not exist independently of the criminal responsibility, the extinction of the latter by death ipso facto extinguishes the former, provided, of course, that death supervenes before final judgment.2

Thus, in People vs. Jose,3 the accused forcibly abducted and thereafter raped the victim and was properly convicted in the trial court of the complex crime of forcible abduction with rape and was ordered to pay moral and exemplary damages to the victim. He appealed the decision and therefore the judgment of conviction did not become final. While the case was pending appeal, the accused died. The Supreme Court dismissed the case against him and he was relieved of all personal and pecuniary penalties attendant to his crime. However, if the civil liability neither solely nor originally springs from the crime, the civil liability shall persist despite the extinction of the criminal liability. Hence, in Torrijos vs. Court of Appeals4 where a person bought a property from the accused, and thereafter the accused again sold the property to another person, the accused was charged and convicted of the crime of estafa. He was likewise ordered to pay back as indemnity the amount paid to him by the first buyer plus damages. The accused appealed but died while the case was pending appeal. The Supreme Court said that while his criminal DKC Holdings Corporation vs. Court of Appeals, G.R. No. 118248, April 5, 2002, 329 SCRA 666; Torrijos vs. Court of Appeals, G.R. No. 40336, October 24, 1975, 67 SCRA 394. 2 Torrijos vs. Court of Appeals, G.R. No. L-40336, October 24, 1975, 67 SCRA 394. 3 G.R. No. 28397, June 17, 1976, 71 SCRA 273. 4 G.R. No. L-40336, October 24, 1975, 67 SCRA 394. 1

178

Obligations and Contracts Text and Cases

Art. 1231

liability was extinguished, his civil liability was not extinguished. In this case, the civil liability did not arise solely or originally from the crime itself but also from the contract of sale of the property which was not implemented and also from his deceitful acts which violated the provisions of the Civil Code on Human Relations, namely Articles 19, 20 and 21. The appeal as to the civil liability therefore should be allowed to proceed subject to the pertinent provision of the Rules of Court on substitution of parties.

179

SECTION 1. — Payment or Performance Article 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) Obligation to pay by the delivery of money means obligation to pay by delivering that which the law recognizes as money at the time of payment.1 Under the Civil Code, payment is not exclusively limited to the giving of money. It also includes any manner of performing the obligation with the end in view of extinguishing it. Hence, if A purchases a car from seller B, the former can pay not only in money but also in services provided that B agrees. Also, it must be noted that there are certain presumptions made by law in favor of payment. Thus, 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.2 Also, the receipt of a later installment of a debt, without reservation as to prior installments, shall likewise give rise to the presumption that such installments have been paid.3 These presumptions however can be rebutted by evidence. If the presumption is successfully overturned, the burden of proving that there has been payment rests on the obligor. Hence, it has also been consistently held that the burden of proof to show payment once the debt has been fully established by evidence is on the debtor. Thus in Biala vs. Court of Appeals4 where the plaintiff presented promissory notes which were not fully rebutted, the Supreme Court upheld the indebtedness of the obligor by saying: x x x When the existence of a debt is fully established by the evidence contained in the record, the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such a defense to the claim of the creditor (Chua Chienco vs. Vargas, 11 Phil. 219, cited in Servicewide Specialists, Inc. vs. Hon. Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80 Phil.

1

604. Article 1176 of the 1950 Civil Code. Id. 4 G.R. No. 43503, October 31, 1990, 191 SCRA 50. 2 3

179

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Arts. 1233-1234

Intermediate Appellate Court, et al., G.R. No. 74553, June 8, 1989, 174 SCRA 80). In the case at bar, all the documents evidencing petitioner’s debts are still in the possession of respondent Lee. No receipt or other satisfactory evidence was presented by the petitioner to prove the alleged payment to respondent. Promissory notes in the hands of the creditor are proofs of indebtedness rather than proofs of payment (First Integrated Bonding and Insurance Company vs. Isnani, G.R. No. 70246, July 31, 1989, 175 SCRA 753). x x x

Article 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157) Payment contemplates full satisfaction of the debt or the obligation. Complete delivery or service must comprise everything that is necessary to satisfy the obligation consistent with the object of the same. Hence, the obligation to give a determinate thing includes the delivery of all its accessions and accessories, even though they may not have been mentioned.5 Payment of a loan with stipulated interest is complete only upon payment of the principal and the interest. Anything less than a complete performance may essentially be considered a breach of the obligation. In Philippine National Bank vs. Court of Appeals6 where the PNB paid an alleged attorney-in-fact of the creditor and where there was no proof that the alleged attorneyin-fact was the representative of the creditor, the Supreme Court considered the payment to such person as not effective and further stated: There is no question that no payment had ever been made to private respondent as the check was never delivered to him. When the court ordered petitioner to pay private respondent the amount of P32,480.00, it had the obligation to deliver the same to him. Under Article 1233 of the Civil Code, a debt shall not be understood to have been paid unless the thing or service in which the obligation consists had been completely delivered or rendered, as the case may be.

Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n) Article 1169 of the 1950 Civil Code. G.R. No. 108630, April 2, 1996, 78 SCAD 37, 256 SCRA 44.

5 6

Art. 1234

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

181

Substantial performance of the obligation is not complete performance. It constitutes a breach of the obligation if not for the legal treatment that when such performance occurs, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. In giving the obligee the right to be given damages, the law recognizes the fact that the obligee has been injured and damaged, and that there has been no waiver of such injury or damage by the said obligee. However, the breach in this case is not a material one enough to compel the obligor to rescind the whole obligation. Hence, for the doctrine of substantial per-formance to apply, the part unperformed must not destroy the value or purpose of the contract.7 The substantial performance however must have been done in good faith and, in this regard, it has been opined that the contemporary view, however, is that even a conscious and intentional departure from the contract specifications will not necessarily defeat recovery, but may be considered as one of the several factors involved in deciding whether there has been full performance. The pertinent inquiry is not simply whether the breach was wilfull but whether the behavior of the party in default comports with the standards of good faith and fair dealing. Even an adverse conclusion on this point is not decisive but is to be weighed by other factors, such as the extent to which the owner will be deprived of a reasonably expected benefit and the extent to which the builder may suffer forfeiture, in deciding whether there has been substantial performance.8

In Pagsibigan vs. Court of Appeals9 where the debtor had, in effect, paid the creditor already more than the original amount of the loan (which was secured by a mortgage) due to the imposition of a high interest rate plus penalty charges and where the debtor, as payment of the remaining balance of P3,558.20, had in effect paid P8,650.00 in addition to the P1,000 it also paid, the Supreme Court ruled that there was substantial compliance on the basis of Article 1234 warranting the cancellation and release of the mortgage. It John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition, 1987, West Publishing Company, St. Paul Minn., Page 462, citing Mac Pon Co. vs. Vinsoni Painting & Decorating Co., 423 So.2d 216 (Ala. 1982); E. Martin Schaeffer vs. Kelton, 95 N.M. 182, 619 P.2d 1226 (1980); Klug & Smith Co. vs. William Sommer and Richard Gebhardt, 83 Wis. 2d 378, 265 N.W. 2d 269 (1978). 8 Id., Page 463, citing Vencenzi vs. Cerro, 186 Conn. 612, 442 A.2d. 1352, 1354 (1982). 9 G.R. No. 90169, April 7, 1993, 221 SCRA 202. 7

182

Obligations and Contracts Text and Cases

Art. 1234

likewise quoted the ruling in Angeles vs. Calasanz10 where rescission was not allowed due to substantial compliance by the debtor on the basis again of Article 1234, thus: The breach of the contract adverted to by the defendantsappellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiff-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P3,920.00 excluding the 7 percent interest, the plaintiffs-appellees had already paid an aggregate amount of P4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffsappellees. It would unjustly enrich the defendants-appellants. Article 1234 of the Civil Code which provides that 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, also militates against the unilateral act of the defendants-appellants in cancelling the contract.

The obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. Thus in the Pagsibigan11 case, the substantial compliance in the payment of the loan warranted the cancellation and release of his mortgaged properties after he was still required to pay some penalties. Also, it has been held that the difference between the value of the house as built and the value it would have had had it been constructed strictly according to the contract was the measure of damages.12 Other cases state that the defaulting party will be allowed to recover the contract price less the cost of correction of the defects of the unfinished work.13 In J.M. Tuason & Co., Inc. vs. Javier,14 the Supreme Court upheld the decision of the lower court in giving the defaulting-purchaser an extension of time to pay all his obligations to the seller-plaintiff by applying Article 1234 to the situation of the defaulting purchaser, to wit: G.R. No. L-42283, March 18, 1985, 135 SCRA 323. G.R No. 90169, April 7, 1993, 221 SCRA 202. 12 John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition, 1987, West Publishing Company, St. Paul, Minn., Page 463 in footnote 75, citing White vs. Mitchell, 123 Wash. 630, 213 P. 10 (1923); Venzke vs. Magdanz, 243 Wis. 155, 9 N.W.2d 604 (1943). 13 Id., Page 464 in footnote 75, citing Bellizzini vs. Huntley Estates, Inc., N.Y.2d 112, 164 N.Y.S.2d 395, 143 N.E.2d 802 (1957). 10 11

Art. 1235

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

183

In this connection, it should be noted that, apart from the initial installment of P396.12, paid upon the execution of the contract, on September 7, 1954, the defendant religiously satisfied the monthly installments accruing thereafter, for a period of almost eight (8) years, or up to January 5, 1962; that, although the principal obligation under the contract was P3,691.20, the total payments made by the defendant up to January 5, 1962, including stipulated interest, aggregated P4,134.08; that the defendant has offered to pay all of the installments overdue including the stipulated interest, apart from reasonable attorney’s fees and the costs; and that, accordingly, the trial court sentenced the defendant to pay all such installments, interest, fees and costs. Thus, plaintiff will thereby recover everything due thereto, pursuant to its contract with the defendant, including such damages as the former may have suffered in consequence of the latter’s default. Under the circumstances, We feel that, in the interest of justice and equity, the decision appealed from may be upheld upon the authority of Article 1234 of the Civil Code.

Article 1235. When the obligee accepts the performance knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. (n) Unlike in Article 1234, the substantial compliance contemplated in Article 1235 connotes the waiver of the obligee of damages arising from the breach of contract which resulted in the incompleteness or irregularity of the obligation. By not expressing any protest or objection, the obligee accepts the performance of the obligation as fully complied with despite his knowledge of such irregularity or incompleteness. In Esguerra vs. Villanueva15 where the debtor claimed that, because the creditor received his partial payments, the creditor was to be considered to have accepted the incompleteness of the performance, and therefore the obligation should have been considered complied with pursuant to Article 1235, the Supreme Court said that such interpretation was wrong and explained: Respondents maintain, and the lower court held, that the “receipt” of said sums of P800.00 and P1,400.00 by the Esguerras constituted “acceptance” of the incomplete and irregular G.R. No. L-28569, February 27, 1970, 31 SCRA 829; See also Legarda Hermanos vs. Saldana, G.R. No. L-26578, January 28, 1974, 55 SCRA 324. 15 G.R. No. L-23191, December 19, 1967, 21 SCRA 1314. 14

184

Obligations and Contracts Text and Cases

Art. 1235

performance of respondents’ obligation under the judgment in cases Nos. 1074 and 1075, and that this “acceptance” having been made without any “protest or objection” on the part of the Esguerras, said obligation must be “deemed fully complied with,” pursuant to Article 1235 of the Civil Code of the Philippines. This theory is based upon the premise that “receipt” of a partial payment is necessarily an “acceptance” therefor, within the purview of said provision, and that the Esguerras had not protested or objected to said payment. Such premise is untenable. The verb “accept,” as used in Article 1235, means to take as “satisfactory or sufficient,” or to “give assent to,” or to “agree” or “accede” to an incomplete or irregular performance. The circumstances obtaining in the case at bar clearly show that the Esguerras had neither acceded or assented to said payment, nor taken the same as satisfactory or sufficient compliance with the judgment aforementioned. Indeed, the day immediately following that of the first payment of P800.00 or on December 13, 1962, the Esguerras asked Judge Villanueva to issue the corresponding writs of execution in the two (2) cases. Thus, the Esguerras patently manifested their dissatisfaction with — which necessarily implied an objection or protest to — said partial payment. Moreover, Judge Villanueva must have so understood the reaction of the Esguerras to the same payment, for he was present when it was made, and still he caused the writs to be issued. What is more, the respondents evidently had the same impression, for, otherwise, they would not have paid the additional sum of P1,460.00 on January 5, 1963. Then, again, the insistence of the Esguerras in causing the attached properties of respondents herein to be disposed of, pursuant to the writs of execution, despite said additional payments, leave no room for doubt that the former had never regarded the partial payment as satisfactory compliance with the latter’s obligation under said judgment. After all, the law does not require the protest or objection of the creditor to be made in a particular manner or at a particular time. So long as the acts of the creditor, at the time of the incomplete or irregular payment by the debtor, or within a reasonable time thereafter, evince that the former is not satisfied with or agreeable to said payment or performance, the obligation shall not be deemed fully extinguished. In the case at bar, the Esguerras had performed said acts within such time.

In Tayag vs. Court of Appeals16 where the sellers accepted from the purchaser numerous payments in installment of the purchase price of a particular piece of land after the due date and posterior to

Arts. 1236-1238

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

185

the grace periods provided in the contract without any protest as to the delayed payments and where it was even the purchaser who filed a case for specific performance relative to the sale, and who consigned at the same time the balance of the purchase price, the Supreme Court said that the actuation of the sellers was clearly a waiver of his right to rescind the contract and that, on the basis of Article 1235 of the Civil Code, he was likewise estopped from reneging their commitment on account of acceptance of benefits arising from overdue accounts of the purchaser. Pertinently, if a party fails to interpose any objection to the entries or conditions in an invoice furnished to him by the other party, such failure can be considered as implied acceptance and therefore he will be liable to pay the amount stated therein.17 Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a) Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) Article 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. (n) Payment made by a third person and accepted by the creditor can extinguish an indebtedness or an obligation. The good faith or the bad faith of the third person is immaterial. However, whether or not the one who paid completely acquires the rights of the creditor as against the debtor depends on whether or not the payment has been G.R. No. 96053, March 3, 1993, 219 SCRA 480. Naga Development Corporation vs. Court of Appeals, G.R. No. L-28173, September 30, 1971, 41 SCRA 105; Pan Pacific Company vs. Philippine Advertising Corporation, G.R. No. L-22050, June 13, 1968; Brillo Handicrafts, Inc. vs. Court of Appeals, 73 SCAD 122, 260 SCRA 383. 16

17

186

Obligations and Contracts Text and Cases

Arts. 1236-1238

made without knowledge or against the will of the debtor. Hence, the following situations can arise: 1) If a third person pays the creditor without the knowledge or against the will of the debtor, the third person can only recover from the debtor to the extent that the debtor has been benefited. As to what is beneficial to the debtor can be invoked only by such debtor and not the creditor. Whether or not it is beneficial to the debtor is determined by the law and not the will of the debtor. The beneficial effects must be determined at the time the payment was made.18 The third person cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty. Hence, if A is indebted to B in the amount of P500,000 secured by a real estate mortgage on the house of A, and X pays B the said indebtedness in the amount of P500,000 without the knowledge or against the will of A, X can only recover the amount of P500,000 but he cannot compel the creditor to transfer the mortgage to him. Hence, in case A does not pay X, X cannot fore-close on the mortgage to satisfy his claim. However, if the third party who paid is interested in the obligation, such as a gua-rantor, surety, or co-debtor, legal subrogation is presumed19 and therefore such interested third party-payor can have the right even as to the accessory obligations such as a mortgage. However, the presumption is rebuttable. Legal 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.20 2) If a third person pays the creditor with the know-ledge of the debtor, but over the latter’s objection, then the effect is the same as in No. 1 because the situation is clearly against the will of the debtor. 3) If the third person pays the creditor with the knowledge and consent of the debtor, the third person can recover from the debtor the amount he paid to the creditor. He can likewise compel the creditor to transfer to him any mortgage, guaranty or penalty. In this case there is legal subrogation which 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.21 In the example given in No. 1, X can recover P500,000. X can likewise compel the creditor to transfer to him the real estate mortgage of A so that, if the latter does not pay, X can foreclose on the mortgage RFC vs. Court of Appeals, 94 Phil. 984. Article 1302(3) of the 1950 Civil Code. 20 Article 1303 of the 1950 Civil Code. 18 19

Arts. 1236-1238

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

187

to satisfy his claim. 4) If the creditor accepts payment from a third person because this has been allowed in his contract with the debtor, then clearly the debtor agrees with such payment beforehand, and therefore the effect is the same as in No. 3. 5) If the third person pays the creditor without inten-ding to be reimbursed by the debtor, the obligation is extinguished whether or not the consent of the debtor is obtained. The payment will be treated as a donation which requires the debtor’s consent. A is indebted to B. X pays B the said indebtedness without intending to be paid back by A. This will be treated as a donation and hence A should accept the payment made by X. If A does not consent or accept the payment made by X, the obligation nevertheless will be extinguished in so far as B is concerned.

In Tanguilig vs. Court of Appeals22 where respondent was sued by the petitioner for non-payment of the windmill the latter constructed for the former, and where the respondent claimed that he made payment to another contractor who built the deep well to which the windmill system was connected and therefore such pay-ment must be credited as payment to the petitioner, the Supreme Court ruled that the only contract that existed between the res-pondent and the petitioner was the construction of a windmill and therefore any payment to the contractor of the deep well was ineffective. Moreover, the Supreme Court said that any notion of payment pursuant to Articles 1236 and 1237 cannot be accepted, thus: Respondent cannot claim the benefit of the law concerning “payments made by a third person.” The Civil Code provisions do not apply in the instant case because no creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been established regarding the construction of the deep well. Specifically, witness Pili did not testify that he entered into a contract with petitioner for the construction of res-pondent’s deep well. If SPGMI was really commissioned by petitioner to construct the deep well, an agreement particularly to this effect should have been entered into.

Article 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 21 22

Article 1303 of the 1950 Civil Code. G.R. No. 117190, January 2, 1997, 77 SCAD 647.

188

Obligations and Contracts Text and Cases

Art. 1239

to the provisions of Article 1427 under the Title on “Natural Obligations.” (1160a) Normally, one has the free disposal of the thing due and capacity to alienate it only if he is the owner of the thing or at least he has been given authority by the owner to use the property as payment for the obligation “to give.” Article 1239 contains a clause which says “without prejudice to the provisions of Article 1427 under the Title on “Natural Obligations.” This article provides that when a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith.

Even if a minor owns something, especially those which have significant value, he does not, on his own, have the free disposal of it without the consent of his parents and the courts. As a general rule, any contract entered into by a minor with respect to the alienation of something which he owns is annullable. Article 1427 however states that “a minor between the ages of 18 and 21 years of age” has no right to recover any fungible thing used as payment for an obligation from the creditor who has spent or consumed it in good faith. Under Article 1427 therefore, payment is legally effected even if the said minor has no free disposal of the thing. Article 1427 must be considered repealed by Articles 234 and 236 of the Family Code of the Philippines,23 as amended by Republic Act No. 6809, which lowered the age of majority and emancipation to 18 years of age and which likewise provide that emancipation shall terminate parental authority over the person and property of the child who shall then be qualified and responsible for all acts of civil life, save the exceptions established by existing laws in special cases. Accordingly, a minor must necessarily be 17 years of age or below. There is no more “minor between the ages of 18 and 21 years of age.” If ever the effects of Article 1427 is still to apply, it shall apply only to those 17 years of age and below. Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successors-ininterest, or any person authorized to receive it. (1162a) 23

Executive Order No. 209 which took effect on August 3, 1988.

Art. 1240

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

189

Payment should only be paid to the creditor or the obligee, or his successors-in-interest, or any person authorized to receive it. The phrase “any person authorized to receive it” means not only a person authorized by the same creditor, but also a person authorized by law to do so, such as a guardian, executor or administrator of estate of a deceased, and assignee or liquidator of a partnership or corporation, as well as any other who may be authorized to do so by law.24

In Panganiban vs. Cuevas,25 the Supreme Court said that payment made to a third person, even through error and in good faith, shall not release the debtor of the obligation to pay and will not deprive the creditor of his right to demand payment. If it becomes impossible to recover what was unduly paid, any loss resulting therefrom shall be borne by the deceived debtor, who is the only one responsible for his own acts unless there is a stipulation for the wrongful payment. In Philippine National Bank vs. Court of Appeals26 where payment was made to a person claiming to be the attorney-in-fact of the creditor but no evidence of his authority was ever presented, the Supreme Court ruled that payment was not effected. Also in Bank of the Philippine Islands vs. Court of Appeals27 where the bank, as debtor and despite knowledge of a dispute involving the ownership of the subject deposit, allowed the withdrawal of the said deposit by the heirs of the deceased, who claimed that the money was the deposit of their deceased father and who successfully obtained a judicial resolution from the probate court allowing the withdrawal of the said money, although said resolution did not specifically order the bank to release the money, and where the bank, relying on the judicial resolution, released in good faith the money which turned out as belonging to another, the Supreme Court, in considering that any determination by a probate court that a property was included in the deceased’s estate was only provisional in character and cannot be subject to execution, and that the relationship between a bank and its depositor was one of creditor and debtor (the depositor being the creditor and the bank being the debtor), and hence any with-drawal by the depositor was in effect payment of a debt by a bank, and that the ownership of the subject money was in dispute, and that the debt Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80 Phil. 605, citing Manresa, Civil Code, 4th ed., p. 254. 25 7 Phil 477. 26 G.R. No. L-108630, April 2, 1996, 70 SCAD 37, 256 SCRA 44. 27 G.R. No. 104612, May 10, 1994, 51 SCAD 188, 232 SCRA 302. 24

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Art. 1241

herein was paid to persons who were not the creditors or at least successors-in-interest of the same, ruled that there was therefore no payment effected to extinguish the obligation as the withdrawal was not proper. Specifically, the Supreme Court said: Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto had no right to pay persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. Payment made by the creditor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern.

Article 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 payment. (1163a) For an incapacitated person, such as a minor or an insane, to be able to administer his property and to be able to transact business, there must be a guardian appointed by the courts to handle his affairs. However, the father and the mother shall be the legal guardian of the property of the unemancipated common child without the necessity of a court appointment.28 In the event that payment is made to an incapacitated person who cannot administer his property, the law says that such payment is effective in two situations: first, when he has kept the thing delivered, and, second, in so far as the payment is beneficial to him. Hence, if a minor receives payment from a debtor

Art. 1241

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

191

arising from a contract, payment should be made to his guardians. If the payment is made directly to the minor, such payment shall be voidable. However if the minor, by the time he reaches the age of majority, still has in his possession the thing delivered for payment, then such payment will become valid. This act of still holding on to the thing delivered as payment at the time when the person is already capacitated can be considered as ratification of the payment which cures the irregularity of the same. Also, if the minor uses the payment for activities beneficial to him, such as making use of the money to pay his school tuition fees, then the payment is valid to the extent that he has been benefited. It must be noted that, in paying to an incapacitated person under a voidable contract, the capacitated person, who may have even acted in good faith, is at a disadvantage in that, generally, the capacitated person cannot ask for the annulment of the contract on the basis of the incapacity of the other party29 and, in the event that the contract is annulled, the incapacitated person is not obliged to make restitution except in so far as he has been benefited by the thing or price received by him.30 Payment made to a person who is not the creditor, his successorin-interest, or a person who is authorized to receive payment is not effective payment which will bind the creditor.31 However, if such payment to a third person nevertheless benefits the creditor, such payment shall be effective in so far as it has redounded to the benefit of the creditor. Hence, if A is the debtor of Mr. B, and A, instead of paying B directly, pays half of the indebtedness to B’s brother who is not authorized by B to receive payment, such payment is not valid. However, if the brother of B uses the money to pay B’s indebtedness to somebody, then the payment will become valid because it benefits B. It will extinguish A’s indebtedness in so far as the payment has redounded to the benefit of B which, in this case, is half of the indebtedness. The benefit to the creditor for payment made by the debtor to a third person must always be proven except in three cases. First, if after the payment, the third person acquires the creditor’s rights. Hence, if A is indebted to B for P1,000, and A does not pay B on due date despite proper demand, such that the stipulated interest on the indebtedness accrues in the amount of P100, and A (the debtor) Article 225 of Executive Order No. 209 which took effect on August 3, 1988, otherwise known as the Family Code of the Philippines. 29 Article 1387 of the 1950 Civil Code. 30 Article 1399 of the 1950 Civil Code. 28

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Art. 1241

pays X (a third person) the principal amount, such payment is not effective. However, if there is concrete proof that interest has not yet been paid, and later B (the real creditor) empowers X to also collect the interest of P100 for himself (X) and not for B, then the benefit to the creditor need not be proven. The fact that X acquires the creditor’s right to collect the interest is enough to show that payment to the third person X benefited the creditor B. The P1,000 principal indebtedness therefore must be considered extinguished. If A pays the interest to X, the totality of the obligation is extin-guished. The second instance when benefit to the creditor need not be proven is when the creditor ratifies the payment to the originally unauthorized third person. If, in the same example, B, after learning that payment was made to X (a third person) approves of the payment to the latter, the debt is extinguished. The third instance when benefit to the creditor need not be proven is when, by the creditor’s conduct, the debtor has been led to believe that the third person has authority to receive the payment. Hence, in the same example, if B tells A that he can transact any business or any of his concerns with X, including the P1,000 indebtedness, and later A pays X the indeb-tedness, the obligation is extinguished, as B cannot disclaim the payment to X. By his representation to A, B is estopped from claiming that X had no authority to accept payment. Article 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164) A person in possession of the credit is presumed to own the credit and hence, a debtor who pays such person in good faith shall be released from the debt. Whether the creditor willfully, unintentionally or negligently allowed a third person to possess the credit does not matter in so far as the debtor who paid in good faith is concerned. The risk is always on the creditor provided payment is made by the debtor in good faith. If payment is made to a person who is not in possession of the credit, the debtor will not be released from his obligation regardless of whether or not payment was made in good faith. Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 104612, May 10, 1994, 51 SCAD 188, 232 SCRA 302. 31

Arts. 1242-1244

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

193

In order to protect other creditors of the debtor and to prevent any transaction which might be intended to defraud said creditors, the debtor is prohibited from paying a particular creditor during the effectivity of a court order prohibiting him to make such payment to that particular creditor. In the event that the debtor makes such payment, it shall not extinguish the obligation as the law considers such payment as invalid. Article 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, as act or forbearance cannot be substituted by another act or forbearance against the obligee’s will. (1166a) Unless the prestation is subject to an alternative or facultative condition, a debtor has no choice in the payment of his obligation except by giving what has been agreed upon by the parties. Hence he cannot pay by giving a particular car if the agreement is to give a particular jeep even if the car is more expensive than the jeep. Likewise, if one has been engaged to sing for one night in exchange for an airplane ticket, the obligor cannot fulfill the obligation by dancing for one week even if such dancing is worth more than the singing. Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales. (n) Dation in payment or Dacion en Pago is the delivery and transmission of ownership of a thing by the debtor to creditor as an accepted equivalent of the performance of an obligation.32 Thus in Philippine National Bank vs. Pineda,33 the Supreme Court ruled that the mere repossession of the machinery and equipment for purposes of securing payment of an obligation and not for the purpose of transferring ownership is not dation in payment.34 In Caltex vs. Intermediate Appellate Court,35 the Supreme Court also noted the requisites for a valid dation in payment, thus: In order that there be a valid dation in payment, the following are the requisites: (1) There must be the performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third person; (2) There must be some difference between the prestation due and that which is given

194

Obligations and Contracts Text and Cases

Art. 1245

in sub-stitution (aliud pro alio); (3) There must be an agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due. (3 Castan, Vol. I, 8th Ed., page 283, cited in IV Caguioa, ‘Comments and Cases in Civil Law’ s/s263, page 325; italics supplied)

Also, in the Caltex case36 where the debtor assigned to the creditor its receivables or refunds from the Special Fund Import Payments due from the National Treasury of the Philippines to be applied as payment of the amount of P4,072,683.13 it owed to the creditor and where the amount actually received from the Special Fund by the debtor was more than P4,072,683.13 and where, after the creditor sought the excess of the amount obtained, the debtor released some of the excess minus P510,550.63 which the debtor claimed as interest on the indebtedness, the Supreme Court, in overturning the decision of the Court of Appeals to the effect that the dacion en pago completely extinguished the obligation of the debtor and therefore the amount of P510,550.63 should be returned to the creditor, ruled: The then Intermediate Appellate Court ruled that the three (3) requisites of dacion en pago are all present in the instant case, and concluded that the Deed of Assignment of July 31, 1980 x x x constitutes a dacion in payment provided for in Article 1245 of the Civil Code which has the effect of extinguishing the obligation, thus supporting the claim of private respondent for the return of the amount retained by petitioner. This Court, speaking of the concept of dation in payment in the case of Lopez vs. Court of Appeals (114 SCRA 671, 685 [1982]), among others, stated: “The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished.” (8 Manresa 324; 3 Valerde 174 fn.) From the above, it is clear that a dation in payment does not necessarily mean total extinguishment of the obligation. Philippine National Bank vs. Pineda, G.R. No. L-46658, May 13, 1991, 197 SCRA 1. 33 Id. 34 See also Development Bank of the Philippines vs. Court of Appeals, G.R. No. 118342, January 5, 1998, 90 SCAD 12. 35 G.R. No. 72703, November 13, 1992, 215 SCRA 580. 36 Id. 32

Art. 1245

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

The obligation is totally extinguished only when the parties, by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation. In the instant case, the then Intermediate Appellate Court failed to take into account the following express recitals of the Deed of Assignment — “That Whereas, ASSIGNOR has an outstanding obliga-tion with ASSIGNEE in the amount of P4,072,682.13 as of June 30, 1980, plus any applicable interest on overdue account. (p. 2, Deed of Assignment) “Now therefore in consideration of the foregoing premises, ASSIGNOR by virtue of these presents, does hereby irrevocably assign and transfer unto ASSIGNEE any and all fund and/or Refund of Special Fund Payments, including all its rights and benefits accruing out of the same, That ASSIGNOR might be entitled to, by virtue of and pursuant to the decision in BOR Case No. 80-123, in payment of ASSIGNOR’s outstanding obligation plus any applicable interest charges on overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE, and ASSIGNEE does hereby accepts such assignment its favor.” (p. 2, Deed of Assignment) (Italics supplied) Hence, it could easily be seen that the Deed of Assignment speaks of three (3) obligations — (1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2) the applicable interest charges on overdue accounts; and (3) the other avturbo fuel lifting and deliveries that assignor (private respondent) may from time to time receive from assignee (Petitioner). As aptly argued by petitioner, if it were the intention of the parties to limit or fix respondent’s obligation to P4,072,682.13; they should have so stated and there would have been no need for them to qualify the statement of said amount with the clause “as of June 30, 1980 plus any applicable interest charges on overdue account” and the clause “and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE.” The terms of the Deed of Assignment being clear, the literal meaning of its stipulations should control (Article 1370, Civil Code). In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all. (Rule 130, Sec. 9, Rules of Court) Likewise, the then Intermediate Appellate Court failed to take into consideration the subsequent acts of the parties which clearly show that they did not intend the Deed of Assignment to totally extinguish the obligation — (1) After the execution of

195

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Art. 1245

the Deed of Assignment on July 31, 1980, petitioner continued to charge respondent with interest on its overdue account up to January 31, 1981. This was pursuant to the Deed of Assignment which provides for respondent’s obligation for “applicable interest charges on overdue account.” The charges for interest were made every month and not once did respondent question or take exception to the interest; and (2) In its letter of February 16, 1981, respondent addressed the following request to the petitioner: “Moreover, we would also like to request for a consideration in the following: 1)

Interest charges be limited to December 31, 1980 only; and

2)

Reduction of 2% on 18% interest rate p.a.

“We are hoping for your usual kind consideration on this matter.” In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Art. 1253, Civil Code). The foregoing subsequent acts of the parties clearly show that they did not intend the Deed of Assignment to have the effect of totally extinguishing the obligations of private respondent without payment of the applicable interest charges on the overdue account.

Dacion en pago is different from pactum commisorium. In dacion en pago, before the creditor becomes the owner of the property collateralized to secure the debt, an intervening agreement subsequent and independent from the original contract is entered into by the creditor and the debtor to have the property collateralized in the original agreement as payment of the debt, thereby extinguishing the obligation. In pactum commisorium, the parties agree, generally in one single contract, that, in the event that the debtor fails to pay the debt, the mortgaged or pledged property of the debtor shall automatically be appropriated or owned by the creditor. Pactum commisorium is void in accordance with Article 2088 of the Civil Code which provides: “The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.” This is in accordance with the rule that any property made as security for a loan must always be foreclosed or subjected to a sale by public bidding in case it shall be used to satisfy the debt wholly or partially of the debtor. The elements of pactum commissorium are: 1) there must be a creditor-debtor relationship between the parites; 2) the property of the debtor was used as security for the loan, either as a mortgage or a pledge; and

Art. 1245

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

197

3) there was automatic appropriation of the property upon failure of the debtor to pay the obligation as provided in their agreement.37 In Bustamante vs. Rosel,38 the debtor and the creditor entered into a loan agreement where it was stipulated that, in case of the default of the debtor, the creditor has the option to buy the collateral for a total consideration of P200,000 inclusive of the borrowed amount and interest thereon. The Supreme Court said that the stipulation is void and said: In this case, the intent of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the preagreed consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the collateral in the event of non-payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.

In Development Bank of the Philippines vs. Court of Appeals39 where the debtor executed deeds of assignment of leasehold rights on certain properties, the Supreme Court said that such assignments were not dacion en pago because they were not designed to directly extinguish an obligation but was furnished to constitute as a security. Neither were the assignments pactum commissorium as they did not provide for the automatic ownership of the properties in case of non-payment. They were likewise not payment by cession because there was only one creditor. The Supreme Court ruled that such assignments were in effect mortgages. Article 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 in consideration. (1167a) Obligations must be complied with in good faith and any act which tends to implement an obligation in a manner which is not consistent with its goals or purposes should always be discouraged. Hence, if an obligor, who is not rich, is bound to deliver any rented car Bustamante vs. Rosel, G.R. No. 126800, November 29, 1999, 116 SCAD 390, 319 SCRA 413; Nakpil vs. Intermediate Appellate Court, 44 SCAD 71, 225 SCRA 456; Development Bank of the Philippines vs. Court of Appeals, 90 SCAD 12, 284 SCRA 14; Uy Tong vs. Court of Appeals, 161 SCRA 383. 38 G.R. No. 126800, November 29, 1999, 116 SCAD 390, 319 SCRA 413. 37

198

Obligations and Contracts Text and Cases

Arts. 1246-1247

to be used at a very simple wedding ceremony and the obligee knows the financial capacity of the obligor, such obligee cannot demand that the obligor comply with his obligation by delivering a multi-million Rolls Royce which could only be rented at such amount which the obligor cannot afford. On the other hand, the obligor cannot deliver a car which is so old that it would not start unless it is pushed. Article 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. (1168) The creditor usually benefits from the obligation. It is always in his favor that the debtor gives, does some service or not do some service. As such, the creditor must, as much as possible, fully take the benefit by not spending in the extra-judicial expenses for the payment or performance of the obligation. With respect to judicial cost, the Rules of Court shall apply. Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestation in which the obligation consists. Neither may the debtor be required to make partial payments. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a) In the case of Nasser vs. Cuevas40 where, on the basis of a compromise agreement, a number of obligors agreed to pay a lawyer his legal fees by way of real property and cash and for this purpose, it was expressly stipulated that a charging lien for attorney’s fees would be established on the properties to secure payment of the legal fees “provided that upon full payment of the corresponding liability of a party, the lien on his/her share is extinguished” and where, upon demand of the lawyer for payment, the obligors contended that the aforequoted clause gave them the right to pay in installment, the Supreme Court rejected this interpretation and ruled that the said clause evidently contemplates the probability that the heirs obliged to pay Canlas’ fees, the lien on his share of the estate is thereby extinguished — a quite obvious proposition, to be sure. The 39

G.R. No. 118342, January 5, 1998, 90 SCAD 12, 284 SCRA 14.

Art. 1248

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

199

clause cannot be construed as granting to any of the obligors, by implication, the option to pay in installments, or as impliedly binding the obligee to accept payment by parts. The legal principle, in any event, is that “the creditor cannot be compelled partially to receive the prestations in which the obligation consists” unless “there is an express stipulation to that effect,” in much the same way that the debtor may not “be required to make partial payments.”

Partial payment however can be made if there is an express stipulation by the parties allowing the same or if the debt is partially liquidated and partially unliquidated. For example, a debtor is bound to perform an obligation by making payment in the amount of P1,000 and by also delivering whatever money he will get from the estate of his already deceased father, the creditor may demand and the debtor may pay the P1,000 without waiting for the determination of the amount of money the debtor will get from the deceased father’s estate. Even if there is no express stipulation, partial payment can likewise be effective if the creditor accepts such partial payment and benefits from it. In Barons Marketing vs. Court of Appeals,41 the Supreme Court said that a creditor cannot be considered in delay if he refuses to accept partial performance because, unless otherwise provided by law or stipulated by the parties, a creditor cannot be compelled to accept partial performance; however, if good faith necessitates acceptance or if the creditor abuses his right in not accepting, the creditor will incur in delay if he does not accept such partial perfor-mance. Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. (1170) Under the old Republic Act 529, otherwise known as the Uniform Currency Act, it was prohibited to use foreign currency in connection with certain contracts in the Philippines. In General Insurance 40

G.R. No. L-41607, August 21, 1990, 188 SCRA 812.

200

Obligations and Contracts Text and Cases

Art. 1249

& Surety Corporation vs. Union Insurance Society of Canton, Ltd.,42 it was held that though the stipulation for the use of foreign currency was void, the contract or transaction was nevertheless valid. Republic Act No. 529 has already been repealed by Republic Act Number 8183 which took effect on July 6, 1996. This law specifically provides that all monetary obligations shall be settled in Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.

A promissory note is a document where a promise to pay is made by the debtor to the creditor. Under the Negotiable Instruments Law, a promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer.43 A bill of exchange is an unconditional order in writing addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order to bearer.44 A check is a bill of exchange drawn on a bank payable on demand.45 The law is very specific that, in fulfillment of an obligation by payment of money, only payment in cash will extinguish the obligation. If promissory notes, bills of exchange or checks are given to pay a debt, such debt will not be extinguished unless these mercantile documents are encashed. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (Citing Sec. 189, Act 2031 on Neg. Insts.; Art. 1249, Civil Code; Bryan London Co. vs. American Bank, 7 Phil. 225; Tan Sunco vs. Santos, 9 Phil 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor.46

However, in Far East Bank and Trust Company vs. Diaz Realty Inc.,47 the Supreme Court said that, if payment by way of a fullyfunded check were offered or tendered and the obligee accepts the check as payment after the obligor’s manifestation that it had been given to settle an obligation, such obligee shall be estopped from later on denouncing the efficacy of such tender of payment. This is especially 41 42

G.R. No. 126486, February 9, 1998, 91 SCAD 509, 286 SCRA 96. G.R. Nos. 30475-76, November 22, 1989, 179 SCRA 530.

Art. 1249

Obligations Extinguishment of Obligations Sec. 1 — Payment or Performance

201

true when the said check was in fact deposited by the obligee and was converted in cash. In National Marketing Corporation vs. Federation of United Namarco Distributors, Inc.,48 the phrase “when through the fault of the creditor they have been impaired” was explained by the Supreme Court, thus x x x The clause of Article 1249 relative to the impairment of the negotiable character of the commercial paper by the fault of the creditor, is applicable only to instruments executed by third persons and delivered by the debtor to the creditor, and does not apply to instruments executed by the debtor himself and delivered to the creditor.

Also, a check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay.49 Under normal banking practice, a check becomes stale if it has not been presented to the bank for a period of six months from the date of the said check. However, if a creditor allows his checks to become stale, it does not mean that the debtor who drew the check will necessarily be discharged from his debt, or that his obligation will be extinguished. It is only when the creditor does not present the check for payment and thereafter the bank upon which the check has been drawn collapses or fails to the point that it cannot meet demands for payment, will the debtor be discharged. “If a bank or banker still remains in good credit and is able to pay the check, the drawer will still remain liable to pay the same, notwithstanding many months may have elapsed since the date of the check and before the presentment for payment and notice of the dishonor. So, if the drawer, at the date of the check or at the time of the presentment of it for payment, had no funds in the bank or banker’s hands, or if, after drawing the check and before its presentment for payment and dishonor, he had withdrawn his funds, the drawer would remain liable to pay the check, notwithstanding the lapse of time.”50 43

Section 184, Act No. 2031 otherwise known as the Negotiable Instruments

Law. Id., Section 126. Id., Section 185. 46 Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, G.R. No. 72110, November 16, 1990, 191 SCRA 411; Philippine Airlines vs. Court of Appeals, G.R. No. L-49188, January 30, 1990. 47 G.R. No. 138588, August 23, 2001; see also Gutierrez vs. Carpio, 53 Phil. 334. 48 G.R. No. L-22578, January 31, 1973, 49 SCRA 238. 49 Section 186, Act No. 2301 otherwise known as the Negotiable Instruments Law. 44 45

202

Obligations and Contracts Text and Cases

Art. 1250

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n) In Filipino Pipe and Foundry Corp. vs. NAWASA,51 the Supreme Court explained the application of Article 1250, to wit: The only issue before Us is whether, on the basis of the continuously spiraling price index indisputably shown by the plaintiff, there exists an extraordinary inflation of the currency justifying an adjustment of defendant appellee’s unpaid judgment obligation to the plaintiff-appellant. Extraordinary inflation exists when “there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. (Tolentino, Commentaries and Jurisprudence on the Civil Code, Vol. IV, P. 284) An example of extraordinary inflation is the following description of what happened to the Deutschmark in 1920: “More recently, in the 1920’s Germany experienced a case of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. Dollar. And as prices went up rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. Dollar!” (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]). As reported, “prices were going up every week, then every day, then every hour. Women were paid several times a day so that they could rush out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of the windows to their waiting Story on Promissory Notes, Sec. 498, cited in Aguedo F. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Volume 1, 1978 edition, Philippine Graphic Arts, Inc., Caloocan City, page 425. 51 G.R. No. L-43446, May 3, 1988, 161 SCRA 32; Serra vs. Court of Appeals, G.R. No. 103338, January 4, 1994, 47 SCAD 55, 229 SCRA 60. 52 Singson vs. Caltex, G.R. No. 137798, October 4, 2000, 134 SCAD 219, 342 SCRA 91; Lantion vs. National Labor Relations Commission, 181 SCRA 513; Commissioner of Public Highways vs. Burgos, 96 SCRA 831. 50

Art. 1250

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wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billion.” (Sidney Rutberg, “The Money Balloon,” New York: Simon and Schuster, 1975, p. 19, cited in Economics, An Introduction by Villegas & Abola, 3rd ed.) While appellant’s voluminous records and statistics proved that there has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot be considered “extraordinary.” It is simply a universal trend that has not spared our country.

The effects of extraordinary inflation or deflation cannot be applied without an official declaration thereof by competent authorities,52 such as the Central Bank53 or Bangko Sentral. The Department of Finance may likewise make the declaration. Without such declaration, creditors cannot demand an increase of what is due them.54 In Velasco vs. Manila Electric Co.55 where the appellant claimed that the damages awarded to him arising from tort was inadequate considering the present high cost of living and therefore should be adjusted in accordance with Article 1250, the Supreme Court rejected the applicability of the said Article ruling thus: It can be seen from the employment of the words “extraordinary inflation and deflation of the currency stipulated” that the legal rule envisages contractual obligations where a specific currency is selected by the parties as the medium of payment; hence it is inapplicable to the obligations arising from tort and not from contract, as in the case at bar, besides there being no showing that the factual assumption of the article has come into existence. x x x.

In Commissioner of Public Highways vs. Burgos,56 the Supreme Court, in ruling that Article 1250 did not apply to expropriations by the government of property in the exercise of its eminent domain powers explained: It is clear that the foregoing provision applies only to cases where a contract or agreement is involved. It does not apply where the obligation to pay arises from law, independent of contract. The taking of private property by the Government in the exercise of its power of eminent domain does not give rise to a contractual obligation. x x x Ramos vs. Court of Appeals, G.R. No. 119872, July 7, 1997, 84 SCAD 280, 275 SCRA 167. 54 Mobil Oil Philippines, Inc. vs. Court of Appeals, 180 SCRA 651. 53

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Moreover, the law as quoted, clearly provides that the value of the currency at the time of the establishment of the obligation shall be the basis of payment which, in cases of expropriation, would be the value of the peso at the time of the taking of the property when the obligation of the Government to pay arises. It is only when there is an “agreement to the contrary” that the extraordinary inflation will make the value of the currency at the time of payment, not at the time of the establishment of the obligation, the basis for payment. In other words, an agreement is needed for the effect of an extraordinary inflation to be taken into account to alter the value of the currency at the time of the establishment of the obligation which, as a rule, is always the determinative element, to be varied by agreement that would find reason only in the supervention of extraordinary inflation or deflation.

The phrase “value of the currency” refers to the purchasing power of the currency. It is often referred to as “par value,” “legal exchange rate,” or “par of exchange.” In Gonzalo L. Manuel Co. vs. Central Bank,57 the Supreme Court discussed the significance and meaning of the “par value” of a currency, to wit: x x x It signifies “the amount it takes one currency (for example, based on gold) to buy a unit in another currency (also based on gold) that is, how pieces of the one unit (or their gold content) are necessary to equal the gold content of the other unit.” “The par value of a currency is the value as officially defined in terms of gold or, under the silver standard, where there was such a standard, in terms of silver. The ‘par of exchange’ therefore applies only between countries having a fixed metallic content for their currency unit. It would be possible to define a currency’s par value in terms of another currency such as the dollar or pound sterling, but usage confines the meaning of par to the official value in terms of gold.”58

Article 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. G.R. No. L-18390, December 20, 1971, 42 SCRA 556. G.R. No. L-36706, March 31, 1980, 96 SCRA 831. 57 G.R. No. L-21789, April 30, 1971, 38 SCRA 533. 58 See also Del Rosario vs. Shell, G.R. No. L-28776, August 19, 1988, 164 SCRA 556. 55 56

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In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a) To further ensure certainty in the fulfillment of an obligation by way of payment, the law provides for the place where payment is to be made. The parties can agree as to where the payment shall be made. If there is no stipulation and the obligation is to give a determinate thing, payment shall be made in the place where the thing is located at the time of the constitution of the obligation. In any other case, the place of payment is the domicile of the debtor. For the exercise of civil rights and the fulfillment of civil obligations, the domicile of natural persons is the place of their habitual residence.59 The additional expenses attendant in making payment shall be borne by the debtor in the event that he changes his domicile in bad faith, such as if the change was made precisely for the creditor not to locate him, or after he has incurred in delay.

Subsection 1. — Application of Payments Article 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 payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a)

The rules contained in Articles 1252 to 1254 of the Civil Code

Article 49 of the 1950 Civil Code. Magdalena Estates, Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966, 18 SCRA 967. 59 60

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apply to a person owing several debts of the same kind to a single creditor.60 Similar to a case where the obligation is subject to an alternative obligation or prestation, the choice as to which debt the payment is to be applied is given to the debtor. For this purpose, the debtor must make a declaration as to which debt should the payment be applied. It must be pointed out that the rule on application of payment by the debtor must conform to the general rules on payment provided for from Articles 1232 up to 1251. Thus, if the debtor makes a declaration as to the particular debt (from among a number of debts) to which his payment is to be applied, the creditor can validly refuse such declaration or application if the payment is to be applied to a debt

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which will only partially pay the particular indebtedness. This is so because, according to Article 1233, payment must, as a general rule, be always completely delivered or rendered, and, according to Article 1248, the creditor cannot be compelled partially to receive the prestation in which the obligation consists. The debtor must apply the payment to an indebtedness which, through such application, shall be completely extinguished. Application of payment cannot be made on debts which are not yet due, unless the parties agree or when the application of payment is made by the party, which may either be the debtor or the creditor, for whose benefit the term has been constituted. For example, A is indebted to B in the amount of P1,000, P2,000 and P900 which will not earn interest if paid on January 2, 1997 but will earn interest from February 2, 1997, the latter date being the second due date if the debtor chooses not to pay on January 2, 1997. Clearly the period prior to January 2, 1997 is for the benefit of the debtor, and therefore, if he decides to give B P500 before January 2, 1997, the choice of application belongs to him. If the creditor is agreeable to be partially paid, the debtor can apply the P500 to the P1,000, P2,000 or P900 depending on his choice even if the indebtedness is not yet due. It is clear that in such a case, whether he pays it on or before January 2, 1997 will not make any difference in so far as the debtor or creditor is concerned because no interest is imposed. The law likewise provides that if the debtor 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. It must be noted that the debtor must not only merely receive the receipt but he must accept the receipt. Thus, if A is indebted to B for P1,000, P2,000, and P900, and A pays B P500 without mentioning as to which debt the P500 will be applied and if B, the creditor, is agreeable to any partial payment, and issues a receipt indicating therein that the P500 shall be applied to the P1,000 debt, and A readily accepts the said receipt, A cannot later complain that the P500 should have been applied to the P2,000 debt unless there exists a cause to invalidate the contract in connection 18 SCRA 967, citing Baltazar vs. Lingayen Gulf Electric Co., G.R. Nos. L-16236-38, June 30, 1965. 207

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with the indebtedness in the amount of P1,000. This is based on the doctrine of estoppel. However, if the indebtedness has been obtained through fraud or intimidation which is a cause to annul the contract, the debtor is not estopped from questioning the application. Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173) Article 1253 of the Civil Code is merely directory, and not mandatory.61 Although interest only attaches to the principal, the payment of both principal and interest, in effect, constitutes two payments by the debtor. In fact according to the law, the receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that the interest has been paid.62 Such is the presumption because it is a rule that payment of the principal shall not be deemed to have been made until the interests have been covered. However, the presumption is rebuttable. Also the right to apply payment to the interest first can be waived as in the case of Pagsibigan vs. Court Appeals63 where the creditor, in receiving numerous partial payments from the debtor, applied the said payments to the principal, interest and the penalties with the principal getting the bulk of the application and where, even in some of the recent partial payments, the said payments were applied to the principal despite the fact that the creditor knew that interest was still due, the Supreme Court said that such action of the creditor is a waiver of his rights under Article 1253. Also, in Rapanut vs. Court of Appeals,64 the Supreme Court said: After pondering on the meaning of Article 1253, we reach the conclusion that in a contract involving installment payments with interest chargeable against the remaining balance of the obligation, it is the duty of the creditor to inform the debtor of the amount of interest that falls due and that he is applying the installment payments to cover said interest. Otherwise, the creditor cannot apply the payments to the interest and then hold the debtor in default for non-payment of installments on the principal.

In Magdalena Estates, Inc. vs. Rodriguez65 where a surety only bound himself solidarily liable to the extent of P5,000 only and paid such an amount to the creditor when the debtor defaulted, and where Article 1176 of the 1950 Civil Code. G.R. No. 90169, April 7, 1993, 221 SCRA 202. 64 G.R. No. 109680, July 14, 1995, 62 SCAD 801, 246 SCRA 323. 65 G.R. No. L-18411, December 17, 1966, 18 SCRA 967. 62 63

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the creditor still claimed interest from the debtor who resisted paying such interest on the ground that, in accepting payment of the principal from the surety in the amount only of P5,000, the creditor waived his right to Article 1253, the Supreme Court allowed the claim of interest by the creditor and stated that Article 1253 is not applicable in the case as the liability of the surety does not extend beyond the terms of the agreement and that the provision on application of payment cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular; his liability is confined to such obligation, and he is entitled to have all payments made applied exclusively to said application and to no other. Besides, Article 1253 of the Civil Code is merely directory, and not mandatory. Inasmuch as the appellee (creditor) cannot protest for non-payment of the interest when it accepted the amount of P5,000.00 from the Luzon Surety Co., nor apply a part of that amount for the interest, we cannot now say that there was a waiver or condonation on the interest due.

Article 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a) If there is no indication as to which debt the payment is to be applied, it shall be applied to the most onerous debt provided that it is due. The “most onerous” debt means the indebtedness which exacts the heavier burden from among many. Thus, a debt with interest is more onerous than a simple debt without interest. A debt with an acceleration clause enabling the creditor to demand payment of the whole obligation if the debtor defaults in even one amortization or installment is more onerous than a debt payable in installment but without an acceleration clause. A debt secured by a mortgage is more onerous than one which is not. For example, A owes G a due debt of P30,000 with an interest rate of 12% per annum, another due debt of P22,000 without interest but secured by his silver watch, and G.R. No. 116805, June 22, 2000, 128 SCAD 312, 334 SCRA 186. Lopez vs. Court of Appeals, G.R. No. L-33157, June 29, 1982, 114 SCRA 671. 68 Article 155 of Executive Order No. 209 which took effect on August 3, 1988, otherwise known as the Family Code of the Philippines. 66 67

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lastly P24,000 collateralized by the house of the debtor and payable in equal installment with the first installment already due and with an acceleration clause. If A makes a payment of P600 without any indication where the latter amount should be applied and the creditor agrees to any partial payment, it will be applied to the most onerous debt which in this case is the P24,000 because, aside from the imposition of an interest rate it has an acceleration clause which will make the whole amount due. In Espina vs. Court of Appeals,66 where a debtor paid an amount without particularly declaring as to whether it should be applied to an indebtedness resulting from unpaid back rentals for the condominium unit he was occupying, or to his obligation arising from his contract to pay the purchase price of such condominium unit which he decided to buy, the Supreme Court ruled that the payment should be applied to the unpaid back rentals as the same were more onerous. The law also provides that if the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. Thus, if A owes B three due debts each of which amounts to P30,000, a payment of P9,000.00 by A, without any indication as to where it is to be applied and where the creditor agrees to partial payment, shall be equally applied to each of the debts. Hence, each debt will be reduced by P3,000 each. But if A owes B three due debts of different amounts of P10,000.00, P20,000.00 and P30,000 and the creditor agrees to partial payment, a payment of P6,000 will be applied in the proportion of 1:2:3. Thus, P1,000 will be applied to the P10,000 debt; P2,000 to the P20,000 debt; and P3,000 to the P30,000 debt.

Subsection 2. — Payment by Cession Article 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. (1175a) Cession is another mode of extinguishing a debt. It is also a form ofArticle payment. Cession under Article 1255 presupposes financial 69 158 of Executive Order No. 209 which took effect on August 3, 1988,

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difficulties on the part of the debtor67 and refers to a situation where the debtor owes two or more creditors. At the least, there are as many debts as there are creditors. It is possible however that from among the many creditors, the debtor may owe any of them two or more debts. Hence, there can be situations when the debts are more than the number of creditors. When the law states that the debtor may cede or assign his property, it refers not only to the cession of one or a number of properties of the debtor but to all of the properties of the debtor which are susceptible of and not exempted by law from being alienated. An example of a property which is generally exempted by law from being executed or sold is the family home.68 However, it may be sold provided that it strictly follows the requirements of law, such as the procurement of the written consent to the sale of the person who constituted the home as a family home and the latter’s spouse and a majority of the beneficiaries of legal age of the family home.69 Just like in any contract, the creditors must agree to the cession under Article 1255. Among the creditors, they must likewise agree as to which debt will be paid first or as to the proportioning of the payment of the money obtained through cession for the payment of debt. If there is no agreement, the applicable law on preference of

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credit will apply.70 The creditors then will administer the totality of the ceded property without the ownership being transferred to them. They will be authorized to sell or alienate the property for purpose of obtaining enough resources or money to pay off their respective debts. Once cession is made, the obligation of the debtor shall only be extinguished up to the extent that the proceeds are able to satisfy the claims of the creditors. Hence, it is possible that the money obtained from the alienation of the property is not enough to satisfy the claims of the creditors. In such case, the creditors can still demand payment for the deficiency. The agreements on the effect of the cession made between the debtor and his creditors shall be governed by special laws. One of the special laws is the Insolvency Law which, if applicable, shall place the assets of the debtor for judicial liquidation for the purpose of paying off his obligations.

Subsection 3. — Tender of Payment and Consignation Article 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 consig-nation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: 1)

When the creditor is absent or unknown, or does not appear at the place of payment;

2)

When he is incapacitated to receive the payment at the time it is due;

3)

When, without just cause, he refuses to give a re- ceipt;

otherwise known as the Family Code of the Philippines. 70 See Title XIX, Chapters 1 to 3, Articles 2236 up to 2251 of the 1950 Civil Code of the Philippines. 71 G.R. No. 111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565. 72 G.R. No. L-28269, August 15, 1969, 29 SCRA 1. 73 G.R. No. 57630, March 13, 1992. 212

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4)

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When two or more persons claim the same right to collect;

5) When the title of the obligation has been lost. (1176a) Article 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) Article 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

74 75

G.R. No. 138588, August 23, 2001. G.R. No. L-58961, June 28, 1983, 123 SCRA 160.

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shall also be notified thereof. (1178) Tender of payment and consignation apply in any contract where there is an obligation to pay. Thus, in Adelfa Properties, Inc. vs. Court of Appeals71 where it was ruled that in a contract to sell, the requisites of a valid tender must be complied with, the Supreme Court said: The mere sending of a letter by the vendee expressing the intention to pay, without the accompanying payment, is not considered a valid tender of payment. Besides, a mere tender of payment is not sufficient to compel private respondents to deliver the property and execute the deed of absolute sale. It is consignation which is essential in order to extinguish petitioner’s obligation to pay the balance of the purchase price. The rule is different in case of an option contract or in legal redemption or in a sale with right to repurchase, wherein consignation is not necessary because these cases involve an exercise of a right or privilege (to buy, redeem, or repurchase) rather than the discharge of an obligation, hence tender of payment would be sufficient to preserve the right or privilege. This is because the provisions on consignation are not applicable when there is no obligation to pay. A contract to sell, as in the case before us, involves the performance of an obligation, not merely the exercise of a right or a privilege. Consequently, performance may be effected not by tender of payment alone but by both tender and consignation.

In Vda. De Quirino vs. Palarca72 where the lessee was given “the right and option to buy the leased premises for P12,000,” the Supreme Court ruled that consignation cannot apply in such a case and stated: x x x the consignation referred to in Article 1256 of our Civil Code is inapplicable to the present case, because said provision refers to consignation as one of the means for the payment or discharge of a “debt,” whereas the lessee was not indebted to the lessor for the price of the leased premises. The lessee merely exercised a right of option and had no obligation to pay said price until the execution of the deed of sale in his favor, which the lessor refused to do.

In Badayos vs. Court of Appeals73 where the exercise of a right 214

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of redemption is involved, the Supreme Court said: In the exercise of the right of redemption, consignation is not necessary for the reason that the relationship that existed between vendor and vendee a retro, was not one of debtorcreditor. The vendor a retro is exercising a right, not discharging an obligation, hence a mere tender of payment is sufficient to preserve the right of a vendor.

In Far East Bank & Trust Company vs. Diaz Realty, Inc.74 where the issue was whether or not the tender of a check is a valid tender of payment, the Supreme Court ruled: For a valid tender of payment, it is necessary that there be a fusion of intent, ability and capability to make good such offer, which must be absolute and must cover the amount due. Though a check is not legal tender, and a creditor may validly refuse to accept it if tendered as payment, one who in fact accepted a fully funded check after the debtor’s manifestation that it had been given to settle an obligation is estopped from later on denouncing the efficacy of such tender of payment.

In the case of Soco vs. Militante,75 the Supreme Court had the opportunity to discuss the requirements of law for an effective tender and consignation, thus: Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. (Limkako vs. Teodoro, 74 Phil. 313). 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 had 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 (Article 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil Code); and (5) Id., Page 178. Id., Page 181. 78 G.R. Nos. 106467-68, October 19, 1999, 114 SCAD 475, 317 SCRA 24. 76 77

215

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that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). Failure in any of these requirements is enough to render a consignation ineffective. (Jose Ponce de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311). Without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation as a payment is void. (Limkako vs. Teodoro, 74 Phil. 313) In order to be valid, the tender of payment must be made in lawful currency. While payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made (Desbarats vs. Vda. De Mortera, L-4915, May 25, 1956), the fact that in previous years payment in check was accepted does not place its creditor in estoppel from requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept. 30, 1958). Thus, tender of a check to pay for an obligation is not a valid tender of payment thereof (Desbarats vs. Vda. De Mortera, supra). See Annotation, The Mechanics of Consignation by Atty. S. Tabios, 104 SCRA 174-179. Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extra-judicial, while consignation is necessarily judicial and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. (8 Manresa 325)

In the same Soco case, the Supreme Court likewise stated the reason for giving the first notice and the second notice, to wit: In this connection, the purpose of the notice is in order to give the creditor the opportunity to reconsider his unjustified refusal and to accept payment thereby avoiding consignation and the subsequent litigation. This previous notice is essential to the validity of the consignation and its lack invalidates the same. (Cabanos vs. Calo, 104 Phil. 1058; Limkako vs. Teodoro, 74 Phil. 313)76 The reason for the notification to the persons interested in the fulfillment of the obligation after consignation had been made, which is separate and distinct from the notification which is made prior to the consignation is stated in Cabanos vs. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058, thus: “There 79 80

G.R. No. L-24791, August 29, 1969, 29 SCRA 160. Riesenbeck vs. Court of Appeals, G.R. No. 90359, June 9, 1992.

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should be notice to the creditor prior and after the 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.”77

In De Mesa vs. Court of Appeals,78 where the debtor in the trial court filed a motion to allow it to just consign all future quarterly installments without need of formal tender of payment and service of notices to the creditor who was duly notified of such motion, the Supreme Court ruled that the circumstances of the case and the order of the court granting the motion can be considered substantial compliance with the requirement of notice to the creditor. The Supreme Court said: Petitioner next argues that there was no notice to her regarding OSSA’s consignation of the amounts corresponding to the 12th up to the 20th quarterly installments. The records, however, show that several tenders of payment were consistently turned down by the petitioner, so much so that respondent OSSA found it pointless to keep on making formal tenders of payment and serving notices of consignation to petitioner. Moreover, in a motion dated May 7, 1987, OSSA prayed before the lower court that it be allowed to deposit by way of consignation all the quarterly installments, without making formal tenders of payment and serving notice of consignation, which prayer was granted by the trial court in the Order dated July 3, 1982. The motion and the subsequent court order served on the petitioner in the consignation proceedings sufficiently served as notice to petitioner of OSSA’s willingness to pay the quarterly installments and the consignation of such payments with the court. For reasons of equity, the procedural requirements of consig-nation are deemed substantially complied with in the present case.

The law likewise states that consignation alone shall produce the same effect in five cases. The first case is when the creditor is absent or unknown, or does not appear at the place of payment. Hence, if A is indebted to B in the amount of P1,000 payable on April 11, 1997 at the Manila Hotel, and on the said date, A is ready to pay, but B is not at the Manila Hotel, then consignation can immediately be made in court without need of looking for B and tendering payment. The second case is when the creditor is incapacitated to receive the payment at the time it is due. Hence, if A is indebted to B who

81

G.R. No. L-17076, January 29, 1962, 4 SCRA 40.

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later on becomes insane, tender of payment need not be made as the said insane creditor might not even understand what the debtor is doing. A can immediately consign the money in court so that he will be relieved of any responsibility such as the running of interest. The third case is when, without just cause, the creditor refuses to give a receipt. A receipt is a proof of payment. It is under-standable that a debtor must protect himself by all means possible and one of these protections is the receipt which he can demand from the creditor upon payment precisely to evidence the fact of payment. However, if there is just cause for the creditor not to issue the receipt, tender of payment must still be made. For instance, if the debtor insists from the creditor that the latter issue a receipt for the full amount of the indebtedness and the creditor refuses to issue such a receipt because there has been no full payment, there is justifiable ground for the creditor not to issue the receipt and therefore tender of payment is still necessary. The fourth case is when two or more persons claim the same right to collect. There is no use tendering payment to any of the two or more persons who claim the right to collect because it may turn out that the person to whom payment is given might not be lawfully entitled to the payment. The fifth case is when the title of the obligation has been lost. For the protection of the debtor, he may immediately go to court if title is lost because, it is better for the court to declare that the obligation has been extinguished than just pay the creditor without recovering the title to the debt or at least without declaring or annotating in the said title that the debt is already ineffective because of the payment. Article 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1179) The creditor shall be responsible for the expenses of consignation because it was his failure to accept payment that led to the consignation. In Miranda vs. Reyes79 where the obligee or debtor tendered payment of the price for redeeming the property to the creditor-defendant a few days before the period of redemption was to expire and the latter immediately accepted the tender and sent his letter of acceptance by mail and where the creditor-defendant, still waiting for the reply, filed a case for consignation, and where the obligor, instead of just withdrawing the money deposited in court, filed an answer claiming that there was no need of consignation as he

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accepted the tender and consequently litigated the case, the Supreme Court ruled on the validity of the consignation and said: The law must be reasonably interpreted and the realities of the situation in each case taken into account so that the purpose of the law may not be defeated. It is true the defendant sent his letter of acceptance on September 24, 1964, but it was not received by the plaintiffs until September 29. In the meantime the redemption period of one year was about to expire. The plaintiffs, therefore, did the most prudent thing under the circumstances by filing the action and depositing the redemption money in court. The defendant bewails this step as “unduly dragging x x x (him) to an expensive and protracted litigation.” This is a pharisaical attitude to adopt. If the litigation has become expensive and protracted the defendant has nobody to blame but himself, for the consignation was no less an effective and timely tender of payment than the one which had been extrajudicially made, and all that the defendant had to do was to withdraw the amount deposited, without going through the rigmarole of filing an answer and contesting the validity of the deposit just because there had been no unjustified refusal to accept the said tender.

Article 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180) Once there is already a finding that the consignation is proper, the debtor should be released from the obligation. He can ask the court to order the cancellation of the obligation. Consequently, the court will order that the creditor accepts the money or thing consigned as payment. The consignation has a retroactive effect. The payment is deemed to have been made at the time of the deposit of the money in court or when it was placed at the disposal of the judicial autho-rity.80 In Gamboa vs. Tan 81 where the debtor filed a case for consignation and deposited the amount of money offered as payment to the creditor who previously refused to accept, and where the court granted the withdrawal of the amount deposited upon motion of the debtor, and where the creditor, aware of the said withdrawal, filed

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an answer stating that the money was not enough, and that he was willing to accept the money as partial payment and likewise sought the nullification of the withdrawal as he was not given notice of the motion regarding the same, the Supreme Court ruled that the withdrawal was proper as it was pursuant to the second paragraph of Article 1260 and said: We think the above article gives the depositor the right to withdraw the amount deposited at any time before the creditor accepts it (not to speak of the court’s order declaring it to be proper). Such right is clear in this case, because the statement of the creditor came late, and, what is more, the acceptance was partial. This last consideration renders unnecessary to discuss the effect of failure to give the creditor any notice of withdrawal, since Cancio’s statement was practically a rejection of the offer of payment.

Prior to any withdrawal of the debtor of the amount, the creditor may accept the amount consigned either unconditionally or with reservation. An acceptance with reservation is valid. Thus in Riesenbeck vs. Court of Appeals,82 the Supreme Court ruled that, in a consignation case, the creditor’s acceptance of the consigned amount but with an express reservation that he is not admitting the correct-ness of the obligation and therefore he is also reserving his right to claim the balance in accordance with what is prayed for in his answer and counterclaims is valid. The reservation did not completely extinguish the obligation. If there is no reservation made, it means that the creditor waives his other claims under the contract. Upon the declaration of the court that the consignation is valid, the debtor cannot anymore claim that he is the owner of the said amount, and hence he cannot withdraw it anymore. Article 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a) When there is already a finding by the court that there has been proper consignation and consequently the obligation has been cancelled, it is incumbent upon the creditor to obtain from the court

Art. 1261

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the money deposited as payment. However, if the obligation having been extinguished, the debtor decides to withdraw the thing deposited with the creditor’s consent, there is therefore nothing which the creditor can obtain from the court. In this case, both the debtor and the creditor, in effect, agreed to revive the indebtedness. However, the creditor, because of his consent to the withdrawal, will lose preference to the thing previously deposited to specifically pay-off his debt. Anybody who has an interest in it can also go after it and the creditor cannot anymore say that it has been precisely consigned to answer for the credit in his favor. Moreover, his solidary debtors, guarantors and sureties shall be released as they likewise benefit from the extinguishment of the obligation and the debtor cannot unilaterally revive the obligation without their consent.



82

G.R. No. 90359, June 9, 1992.

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SECTION 2. — Loss of the Thing Due Article 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a) When the object of the prestation is a determinate thing, the debtor shall be excused from performing his obligation if such thing is lost without his fault. However, if it is his fault or if it has been lost after the debtor has incurred in delay, the debtor shall answer for the resulting damages. In Federation of United Namarco Distributors, Inc. vs. National Marketing Corporation (NAMARCO)1 where the debtorappellant NAMARCO refused to deliver the goods to the creditorfederation after due demand, and, as a result, some of the goods were destroyed, the Supreme Court said that the debtor-appellant had to bear the risk of loss and said: Appellant also claims that the trial court erred in allowing the appellee to take delivery of 445 cases of oranges only, instead of 2,400 cases, in effect charging it (appellant) the loss of 1,955 cases. The claim is unmeritorious. Let it be remembered that as early as January 25, 1960, appellant had refused to deliver the imported commodities to appellee. It is true that on March 2, 1960, the FEDERATION, upon filing its complaint, obtained a writ of preliminary injunction to prevent NAMARCO from disposing of these goods through other distributors or retailers, but the FEDERATION was willing to accept, and in fact had been requesting the delivery of the same to it or its members for sale to G.R. No. L-17819, March 31, 1962, 4 SCRA 867. G.R. No. 116896, May 5, 1997, 82 SCAD 377.

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the general public, but NAMARCO refused to make such delivery. It was only on March 26, 1960 that the trial court upon appellee’s motion, ordered the release to it of, among others, “2,400 cases of mandarin oranges provided they are in good condition, or only so much thereof that are in good condition.” Consequently, the FEDERATION could not be blamed for refusing to take delivery of the oranges that had in the meantime become spoiled during the period from January 25 to March 26. In the circumstances, it is but proper that appellant must bear the loss (the rotting of 1,955 cases of oranges) occasioned by its own fault. Appellant asserts that the trial court likewise erred in holding it liable for storage charges from March 2, 1960 (date of filing of appellee’s complaint in the lower court) of the commodities covered by the contract of sale in question. The argument merits no serious consideration. It is true that under the contract of sale the handling and storage charges of the commodities covered thereby are for the account of appellee FEDERATION. However, the storage charges that became due from the date the goods had to remain in the warehouse because of the refusal of NAMARCO to deliver the same to the FEDERATION which had been demanding the surrender thereof to it, can not be charged to the FEDERATION, but to NAMARCO as the one who, in the performance of its obligation under the contract, has been guilty of delay in the delivery of the goods subject matter thereof.

With respect to liability even for fortuitous event, or when the nature of the obligation requires an assumption of risk, this has been fully discussed under Article 1174. In these cases, because the thing is lost already, damages can be obtained from the debtor. Thus, if the specific and particular car to be delivered by the debtor is worth P500,000, and it is lost through a fortuitous event, but the parties stipulate that the debtor, even under such circumstances, will still be liable, the creditor cannot insist on the delivery of the specific car because it has already been lost, but he can seek damages in the amount of P500,000 which is the value of the car. Article 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n) A generic thing is not a determinate thing. A generic thing, which is the object of the prestation cannot really be lost or destroyed unless the whole class of said thing is destroyed, hence the obligation subsists despite the loss or destruction of one thing in the said class.

Arts. 1264-1265

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For example, if the debtor is bound to deliver a ball without any specification, he may deliver any kind of ball. If he buys one and subsequently loses it through a fortuitous event, his obligation is not extinguished. The debtor simply has to buy another ball. Article 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n) A loss may be complete or partial. If the loss is complete, Articles 1262 and 1263 will apply. If the loss is partial and the circumstances so warrant, the court may consider it as a complete loss which extinguishes the obligation. This can only happen if the partial loss is so important so as to totally affect the whole object of the obligation. However, if it is considered as a complete loss, then the rules under Articles 1262 and 1263 must apply. For example, if the debtor is under an obligation to deliver a specific computer consisting of the CPU with specific drives and particular hard disks together with a very specialized screen peculiarly made for the said computer, with a special keyboard made to respond only to said screen, and the said screen is lost through a fortuitous event before the debtor has incurred in delay, there is clearly a partial loss which renders the computer system totally useless. In this case, the debtor can go to court and declare that the partial loss has extinguished his obligation to deliver the computer. Article 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. (1183a) As a general rule, it is presumed that the loss of the thing is due to the fault of the debtor who possesses it. The presumption arises from the fact that it was lost while it is in the possession of the debtor. If the debtor is not in the possession of the thing when it is lost, the presumption does not arise. If the presumption applies, it is incumbent upon the debtor to prove that the loss is not through his fault or it has been caused by a fortuitous event. However, he will still be responsible for a fortuitous event if it has been so stipulated by the parties, if the law so states, or if the nature of the obligation involves an assumption of risk, and if the obligor delays or has promised the

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same thing to two or more persons who do not have the same interest. In any event, the presumption does not apply even if the loss happens at the time the thing is in the possession of the debtor if, at the time of the loss, an earthquake, storm, or other natural calamity exists. Article 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (1184a) This article refers to the prestation “to do.” In Philippine National Construction Corporation vs. Court of Appeals2 where the lessee in a lease contract sought its release from paying the rentals and from the said contract itself invoking Article 1266 and claiming that, due to the change in political climate after the EDSA revolution and change in financial condition, it was not able to use the property for the purpose for which it intended to utilize it, i.e., to use the leased premises as a site of a rock crushing plant, the Supreme Court rejected such prayer for the lessee’s release by stating: It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force of law between the parties and should be complied with in good faith. But the law recognizes exceptions to the principle of the obligatory force of contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: “The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.” Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to obligations “to do,” and not to obligations “to give.” An obligation “to do” includes all kinds of work or service; while an obligation “to give” is a prestation which consists in the delivery of a movable or an immovable thing in order to create a real right or for the use of the recipient, or for its simple possession, or in order to return it to its owner. The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation “to give;” hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event and causes mentioned by the petitioner are not the legal or physical impossibilities contemplated in the said article. Besides, petitioner failed to state specifically the circumstances brought about by the “abrupt change in the political climate” except the alleged prevailing uncertainties in Taylor vs. Caldwell, King’s Bench, 1863, 3 B. & S., 122 Eng. Rep. 309, cited in

3

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government policies on infrastructure projects.

When the prestation becomes legally or physically impossible without the fault of the obligor, it shall be considered a loss which extinguishes the obligation. Thus, if the obligor is bound to build a fence along the property of the obligor and the said property is expropriated by the government which bars everybody from entering the same, the obligation has become legally impossible to do and hence it is extinguished. Also, in a case3 where a debtor was bound to do a concert and to provide musical bands and other entertainment only and exclusively in a particular Music Hall and the parties contracted on the basis of the continued existence of the said Music Hall, which however burned down without the fault of either the debtor or the creditor, before the concert can begin, the obligation of the debtor to render a concert has become physically impossible to perform and therefore the same was extinguished. Article 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n) Difficulty alone does not excuse the debtor from fulfilling his prestation. This has been referred to as “subjective impossibility” which means that “a promissor’s duty is never discharged by the mere fact that the supervening events deprive him of the ability to perform, if they are not such as to deprive other persons, likewise, of ability to render such a performance.”4 However, Article 1267 creates a new norm by providing that 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. This is still within the penumbra of the rule on impossibility of performance although the obligation may not technically and necessarily be impossible. The law lays down the requisite for this article to apply and they are the following: a) the prestation has become so difficult to render, and b) the service has become manifestly beyond the contemplation of the parties. These requirements must exist together. This is an innovation under the 1950 Civil Code and its rationale has been aptly stated as follows: Cases and Materials on Contracts, by E. Allan Farnsworth and William F. Young, 3rd edition, Mineola New York, The Foundation Press, Inc., 1980, Page 953. 4 United States vs. Wegematic Corp., 360 F.2d 674, cited in Cases and Materials on Contracts, by E. Allan Farnsworth and William F. Young, 3rd edition, Mineola New York, The Foundation Press, Inc., 1980, Page 972. 5 Naga Telephone Co. vs. Court of Appeals, G.R. No. L-107112, February 24, 1994, 48 SCAD 539, 230 SCRA 351. 6 G.R. No. 116896, May 5, 1997, 82 SCAD 377.

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The general rule is that impossibility of performance releases the obligor. However, it is submitted that 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 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.5

For example, if an obligor is bound to deliver 40 cases of mangoes from the Philippines to South Africa by ship at the cost of $30,000 on or before April 11, 1997 and the usual route known to the parties in going to South Africa has been suddenly closed prompting the obligor to look and eventually pass through another route, which is likewise closed, again leaving the obligor with no other choice but to attempt passing through another alternative route four times longer than the usual route, and which route could be traversed by its vessel without damaging itself and without entailing enormous additional and unreasonable cost (i.e., the obligor would have to charter other vessels for the continuing voyage), and also without subjecting the fruits to possible harm as they would most likely spoil along such a long trip, the obligation in this case has clearly become so difficult to do and is manifestly beyond their contemplation. The obligation should be deemed extinguished. In Philippine National Construction Corporation vs. Court of Appeals6 where the lessee in a lease contract sought its release from paying the rentals and from the said contract itself invoking Article 1266 and the theory of rebus sic stantibus from where Article 1267 was based, claiming that, due to the change in political climate after the EDSA revolution and change in financial condition, it was not able to use the property for the purpose for which it intended to utilize it, i.e., to use the leased premises as a site of a rock crushing plant, the Supreme Court rejected the application of the concept of rebus sic stantibus by stating: The principle of rebus sic stantibus neither fits in with the facts of the case. 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. This theory is said to be the basis of Article 1267 of the Civil Code, which provides:

ART. 1267. When the service has become difficult as to be

Id. G.R. No. L-44349, October 29, 1976, 73 SCRA 637. 9 G.R. No. 124221, August 4, 2000, 131 SCAD 303, 337 SCRA 298. 7 8

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manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole and in part. This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country after the EDSA Revolution and its poor financial condition “rendered the performance of the lease contract impractical and inimical to the corporate survival of the petitioner.” This Court cannot subscribe to this argument. As pointed out by the private respondents: It is a matter of record that petitioner PNCC entered into a contract with private respondents on November 18, 1985. Prior thereto, it is of judicial notice that after the assassination of Senator Benigno Aquino on August 21, 1983, the country has experienced political upheavals, turmoils, almost daily mass demonstrations, unprecedented inflation, peace and order deterioration, the Aquino trial and many other things that brought about the hatred of people even against crony corporations. On November 3, 1985, Pres. Marcos, being interviewed live on U.S. television announced that there would be a snap election scheduled for February 7, 1986. On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the contract of lease with private respondents with open eyes of the deteriorating conditions of the country. Anent petitioner’s alleged poor financial condition, the same will neither release petitioner from the binding effect of the contract of lease. As held in Central Bank vs. Court of Appeals (139 SCRA 46, citing Repide vs. Afzelius, 39 Phil. 190), cited by private respondents, mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense to an action for specific performance.



In the case of Naga Telephone Co., Inc. vs. Court of Appeals,7 a

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contract was entered into between the petitioner and the respondent where they agreed that the petitioner shall use the electrical posts of the respondent in Naga City free of charge, but the contract can be terminated if the respondent is forced to stop its business. As consideration, the petitioner agreed to install free of charge 10 telephone connections to the respondent. At the time of the execution of the contract, it was the contemplation of the parties that the posts were only to be used in Naga City because, at that time the capability of respondent was very limited. This was so even if at that time there were many subscribers in Naga City for telephone lines, who cannot be served because of this contemplated limited capability. After 11 years of the effectivity of the contract, the contract became so burdensome to the petitioner. This fact was shown by the following: the telephone cables strung by the respondent had become heavier with the increase in the volume of their subscribers, worsened by the fact that their linemen bore holes through the posts at which points those posts were broken during typhoons, and that a post costs as much as P2,630. While there was an increased use of the posts, there was no corresponding increase in the telephone connections to the respondent. Petitioners also began using respondent’s telephone posts outside Naga City. The contract became so one-sided to the prejudice of the respondent. The Supreme Court agreed with the lower court and the Court of Appeals, that Article 1267 was applicable under the situation as the continued enforcement of the contract had manifestly gone beyond the contemplation of the parties so much so that the respondent should be released from the contract to avoid petitioner’s unjust enrichment at respondent’s expense. With respect to petitioner’s contention that, because the contract did not involve the rendition of service or a personal prestation and it was not for future service with future unusual change, Article 1267 should not apply and therefore the ruling in the Occena vs. Jabson8 case should be followed, the Supreme Court said: Article 1267 speaks of “service” which has become difficult. Taking into consideration the rationale behind this provision, the term “service” should be understood as referring to the “performance” of the obligation. In the present case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the contract be for

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future service with future unusual change. x x x Considering the practical needs and the demands of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of the party prejudiced. In a nutshell, private respondent in the Occena case filed a complaint against petitioner before the trial court praying for modification of the terms and conditions of the contract that they entered into by fixing the proper shares that should pertain to them out of the gross proceeds from the sales of subdivided lots. We ordered the dismissal of the complaint therein for failure to state a sufficient cause of action. We rationalized that the Court of Appeals misapplied Article 1267 because: “x x x respondent’s complaint seeks not release from the subdivision contract but that the court ‘render judgment modifying the terms and conditions of the contract . . . by fixing the proper shares that should pertain to the herein parties out of the gross proceeds from the sale of subdivided lots of subject subdivision.’ The cited article (Article 1267) does not grant the courts (the) authority to remake, modify or revise the contract or to fix the division of shares between the parties, so as to substitute its own terms for those covenanted by the parties themselves. Res-pondent’s complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent’s complaint and the circumstances therein arrived, the courts cannot even in equity grant the relief sought.” The ruling in the Occena case is not applicable because we agree with respondent court that the allegations in private respondent’s complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267. We, therefore, release the parties from their correlative obligations under the contract. x x x

In Magat, Jr. vs. Court of Appeals,9 respondent won a bidding to operate a fleet taxi cabs with radio transceivers. For this purpose, respondent ordered certain radio transceivers through the petitioner. The petitioner ordered from Japan. It was agreed that the radio transceivers will be delivered within 60 to 90 days notice from the respondent of the assigned radio frequency taking note of government regulations. The radio frequency was assigned but later the government, because of the imposition of martial law, denied the application for a permit to import the radio transceivers. Due to this

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denial, the respondent was likewise unable to obtain the necessary letter of credit. Respondent did not continue with the contract. The Supreme Court rejected the case of petitioner for breach of contract by thus ruling: Guerrero (respondent) testified that a permit to import the transceivers from Japan was denied by the Radio Control Board. He stated that he, together with Aligada, Victorino (petitioner), and a certain John Dauden personally went to the Radio Control Office, and were denied a permit to import. They also went to the Office of the President, where Secretary Ronaldo B. Zamora explained that radios were “banned like guns because of martial law.” Guerrero testified that this prevented him from securing a letter of credit from the Central Bank. This testimony was not rebutted. The law provides that “when the service (required by the contract) has become so manifestly beyond the contemplation of the parites, the obligor may also be released therefrom, in whole or in part. Here, Guerrero’s inability to secure a letter of credit and to comply with his obligation was a direct consequence of the denial of the permit to import. For this he cannot be faulted.

Article 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) If A stole a watch from B and was criminally charged for such an offense, and the watch was lost through a fortuitous event, the debtor-accused must still pay the price of the watch. The loss will not excuse him from being responsible as he did not have the right to possess the same in the first place. If A however offered back the watch to B, and the latter refused to accept, the risk of loss of the watch would be on B except if there was justifiable reason not to accept it as, for example, it had already been severely damaged. Article 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186)

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This is another provision designed to protect the interest of the creditor. Hence, if A buys a house from G, and the house, which is insured, is accidentally burned by a fortuitous event prior to the demand for its delivery by A, the obligation of G to deliver the house is extinguished. However, in the event that A has already paid the price of the house, he can seek reimbursement of the insurance proceeds due from the insurance company.

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SECTION 3. — Condonation or Remission of the Debt Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) Condonation is an act of liberality. It connotes that there is a previous demandable obligation but the obligee or the creditor decides not to enforce the debtor’s prestation anymore. It requires however the implied or express consent of the obligor. In effect, condonation or remission of a debt is a donation of the obligee’s credit in favor of the debtor. The remission or condonation is governed by the rules on inofficious donation. A donation is inofficious if it turns out that the thing or amount donated (remitted or condoned) encroaches or infringes on the legitime or successional rights of the heirs of the condoning creditor. Thus, if a creditor condones the debt of a debtor in the amount of P50,000, and later on, the creditor gives birth to a child at a time when her properties are worth only P10,000, her overall estate (including the remitted P50,000) at the time of the birth of the child is therefore P60,000. The legitime of the child as provided in the Civil Code is one-half (1/2) of the estate1 which, in this example, is P30,000. Hence, technically the free portion which can be given to any person not necessarily an heir is also P30,000. Thus, since the child will only get P10,000 because this is the only existing property out of an estate of P60,000, the remission in favor of the debtor is inofficious to the extent of P20,000. The remission clearly infringes on the legitime of the child. The debtor must therefore be made to pay P20,000 out of the P50,000 remitted debt. Hence, the child shall get P20,000 in addition to his P10,000 which will complete his legitime. Article 888 of the 1950 Civil Code. Biala vs. Court of Appeals, G.R. No. 43503, October 31, 1990, 191 SCRA 51; First Integrated Bonding and Insurance234 Company vs. Isnani, G.R. No. 70246, July 1 2

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The rules on the reduction of inofficious donations are provided in the Civil Code thus: Article 750.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. Article 771. 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. Article 772. Only those who at the time of the donor’s death have a right to the legitime and their heirs and successors in interest may ask for the reduction of inofficious donations. Those referred to in the preceding paragraph cannot renounce their right during the lifetime of the donor, either by express declaration, or by consenting to the donation. The donees, devisees and legatees, who are not entitled to the legitime and the creditors of the deceased can neither ask for the reduction nor avail themselves thereof. Article 773. If, there being two or more donations, the disposable portion is not sufficient to cover all of them, those of the more recent date shall be suppressed or reduced with regard to the excess. Article 760. Every donation inter vivos, made by a person having no children or descendants, legitimate or legitimated by subsequent marriage, or illegitimate, may be revoked or reduced as provided in the next article, by the happening of any of these events: (1) If the donor, after the donation, should have legitimate or legitimated or illegitimate children, even though they be posthumous; (2) If the child of the donor, whom the latter believed to be dead when he made the donation, should turn out to be living;

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Art. 1270

(3) If the donor should subsequently adopt a minor child. Article 761. In cases referred to in the preceding article, the donation shall be revoked or reduced insofar as it exceeds the portion that may be freely disposed of by will, taking into account the whole estate of the donor at the time of the birth, appearance or adoption of a child. Article 762. Upon the revocation or reduction of the donation by the birth, appearance or adoption of a child, the property affected shall be returned, or its value if the donee has sold the same. If the property is mortgaged, the donor may redeem the mortgage, by paying the amount guaranteed, with a right to recover the same from the donee. When the property cannot be returned, it shall be esti-mated at what it was worth at the time of the donation. Article 763. The action for revocation or reduction on the grounds set forth in Article 760 shall prescribe after four years from the birth of the first child, or from his legitimation, recognition or adoption or from the judicial declaration of filiation, or from the time information was received regarding the existence of the child believed dead. This action cannot be renounced, and is transmitted, upon the death of the donor, to his legitimate and illegitimate children and descendants.

The law likewise provides that express condonation shall, furthermore, comply with the forms of donation. Title III, Chapter 2 of the Civil Code on Donations pertinently provides: Article 748. The donation of a movable may be made orally or in writing. 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. Article 749. 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

Arts. 1271-1272

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237

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.

Article 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) The most common private document evidencing a credit is a promissory note. A promissory note in the hands of the creditor is proof of indebtedness rather than proof of payment.2 If a creditor delivers a promissory note to the debtor, the former, in effect, furnishes the debtor the evidence which could prove the indebtedness of such debtor in his favor. It therefore implies that he is no longer interested in the debt. The law provides that such act will be considered a renunciation. Thus, if A is indebted to B in the amount of P1,000.00 evidenced by a promissory note executed by A, which is in the possession of B who later voluntarily gives it to A, such delivery implies a renunciation of the debt. However, in the event that the remission of the P1,000 is claimed to be void because it is inofficious, the heirs of A can show that A’s possession of the promissory note is not a result of a remission made by A but a result of A’s payment of the obligation. In case of payment, the promissory note is always taken by the debtor. Article 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189) The fact that the document evidencing the debt is in the possession of the debtor gives rise to the refutable presumption that such document has been delivered by the creditor voluntarily. However, this presumption can be overturned by clear evidence to the contrary. 31, 1989, 175 SCRA 753. 3 Article 2085 of the 1950 Civil Code. 4 Articles 1316 and 2093 of the 1950 Civil Code.

238

Obligations and Contracts Text and Cases

Arts. 1273-1274

Article 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190) The existence of the accessory obligation depends on the existence of the principal obligation. But the existence of the principal obligation does not depend on the accessory obligation. If the principal obligation is extinguished, it carries with it the extinguishment of the accessory obligation but not vice-versa. If A is indebted to B, and the indebtedness is guaranteed by X, and B told X that he will not anymore claim on X’s guarantee as the said creditor is renouncing the same, X is released but the principal obligation of A still subsists. B can still collect from A. However, if B renounces the indebtedness of A, B cannot go against X because the latter’s guarantee, being an accessory obligation, is extinguished with that of the principal obligation. Article 1274. It is presumed that the necessary obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a) A pledge involves a movable property constituted by the owner of such property who has free disposal of it, to secure the fulfillment of a principal obligation3 and such contract is perfected only upon the delivery of the thing pledged to the creditor.4 A pledge is an accessory contract. A person may even pledge his property not for his own indebtedness but for the indebtedness of another person. Hence, in a contract of pledge, the creditor or the obligee must be in possession of the thing pledged. If it is in the possession of the debtor or of the third person who owns it, there is a presumption that the accessory obligation has been condoned or remitted. However, this is a refutable presumption.

239

SECTION 4. — Confusion or Merger of Rights Article 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a) A creditor cannot collect a debt from himself. A debtor cannot pay a debt to himself. Thus, according to the law, the obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. Thus, if the son owes his father P10,000.00, and the father dies leaving as part of his estate, inherited by the son, the amount of P10,000 owed by the son to his father. There is a merger of creditor and debtor. The son cannot collect his indebtedness from himself as there is confusion which extinguishes the obligation. In Chittick vs. Court of Appeals1 where the former wife filed a complaint against her father for support in arrears and for her share in the conjugal partnership, and where, after the former wife was substituted in the case by her children upon her death, the father likewise died, the Supreme Court dismissed the complaint stating that since the Chittick children as heirs of respondent creditor are also the heirs of the petitioner-debtor, the obligation sued upon had been extinguished by the merger in their persons of the character of creditor and debtor of the same obligation.

Article 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193) An indebtedness by a debtor and guaranteed by a third person is extinguished if there is a merger of the characters of the debtor and creditor. In this case, the guarantor is clearly benefited because G.R. No. L-25350, October 4, 1988, 166 SCRA 219.

1

239

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Obligations and Contracts Text and Cases

Art. 1277

the extinguishment of the principal obligation extinguishes the accessory obligation of guarantee. Indeed, the debtor, in whose person the character of the creditor has merged, cannot collect from the guarantor claiming that he (the debtor) is now at the same time the creditor because it is legally quite absurd to tell the guarantor that, after exhausting all available remedies to collect the indebtedness from himself, he failed to collect it, and thus, he is now going against the guarantor for collection of the amount owed. However, the merger of the persons of the guarantor and the creditor does not extinguish the obligation. It merely extinguishes the accessory obligation. Also, a merger of the characters of the debtor and the guarantor extinguishes the accessory obligation, but not the principal obligation. Article 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194) Joint debtors owe the creditor only their share in the whole indebtedness and the creditor can only collect from a joint debtor his share in the total indebtedness. Thus, if A, B and C jointly owe X P3,000 and there is a merger of the characters of X and C, the obligation is extinguished in so far as the P1,000 share of C in the indebtedness is concerned but not as to the rest. X can still collect P1,000 each from A and B. If the obligation of the debtors is solidary and there is merger of the characters of C and X, the obligation is extinguished.2 However, if A pays the whole indebtedness to X prior to the merger of the characters of C and X, A can still collect from X and likewise from B their respective shares in the indebtedness which is P1,000 each.3

Article 1215 of the 1950 Civil Code. Article 1215 in relation to Article 1219 of the 1950 Civil Code.

2 3

241

SECTION 5. — Compensation Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195) Article 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4)

That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196) Compensation is a mode of extinguishing an obligation whereby the parties are mutually debtors and creditors of each other such that if they exactly owe each other the same amount and the requisites under Article 1279 are present, they do not have to make actual payment to each other in the sense that they do not have to hand money or the things due to each other, as payment is made by operation of law. Hence, if A is indebted to B in the amount of P2,000, and B is, in turn, indebted to A in the amount of P2,000, and both indebtedness are due without any third person claiming the same, the obligation is extinguished as there is legal compensation. If they mutually owe each other the unequal amounts, then there is compensation up to the extent that the amounts are covered by their mutual outstanding obligations. 241

242

Obligations and Contracts Text and Cases

Arts. 1278-1279

The first requisite for legal compensation is that each one of the obligors be bound principally and that each of them be at the same time a principal creditor of the other. The parties must be mutual creditors and debtors of each other. Thus in Soriano vs. Compana General de Tabacos de Filipinas1 where the defendant extended a crop loan to the plaintiff who secured payment of the loan by, among others, the sugarcane crops that would be planted and harvested, and where the defendant, after receipt of some export sugar from the plaintiff, shipped the same to the United States for it’s (defendant’s) own account and benefit, and where, later on, the defendant resisted the claim of the plaintiff to be credited an amount of P51,528.01 representing the amount of the sugar it delivered to the defendant, by invoking automatic compensation because the plaintiff was its debtor due to his crop loan account, and at the same time a creditor of the defendant for the proceeds of the sale of plaintiff’s sugar. The Supreme Court rejected the theory of legal compensation because the parties were not mutual debtors and creditors of each other considering the fact that, by its own admission, the sugar was sold not for the account of the plaintiff but for the account of the defendant and therefore defendant could not have been a debtor of the plaintiff. Also in Republic vs. Mambulao Lumber Company,2 where the said company contended that the reforestation charges collected under Republic Act No. 115 and not used in the area subject of its timber license, could be applied in compensation of the sum due from it as forest charges, the Supreme Court ruled that the reforestation charges were in the nature of taxes and therefore can never be refunded even if the reforestation charges were not actually used in the area subject of its timber license, and, because they were taxes, the reforestation charges were not debts for purposes of legal compensation to make the parties therein mutual creditors and debtors of each other. The Supreme Court even quoted tax authorities to prove its point, thus: “A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they proper subject of recoupment since they do not arise out of contract or transaction sued on x x x.” (80 C.J.S. 73-74)

“The general rule, based on grounds of public policy is wellG.R. No. L-17392, December 17, 1966, 18 SCRA 999. G.R. No. L-17725, February 28, 1962, 4 SCRA 622.

1 2

Arts. 1278-1279

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243

settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the parties but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required. x x x If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer’s claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion.” (47 Am. Jur. 766-767)

The second requisite for legal compensation is 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. Clearly, there can be no compensation if one debt involves the payment of money and the other the delivery of a particular thing. However, there can be compensation involving things which are determined such as any computer but not a specific determinate thing such as a computer with serial number 10325. In this sense, “consumable” used by the law must be interpreted as “fungible” which is susceptible of substitution. In Ong vs. Court of Appeals,3 where compensation is sought for an obligation of a debtor to deliver a sum of money to a creditor and another obligation of the latter to deliver zippers to the former, the Supreme Court said that there can be no compensation, thus: Now, to the only legal question raised, to wit, the alleged compensation between the reciprocal obligations of the parties. Fermin claims the balance of his debt is deemed set off by the price of the zippers in the possession of Mariano, who had the obligation to return them to him. The flaw in this argument is the assumption that Mariano had such an obligation, which has not been proved by Fermin. It has already been found that Mariano has not retained them nor did he have any need for them as he was in a different business. He had not bought them or otherwise owed their value to Fermin, who was in fact the obligor. Fermin does not deny that he deposited the zippers in Mariano’s warehouse without paying storage fees or any other consideration. G.R. No. 75819, September 8, 1989, 177 SCRA 402.

3

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Obligations and Contracts Text and Cases

Arts. 1278-1279

This being so, Fermin obviously cannot take refuge in Article 1279 of the Civil Code, providing as follows: x x x As the respondent Court correctly observed in holding that the above provision was not applicable: The instant case does not certainly satisfy the above because: (1) appellant is not a debtor of appellee, it is only the latter who is indebted to appellant; (2) the debts, even admitting that the delivery of the zippers to plaintiff is a debt, do not both consist in a sum of money nor are they of the same quality and kind x x x.

The third requisite is that the two debts be due. However, the debts need not be contracted or incurred at the same time.4 A debt cannot be demanded if it is not yet due. Hence, this requisite is very important. However, the parties can agree that compensation can be made even as to the debts which are not yet due. In Perez vs. Court of Appeals,5 where a finance company was indebted to an investor with respect to two debts due originally on August 6, 1974 and August 13, 1974 respectively and which debts were rolled-over so that their maturity dates were extended to October 4, 1974 and October 11, 1974, respectively, and where the finance company was the creditor with respect to a certain obligation to mature on August 5, 1994 as against a certain company to whom the two credits of the investor, which were to mature on October 4 and 11, 1974 respectively, were assigned on September 9, 1974, the Supreme Court said that: Since, on the respective dates of maturity, specifically, August 6, 1974 and August 13, 1974, respectively, Ramon C. Mojica was still the holder of those bills, it can be safely assumed that it was he who had asked for the roll-overs on the said dates. MEVER was bound by the roll-overs since the assignment to it was made only on September 9, 1974. The inevitable result of the roll-overs of the principals was that Bill No. 1298 and Bill No. 14129 were not yet due and demandable as of the date of their assignment by MOJICA to MEVER on September 9, 1974, nor as of October 3, 1974 when MEVER surrendered the Bills to CONGENERIC. As a consequence, no legal compensation could have taken place because, for it to exist, the two debts, among other requisites, must be due and demandable.

Also, in PNB Madecor vs. Uy6 where one of the debts was payable only upon demand and there was no demand made, the Supreme Court ruled that there can be no compensation because such debt is PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001. G.R. No. L-56101, February 20, 1984, 127 SCRA 636.

4 5

Arts. 1278-1279

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not yet due. The fourth requisite is that they be liquidated and demandable. The debt must be determined and certain. Thus compensation cannot take place where one of the debts is not liquidated as when there is a running interest still to be paid thereon. Thus, in Compania Maritima vs. Court of Appeals,7 the Supreme Court, in disallowing compensation because the amount is not liquidated, said More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful expenses incurred by PAN-ORIENTAL, is also still unliquidated since interest does not stop accruing “until the expenses are fully paid.” Thus, we find without basis REPUBLIC’s allegation that PAN-ORIENTAL’s claim in the amount of P40,797.54 was extin-guished by compensation since the rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P18,702.46 would still be owing by PANORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the legal rate of interest “from February 3, 1951 until fully paid.”

In Miailhe vs. Halili8 where the Supreme Court reduced the liability in favor of the petitioner resulting, among others, in an excess amount of P2,004.28, which consequently became payable to the respondent, and where the petitioner did not want to return the said amount on the ground that he had the right to retain the same considering that, in another case, which was on appeal, the lower court had rendered judgment against the respondent and in favor of the petitioner for the sum of P2,004.28, and hence, compensation should apply, the Supreme Court said that there can be no com-pensation because the amount of P2,004.28 awarded to the petitioner in another case was still under litigation and therefore still being disputed, and that it was a requirement for compensation to take place that the amount involved be certain and liquidated. The fifth requisite is that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. By “due time” should be meant the period before legal compensation was supposed to take place, considering that PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001. G.R. No. L-50900, April 9, 1985, 135 SCRA 593. 8 G.R. No. L-16587, October 31, 1962, 6 SCRA 453. 6 7

246

Obligations and Contracts Text and Cases

Art. 1280

legal compensation operates so long as the requisites concur, even without any conscious intent on the part of the parties. A controversy that is communicated to the parties after that time may no longer undo the compensation that had taken place by force of law, lest the law concerning legal compensation be for naught.9

Hence, for example: A is indebted to B in the amount of P1,000, due on May 3, 1999 and B is likewise indebted to A in the same amount due on May 23, 1999. Legal compensation therefore could set in on May 23, 1999. However, D filed suit against A and was able to obtain a favorable resolution from the court garnishing all money and credits of A. One of the garnished credits belonging to A was the indebtedness of B in his (A’s) favor. If it were only on June 1, 1999 that B was able to know of the garnishment, legal compensation has already set in by May 23, 1999. Hence, D cannot anymore make use of the credits of A against B to satisfy A’s obligation in his (D’s) favor. However, if B were notified of the garnishment on May 20, 1999, there can be no compensation of the mutual debts of A and B against each other as the controversy commenced by D, a third person, was duly communicated at a time before legal compensation could set in.10 Article 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197) A guarantor is a person who promises to pay the creditor in the event that the principal debtor fails to pay the indebtedness. But before the creditor can go against a guarantor, the creditor must first exhaust all possible ways to collect the debt from the principal debtor unless the guarantor binds himself solidarily with the principal debtor. If the creditor goes against the guarantor, the latter can resist payment by invoking compensation between the creditor and the principal debtor. The phrase “notwithstanding the provisions of the preceding article” refers to the fact that, even if the guarantor and the principal creditor are not mutual debtors and creditors of each other, the obligation of the guarantor can be extinguished by invoking compensation in so far as the principal debtor is con-cerned. Article 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total comPNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001. See PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.

9

10

Arts. 1281-1283

Obligations Extinguishment of Obligations Sec. 5 — Compensation

247

pensation. (n) Total compensation arises when the mutual debts of the parties to each other are equal. There is partial compensation when the debts are not equal, in which case, the debts are extinguished to the concurrent amount. Hence, if A owes Z P2,000 and Z owes A P500, compensation can occur but only on a partial basis. Z’s indebtedness will be extinguished, but A’s indebtedness will subsist but partially extinguished to the extent of P500, reducing liability to the amount of P1,500. Article 1282. The parties may agree upon the compensation of debts which are not yet due. (n) As a general rule, compensation can only occur when the debts are due and demandable. However, the parties may agree upon the compensation of debts which are not yet due. This type of compensation is not legal compensation but contractual compensation. Hence, if A is indebted to Z in the amount of P1,000 due on April 11, 1997 and Z is indebted to A in the same amount but due on May 7, 1997, there can be no compensation on April 11, 1997. However, Z and A can agree that, even if May 7, 1997 has not yet arrived, their mutual indebtedness compensate each other so that their respective obligations are extinguished. Article 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (n) This is judicial set-off. Thus, if A files a collection case against B in the amount of P1,000, B can file a counterclaim in the same amount claiming damages arising from the same or different transaction and requesting the court to just set-off the damages. If the court agrees, then there can be compensation. In Ong vs. Court of Appeals,11 the Supreme Court ruled that for judicial set-off to apply, the amount of damages or the claim sought to be compensated must be duly proven, thus: The petitioner says, however, that there was a judicial setoff under Article 1283 of the Civil Code, reading as follows: 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.

248

Obligations and Contracts Text and Cases

Arts. 1284-1285

The trouble is that Fermin has not proved the right to any damage as a result of the claimed retention of the zippers by Mariano. There was also no proof of the amount of such damages as he could not even say how many of the zippers had been earlier withdrawn by him.

Article 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n) A rescissible or voidable debt is valid up to the time it is rescinded or annulled. Hence, if all the requisites for a valid compensation are present before a contract is rescinded or annulled, the compensation can occur by operation of law. Hence, if A is in-debted to B for P1,000 and the latter is likewise indebted to A for the same amount which are both due and demandable, compensation will occur even if the loan obtained by B from A was procured through force and intimidation, therefore making the same voidable, for as long as such debt has not yet been annulled. Article 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor , unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (1198a) Article 1285 provides three cases when one of the creditors assigns his credit to a third person. The first case is when 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 11

G.R. No. 75819, September 8, 1989, 177 SCRA 402.

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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. Thus, as an example: X owes Y P1,000 due on April 12, 1997. Y is likewise indebted to X in the same amount due on May 6, 1997. On April 14, 1997, Y assigned his credit to O with the consent of X who does not make any reservation as to his right of compensation which could occur on May 6, 1997. On May 7, 1997, O demands payment from X the amount of P1,000 which has been assigned to him by Y. X cannot resist payment by invoking that the amount of indebtedness of Y in his favor may be applied in compensation of the said amount of P1,000 assigned by Y to O. However, if at the time X gives his consent to the assignment, he reserves his right to the compensation, he can validly invoke that the obligation has been extinguished through com-pensation. In Perez vs. Court of Appeals,12 the Supreme Court took special consideration of the nature of money market transactions with respect to the issue of assignment in compensation. In this case, a finance company issued to an investor two promissory notes to mature originally on August 6, 1974 and August 13, 1974, res-pectively, and which commercial papers were rolled-over so that their maturity dates were extended to October 4, 1974 and October 11, 1974 respectively. The same finance corporation was the creditor with respect to a certain obligation to mature on August 5, 1994 as against a certain company to whom the two credits of the investor, which were to mature on October 4 and 11, 1974, respectively, were assigned on September 9, 1974. Compensation was claimed in this case on the basis of the third paragraph of Article 1285. The Supreme Court rejected the same and instead applied the first paragraph because the debtor cannot claim that he had no knowledge of the assignment in view of the special nature of money market tran-sactions, thus: The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expeditiously transacted and transferred to any investor/lender without need of notice to said issuer. In practice, non-notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor. Accordingly, we find no applicability herein of Article 1285, 3rd paragraph of the Civil Code. Rather, it is the first paragraph of the same legal provision that is applicable: 12

G.R. No. L-56101, February 20, 1984, 127 SCRA 636.

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Art. 1285

“Article 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.” x x x

The second case is when the creditor communicated the cession to the debtor 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. Thus, as an example: X owes Y P1,000 due on April 12, 1997 and another P2,000 due on May 10, 1997. Y is likewise indebted to X in the amount of P1,000 due on May 6, 1997 and another P2,000 due on May 9, 1997. On May 7, 1997, Y assigns all his credits to O but X does not consent to the assignment. On June 1, 1997, O demands payment from X of the first P1,000 and the second P2,000 assigned to him by Y. X can resist payment of the P1,000 on the ground that compensation has taken place because both have become due before the cession, but he cannot set up compensation as to the P2,000 which has become due after the cession. The third case is when 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 has knowledge of the assignment. In the example given in the second case, if X is informed by Y only on May 15, 1997 that he has assigned all his credits to O, and the latter demands payment of the first P1,000 and the second P2,000 on June 1, 1997, X can invoke that all the indebtedness have been extinguished because compensation has set in. In Sesbreño vs. Court of Appeals13 where Philfinance was indebted to Delta evidenced by PN No. 143-A and the latter was likewise indebted to the former evidenced by DMC PN No. 2731, and where Philfinance assigned its credit against Delta, evidenced by DMC PN No. 2731, to Sesbreno (one of Philfinance’s creditors) who only notified Delta of such assignment after the indebtedness of Delta in favor of Philfinance and the indebtedness of Philfinance in favor of Delta both became mutually due, and where, despite the said maturities of said debts, Sesbreño decided to claim from Delta on the basis of the assigned credit made to him by Philfinance, the Supreme Court, citing Article 1285 especially the last paragraph thereof, ruled that Sesbreno could no longer claim from Delta because he notified Delta of his rights as assignee after compensation had taken place by operation of law between Philfinance 13 14

G.R. No. L-89252, May 24, 1993, 222 SCRA 466. Articles 1962 and 1972 of the 1950 Civil Code.

Art. 1285

Obligations Extinguishment of Obligations Sec. 5 — Compensation

and Delta. The Supreme Court pertinently ruled as follows: We turn to Delta’s arguments concerning the alleged compensation or off-setting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken place. The essential requisites of compensation are listed in the Civil Code as follows: “Article 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 controversy, commenced by third persons and communicated in due time to the debtor.” (Italics supplied) On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 “Letter of Agreement” with Philfinance, where Delta acknowledged that the relevant promissory notes were “to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity.” As noted, the assignment to petitioner was made on 9 February 1981 or forty-nine (49) days before the “co-terminal maturity” date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation from taking place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta, would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him. The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, that is after the maturity not only of the money market placement made

251

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by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by ope-ration of law because the offsetting instruments had both reached maturity. It is firmly settled doctrine that the rights of an assignee are not any greater than the rights of the assignor, since the assignee is merely substituted in the place of the assignor and that the assignee acquires his rights subject to the equities — i.e., the defenses— which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that: “Article 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.” (Italics supplied) Article 1626 of the same Code states that: “The debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation. In Sison vs. Yap-Tico, the Court explained: “No man is bound to remain a debtor: he may pay to him with whom he contracted to pay; and if he pays before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debtor notice.” At the time that Delta was put to notice of the assignment in petitioner’s favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have been then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him. It bears some emphasis that petitioner could have notified Delta of the assignment in his favor as soon as that assignment or

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Obligations Extinguishment of Obligations Sec. 5 — Compensation

253

sale was effected on 9 February 1981. He could have also notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated Custodianship Receipt (“DCR”) No. 10805 issued by private respondent Philfinance in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. xxx

Article 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a) If all the requisites under Article 1279 are present, compensation takes place by operation of law. The parties need not notify each other that they intend to have their debts compensated. Indemnity for expenses of exchange or transportation to the place of payment can arise only if there is partial compensation. If there is complete compensation, the parties need not do anything as the obligations are completely extinguished. Hence, if A owes B P1,000 payable in Davao and B owes A the same amount payable in Marikina and both are due, A and B do not have to go to the places of payment as the compensation here is complete and therefore both obligations are totally extinguished. But if B owes A P500, then there is only partial compensation, and A has to go to Marikina for him to receive the payment of B for the balance of P500. A, the creditor, should be reimbursed by the debtor the amount of transportation expenses A has incurred in going to Marikina because, under Article 1247, the extrajudicial expenses required for payment shall be for the account of the debtor, unless it is otherwise stipulated. Article 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depository 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

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prejudice to the provisions of paragraph 2 of Article 301. (1200a) Article 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n) Compensation will not occur in the following situations even if there is technically a loan or an indebtedness existing: 1)

Debts arising from a depositum or from the obligations of a depository. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same.14 Thus, if A owes B P1,000 due on April 11, 1997, and A deposited with B an amount of P1,000 only for safekeeping to be returned on April 11, 1977, there can be no compensation come April 11, 1997 as the obligation of B to return the P1,000 arises from the obligations of a depository.

2)

Debts arising from the obligations of a bailee in commodatum. The bailee in commodatum acquires the use of the thing loaned but not its fruits.15 The bailee is obliged to pay the ordinary expenses for the use and preservation of the thing loaned.16 The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has the right of retention for damages mentioned in Article 1951.17

3)

Debts arising from duty to support. Compensation cannot likewise apply if the other obligation is one of support to the other party. Thus, a father, who is required to give support to his son, cannot claim that he need not give the support considering that his son owes him the same amount of money. The law provides that this rule on gratuitous support shall be “without prejudice to the provisions to paragraph 2 of Article 301” of the Civil Code which provides that support in arrears can be compensated or renounced. Hence if the father has not given his son the amount of P4,000 which is equivalent to the previous four months of unremitted financial support, but the same son owes the father P4,000, there can be compensation in his case. The application of paragraph 2 of Article 301 of the Civil Code

Article 1395 of the 1950 Civil Code. Article 1941 of the 1950 Civil Code. 17 Article 1944 of the 1950 Civil Code. 15 16

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Obligations Extinguishment of Obligations Sec. 5 — Compensation

255

is of doubtful applicability in view of the fact that the said Article 301 of the Civil Code has already been deleted by the New Family Code.18 4)

Debts consisting of a civil liability arising from a penal offense. If A is indebted to B by virtue of a contract of loan and B is indebted to A by virtue of an award of civil damages in favor of A as a result of B’s conviction in inflicting physical injuries on A, there can be no compensation. Also, a criminal violation of the Trust Receipt Law which makes the obligor financially and civilly liable to the contracting bank to the extent indicated in the Trust Receipt contract cannot be extinguished by a claim of compensation of the amount of deposit which the obligor has with the bank even if, under the law, a person who opens a deposit account in a bank is technically a creditor of that bank.19

Article 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. (1201) The rules on application of payments are provided for in Subsection 1, Chapter 4, Book IV, Title I of the Civil Code covering Articles 1252 up to 1254. Hence, if A owes X P3,000 due on April 11, 1997, and X owes A P3,000 without interest, and another P3,000 with interest at 12% per annum in case of non-payment, all due on April 11, 1997, there can be compensation. If X does not designate the indebtedness to which compensation will apply, it will be applied to the most onerous debt which is the interest-bearing P3,000 debt. This is the most onerous because the payment of the interest is necessarily most burdensome. Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguishes both to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (1202a)

Compensation is the most expedient way of extinguishing an

Executive Order No. 209 as amended which took effect on August 3, 1988. Metropolitan Bank and Trust Company vs. Tonda, G.R. No. 134436, August 16, 2000, 132 SCAD 111, 338 SCRA 254. 20 G.R. No. L-62169, February 20, 1983, 120 SCRA 930. 18 19

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obligation. It is automatic and occurs even though the creditors and debtors are not aware of the compensation. Thus in Mindanao Portland Cement vs. Court of Appeals20 where a creditor was able to obtain in a civil case an award of attorney’s fees in the amount of P10,000.00 from the debtor, and the latter was also able to obtain a judgment in another civil case for attorney’s fees in the same amount from the former, the Supreme Court said there was compensation, thus: It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to each other consisting in final and executory judgments of the Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00 by way of attorney’s fees. The two (2) obligations, therefore respectively offset each other, compensation having taken effect by operation of law and extinguished both debts to the concurrent amount of P10,000.00 pursuant to the provisions of Arts. 1278, 1279 and 1290 of the Civil Code, since all the requisites provided in Article 1279 of the Code for automatic compensation “even though the creditors and debtors are not aware of the compensation” were duly present.

In Pioneer Insurance & Surety Corporation vs. Court of Appeals,21 an interesting case of compensation was likewise decided, thus: In September, 1978, petitioner Pioneer Insurance and Surety Corporation issued general warehousing bonds in favor of the Bureau of Customs for importation of raw materials in the total amount of P6,500.00. The bonds were issued on behalf of the private respondents Wearever Textile Mills, Inc., and its president, Vicente T. Lim. To secure the petitioner from and against any and all harm, damages and losses of whatever kind and nature which it may incur as a consequence of its becoming a surety upon the bonds, the respondents executed jointly and severally in favor of the petitioner indemnity agreements for said bonds each of which contains the following stipulations: “INDEMNITY — The undersigned, jointly and severally, agree and bind themselves to indemnify and hold and save harmless the Corporation from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever kind and nature which the Corporation shall or may 21 G.R. No. 76509, December 15, 1989, 180 SCRA 156. at any time incur in consequence of having become surety upon

Art. 1290

Obligations Extinguishment of Obligations Sec. 5 — Compensation

the bond/note or any extension, renewal, substitution or alteration thereof made at the instance of the undersigned or executed on behalf of the undersigned or any of them; and to pay, reimburse and make good to the Corporation, its successors and assigns, all sums and amounts of money which it or its representatives shall or may pay or cause to be paid or become liable to pay, on account of the undersigned or any of them, of whatsoever kind and nature including 20% of the amount involved in the litigation or other matters growing out or connected therewith for attorney’s fees but in no case to be less than P200.00. The undersigned further agree, jointly and severally, that in case of any extension or renewal of the bond/note, to bind ourselves for the payment thereof under the same terms and conditions, as above mentioned, without the necessity of executing another Indemnity Agreement for the purpose and we hereby equally waive our right to be notified of any renewal or extension of the bond/note which may be granted under this Indemnity Agreement. “MATURITY OF OUR OBLIGATIONS CONTRACTED HEREWITH — The above indemnities shall be paid to the corporation as soon as demand is received from the creditor or as soon as it becomes liable to make payment of any sum under the terms of the above-mentioned bond/note, its renewal, extensions or substitutions whether the said sum or sums or part thereof have been actually paid or not.” (pp. 29-30, Rollo) The private respondents failed to comply with their commitment under the warehousing bonds by reason whereof the Bureau of Customs demanded from the petitioner payment of the value of the said bonds in the amount of P6,390,259.00. This amount eventually reached P9,031,000.00 in 1983. In the meantime, in response to the petitioner’s demand letter, the private respondents wrote petitioner promising that they will settle their obligations with the Bureau of Customs. On representations by private respondents to the Bureau of Customs, the latter granted the request of respondents for staggered monthly installment payments of their obligation on condition that the respondents will make an initial payment of P500,000.00 and thereafter shall amortize the balance of P400,000.00 monthly until fully paid pursuant to the first endorsement by the Bureau of Customs dated September 22, 1976. Other than the initial payment of P500,000.00, however, respondents have not made any other payments thereby violating the terms of the said agreement. As a result of the foregoing, the Bureau of Customs again demanded from the petitioner payment of its bonds. No payment, however, has been made as yet.

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Sometime in 1979, a fire gutted the respondent’s factory destroying materials insured with the petitioner in the amount of P1,144,744.49. Respondents demanded from the petitioner payment of the proceeds of the insurance policy but the latter refused to pay claiming that said proceeds must be applied by way of partial compensation or set-off against its liability with the Bureau of Customs arising from the warehousing bonds. The petitioner’s efforts to protect itself from total loss in the much bigger amount of P6,390,259.00 which as of April 19, 1983 had already reached P9,031,000.00 having proved fruitless, the complaint for compensation was filed below. The trial court rendered judgment in favor of the private respondents and ordered the petitioner to pay, among others, the insurance proceeds in the amount of P1,144,744.49 plus legal interest from November 19, 1979 until the whole amount is fully paid. On appeal, the Court of Appeals affirmed the trial court’s decision, holding that legal compensation cannot take place because the requisites thereof are not present, namely: that petitioner is not the creditor of private respondents; and that the former’s claim against the latter is not due, demandable and liquidated because its liability on the warehousing bonds was extinguished when the textile goods covered by the same were destroyed by the fire. Therefore, according to the appellate court since the petitioner and private respondents are not mutually creditors to each other, the law on compensation is inapplicable. In this petition, Pioneer Insurance alleges that legal compensation or set-off under Articles 1278 and 1279 can take place because there is due to private respondents from the petitioner the amount of P1,144,744.49 as proceeds of the fire insurance policy in the same manner that the private respondents are bound, jointly and severally, to reimburse petitioner what the latter is liable to pay the Bureau of Customs in the total amount of P6,390,259.00 and which, as of the date of the filing of the complaint, had already reached P9,031,000.00. The petitioner also stresses that even if it has not yet paid the Bureau of Customs any amount, the private respondents have already become indebted to the petitioner pursuant to the indemnity agreement which stands as the law between the parties. On the other hand, the private respondents argue that the demands to pay made by the Bureau of Customs did not prove nor create any liability and even if they did, the liability under the warehousing bonds in favor of the Bureau of Customs was the liability of the petitioner, that petitioner did not pay and has

Art. 1290

Obligations Extinguishment of Obligations Sec. 5 — Compensation

never paid the Bureau of Customs under the warehousing bonds and, therefore, the private respondents have nothing to reimburse the petitioner for and that the approved staggered payment arrangement of the respondents with the Bureau of Customs released petitioner from liability under the warehousing bonds.

We rule for the petitioner.

In the case of the International Corporate Bank, Inc. vs. The Intermediate Appellate Court, et al. (G.R. No. 69560, June 30, 1988), we reiterated the requisites of legal compensation. We said: “Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge of the debtors.’ (Art. 1290, Civil Code). Art. 1279 of the Civil Code requires among others, that in order that legal compensation shall take place, the two debts be ‘due and they be liquidated and demandable.’ 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 arising from breach of contract. (Compania General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Hererro, 17 Phil. 29) “There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent is indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking place. (CA Decision, Rollo, pp. 112-113) There is no dispute that the petitioner owes the private respondents the amount representing the proceeds of the insurance policy. The private respondents, however, try to negate their liability by questioning the veracity and accuracy of the Bureau of Customs’ demand letters to the petitioner and by claiming that they have no more liability because of the fortuitous event. At the same time however, they admit liability when they argued that the petitioner was released from the same upon their agreement with the Bureau of Customs to make staggered payments. Finally, the private respondent argue that since the petitioner has not made any payment yet regarding the amount demanded by the Bureau of Customs, there is nothing for which

259

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the petitioner should be reimbursed. It is needless to emphasize that at the time the fire occurred, the private respondents together with the petitioner had already incurred liability on the warehousing bonds with the Bureau of Customs because of the respondents’ inability to comply with the provisions of their undertaking. It is therefore, clear that as far as the amount of P9,031,000.00 is concerned, both the petitioner and respondents were already liable for said amount to the Bureau of Customs when the contingency for which compensation is sought, happened. Neither can the respondents claim that the petitioner was released from liability when they made arrangements with the Bureau of Customs for staggered payments since the facts will bear out that other than the P500,000.00 payment by respondents, no further payment was made by them thus leading the Bureau of Customs to go after the petitioner again. The private respondents, contend, however, that since the petitioner has not made any payment with the Bureau of Customs, it cannot demand reimbursement and, thus, petitioner cannot apply legal compensation or set-off against them because their liability has not yet become due and demandable. In the recent case of Mercantile Insurance Co., Inc. vs. Felipe Ysmael, Jr. & Co., Inc. (G.R. No. L-43962, January 13, 1989), we ruled: “The question as to whether or not under the Indemnity Agreement of the parties, the Surety can demand indemni-fication from the principal, upon the latter’s default, even before it has paid to the creditor, has long been settled by this Court in the affirmative.

It has been held that:

“The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors. (Cosmopolitan Ins. Co., Inc. vs. Reyes, 15 SCRA 528 [1965], citing Security Bank vs. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; also Surety and Ins. Co., Inc. vs. Aguilar, et al., G.R. No. L-5625, March 16, 1954).” Clearly, the petitioner can demand reimbursement from the respondents even before it has actually paid its obligation to the Bureau of Customs. It can, in principle, be held liable under the warehouse bonds even before actual payment to the Bureau of Customs. The liability has been fixed. What remains is simply its liquidation. The respondents who defaulted on the agreement to make staggered payments thereby causing the

Art. 1290

Obligations Extinguishment of Obligations Sec. 5 — Compensation

petitioner’s liability to the Bureau of Customs cannot refuse the set-off. Consequently, legal compensation can take place between the petitioner and the private respondents, that is, the petitioner can partially set-off the insurance proceeds in the amount of P1,144,744.49 against its liability under the warehousing bonds which has been computed in the amount of P9,031,000.00 as of 1983. From the records, it is seen that the last demand letter of the Bureau of Customs asking the petitioner to pay the value of the bonds was on March 27, 1981. The records are silent on whether or not the Bureau of Customs sued either of the parties to enforce liability under the warehousing bonds. It may be noted that the petitioner admits its liability under the warehousing bonds. Since the issue is legal compensation and in order to avoid any miscarriage of justice, the Court refers the issue on the enforcement of liability under the bonds to the Bureau of Customs.

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SECTION 6. — Novation

Article 1291. Obligations may be modified by:



(1) Changing their object or principal conditions;



(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203) Novation is another way of extinguishing an obligation. Novation under the provisions of the Civil Code refers to extinctive novation and not modificatory novation. In Ajax Marketing & Development Corporation vs. Court of Appeals1 where petitioners’ three debts (secured by continuing real estate mortgages also intended to secure future indebtedness, including renewals and extensions) were consolidated into one debt with the original debtors incorporating themselves into a corporation for purposes of the consolidated debt, and where the original debtors claimed that there was novation considering the resulting consolidation, and the change in the person of the debtor, the Supreme Court ruled that there was no subjective or objective novation and explained that: Novation, unlike other modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and creates a new one in lieu of the old. It can be objective, subjective, or mixed. Objective novation occurs when there is a change of the object or principal conditions of an existing obligation while subjective novation occurs when there is a change of either the person of the debtor, or of the creditor in an existing obligation. When the change of the object or principal conditions of an obligation occurs at the same time with the change of either the person of the debtor or creditor, a mixed novation occurs. x x x Thus to effect an objective novation it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new one. In the same vein, to effect G.R. No. 118585, September 14, 1995, 64 SCAD 311, 248 SCRA 222. Garcia, Jr. vs. Court of Appeals, G.R. No. 80201, November 20, 1990, 191 SCRA 262

1 2

Art. 1291

Obligations Extinguishment of Obligations Sec. 6 — Novation

a subjective novation by a change in the person of the debtor it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. There is no novation without such release as the third person who has assumed the debtor’s obligation becomes merely a co-debtor or surety. “The attendant facts herein do not make a case of novation. There is nothing in the records to show the unequivocal intent of the parties to novate the three loan agreements through the execution of PN No. BDS-3065. The provisions of PN No. BDS 3065 yield no indication of the extinguishment of, or an incompatibility with, the three loan agreements secured by the real estate mortgages over TCT No. 105233. On its face, PN No. BDS-3065 has these words typewritten: “secured by REM” and “9. COLLATERAL. This is wholly/partly secured by: (x) real estate,” which strongly negate petitioners’ asseveration that the consolidation of the three loans effected the discharge of the mortgaged real estate property. Otherwise there would be no sense placing these material provisions. x x x The foregoing shows that petitioners agreed to apply the real estate property to secure obligations that they may thereafter obtain including their renewals or extensions with the principals fixed at “P600,000.00, P150,000.00, and P250,000.00 which when added have an aggregate sum of P1.0 million. PN No. BDS-3605 merely restructured and renewed the three previous loans to expediently make the loans current. There was no change in the object of the prior obligations. The consolidation of the three loans, contrary to petitioner’s contention, did not release the mortgaged real estate property from any liability because the mortgage annotations at the back of TCT No. 105233, in fact, all remained uncancelled, thus indicating the continuing subsistence of the real estate mortgages. “Neither can it be validly contended that there was a change or substitution in the persons of either the creditor (Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans in PN No. BDS 3605. The bare fact of petitioners’ conversion from a partnership to a corporation, without sufficient evidence, either testimonial or documentary, that they were expressly released from their obligations, did not make petitioner AJAX, with its new corporate personality, a third person or new debtor within the context of a subjective novation. If at all, petitioner AJAX only became a co-debtor or surety. Without express release of the debtor from the obligation, any third party who may thereafter assume the obligation shall be considered merely as co-debtor or surety. Novation arising from a purported change in the person of the debtor must be clear and express because, to repeat, it is never presumed. Clearly

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then, from the aforesaid points, neither objective nor subjective novation occurred.”

It is a general rule that no form of words or writing is necessary to give effect to a novation.2 Thus, in Goni vs. Court of Appeals,3 the Supreme Court upheld that an oral lease agreement can validly novate a contract to sell provided that it can be shown that the intent to novate was present and that the terms are truly incompatible in every respect. Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204) There can be no novation unless two distinct and successive binding contracts take place, with the later one designed to replace the preceding convention.4 Also, if a subsequent contract is designed to novate a previous contract and not all parties to the original contract consented to or are made parties in the subsequent contract, there can be no novation.5 Modifications introduced before a bargain becomes obligatory can in no sense constitute novation in law.6 An obligation which intends to substitute another obligation extinguishes the latter obligation only if it so expressly declares in certain terms or when the old obligation is completely incompatible with the new obligation in every aspect7 that there can be no other import but to wipe out the old obligation by the new one. Novation therefore can never be presumed. The extinguishments 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 493. other hand, no specific form is required for an implied novation,

G.R. No. L-27434, September 23, 1986, 144 SCRA 222. Evadel Realty and Development Corporation vs. Spouses Antero, G.R. No. 144291, April 20, 2001. 5 Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD 281, 320 SCRA 625. 6 Montelibano vs. Bacolod-Murcia Milling Co., G.R. No. L-15092, May 18, 1962, 5 SCRA 36. 7 National Power Corporation vs. Dayrit, G.R. Nos. L-62845-46, November 25, 1983, 125 SCRA 849. 8 Quinto vs. People, G.R. No. 126712, April 14, 1999, 105 SCAD 473, 305 SCRA 3 4

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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 incom-patibility between the old and the new obligations. There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes that 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.8

Hence, if an obligation evidenced by a promissory note was superseded by another obligation evidenced by a new promissory note which expressly provided that the old promissory note was cancelled, there is novation as the phrase “to cancel” means to strike out, revoke, rescind, abandon, or terminate.9 However, a contract to sell of a condominium unit was executed after the lessor and the lessee executed their lease contract, the former does not necessarily novate the latter absent any clear expression of the intention to novate.10 In Garcia, Jr. vs. Court of Appeals,11 the Supreme Court, quoting the Court of Appeals, said: x x x In every novation there are four essential requisites: (1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. There must be consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid new one (Tiu Siuco vs. 708. Bautista vs. Pilar Development Corporation, G.R. No. 135046, August 17, 1999, 110 SCAD 964, 312 SCRA 611. 10 Espina vs. Court of Appeals, G.R. No. 116805, June 22, 2000, 128 SCAD 312, 334 SCRA 186. 11 G.R. No. L-80201, November 20, 1990, 191 SCRA 493. 12 G.R. No. L-22366, October 30, 1969, 29 SCRA 791, citing Martinez vs. Cavives, 9

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Habana, 45 Phil. 707). The acceptance of the promissory note by the plaintiff is not novation of the contract. The legal doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and adding other obligations not incompatible with the old one (Inchausti & Co. vs. Yulo, 34 Phil. 978). It is not proper to consider an obligation novated as in the case at bar by the mere granting of extension of payment which did not even alter its essence. To sustain novation necessitates that the same be declared in unequivocal terms or that there is complete and substantial incompatibility between the two obligations (Sandico vs. Pacquing, 42 SCRA 322). An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding other obligations not incompatible with the old one or wherein the old contract is merely supplementing the new one (Dungo vs. Lopena, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. vs. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. vs. Cruz, AC GR CV 047190, Nov. 27, 1985)

Thus, in Guerrero vs. Court of Appeals12 where the petitioner together with two other persons executed an agreement of counterguaranty in favor of a surety corporation binding themselves solidarily for whatever claim the surety corporation may have against them, and where, upon default in the payment of the subject solidary obligation, the surety corporation sued one of the solidary debtors and consequently obtained a favorable judgment on the basis of a compromise agreement directing the sued solidary debtor to pay the whole obligation, and where, upon failure to satisfy the judgment, the surety corporation filed a case against the petitioner for the collection of the same amount of money, and where the petitioner resisted such claim on the ground that the previous judgment in the civil case against one of the solidary debtors novated the contract of indemnity and therefore released the petitioner from its obligation, the Supreme Court rejected such contention on the ground that there was no novation, to wit: There being no modicum of doubt, in this case before us, that the obligation of the petitioner has matured, the release of his obligation by virtue of novation must be proved by clear and convincing evidence, in the absence of an express release, nothing less than a showing of complete incompatibility between 25 Phil. 581; Young vs. Villa, 93 Phil. 21. 13 G.R. No. L-18411, December 17, 1966, 18 SCRA 967.

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the two obligations — the “agreement of counter-guaranty” and the compromise agreement — would justify a finding of novation by implication. The express mandate of the law that for an obligation to be extinguished by another “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,” blazes the direction to be taken by courts in appraising the defense of novation. This Court has held time and time again that novation is never presumed. The necessity to prove the same by clear and convincing evidence is accentuated where, as in this case, the obligation of the debtor has already matured. We fail to see any incompatibility between the two obligation that would sustain the defense of novation. The fact that in the compromise agreement and subsequently in the execution sale, ALTO chose first to realize its credit from Robles, did not imply a waiver of its right to proceed against any of the solidary debtors or some of all of them simultaneously, and the demand made against one of them is no obstacle to demands which may subsequently be directed against the others so long as the debt or any part of it remains outstanding and unpaid. Upon all the foregoing, the inescapable conclusion is that the compromise agreement on the basis of which judgment was rendered in Civil Case 29357, did not serve to release the petitioner from his obligation of indemnity to ALTO.

In Magdalena Estates, Inc. vs. Rodriguez13 where the appellants, in buying a property from the appellee, issued a promissory note with interest, and where they also procured a bond from a surety company for the payment of the principal, and where the appellee accepted without reservation the agreement set forth in the surety bond which however did not make provisions on the interest, and where appellant contended that the surety bond novated the obligation of the appellant with respect to the interest, the Supreme Court rejected such a contention by stating: The rule is settled that novation by presumption has never been favored. To be sustained, it needs to 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. An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with 14

G.R. No. L-47369, June 30, 1987, 151 SCRA 339.

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the old one, or wherein the old contract is merely supplemented by the new one. The mere fact that the creditor receives a guaranty or accepts the payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released form responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. (Straight vs. Haskel, 49 Phil. 614; Pacific Commercial Co. vs. Sotto, 34 Phil. 237; Estate of Mota vs. Serra, 47 Phil. 464; Dungo vs. Lopena, G.R. No. L-18377, December 29, 1962, 6 SCRA 1007). In the instant case, the surety bond is not a new and separate contract but an accessory of the promissory note.

In Cochingyan vs. R & B Surety and Insurance Co.14 where, in a trust agreement, the trustor bound itself to pay to the creditorbeneficiary whatever amount the debtors have to pay to the creditorbeneficiary, and where the said principal loan was previously secured by a bond issued by a surety company, the Supreme Court ruled that the trust agreement did not novate the surety agreement by stating: x x x it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that “[the Trust Agreement] shall not in any manner release” R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incom-patibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. But where, as in this case the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all. What the trust agreement did was, at most, merely to bring in another person or persons — the Trust[s] — to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. x x x In the present case, we note that the Trustor under 15

G.R. No. 112191, February 7, 1997, 79 SCAD 149.

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the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB.

In Fortune Motors (Phils.) Corporation vs. Court of Appeals15 where a financing agreement merely detailed the obligations of one of the parties without changing the nature of the previous agreement, the Supreme Court said: Neither do we find merit in the averment of petitioners that the Financing Agreement contained onerous obligations not contemplated in the surety undertakings, thus changing the principal term thereof and effecting a novation. We have ruled previously that there are only two ways to effect novation and thereby extinguish an obligation. First, novation must be explicitly stated and declared in unequivocal terms. Novation is never presumed. Second, the old and new obligations must be incompatible on every point. The test of incompatibility is whether 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. Novation must be established either by the express terms of the new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the new one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or by their acts which are too clear and unequivocal to be mistaken. Under the surety undertakings however, the obligation of the sureties referred to absolutely, unconditionally and solidarily guaranteeing the full, faithful and prompt performance, payment and discharge of all obligations of Petitioner Fortune with respect to any and all contracts and other agreements with Respondent Filinvest in force at that time or thereafter made. There were no qualifications, conditions or reservations stated therein as to the extent of the suretyship. The Financing Agreement, on the other hand, merely detailed the obligations of Fortune to CARCO 16

G.R. No. 138544, October 3, 2000, 135 SCAD 98, 341 SCRA 781.

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(succeeded by Filinvest as assignee). There is no incompatibility to speak of in the two contracts. They can stand together without conflict. Furthermore, the parties have not performed any explicit and unequivocal act to manifest their agreement or intention to novate their contract. Neither did the sureties object to the Financing Agreement nor try to avoid liability thereunder at the time of its execution. x x x

In Security Bank and Trust Company, Inc. vs. Cuenca,16 the Supreme Court ruled that the original loan agreement was novated by a new one and stated some indicators of the incompatibility of the two contracts, thus: x x x Clearly, the requisite of novation are present in this case. The 1989 Loan Agreement extinguished the obligation obtained under the 1980 credit accommodation. This is evident from its explicit provision to “liquidate” the principal and the interest of the earlier indebtedness, as the following shows: 1.02 Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding indebtedness in the Lender (the “Indebtedness”) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the indebtedness. The testimony of an officer of the bank that the proceeds of the 1989 Loan Agreement were used “to pay-off” the original indebtedness serves to strengthen this ruling. Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot co-exist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million, the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different. Likewise the later contract contained conditions, “positive covenants” and “negative covenants” not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook “from time to time and upon request by the Lender, (to) perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement. Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter 17

G.R. No. 126891, August 5, 1998, 97 SCAD 103, 293 SCRA 634.

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acquired, nor would it participate in any merger or consolidation.

In Lim Tay vs. Court of Appeals17 the Supreme Court held that a dacion en pago is a form of novation in which a change takes place in the object involved in the original contract. Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a) Article 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. (n) In Bangayan vs. Court of Appeals,18 it has been held that an assignment of a lease contract by the lessee must get the consent of the lessor because such assignment would involve the transfer, not only of rights but also of obligations. It constitutes novation by substitution of the person of one of the parties namely the lessee-debtor. In Gaw vs. IAC,19 where the petitioner entered into an exclusive dealership agreement with a certain company to sell the latter’s product, and where the petitioner entered into a co-terminous marketing agreement with another person for the latter to market the products and for the purpose of obtaining funds to fulfill the deposit required by the company, and where such deposit, upon being tendered by the said person, was refused by the company for fear that it might violate the exclusive dealership agreement with the petitioner, and where the said company said that it would accept provided it be made under the name of the petitioner, the Supreme Court ruled that in such a case the co-terminous marketing agreement did not novate the dealership agreement by stating: While in a sense, the marketing agreement between Gaw and Tan is related to the original dealership agreement between the former and PWCC, as the term of the former is co-terminous with that of the latter, we cannot subscribe to petitioner’s contention that the marketing agreement was “an

G.R. No. 123581, August 29, 1997, 86 SCAD 447, 278 SCRA 379. G.R. No. L-70451, March 24, 1993, 220 SCRA 405. 20 Article 1347 of the 1950 Civil Code. 18 19

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attempted novation” of the dealership agreement. Arguing that “Tan intended to step into the shoes of petitioner Gaw as a debtor of Prime White in respect to the additional deposit of P250,000,” Gaw cites Article 1293 of the Civil Code which provides that “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.” Yet Gaw fails to prove that PWCC, the creditor, knew all about the so-called substitution. It is axiomatic that novation is never presumed. It must be explicitly stated in the contract and there must be a manifest incompatibility between the old and the new obligation in every aspect. The fact that the two agreements are co-terminous with each other does not imply that a new obligation had arisen when the marketing agreement was signed, thus displacing the dealership contract. Not only was Gaw not released from complying with the terms and conditions of the dealership agreement but he was, in a sense, already implementing the latter. Hence, the change in the principal object or conditions, the substitution of the person of the debtor, the subrogation of a third person in the rights of the creditor must all involve a clear and manifest intent to extinguish the old obligation and to release the debtor from such old obligation. Novation therefore creates a new obligation.

Novation through the replacement of the old debtor by a new debtor may either be with or without the initiative of the old debtor. If the old debtor, to extinguish his obligation, suggests to the creditor that he be substituted by a new debtor of his choice and the creditor agrees, there will be a novation called delegacion. If the old debtor is substituted without the knowledge or consent of the old debtor and the obligation is extinguished, there is also a novation called expromission. In both delegacion and expromission, the consent of the creditor is indispensable. For example, Y is indebted to Z in the amount of P1,000 and, without the knowledge or consent of Y, O commits to pay Z the indebtedness of Y should it become due, Z can still claim from Y the said indebtedness on due date, despite O’s commitment, because there is no novation. There is nothing in the commitment of O that clearly shows the intention of O to release Y from his obligation. O only became an additional debtor. However, if Z agrees that the obligation of Y is to be extinguished upon O’s making the commitment to pay the indebtedness of Y, there is a novation. If O later on makes a

Art. 1295

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partial payment of P500, Z cannot go against Y for the balance, as his obligation has already been extinguished in so far as Z is concerned. O can demand reimbursement from Y, not of the whole P1,000, but only P500 because this is the amount which benefited Y. This is pursuant to the second paragraph of Article 1236 of the Civil Code. If O pays the whole amount, then he can recover the full amount from Y. However, in all these cases, if the original indebtedness of Y to Z is secured by a mortgage on the house of Y and the payment of the indebtedness of Y is made by O, he cannot compel Z to subrogate him in his rights, such as those arising from mortgage, guaranty or penalty. Hence, if Y fails to reimburse O, the latter cannot make use of the mortgage which has been constituted on the indebtedness. This is pursuant to Article 1237 of the Civil Code. In the event that after O commits to pay the indebtedness of Y which, upon agreement with Z releases Y from his obligation with Z, O becomes insolvent or does not pay Z the indebtedness upon demand by Z on due date, Z can no longer go against the original debtor, Y, to claim the debt, as the latter’s obligation has already been extinguished through novation. Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt. (1206a) If the old debtor proposes to the creditor that he be substituted by a new debtor, with the understanding that he (the old debtor) will be released from the obligation, and the creditor accepts the proposal, and the new debtor assumes the indebtedness, there is a novation that occurs and it extinguishes the obligation of the old debtor to make payment. In the event that the new debtor is insolvent, the creditor cannot go against the old debtor to collect the indebtedness as the latter’s obligation has already been extinguished. However, the creditor can go against the old debtor in two cases. The first case is when the insolvency of the new debtor has already been existing and of public knowledge when the old debtor delegated the debt. It is enough that the insolvency has been existing and of public knowledge at the time of the delegation. The second case is when the insolvency of the new debtor is known to the old debtor when he delegates his debt. In both cases, the creditor must

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not have knowledge of the insolvency of the new debtor. Otherwise, he cannot claim the benefit of the exceptions as he would be considered in estoppel. In both cases also, the insolvency must have existed at the time the old debtor delegated his debt. While it may seem that the “already-existing” requirement applies only to the first case, this is not so as it should likewise apply to the second case. In fact, an already-existing insolvency is necessarily implied in the second case. Otherwise, the old debtor would not have known such insolvency. Article 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (1207) The accessory always follows the principal. If the principal is extinguished, the accessory goes with it. Hence, all accessory obligations such as those arising from a contract of mortgage, guarantee, and pledge are likewise extinguished. However, the law likewise says that the accessory obligation may subsist only insofar as they may benefit third persons who do not give their consent. For example, X borrows P100,000 from Y to be paid after 12 months. The loan is secured by a real estate mortgage of Z’s house. The mortgage is to be effective only for 12 months. In constituting his house as security for the loan of X, Z agrees to be paid by X the amount of P1,000 for as long as the loan secured by the mortgage exists. However, instead of paying Z the said amount, X will just apply the P1,000 to the P12,000 indebtedness of Z in his favor such that by the time the 12-month loan matures, the indebtedness of Z would have already been paid. This is made because Z has no cash to pay the P12,000 obligation to X. On the eleventh month, X and Y decide to consolidate the P100,000 loan with the other P700,000 loan which X owes in favor of Y and, in so doing, they expressly agreed in the consolidation-document that the loan of P100,000 shall in effect cease and be integrated in the P700,000 with a lower interest rate and payable for a longer period of time without any collateral. Z did not consent to this arrangement as it would clearly prejudice him. His mortgage therefore may subsist for the remaining month attached to the principal new obligation. Article 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (n)

A subsequent void obligation intended to novate an old one has

Arts. 1297-1298

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no legal effect and will be considered as not having been agreed upon in the first place. Hence, the original obligation shall subsist. However, if in coming up with the new but void obligation, the parties agree that it shall in any event extinguish the old obligation, then such old obligation will not be revived. Hence, if X is bound to give Y a car and this is novated by binding X to give instead his future inheritance to Y, which he will get upon the death of his father, the latter new obligation is void because, according to the law, future inheritance cannot be the object of a contract.20 This new void obligation will not be deemed to have been entered into and the old obligation will be revived. However, if the parties agree that the act of entering into the new but void obligation will in any event extinguish the old one, then the latter will not be revived. Article 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor, or when ratification validates acts which are voidable. (1208a) Novation of a principal obligation definitely presupposes a previously existing obligation which is valid. If the previously existing obligation is void, a subsequent obligation intending to novate it shall likewise be void unless it is clear that such subsequent one can stand on itself and without any reference to the old one. If the original obligation is merely annulable or voidable, it means that it is valid up to the time it is annulled. Hence, it can be novated before it is annulled. For example, if, through force and intimidation, X was obliged to give Y a car and later the prestation was novated, again through force and intimidation, in such a way that X is now obliged to give Y not a car but a house, it is only X who can file a case for annulment of the obligation, and if he does not do so, then the new obligation may be given effect. Also, if, after the obligation was novated, X asks for an increase in the price of the house and Y agrees, then the obligation is ratified because of the act of X. Article 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (n)

If, for example X is bound to give Y a house only if he passes

21

Sesbreño vs. Court of Appeals, G.R. No. 89252, May 24, 1993, 41 SCAD 633,

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his law course and thereafter the obligation is novated such that X instead is bound to give Y a car without any statement as to the suspensive condition, it shall be deemed that the giving of the car is likewise subject to Y passing his law course. In order not to subject the obligation to the previous suspensive condition, there must be an express statement to that effect in the new obligation as novated. Article 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. (1209a) Legal subrogation is that which takes effect by mandate of law and does not proceed from an agreement of the parties. Hence, the law which forms the basis of the subrogation must be clearly identified and invoked to enforce the rights pertinent thereto. Conventional subrogation, which in the first place is never lightly inferred, must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point.21 Both kinds of subrogation principally involve the change in the person of the creditor. Thus, if X is indebted to B for P10,000.00 secured by a mortgage on X’s house and, for consideration, Y, with the consent of X, assumes the credit with the stipulation that X’s obligation against B is extinguished such that B can no longer collect from X, Y becomes the new creditor who can enforce the claim, and if X cannot pay, Y can foreclose on the mortgage. Article 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n) Conventional subrogation must be agreed upon by the debtor, new creditor and the old creditor. It is therefore contractual. For the replacement or substitution of the creditor to be legally complete in all aspects, all parties must agree to the same. Hence, if the debtor does not agree and the third-party makes payment to the creditor, such third party can demand payment from the debtor up to the extent the latter has been benefited,22 but cannot compel the creditor 222 SCRA 466. 22 Article 1236 of the 1950 Civil Code.

Arts. 1301-1302

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to subrogate him (third party) in his rights, such as those arising from mortgage, guaranty, or penalty.23 Article 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, without prejudice to the effects of confusion as to the latter’s share. (1210a) There are three cases when legal subrogation is presumed. The first case is when a creditor pays another creditor who is preferred, even without the debtor’s knowledge. Under our law,24 claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same is a preferred credit. Hence, any creditor who owns such credit is a preferred creditor and if another creditor pays off the unpaid purchase price of the movable, such paying creditor will be presumed to have been subrogated to the rights of the creditor who originally owned the credit. Title XIX, Book IV of the Civil Code contains all the provisions on concurrence and preference of credits. The second case is when a third person, not interested in the obligation, pays with the express or tacit approval of the debtor. In this case, the debtor, in effect, agrees to the payment and hence there exists something similar to a conventional subrogation. The presumption of legal subrogation will arise from this situation. In Chempil vs. Court of Appeals,25 where the petitioner claimed that he was subrogated to the rights of the creditor when it paid its indebtedness to the bank but where the money used for payment belonged to the debtor, the Supreme Court ruled that there was no subrogation under Article 1302(2), thus:

CEIC traces its claim over the disputed shares to the

Article 1237 of the 1950 Civil Code. Article 2241(3) of the 1950 Civil Code. 25 G.R. Nos. 112438-39, December 12, 1995, 66 SCAD 557, 251 SCRA 257. 23 24

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attachment lien obtained by SBTC on 2 July 1985 against Antonio Garcia in Civil Case No. 10398. It avers that when FCI, CEIC’s predecessor-in-interest, paid SBTC the due obligations of Garcia to the said bank pursuant to the Deed of Absolute Sale and Purchase of Shares of Stock, FCI and later CEIC, was subrogated to the rights of SBTC, particularly to the latter’s aforementioned attachment lien over the disputed shares. CEIC argues that SBTC’s attachment lien is superior as it was obtained on 2 July 1985, ahead of the consortium’s purported attachment on 19 July 1985. More importantly, said CEIC lien was duly recorded in the stock and transfer books of Chempil.

CEIC’s subrogation theory is unavailing.

By definition, subrogation is “the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts; this is the subrogation referred to in Article 1302. Conventional subrogation is that which takes place by agreement of the parties . . .” CEIC’s theory is premised on Article 1302(2) of the Civil Code which states: x x x Despite, however its multitudinous arguments, CEIC presents an erroneous interpretation of the concept of subrogation. An analysis of the situations involved would reveal the clear inapplicability of Art. 1302(2). Antonio Garcia sold the disputed shares to FCI for a consideration of P79,207,331.28. FCI, however, did not pay the entire amount to Garcia as it was obligated to deliver part of the purchase price directly to SBTC pursuant to the following stipulations in the Deed of Sale: “Manner of Payment

Payment of the Purchase Price

shall be made in accordance with the following order of preference provided that in no instance shall the total amount paid by the Buyer exceed the Purchase Price: a.

Buyer shall pay directly to the Security Bank and Trust Co. the amount determined by the Supreme Court as due and owing in favor of the said bank by the Seller.

Art. 1302

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The foregoing amount shall be paid within fifteen (15) days from the date of the decision of the Supreme Court in the case entitled ‘Antonio M. Garcia, et al. vs. Court of Appeals, et al.’ G.R. Nos. 82282-83 becomes final and executory.” (Italics ours) Hence, when FCI issued the BA check to SBTC in the amount of P35,462,869.62 to pay Garcia’s indebtedness to the said bank, it was in effect paying with Garcia’s money, no longer with its own, because said amount was part of the purchase price which FCI owed Garcia in payment for the sale of the disputed shares by the latter to the former. The money “paid” by FCI to SBTC, thus properly belonged to Garcia. It is as if Garcia himself paid his own debt to SBTC but through a third party — FCI. The aforequoted contractual stipulation in the Deed of Sale dated 15 July 1988 between Antonio Garcia and FCI is nothing more but an arrangement for the sake of convenience. Payment was to be effected in the aforesaid manner so as to prevent money form changing hands needlessly. Besides, the very purpose of Garcia in selling the disputed shares and his other properties was to “settle certain civil suits filed against him.” Since the money used to discharge Garcia’s debt rightfully belonged to him, FCI cannot be considered a third party payor under Article 1302(2). It was a conduit, or aptly categorized by respondents, merely an agent as defined in Article 1868 of the Civil Code: x x x FCI was merely fulfilling its obligation under the aforementioned Deed of Sale. Additionally, FCI is not a disinterested party as required by Art. 1302(2) since the benefits of the extinguishment of the obligation would redound to none other but himself. Payment of the judgment debt to SBTC resulted in the discharge of the attachment lien on the disputed shares by FCI. The latter would then have a free and “clean” title to said shares. In sum, CEIC, for its failure to fulfill the requirement of Art. 1302(2), was not subrogated to the rights of SBTC against Antonio Garcia and did not acquire SBTC’s attachment lien over the disputed shares which, in turn, had already been lifted or discharged upon satisfaction by Garcia, through FCI, of his debt to the said bank.

The third case is when, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. A person interested in the fulfillment of the obligation is one who will be affected by payment of the debtor. Thus, a guarantor will be released if the principal obligation of the debtor is paid. This is

280

Obligations and Contracts Text and Cases

Arts. 1303-1304

also true with respect to a surety or a solidary debtor. For example, A is indebted to M. The loan was secured by a real estate mortgage constituted by X on his own property for the benefit of A’s debt. In the event X pays M, the presumption of legal subrogation will arise in favor of X even if such payment was made without the consent of A. Since there is merger or confusion of the characters of the creditor and the mortgagor, the real estate mortgage is extinguished. Article 1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) This provision states the general effect of subrogation. Euphemistically speaking, the third person “steps into the shoes” of the creditor and becomes the new creditor. However, in conventional subrogation, the parties may stipulate the nature, limits, extent and scope of the subrogation provided these are not contrary to law, morals, good customs, public order, or public policy. Article 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has subrogated in his place in virtue of the partial payment of the same credit. (1213) This provision contemplates a situation where a debt has been partially paid by a third person, with the consent of the debtor. If there is no consent of the debtor, the only right of the third party who made the payment is to be reimbursed of the amount he has partially paid pursuant to Article 1236. Article 1237 states that whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him his rights, such as those arising from mortgage, guaranty, or penalty. In the event partial payment is made by a third person which extinguishes the debtor’s obligation to pay the creditor up to the extent of said partial payment, the creditor can still demand from the debtor the balance of the obligation. In the meantime, the third party who made the partial payment can likewise demand from the debtor what he has paid to the creditor. In the event that the creditor and the third party demands from the debtor at the same time the payment of what is due them, the creditor will be preferred. He will be paid first as the law states that he is preferred.

Art. 1304

Obligations Extinguishment of Obligations Sec. 6 — Novation

281

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TITLE II. — CONTRACTS Chapter 1

GENERAL PROVISIONS Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a) This particular provision states the statutory definition of contracts. Contract is a source of obligation and therefore, in this sense, it can be defined also as a legally enforceable agreement. A contract is 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.1 However, there are cases where, although there is a meeting of the minds between or among the parties, the contract still cannot be legally enforced because it lacks some of the required formalities mandated by law for enforceability. This is particularly true in the case of agreements falling under the Statute of Frauds. With certain exceptions, the latter agreements are useless contracts for they cannot be implemented which, in effect, negates the existence of a contract. In its broadest sense, a contract has likewise been defined as an agreement whereby at least one of the parties acquires a right, either in rem or in personam, in relation to some person, thing, act or forbearance.2 Among the sources of an obligation is a contract (Article 1157, Civil Code), which is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305, Civil Code). Jardine Davies vs. Court of Appeals, G.R. No. 128066, June 19, 2000, 128 SCAD 20, 333 SCRA 684, citing Sanchez Roman, 148-149. 2 William F. Elliott, Commentaries on the Law of Contracts, Volume I, Indianapolis The Bobbs-Merrill Company, 1913 Edition, Page 2. 1

282

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Contracts General Provisions

283

A contract undergoes various stages that include its negotiation or preparation, its perfection and, finally, its consummation. Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the concurrence of the essential elements thereof. A contract which is consensual as to perfection is so established upon a mere meeting of the minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. A contract which requires, in addition to the above, the delivery of the object of the agreement, as in a pledge or commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain formalities prescribed by law, such as in a donation of real property, is essential in order to make the act valid, the prescribed form being thereby an essential element thereof. The stage of consummation begins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof.3

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. (1255a) This provision states the autonomous nature of contracts. Freedom to stipulate terms and conditions is the essence of the contractual system4 provided such stipulations are not contrary to law, morals, good customs, public order, or public policy. This freedom also prohibits a party from coercing or intimidating or unduly influencing another to enter into a contract.5 In Azcuna, Jr. vs. Court of Appeals,6 the Supreme Court, in commenting on the legality of a provision in a lease contract to the effect that, if the lessee does not vacate the premises on due date, the lessee shall be charged P1,000.00 per day as damages without prejudice to other remedies which the lessor is entitled to, ruled: x x x The freedom of the contracting parties to make stipulations in their contract provided they are not contrary to law, morals, good customs, public order or public policy is so settled and the Court finds nothing immoral or illegal with the 3 Ang vs. Court of Appeals, G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602; Soler vs. Court of Appeals, G.R. No. 123892, May 21, 2001. 4 Republic vs. PLDT, G.R No. L-18841, January 27, 1969, 26 SCRA 620. 5 Id. 6 G.R. No. 116665, March 20, 1996, 69 SCAD 643, 255 SCRA 215.

284

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Art. 1306

indemnity/penalty clause of the lease contract (paragraph 10) which does not appear to have been forced upon or fraudulently foisted on petitioner. Petitioner cannot now evade further liability for liquidated damages, for “after entering into such an agreement, petitioner cannot thereafter turn his back on his word with a plea that on him was inflicted a penalty shocking to the conscience and impressed with inequity as to call for the relief sought on the part of a judicial tribunal.”

In Pakistan International Airlines vs. Ople7 where the airline company and the employees entered into a contract providing stipulations regarding employment calculated to evade the provision of the Labor Code, the Supreme Court ruled that contractual stipulations contravening provisions of law designed to protect laborers and employees were not valid. Particularly, the Supreme Court ruled: In its third contention, petitioner PIA invokes paragraphs 5 and 6 of its contract of employment with private respondents Farrales and Mamasig, arguing that its relationship with them was governed by the provisions of its contract rather than by the general provisions of the Labor Code. Paragraph 5 of that contract set a term of three (3) years for that relationship, extendible by agreement between the parties; while paragraph 6 provided that, notwithstanding any other provision in the contract, PIA had the right to terminate the employment agreement at any time by giving one-month’s notice to the employee or, in lieu of such notices, one-month’s salary. A contract freely entered into should, of course, be respected, as PIA argues, since a contract is the law between the parties. The principle of party autonomy in contracts is not, however, an absolute principle. The rule in Article 1306, of our Civil Code is that the contracting parties may establish such stipulations as they may deem convenient, “provided they are not contrary to law, morals, good customs, public order or public policy.” Thus, counter-balancing the principle of autonomy of contracting parties is the equally general rule that provisions of applicable law, especially provisions relating to matters affected with public policy, are deemed written into the contract. Put a little differently, the governing principle is that parties may not contract away applicable provisions of law especially peremptory provisions dealing with matters heavily impressed with public interest. The law relating to labor and employment is clearly such an area and parties are not at liberty to insulate themselves and their relationships from the impact of labor laws and regulations G.R. No. 61594, September 28, 1990, 190 SCRA 90.

7

Art. 1306

Contracts General Provisions

by simply contracting with each other. It is thus necessary to appraise the contractual provisions invoked by petitioner PIA in terms of their consistency with applicable Philippine law and regulations. As noted earlier, both the Labor Arbiter and the Deputy Minister, MOLE, in effect held that paragraph 5 of that employment contract was inconsistent with Articles 280 and 281 of the Labor Code as they existed at the time the contract of employment was entered into, and hence refused to give effect to said paragraph 5. This article reads as follows: “Art. 280. Security of Tenure — In cases of regular employment, the employer shall not terminate the services of an employee except for a just cause or when authorized by this Title. An employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and to his backwages computed from the time his compensation was withheld from him up to the time of his reinstatement. Art. 281. Regular and Casual Employment — The provisions of written agreement to the contrary notwithstanding and regardless of the oral agreements of the parties, an employment shall be deemed to be regular where the employee has been engaged to perform activities which are usually necessary or desirable in the usual business or trade of the employer, except where the employment has been fixed for a specific project or undertaking, the completion or termination of which has been determined at the time of the engagement of the employee or where the work or services to be performed is seasonal in nature and the employment is for the duration of the season. An employment shall be deemed to be casual if it is not covered by the preceding paragraph: Provided, That, any employee who has rendered at least one year of service, whether such service is continuous or broken, shall be considered as regular employee with respect to the activity in which he is employed and his employment shall continue while such actually exists.” Examining the provisions of paragraphs 5 and 6 of the employment agreement between petitioner PIA and private respondents, we consider that those provisions must be read together and when so read, the fixed period of three (3) years

285

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Obligations and Contracts Text and Cases

Art. 1306

specified in paragraph 5 will be seen to have been effectively neutralized by the provisions of paragraph 6 of that agreement. Paragraph 6 in effect took back from the employee the fixed three (3)-year period ostensibly granted by paragraph 5 by rendering such period in effect as facultative one at the option of the employer PIA. For petitioner PIA claims to be authorized to shorten that term, at any time and for any cause satisfactory to itself, to a one-month period, or even less by simply paying the employee a month’s salary. Because the net effect of paragraphs 5 and 6 of the agreement here involved is to render the employment of private respondents Farrales and Mamasig basically at the pleasure of petitioner PIA, the Court considers that paragraphs 5 and 6 were intended to prevent any security of tenure from accruing in favor of private respondents even during the limited period of three (3) years, and thus to escape completely the thrust of Articles 280 and 281 of the Labor Code.

In Manila Bay Club Corporation vs. Court of Appeals8 where, because of the failure of the petitioner to comply with the insurance clause of the lease contract, the lessor terminated the lease pursuant to a provision in the same lease contract stipulating that failure to comply with any provision of the contract shall allow the lessor to rescind the same, the Supreme Court ruled on the validity of the termination and said: We do not agree with petitioner. Under paragraph 19 of the lease contract, the lessee’s (petitioner) failure or neglect to perform or comply with any of the covenants, conditions, agreements or restrictions stipulated shall result in the automatic termination and cancellation of the lease. It can be fairly judged from the tenor of paragraph 19 that the parties intended mandatory compliance with all the provisions of the contract. Among such provisions requiring strict observance is the “insurance clause” (paragraph 22) which expressly provides that “the building must be insured and the insurance premium must be for the account of the LESSEE. x x x” (italics supplied). Thus, upon petitioner’s failure to comply with the mandatory requirement of paragraph 22, private respondents were well within their right to rescind the lease contract by express grant of paragraph 19. Certainly, there is nothing wrong if the parties to the lease contract agreed on certain mandatory provisions concerning their respective rights and obligations, such as the procurement of the insurance and the rescission clause. For it is well to recall that contracts are respected as the law between the contracting parties, and they may establish such stipulations, clauses, terms and conditions G.R. No. 110015, July 11, 1995, 62 SCAD 485, 245 SCRA 715.

8

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Contracts General Provisions

287

as they may want to include. As long as such agreements are not contrary to law, morals, good customs, public policy or public order, they shall have the force of law between them.

In Philippine American General Insurance Co. vs. Mutuc 9 where the appellant, after agreeing that his bond may be renewed or extended without notification, claimed that such provision was null and void, and where the lower court, despite such claim, held him liable for the bond, the Supreme Court affirmed the decision of the lower court and ruled: There was no other valid conclusion that could be reached by the lower court. Even appellant must have seen that so it ought to be. That would account for the contention in his brief that the stipulation as to “any extension” without the need for his being notified was “null and void being contrary to law, morals, good customs, public order or public policy.” That is a pretty tall order. There is more than just a hint of hyperbole in such a sweeping allegation. Appellant though ought to have realized that assertion is not the equivalent of proof. A little more objectivity on his part should bring the realization that no offense to law or morals could be imputed to such a contractual provision. As to good customs, that category requires something to substantiate it. A mere denunciatory characterization certainly cannot suffice. That leaves public order or public policy. It is difficult to follow appellant’s train of reasoning. He would premise it on the indemnity agreement being a contract of adhesion. He was not at all compelled to agree to it. He was free to act either way. He had a choice. It may be more offensive to public policy, let alone morals or good customs, if thereafter he would be allowed to go back on his word. Besides the policy underlying such a stipulation in this litigation is clear. What was guaranteed was the faithful performance of defendant Mutuc of his employment as a member of the crew of a vessel plying overseas. That was more logical considering the difficulty of contracting him then for the extension without the need for notification. So the parties agreed. There could be thus nothing that did offend public policy or public order when such an arrangement was explicitly provided for. Appellant has not made out a case for reversal.

In Teves vs. People’s Homesite and Housing Corporation,10 the Supreme Court pertinently said:



In the absence of express legislation or constitutional

G.R. No. L-19632, November 13, 1974, 61 SCRA 22.

9

288

Obligations and Contracts Text and Cases

Art. 1306

prohibition, a court, in order to declare 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 contravene some established interest of society, or is inconsistent with sound policy and good morals which tends to undermine the security of individual rights, whether of personal liability or of private property.

In De Leon vs. Court of Appeals11 where the parties stipulated that “in consideration for a peaceful and amicable termination of relations between the undersigned and her lawful husband,” the parties agreed to give some properties to the wife and a monthly support for the children, and for the wife to agree to a judicial sepa-ration of property plus the amendment to the divorce proceedings initiated by the wife in the United States to conform to the agreement, the Supreme Court sustained the lower court’s ruling that the agreement is contrary to law, Filipino morals and public policy because the consideration of the agreement is the termination of the marriage by the parties which they cannot do on their own and without any legal basis. It is a rule that only laws existing at the time of the execution of a contract are applicable thereto and that later statutes do not govern said contract unless the latter is specifically intended to have a retroactive effect. A later law which enlarges, abridges or in any manner changes the intent of the parties to the contract necessarily impairs the contract itself and cannot be given retroactive effect without violating the constitutional prohibition against impairment of contracts. However, while the legal system upholds the sanctity of a contract so that a contract is deemed to be the law between the contracting parties, non-impairment of contracts or vested rights clauses will have to yield to the superior and legitimate exercise by the State of police power to promote the health, morals, peace, education, good order, safety and general welfare of the people. Moreover, statutes promulgated in exercise of a valid police power must be read into every contract.12 Thus, in Ortigas vs. Court of Appeals13 where the contract of sale provided that the property shall only be used for residential purposes but where the buyer sub-sequently built a commercial edifice in consonance with a later zoning ordinance classifying the area as a commercial zone, the Supreme Court ruled that the construction was proper because the restric-tions in the 10 G.R. No. L-21498, June 27, 1968, 23 SCRA 1141; Gabriel vs. Monte de Piedad, 71 Phil. 479. 11 G.R. No. 80965, June 6, 1990, 186 SCRA 345. 12 Ortigas & Company., Ltd. vs. Court of Appeals, G.R. No. 126102, December 4, 2000, 139 SCAD 158, 346 SCRA 748.

Art. 1307

Contracts General Provisions

289

contract of sale were deemed extinguished by the retroactive operation of the zoning ordinance and could no longer be enforced.14 Article 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. (n) Innominate contracts under the Civil Code are those which are not specifically governed by any provision in the Civil Code or special law but which likewise involve the fulfillment or accomplishment of some prestations. They are governed by the following: 1)

Stipulation of the parties. The parties may have some arrangements which they feel should bind them but which nevertheless do not have any exact legal provisions in the Civil Code to govern the nature of the obligation appertaining to it. Following the general rule on contracts, they can therefore stipulate any provision, term and condition that will govern the enforceability of their agreement provided they are not contrary to law, morals, good customs, public order, or public policy;

2)

Provisions in the law of obligations and contracts under Title I and II of the Civil Code. Innominate contracts still involve prestations which are to be accomplished by the parties. Though they may be innominate, they are still contracts which are sources of obligations. Hence, they should likewise follow the general rule on obligations and contracts;

3)

Rules governing the most analogous nominate contracts. The Civil Code provides for various types of nominate contracts, namely: sale,15 barter or exchange,16 lease,17 partnership,18 agency,19 loan,20 deposit,21 aleatory contracts,22 compromises, 23 guaranty, 24 pledge, 25 mortgage, 26 and antichresis.27 Other special laws govern some other types of contracts like insurance, real estate mortgage, and charter party;

4)

Customs of the place. Custom is a rule of conduct formed

Ibid. Ibid. 15 Book IV Title VI of the 1950 Civil Code, Articles 1458 to 1637. 16 Book IV Title VII of the 1950 Civil Code, Articles 1638 to 1641. 17 Book IV Title VIII of the 1950 Civil Code, Articles 1642 to 1766.

13



14

290

Obligations and Contracts Text and Cases

Art. 1307

by repetition of acts uniformly observed as a social rule, legally binding and obligatory and it must be proved as a fact according to the rules of evidence.28

Innominate contracts may be divided into the kind of prestation it obligates the parties to do. It can involve a prestation where the parties mutually give each other a certain thing (do ut des) or mutually render a service (facio ut facias). It may likewise involve a mixed prestation such that one party gives something and the other party does something (do ut facias; facias ut des). In Dizon vs. Gaborro29 where a contract was entered into whereby the respondent assumed to pay the indebtedness of petitioner to certain banks, and in consideration therefor, respondent was given the possession, the enjoyment and use of certain lands until petitioner can reimburse fully the respondents the amounts paid by the latter to the banks, to accomplish the following ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit of the possessor; (c) assure the return of the land to the petitioner thus rendering equity and fairness to all parties concerned, the Supreme Court said: In view of all these considerations, the law and jurisprudence, and the facts established, We find that the agreement between petitioner Dizon and respondent Gaborro is one of those innominate contracts under Art. 1302 of the New Civil Code whereby the petitioner and respondent agreed “to give and to do” certain rights and obligations respecting the lands and mortgage debts of petitioner which would be acceptable to the bank, but partaking of the nature of an antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned.

In Corpus vs. Court of Appeals30 where the agreement as to legal fees between a lawyer and his client was not reduced into writing but Book IV, Title IX of the 1950 Civil Code, Articles 1767 to 1867. Book IV, Title X of the 1950 Civil Code, Articles 1868 to 1932. 20 Book IV, Title XI of the 1950 Civil Code, Articles 1933 to 1961. 21 Book IV, Title XII of the 1950 Civil Code, Articles 1962 to 2009. 22 Book IV, Title XIII of the 1950 Civil Code, Articles 2010 to 2027. 23 Book IV, Title XIV of the 1950 Civil Code, Articles 2028 to 2046. 24 Book IV, Title XV of the 1950 Civil Code, Articles 2047 to 2084. 25 Book IV, Title XVI, Chapter 2 of the Civil Code, Articles 2085-2123. 26 Id., Chapter 3, Articles 2085-2092, Articles 2124 to 2131. 27 Id., Chapter 4 of the Civil Code, Articles 2132 to 2139. 28 Yao Kee vs. Sy-Gonzales, G.R. No. L-55960, November 24, 1988, 167 SCRA 736. 29 G.R. No. L-36821, June 22, 1978, 83 SCRA 688. 18

19

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Contracts General Provisions

291

there were indicators that payment of the same was contemplated by the parties, the Supreme Court said: Moreover, the payment of attorney’s fees to respondent David may also be justified by virtue of the innominate contract of facio ut des (I do and you give) which is based on the principle that “no one shall unjustly enrich himself at the expense of another.” Innominate contracts have been elevated to a codal provision in the New Civil Code by providing under Article 1307 that such contracts shall be regulated by the stipulations of the parties, by the general provisions or principles of obligations and contracts, and by the customs of the people. The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained the claim of plaintiff Perez for payment of services rendered against defendant Pomar despite the absence of an express contract to that effect, thus: “It does not appear that any written contract was entered into between the parties for the employment of the plaintiff as interpreter, or that any other innominate contract was entered into; but whether the plaintiff’s services were solicited or whether they were offered to the defendant for his assistance, inasmuch as these services were accepted and made use of by the latter, we must consider that there was a tacit and mutual consent as to the rendition of the services. This gives rise to the obligation upon the person benefited by the services to make compensation therefor, since the bilateral obligation to render service as interpreter, on the one hand and on the other to pay for the service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code). xxx x x x 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 defendant, he having accepted the benefit of the service, to pay a just compensation therefor, by virtue of the innominate contract of facio ut des implicitly established. x x x”

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a) This provision expresses the concept of mutuality of contracts.31 In Garcia vs. Rita Legarda, Inc.32 where a contract to sell a real property stipulated that the vendor was given the right to unilaterally rescind or terminate the contract in the event the other party failed 30 G.R. No. L-40424, June 30, 1980, 98 SCRA 424. to pay any of the required installments of the purchase price, the

292

Obligations and Contracts Text and Cases

Art. 1308

Supreme Court ruled that such provision did not violate Article 1308 and explained: The above legal provision is a virtual reproduction of Article 1256 of the old Civil Code but it was so phrased as to emphasize the principle that the contract must bind both parties. This, of course, is based firstly, on the principle that obligations arising from contracts have the force of law between the contracting parties and secondly, that there must be mutuality between parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom (8 Manresa 556). Its purpose is to render void a contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties. x x x The above stipulation, to our mind, merely gives the vendor “the right to declare this contract cancelled and of no effect” upon fulfillment of the conditions therein set forth. It does not leave the validity or compliance of the contract “entirely to the will of one of the contracting parties;” the stipulation or agreement simply says that in case of default in the payment of installments by the vendee, he shall have (1) “a month of grace,” and that (2) should said month of grace expire without the vendee paying his arrears, he shall have another “period of 90 days” to pay “all the amounts he should have paid,” etc., then the vendor “has the right to declare this contract cancelled and of no effect.” We have heretofore upheld the validity of similar stipulations. In Taylor vs. Ty Tieng Piao, etc. (43 Phil. 873, 876-878) the ruling was that a contract expressly giving to one party the right to cancel the same if a resolutory condition therefor agreed upon — similar to the one under consideration — is not fulfilled, is valid, the reason being that when the contract is thus cancelled, the agreement of the parties is in reality being fulfilled. Indeed, the power thus granted can not be said to be immoral, much less unlawful, for it could be exercised — not arbitrarily — but only upon the other contracting party committing the breach of contract of non-payment of the installments agreed upon. Obviously, all that said party had to do to prevent the other from exercising the power to cancel the contract was for him to comply with his part of the contract. And in this case, after the maturity of any particular installment and its non-payment, the contract gave him not only a month of grace but an additional period of 90 days. Mendoza vs. Court of Appeals, G.R. No. 116710, June 25, 2001. G.R. No. L-20175, October 30, 1967, 21 SCRA 555; See also Philippine Banking Corporation vs. Lui She, G.R. No. L-17587, September 12, 1967, 21 SCRA 52. 33 G.R. No. 124290, January 16, 1998, 90 SCAD 325, 284 SCRA 357.

31



32

Art. 1308

Contracts General Provisions

293

In Allied Banking Corporation vs. Court of Appeals,33 the Supreme Court ruled that a stipulation in a lease contract to the effect that the contract “may be renewed for a like term at the option of the lessee” is valid. It does not go against the attribute of mutuality of contracts. Such right on the part of the lessee is part of the consideration in the contract. The clause likewise means that, once the lessee exercises the option to renew, all the terms and conditions of the old contract are renewed and not only the period. In Philippine National Bank vs. Court of Appeals34 where PNB and the debtor entered into a loan agreement stipulating, among others, that PNB was authorized to increase the stipulated 18% interest per annum within the limits prescribed by law at any time depending on whatever policy it [PNB] may adopt in the future provided that the interest rate on the note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board, and where the PNB indeed increased the rates to 32%, then subsequently to 41% and then finally to 48% within the year over the objection of the debtor, the Supreme Court declared null and void such increases on the ground that, at that time, Presidential Decree No. 116 specifically provides that increases in interest rates shall be made “once every twelve months” and furthermore such increases violated the mutuality of contracts enunciated in Article 1308 of the Civil Code, thus: In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent upon the exclusive will of the one of the contracting parties is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative “take it or leave it” (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. G.R. No. 88880, April 30, 1991, 196 SCRA 536. G.R. No. 103338, January 4, 1994, 47 SCAD 55, 229 SCRA 60. 36 See Villalon vs. Court of Appeals, G.R. No. 116996, December 2, 1999, 116 SCAD



34



35



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Obligations and Contracts Text and Cases

Arts. 1309-1310

However, contracts of adhesion are not per se void. There must be a showing that it is highly inequitable for such contract to be invalidated. Thus in Serra vs. Court of Appeals35 where the contract was assailed by one party who was a lawyer-CPA as invalid for being a contract of adhesion, the Supreme Court said: A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or his “adhesion” thereto. These types of contracts are as binding as ordinary contracts. Because in reality, the party who adheres to the contract is free to reject it entirely. Although, this Court will not hesitate to rule out blind adherence to terms where facts and circumstances will show that it is basically one-sided. We do not find the situation in the present case to be inequitable. Petitioner is a highly educated man, who, at the time of the trial was already a CPA-Lawyer, and when he entered into the contract, was already a CPA, holding a respectable position with the Metropolitan Manila Commission. It is evident that a man of his stature should have been more cautious in transactions he enters into, particularly where it concerns valuable properties. He is amply equipped to drive a hard bargain if he would be so minded.

Article 1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. (n) Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. (n) The parties may constitute a third party to determine the performance of the contract. The decision shall become effective when both of the contracting parties already have knowledge of the decision. It will not be binding if only one of the parties knows of the decision. This determination must however not destroy the nature of mutuality of the contract between the principal parties based on their essential equality. Hence, the law requires that the determination must not be evidently inequitable. Otherwise the court shall decide what is equitable under the circumstances. For example, A and B enter into a contract whereby A will sing in the nightclub of B for 2 days. The contract stipulates that, for two days, A is to be paid P5,000 for such number of songs to be determined by 499, 319 SCRA 530; Garcia vs. Court of Appeals, 258 SCRA 446; Capitol Insurance & Surety Co., Inc. vs. Central Azucarera del Danao, 221 SCRA 98. 37 G.R. No. 115117, June 8, 2000, 127 SCAD 395, 333 SCRA 170.

Art. 1311

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X two days before the performance, and any violation renders the contract ineffectual entitling B not to pay A any consideration as a penalty. They sign the contract. Later, X makes a determination that A is to sing 20 songs, selected by X continually without a break starting from 6:00 in the evening to 2:00 the next morning; and, if the nightclub is filled with people, A will give an encore three times divided into 30 minutes each time. A shall only sing those specifically requested by the audience, and in case he does not know the song, his fee is to be reduced. X notified A two days before the performance that the latter will sing 15 English rock songs and 5 Norwegian songs which obviously A does not know. This is clearly a situation where the performance is so inequitable. In fact the contract itself and not merely the determination of its performance is almost left to the will of the third party and it greatly favors the nightclub owner. Also, it tends to destroy the basic equality of the contracting parties. A can go to court which will decide what is equitable under the circumstances. Court intervention is necessary in order that the intent of the parties will not be rendered nugatory by the inequitable terms and conditions of a third party. Article 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. (1257a) The nature of relativity of contracts is enunciated in Article 1311. Generally, contracts take effect only between the immediate parties to the same. Hence, as a general rule, a stranger cannot invoke the contract of another for his own interest or for a source of an alleged prejudice. A party to a contract cannot impose any obligation or liability to one who, under its terms, is a stranger to the said contract.36 Thus, in Integrated Packaging Corporation vs. Court of Appeals37 where the company-petitioner, which was itself defaulting in paying its supplier, sued the said supplier-private

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respondent allegedly for causing damage to it in that it was not able to comply with its contract with another corporation (Philacor) because the supplier-private respondent failed to deliver the materials which were supposed to be used by the company-petitioner for the orders of the said corporation, the Supreme Court rejected any claim of damages in favor of the company-petitioner, not only because it was shown that the non-delivery of the materials by the supplier-private respondent was justified in view of the non-payment by the company of the deliveries, but also because the supplier-private respondent has absolutely nothing to do with the contract between the companypetitioner and his client-corporation (Philacor). The Supreme Court said: As correctly held by the appellate court, private respondent cannot be held liable under the contracts entered into by petitioner with Philacor. Private respondent is not a party to said agreements. It is also not a contract pour autrui. Aforesaid contracts could not affect third persons like private respondents because of the basic civil law principle of relativity of contracts which provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof. Indeed, the order agreement entered into by petitioner and private respondent has not been shown as having a direct bearing on the contracts of petitioner with Philacor. As pointed out by private respondent and not refuted by petitioner, the paper specified in the order agreement between petitioner and private respondent are markedly different from the paper involved in the contracts of petitioner with Philacor. Further-more, the demand made by Philacor upon petitioner for the latter to comply with its printing contract is dated February 15, 1984, which is clearly made long after private respondent had filed its complaint on August 14, 1981. This demand relates to contracts with Philacor dated April 12, 1983 and May 13, 1983, which were entered into by petitioner after private respondent filed the instant case. To recapitulate, private respondent did not violate the order agreement it had with petitioner. Likewise, private respondent could not be held liable for petitioner’s breach of contract with Philacor. It follows that there is no basis to hold private respondent liable for damages. Accordingly, the appellate court 38 William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913 Edition, Indianapolis, The Bobbs-Merrill Company, Page 717. 39 Id. 40 Id. 41 G.R. No. 118248, April 5, 2000, 124 SCAD 464, 329 SCRA 666.

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did not err in deleting the damages awarded by the trial court to petitioner.

The basic principle of relativity of contracts extends to the principal parties’ assigns and heirs. Under certain conditions, the law operates to effect the transfer of a chose of action from one person to another without any concurring act on the part of the parties or indeed without their assent.38 The usual ways by which such transfers are brought to pass are by the transfer of an interest in land, by marriage, and by death.39 Hence, the period of a contract of lease is binding upon the heirs of the lessor. Likewise, a sublessee is bound by the terms of the principal contract of the lessor and the lessee. Indeed, real property is peculiar in that, upon its transfer, covenants may be annexed to the contract which run with the land and one who subsequently acquires an interest therein takes it subject to the benefits and obligations of such covenants.40 In DKH Holdings Corporation vs. Court of Appeals41 where the sole heir of the lessor refused to honor the lease contract entered into by the deceased lessor contending that, though he inherited the property from the deceased lessor, he was not a party to the lease contract, the Supreme Court said that the sole heir must honor the contract because in inheriting the property, he acquired all the rights and obligations of the deceased lessor with respect to the property. Pertinently, the Supreme Court based its decision on Article 1311 and stated: As early as 1903, it was held that “He who contracts does so for himself and his heirs.”42 In 1952, it was ruled that if the predecessor was duty-bound to reconvey land to another, and at his death the reconveyance had not been made, the heirs can be compelled to execute the proper deed for reconveyance. This was grounded upon the principle that heirs cannot escape the legal consequences of a transaction entered into by their predecessorin-interest because they have inherited the property subject to the liability affecting their common ancestor.43 It is futile for Victor to insist that he is not a party to the contract because of the clear provision of Article 1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is privity of interest between him and his deceased mother. He only succeeds to what rights his mother had and what is valid and binding Eleizeguii vs. Lawn Tennis Club, G.R. No. 967, 2 Phil. 309. Carillo vs. Salak de Paz, G.R. No. L-4133, 91 Phil. 82. 44 DKC Holdings Corporation vs. Court of Appeals, G.R. No. 118248, April 5, 2000, 124 SCAD 464, 329 SCRA 666. 45 Article 1973 of the 1950 Civil Code. 46 Coquia vs. Fieldman’s Insurance Co., Inc., G.R. No. L-23276, November 29,

42



43

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against her is also valid and binding as against him. x x x In the case at bar, the subject matter of the contract is likewise a lease, which is a property right. The death of a party does not excuse non-performance of a contract which involves a property right, and the rights and obligations thereunder pass to the personal representatives of the deceased. Similarly, nonperformance is not excused by the death of the party when the other party has a property interest in the subject matter of the contract. Under both Article 1311 of the Civil Code and jurisprudence, Victor is bound by the subject Contract of Lease with Option to Buy.

Transmission of rights and obligations in a contract may likewise be agreed upon by the parties. Thus, a contract may provide that, in the event a contractor fails to finish the house on time, another contractor may assume his place in the contract subject to the same terms and conditions. If the transferee is the heir of the decedent, he shall not be held liable beyond the value of the property he received from the decedent. Hence, if the deceased left the heir a property which, however, was a collateral for a debt which the deceased incurred during his lifetime, the creditor can go against the property to pay off the indebtedness of the deceased. If the property is not sufficient to satisfy the debt, the creditor cannot personally go against the heir to collect the deficiency. However, the law likewise provides that contracts cannot take effect with respect to the heirs or assigns in three (3) cases. The first case is when the nature of the contract does not allow transmission. Hence, a contract which binds a person to sing in a particular nightclub because of the special way he sings his songs is not transmissible because the hiring of the singer is quite personal and his abilities cannot be exactly duplicated by any person. Moreover, the audience may have bought the tickets to the show precisely because that particular singer, and nobody else, will sing. In American Jurisprudence, “Where acts stipulated in a contract require the exercise of special knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal qualification of one or both parties, the agreement is of a personal nature, and terminates on the death of the party who is required to render such service.” 1968, 26 SCRA 178; Florentino vs. Encarnacion, 79 SCRA 193 (1977). 47 Kauffman vs. Philippine National Bank, 42 Phil. 182; Bank of the Philippine Islands vs. V. Concepcion Hijos, Inc., 50 Phil. 806; Uy Tam vs. Leonard, 30 Phil. 471.

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It has also been held that a good measure of determining whether a contract terminates upon the death of one of the parties is whether it is of such a character that it may be performed by the promissor’s personal representative. Contracts to perform personal acts which cannot be as well performed by others are discharged by the death of the promissory. Conversely, where the service or act is of such a character that it may as well be performed by another, or where the contract, by its terms, shows that performance by others was contemplated, death does not terminate the contract or excuse non-performance.44

The second instance is when the parties stipulate that no transmission of rights shall be allowed. For example, the parties to a contract of lease can provide a stipulation that the lease contract cannot be subleased and a sublease without the consent of the lessor shall allow the lessor to terminate the lease. The third case is when the law provides non-transmission. Thus, in a contract of voluntary deposit, the depositary cannot deposit the thing with a third person, unless there is a stipulation to the contrary.45 Also, in lease, Article 1649 of the Civil Code provides that “the lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary.” The second paragraph of Article 1311 is but a restatement of the well-known principle concerning contracts pour autrui, the enforcement of which may be demanded by a third party for whose benefit it has been made, although not a party to the contract, before the stipulation in his favor has been revoked by the contracting parties.46 There must be a clear intent to benefit the third party. It is insufficient that the third party be merely incidentally benefited.47 The requisites of a stipulation pour autrui are the following: 1.

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.

Neither of the contracting parties bears the legal representation or authorization of the third party;48

5.

The favored party must have communicated his acceptance

Young vs. Court of Appeals, G.R. No. 79518, January 13, 1989, 169 SCRA 213. G.R. No. L-79734, December 8, 1988, 168 SCRA 373. 50 William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913



48



49



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of the stipulation to the obligor before its revocation.

In Marmont Resort Hotel vs. Guiang49 where a memorandum of agreement was entered into between Marmont Hotel and Maris Trading for the installation of a complete water supply facility, and where the installation encroached on the property of the respondentspouses with the latter’s permission and which encroachment eventually prompted Maris Trading and the respondent spouses to enter into a second memorandum of agreement stipulating that, for valuable monetary consideration and the fact that the installation and the drilling of the water facility for the benefit of Marmont Hotel were made in the property of the respondent spouses with their consent, the latter shall cede their possessory rights over the property to Maris Trading, the Supreme Court ruled that the respondent spouses can be held liable for not allowing Marmont Hotel from inspecting the water facility in their property, thus: It is clear from the foregoing stipulations that petitioner Marmont was to benefit from the second Memorandum of Agreement. In fact, said stipulations appear to have been designed precisely to benefit petitioner and, thus, partake of the nature of stipulations pour autrui, contemplated in Article 1311 of the Civil Code. A stipulation pour autrui is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, which stipulation is found in a contract entered into by parties neither of whom acted as agent of the beneficiary. We believe and so hold that the purpose and intent of the stipulating parties (Maris Trading and respondent spouses) to benefit the third person (Petitioner Marmont) is sufficiently clear in the second Memorandum of Agreement. Marmont was not of course a party to that second Agreement, but as correctly pointed out by the Trial Court and the appellate court, the respondent spouses could not have prevented Maris Trading from entering the property possessory rights over which had thus been acquired by Maris Trading. That respondent spouses remained in physical possession of that particular bit of lane, is of no moment: they did so simply upon the sufferance of Maris Trading. Had Maris Trading, and not the respondent spouses, been in physical Edition, Indianapolis, The Bobbs-Merrill Company, Page 671, citing Chung Kee vs. Davidson, 73 Cal. 522, 15 Pac. 100; Bacon vs. Davis, 9 Cal. App. 83, 98 Pac. 71; Bristow vs. Lane, 21 Ill. 194; Livingstone vs. Chicago & N.W.R. Co., 142 Iowa 404, 120 N.W. 1040; Knott vs. Dudubque & S.C. Ry. Co., 84 Iowa 462, 51 N.W. 57; Burton vs. Larkin, 36 Kans, 246, 13 Pac. 398, 59 Am. Rep. 541; Duchamp vs. Nicholson, 2 Mart. (La.) (N.S.) 151; Maxfield vs. Schwartz, 43 Minn, 221, 45 N.W. 429. 51 Bank of America NT & SA vs. Intermediate Appellate Court, G.R. No. L-74521,

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possession, we believe that Marmont would have been similarly entitled to compel Maris Trading to give it (Marmont) access to the site involved. The two (2) courts below failed to take adequate account of the fact that the sole purpose of Maris Trading in acquiring possessory rights over that specific portion of the land where well and pump and piping had been installed, was to supply the water requirements of petitioner’s hotel. That said purpose was known by respondent spouses, is made explicit in the second Memorandum of Agreement. Maris Trading itself had no need for a water supply facility; neither did the respondent spouses. The water facility was intended solely for Marmont Resort Hotel. The interest of Marmont cannot therefore be regarded as merely “incidental.”

However, it is unnecessary that such third person be always named in the contract.50 The benefit must only be a part of the contract contained in one of its stipulations and should not constitute the whole contract. Thus, a letter of credit in commercial transactions in favor of the exporter becomes ultimately but the result of a stipulation pour autrui.51 In a letter of credit transaction, the importer and a bank enters into an agreement where the bank pays an exporter in another country of goods ordered and delivered to the importer. The exporter-beneficiary therefore benefits from the stipulation in a contract between the importer and the bank. Also in Coquia vs. Fieldman’s Insurance Co., Inc.,52 the Supreme Court considered a particular insurance contract as a contract pour autrui and narrated thus: It appears that on December 1, 1961, appellant Fieldman’s Insurance Company, Inc. — hereinafter referred to as the Company — issued, in favor of the Manila Yellow Taxicab Co., Inc. — hereinafter referred to as the Insured — a common carrier accident insurance policy, covering the period from December 1, 1961 to December 1, 1962. It was stipulated in said policy that: “The Company will, subject to the Limits of Liability and under the Terms of this Policy, indemnify the Insured in the event of accident caused by or arising out of the use

November 11, 1986, 145 SCRA 419; Vargas Plow Factory, Inc. vs. Central Bank, G.R. No. L-25732, February 27, 1969, 27 SCRA 84. 52 G.R. No. L-23276, November 29, 1968, 26 SCRA 178. 53 William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913 Edition, Indianapolis, The Bobbs-Merrill Company, Page 672, citing Bay vs. Williams, 112 Ill 91, 1 N.E. 340, 54 Am. Rep. 209; Seaman Hasbrouck, 35 Barb (N.Y.) 151; Smith vs. Pfluger, 126 Wis. 253, 105 N.W. 476, 110 Am. St. 911. 54 Id., citing Rogers vs. Gosnell, 58 Mo. 589; Lawrence vs. Fox, 20 N.Y. 268; Baker vs. Elgin, 11 Ore. 333, 8 Pac. 280; Brown vs. Markland, 16 Utah 360, 52 Pac. 597, 67 Am. St. 629; Tweeddale vs. Tweeddale, 116 Wis. 517, 93 N.W. 440, 61 L.R.A. 509, 96

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of Motor Vehicle against all sums which the Insured will become legally liable to pay in respect of: 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.” While the policy was in force, or on February 10, 1962, a taxicab of the Insured, driven by Carlito Coquia, met a vehicular accident at Mangaldan, Pangasinan, in consequence of which Carlito died. The Insured filed therefore a claim for P5,000.00 to which the Company replied with an offer to pay P2,000.00, by way of compromise. The Insured rejected the same and made a counter-offer for P4,000.00, but the Company did not accept it. Hence, on September 18, 1962 the Insured and Carlito’s parents, namely, Melecio Coquia and Maria Espanueva — hereinafter referred to as the Coquias — filed a complaint against the Company to collect the proceeds of the afore-mentioned policy. In its answer, the Company admitted the existence thereof, but pleaded lack of cause of action on the part of the plaintiffs. After appropriate proceedings, the trial court rendered a decision sentencing the Company to pay to the plaintiffs the sum of P4,000.00 and the costs. Hence, this appeal by the Company, which contends that plaintiffs have no cause of action because: 1) the Coquias have no contractual relation with the Company; and 2) the Insured has not complied with the provisions of the policy concerning arbitration. As regards the first defense, it should be noted that, 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 Article 1311 of the Civil Code of the Philippines, reading: “If a contract should contain some stipulation in favor of a third person, he may demand its fufillment 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.” This is but the restatement of a well-known principle concerning contract 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, 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? Am. St. 1003.

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In connection, said policy provides, inter alia:

“Section I — Liability to Passengers. 1. The Company will, subject to the Limits of Liability and under the Terms of this Policy, indemnify the Insured in the event of accident caused by or arising out of the use of Motor Vehicle against all sums which the Insured will become legally liable to pay in respect of: Death or bodily injury to any fare-paying passenger including the Driver x x x who is riding in the Motor Vehicle insured at the time of accident or injury.

“Section II — Liability to the Public x x x

xxx

xxx

“3. In terms of and subject to the limitations of and for the purposes of this Section, the Company will indemnify any authorized Driver who is driving the Motor Vehicle x x x.”

“Conditions xxx

xxx

xxx

“7. In the event of death of any person entitled to indemnity under this Policy, the Company will in respect of the liability incurred by such person, indemnify his personal representatives in terms of and subject to the limitations of this Policy, provided, that such representative shall, as though they were the Insured, observe, fulfill and be subject to the Terms of this Policy insofar as they can apply. “8. The Company may, at its option, make indemnity payable directly to the claimants or heirs of claimants, with or without securing the consent of or prior notification to the Insured, it being the true intention of this Policy, the liabilities of the Insured towards the passengers of the Motor Vehicle and the Public.” Pursuant to these stipulations, 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.” In fact, the Company “may, at its option, make indemnity payable directly to the claimants or heirs of claimants x x x it being the true intention of this Policy to protect x x x the liabilities of the Insured towards the passengers of the Motor Vehicle and the Public” — in other words, third parties. Thus, the policy under consideration is typical of contracts pour autrui, this character being made more manifest by the fact that the deceased driver paid fifty percent (50%) of the corresponding premiums, which were deducted from his weekly commissions. Under these conditions, it is clear that the Coquias

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— 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 herein.

The law likewise requires that, in stipulations pour autrui, the third party communicates his acceptance to the obligor before its revocation. It is not necessary as a general rule for the third party to make a formal acceptance prior to bringing of the suit.53 The assent of the beneficiary will be presumed.54 The commencement of an action to enforce a promise is sufficient as an acceptance.55 In Mandarin Villa, Inc. vs. Court of Appeals56 where the owner of a restaurant refused to honor a credit card for the purpose of payment from a customer on the ground that its machine validating such credit card indicated that the latter had expired, when in fact it had not expired as clearly indicated in the card itself, and where the owner would have known such fact had it merely followed the rules it agreed upon with the credit card company providing that, in cases of expiration of the credit card as indicated in the machine, the restaurant owner-obligor should examine the card itself and follow certain other procedures, the Supreme Court found the restaurant-owner liable for damages anchoring its decision on the latter’s negligence and on Article 1311 of the Civil Code on pour autrui stipulations, thus: We note that Mandarin Villa Seafood Village is affiliated with BANKARD. In fact, an “Agreement” entered into by petitioner and BANKARD dated June 23, 1989, provides inter alia: “The MERCHANT shall honor validly issued PCCCI credit cards presented by their corresponding holders in the purchase of goods and/or services supplied by it provided that the card expiration date has not elapsed and the card number does not Id., citing North Alabama Development Co. vs. Orman, 55 Fed. 18, 5 C.C.A. 22; McCoy vs. McCoy, 32 Ind. App. 38, 69 N.E. 193, 102 Am. St. 223; Coppage vs. Gregg, 127 Ind. 359, 26 N.E. 903; Copeland vs. Summers, 138 Ind. 219, 35 N.E. 514, 37 N.E. 971; Motley vs. Manufacturers’ Ins. Co., 29 Maine 337, 50 Am. Dec. 591; Stariha vs. Greenwood, 28 Minn 521, 11 N.W. 76; Campbell vs. Smith, 71 N.Y. 26, 27 Am. Rep., 5; Blake vs. Atlantic Nat. Bank, 33 R.I. 464, 82 Atl. 225. 56 G.R. No. 119850, June 20, 1996, 71 SCAD 255, 257 SCRA 538. 57 G.R. No. 79518, January 13, 1989, 169 SCRA 213. 58 Equitable PCI Bank vs. Rosita Ku, G.R. No. 142950, March 26, 2001; Oro Cam Enterprises, Inc. vs. Court of Appeals, 116 SCAD 419, 319 SCRA 444. 59 Asuncion vs. Evangelista, G.R. No. 133491, October 13, 1999, 316 SCRA 848. 60 William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913 Edition, Indianapolis, The Bobbs-Merrill Company, Pages 663-665. 61 G.R. No. 120554, September 21, 1999, 314 SCRA 751. 55

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appear on the latest cancellation bulletin of lost, suspended and canceled PCCCI credit cards and, no signs of tampering, alterations or irregularities appear on the face of the credit card.” While private respondent may not be party to the said agreement, the above-quoted stipulation conferred a favor upon the private respondent, a holder of credit card validly issued by BANKARD. This stipulation is a stipulation pour autrui and under Article 1311 of the Civil Code private respondent may demand its fulfillment provided he communicated his acceptance to the petitioner before its revocation. In this case, private respondent’s offer to pay by means of his BANKARD credit card constitutes only an acceptance of the said stipulation but also an explicit communication of his acceptance to the obligor.

In Young vs. Court of Appeals,57 the Supreme Court also had the opportunity to decide on the matter of “communication of acceptance.” The pertinent portions of the case are as follows: Defendant Philippine Holding, Inc. is the former owner of a piece of land located at Soler St., Sta. Cruz, Manila, and a two storey building erected thereon, consisting of six units; Unit 1350 which is vacant, Unit 1352 occupied by Antonio Young, Unit 1354 by Rebecca C. Young, Unit 1356 by Chui Wan and Felisa Tan Yu, Unit 1358 by Fong Yook Lu and Ellen Yee Fong and Unit 1360 by the Guan Heng Hardware (Rollo, pp. 14-15). The owner Philippine Holding, Inc. secured an order from the City Engineer of Manila to demolish the building. Antonio Young, then a tenant of said Unit 1352, filed an action to annul the city Engineer’s demolition Order (Civil Case No. 123883) entitled Antonio S. Young vs. Philippine Holding, Inc. before the then Court of First Instance of Manila, Branch XXX. As an incident in said case, the parties submitted a Compromise Agreement to the Court on September 24, 1981. Paragraph 3 of said agreement provides that plaintiff (Antonio S. Young) and Rebecca Young and all persons claiming rights under them bind themselves to voluntarily and peacefully vacate the premises which they are occupying as lessees (Units 1352 and 1354, respectively) which are the subject of the condemnation and demolition order and to surrender possession thereof to the defendant Philippine Holding, Inc. within sixty (60) days from written notice, subject to the proviso that should defendant decide to sell the subject property or portion thereof, “plaintiff and Rebecca C. Young have the right of first refusal thereof.” (Rollo, p. 49).

62



63

29 Phil. 542. Article 1163 of the 1950 Civil Code.

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On September 17, 1981, Philippine Holding, Inc. had previously sold the above said property described in the compromise agreement by way of dacion in payment to PH Credit Corporation (Rollo, p. 49). On November 9, 1982, the property was subdivided into two parcels, one 244.09 sq.m. in area covering Units 1350, 1352 and 1354 (TCT No. 152439) and the other 241.71 sq.m. in area covering Units 1356, 1358 and 1360 (TCT No. 152440) and both titles were placed in the name of PH Credit Corporation. On December 8, 1982, PH Credit Corporation sold the property covered by TCT 152439 to the Blessed Land Development Corporation represented by its President Antonio T.S. Young and on September 16, 1983, PH Credit Corporation sold the property covered by TCT 152440 embracing Units 1356, 1358 and 1360 to spouses Fong Yook Lu and Ellen Yee Fong (Rollo, p. 15). Thereafter, petitioner Rebecca C. Young and her coplaintiffs, the spouses Chi Wan and Felisa Tan Yu filed in the Regional Trial Court of Manila, Civil Case No. 84-22676 for the annulment of the sale in favor of herein respondent spouses, Fong Yook Lu and Ellen Yee Fong and for specific performance and damages against the PH Credit Corporation and Philippine Holding, Incorporated. Plaintiff spouses Chui and Felisa Tan Yu alleged that defendant corporation and Francisco Villaroman, sold the property without affording them (the plaintiffs-spouses) the right of first refusal to purchase that portion of the property which they are renting. Plaintiff Rebecca C. Young, now petitioner, also claimed the right of the first refusal purportedly granted to her under the aforestated proviso of the abovesaid compromise agreement and prayed that the sale be annulled and that they be allowed to exercise her right of first refusal to purchase subject property (Rollo, p. 50). The lower court decided in favor of the defendants and against the plaintiffs, thus dismissing the complaint together with defendants’ counterclaims (Rollo, p. 15). On the other hand, the claim of Rebecca C. Young was similarly rejected by the trial court on the following grounds: (1) that she was not a party in the Civil Case No. 123883, wherein subject compromise agreement was submitted and approved by the trial court apart from the fact that she did not even affix her signature to the said compromise agreement; (2) that Rebecca Young had failed to present any evidence to show that she had

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demanded from the defendants-owners, observance of her right of first refusal before the said owners sold units 1356, 1358 and 1360; (3) that even assuming that her supposed right of first refusal is a stipulation for the benefit of a third person, she did not inform the obligor of her acceptance as required by the second paragraph of Article 1311 of the Civil Code. Chui Wan and Felisa Tan Yu and Rebecca C. Young, assisted by her husband, appealed to the Court of Appeals which dismissed the same on August 7, 1987, for lack of merit.

The petition is devoid of merit. xxx

xxx

xxx

Petitioner further argued that the stipulation giving her the right of first refusal is a stipulation pour autrui or a stipulation in favor of a third person under Article 1311 of the Civil Code. xxx

xxx

xxx

Assuming that petitioner is correct in claiming that this is a stipulation pour autrui, it is unrebutted that she did not communicate her acceptance whether expressly or impliedly. She insists however, that the stipulation has not yet been revoked, so that her present claim or demand is still timely. As correctly observed by the Court of Appeals, the above argument is pointless, considering that the sale of subject property to some other person or entity constitutes in effect a revocation of the grant of the right of first refusal to Rebecca C. Young.

Article 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 Law. (n) The article provides another example when a third person not a party to a contract is affected or may be subject to its provisions. Thus, a lease of real estate recorded in the Registry of Property between a lessor and a lessee shall bind a subsequent buyer who purchases and comes into the possession of the contract’s object which is the property leased. The latter is bound to honor the contract entered into by the former lessor. Likewise, a sublessee is bound by the contract of the lessor and the lessee. Hence, if the lessor terminates the lease contract for a valid cause, the sublessee can be ejected from the leased premises even if he is not a party to the lease contract. Likewise, if the lessor was successful in judicially ejecting the lessee,

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Arts. 1312-1313

the following can likewise be ejected despite the fact that they were not made parties to the ejectment suit: a) trespassers, squatters, or agents of the defendant-lessee fraudulently occupying the property to frustrate the judgment; b) guest or other occupants of the premises with the permission of the defendant-lessee; c) transferees pendente lite; d) sub-lessees; e) co-lessees; f) members of the family, relatives and other privies of the defendant-lessee.58 Also, a property mortgaged as a collateral of a debt and recorded in the Registry of Property shall bind any subsequent possessor-owner of the same.59 Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n) The articles provides another example when a third person not a party to a contract is affected by such contract. The objective of a contract is to be able to bind the parties to perform a particular obligation consistent with the provisions and the spirit of the contract. For this purpose, creditors are protected with respect to contracts intended to defraud them. Hence, Article 1381(3) provides that a contract shall be rescissible if it is undertaken in fraud of creditors when the latter cannot in any other manner collect the claim due them. In such a case, even if the creditor is not a party to the contract intended to defraud him, he is given legal personality by law to terminate the contract. Article 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n) Contracts are binding between and among the parties who entered into the same. The parties therefore are expected to comply with the contract in keeping with good faith, usage and law. Contract is a source of obligation and has the force of law between the contracting parties. But while a contract between two parties cannot impose on a stranger, without his assent, a liability in accordance with the terms of the contract, it is nevertheless true that a stranger does owe to the parties to the agreement a duty not to interfere 64 William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913 Edition, Indianapolis, The Bobbs-Merrill Company, Page 659. 65 Article 1166 of the 1950 Civil Code. 66 Article 1165 of the 1950 Civil Code. 67 EDCA Publishing vs. Santos, G.R. No. L-80298, April 26, 1990, 184 SCRA 614;

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309

with its performance. All persons are under a duty to respect the rights of others. The law recognizes that a contract confers certain rights on the person with whom it is made, and not only binds the parties to it by the obligation entered into, but also imposes on all the world, in a sense at least, the duty of respecting the contractual obligation. x x x This doctrine is not confined to contract of services. It covers every case where one person maliciously persuades another to break any contract with a third person. When loss ensues, malice is the gist of the action for wantonly or maliciously inducing one to break his contract with intent to injure another. This does not mean that acts done under the right of competition or under cover of friendly neighborly counsel or mere persuasion are, generally speaking, wrongful in law or in fact. Still if the persuasion be used for the indirect purpose of injuring the plaintiff, or benefiting the defendant, at the expense of the plaintiff, it is a malicious act, which, in law and in fact, is a wrongful act and therefore an actionable act of injury issued from it. But with this explanation it may be said that in order to recover in such an action malice must be shown to exist. It is also true that no liability ordinarily attaches where the party sought to be charged in damages was acting in the lawful exercise of some distinct right. Moreover, if none of the legal rights of the plaintiff are interfered with, an action for damages cannot be maintained, An action for damages is not, however, the sole remedy. In a proper case one may properly be enjoined from in any way procuring the violation of lawful and valid contract. While the one who violates his contract may be personally liable to the other party thereto for its breach, the party guilty of such breach may, nevertheless, recover against the one who induces him to violate his contract when the latter, by such acts and persuasion, intended to injure the other contracting party or to coerce him into adopting a line of business against his will and judgment.60

Hence, if for example, A was contracted by B to be the resident painter in his studio for one year and C maliciously induces B to dishonor the contract so that he can go to C’s studio, C can be liable for damages under Article 1314. In Song Pin Bun vs. Court of Appeals,61 a company (Tek Hua Enterprises) leased property from the lessor DCCSI. After the lease expired, the company still occupied the premises. When the managing partner of Tek Hua Enterprises died, the son, So Ping Bun, of the said managing partner took possession of the premises for his own company, Trendsetter Marketing, using the leased premises as warehouse for his textile business. Hence, Tek Hua asked So Ping Bun and Trendsetter Marketing to vacate the premises. They refused

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and instead asked the lessor for the execution of formal contracts of lease with his own corporation. The lessor agreed. The lease contracts were executed. Tek Hua Enterprises sued for the nullification of the lease contracts on the ground of contractual interference under Article 1314 of the Civil Code. Tek Hua Enterprises won but did not order So Ping Bun and his company to pay damages. They were only ordered to pay attorney’s fees. Trendsetter Marketing and the son of the deceased managing partner of Tek Hua Enterprises contend that since no award of damages were imposed, they were not liable for attorneys fees. The Supreme Court rejected this contention by explaining the concept of tort interference, thus: The foregoing issues involve, essentially, the correct interpretation of the applicable law on tortuous conduct, particularly unlawful interference with contract. We have to begin, obviously, with certain fundamental principles on torts and damages. Damage is the loss, hurt, or harm which results from in-jury, and damages are the recompense or compensation awarded for the damage suffered. One becomes liable in an action for damages for a non-trespassory invasion of another’s interest in the private use and enjoyment of asset if: (a) the other has property rights and privileges with respect to the use or enjoyment interfered with, (b) the invasion is substantial, (c) the defendant’s conduct is a legal cause of the invasion, and (d) the invasion is either intentional and unreasonable or unintentional and actionable under general negligence rules. The elements of tort interference are: (1) existence of a valid contract; (2) knowledge on the part of the third person of the existence of contract; and (3) interference of the third person is without legal justification or excuse. A duty which the law of torts is concerned with is respect for the property of others, and a cause of action ex delicto may be predicated upon an unlawful interference by one person of the enjoyment by the other of his private property. This may pertain to a situation where a third person induces a party to renege on or violate his undertaking under a contract. In the case before us, petitioner’s Trendsetter Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner deprived respondent corporation of the latter’s property right. Clearly, and as correctly viewed by the appellate court, the three elements of tort interference above-mentioned are present in the instant case. Article 1475 of the New Civil Code. 68 Heirs of Quirico Seraspi vs. Court of Appeals, G.R. No. 135602, April 28, 2000, 125 SCAD 749. 69 Articles 1868 to 1932 of the 1950 Civil Code.

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Authorities debate whether interference may be justified where the defendant acts for the sole purpose of furthering his own financial or economic interest. One view is that, as a general rule, justification for interfering with the business relations of another exists where the actor’s motive is to benefit himself. Such justification does not exist where his sole motive is to cause harm to the other. Added to this, some authorities believe that it is not necessary that the interferer’s interest outweigh that of the party whose rights are invaded, and that an individual acts under an economic interest that is substantial, not merely de minimis, such that wrongful and malicious motives are nega-tived, for he acts in self-protection. Moreover, justification for protecting one’s financial position should not be made to depend on a comparison of his economic interest in the subject matter with that of others. It is sufficient if the impetus of his conduct lies in a proper business interest than in wrongful motives. As early as Gilchirst vs. Cuddy,62 we held that where there was no malice in the interference of a contract, and the impulse behind one’s conduct lies in a proper business interest rather than in wrongful motives, a party cannot be a malicious interferer. Where the alleged interferer is financially interested, and such interest motivates his conduct, it cannot be said that he is an officious or malicious intermeddler. In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the warehouse to his enterprise at the expense of respondent corporation. Though petitioner took interest in the property of respondent corporation and benefited from it, nothing on record imputes deliberate wrongful motives or malice on him. Section 1314 of the Civil Code categorically provides also that, “any third person who induces another to violate his contract shall be liable for damages to the other contracting party.” Petitioner argues that damage is an essential element of tort interference, and since the trial court and the appellate court ruled that private respondents were not entitled to actual, moral or exemplary damages, it follows that he ought to be absolved of any liability, including attorney’s fees. It is true that the lower courts did not award damages, but this was only because the extent of damages was not quantifiable. We had a similar situation in Gilchrist, where it was difficult or impossible to determine the extent of damage and there was nothing on record to serve as basis thereof. In that case, We refrained from awarding damages. We believe the same

70

Article 1868 of the 1950 Civil Code.

311

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conclusion applies in this case. While we do not encourage tort interferers seeking their economic interest to intrude into existing contracts at the expense of others, however, we find that the conduct herein complained of did not transcend the limits forbidding an obligatory award for damages in the absence of any malice. The business desire is there to make some gain to the detriment of the contracting parties. Lack of malice, however, precludes damages. But it does not relieve petitioner of the legal liability for entering into contracts and causing breach of existing ones. The respondent court correctly confirmed the permanent injunction and nullification of the lease contracts between DCCSI and Trendsetter Marketing, without awarding damages. The injunction saved the respondents from further damage or injury caused by petitioner’s interference.

Article 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258) Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. (n) A contract is the law between the parties. Any non-fulfillment of the contract will make the violator liable. The law likewise states that the parties are bound to fulfill all the consequences which, according to their nature, may be in keeping with good faith, usage and the law. Thus the parties are bound to exercise the diligence of a good father of a family with respect to the thing sought to be delivered unless there is another standard of care stipulated by the parties or required by a law.63 There is an implied obligation or duty to do the act contracted to be performed with reasonable care in order that the person or property of others may not be injured by any force which he sets in motion or by any agent or agency for which he is responsible.64 They are likewise obliged to deliver with the determinate thing which is the object of the contract all its accessions and accessories even though they may not have been mentioned.65 They shall be liable for fortuitous event in case of delay.66 Generally, a contract is perfected by mere consent of the parties. For example, a contract of sale is consensual and is perfected once agreement is reached between the parties on the subject matter and

Arts. 1315-1316

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313

the consideration.67 However, ownership over the object of the contract of sale is transferred only upon actual or constructive delivery.68 There are also contracts which are perfected, not by mere consent alone, but by the delivery of the object of the contract. These are real contracts such as deposit, pledge and commodatum. An accepted promise to deliver something by way of commodatum is binding upon the parties, but the commodatum itself shall be perfected upon the delivery of the object of the contract (Article 1934). Delivery is essential in commodatum because, in such a contract, the bailee in commodatum acquires the use of the thing loaned but not its fruits. Hence, if he does not have the object which he is entitled to make use, there can never be perfection. The contract can not be implemented. A contract of pledge is constituted by the owner of the object to be pledged to secure a loan. In a pledge, it is indispensable that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. This transfer of possession is a requirement of law under Article 2093. Hence, before a contract of pledge can be perfected, the object pledged must first be delivered. Delivery is also required before a contract of deposit is perfected because, under Article 1962, a deposit is constituted from the moment a person receives a thing belonging to another, with the obliga- tion and principal purpose of safely keeping it and of returning the same. Article 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 on whose behalf it has been Article 1910 of the 1950 Civil Code. Article 1911 of the 1950 Civil Code. 73 Article 1887 of the 1950 Civil Code. 74 Article 1874 of the 1950 Civil Code. 75 Executive Order No. 209 which took effect on August 3, 1988. 76 Article 220(6) of the Family Code of the Philippines. 77 Article 225 of the Family Code of the Philippines. 78 Id. 79 Id. 71 72

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Art. 1317

executed, before it is revoked by the other contracting party. (1259a) Normally, a person can contract in the name of another if such person has been validly constituted as an agent of the latter. The laws on agency will apply.69 By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.70 The principal of the agent must comply with all the obligations which the agent may have contracted within the scope of his authority. As for obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly.71 Even when the agent exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers.72 In the execution of the agency, the agent shall act in accordance with the instructions of the principal. In default thereof, he shall do all that a good father of a family would do, as required by the nature of the business.73 When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void.74 An example of a law which gives a right to certain persons to represent another is the Family Code of the Philippines.75 Specifically, the parents and those exercising parental authority have the right and duty to represent their unemancipated children in all matters affecting their interests.76 The father and the mother shall be the legal guardian of the property of the unemancipated common child without the necessity of a court appointment.77 In case of disagree-ment, the father’s decision shall prevail unless there is a judicial order to the contrary.78 Parents can enter into contract with respect to properties of their children even without court approval if this will involve only simple acts of administration like repairs of properties owned by the children. However, with respect to acts of dominion like selling, encumbering or alienating the properties of their children, court authority is needed; otherwise the contract shall be considered void. To protect the interest of the children, the law requires that where the value of the property or the annual income of the child exceeds P50,000.00, the parent concerned shall be required to furnish a bond in such amount as the court may determine, but not less than ten per centum (10%) of the value of the property or annual income, to Regal Films, Inc. vs. Concepcion, G.R. No. 139532, August 9, 2001. G.R. No. L-53820, June 15, 1992, 209 SCRA 763. 82 G.R. No. 139532, August 9, 2001, 152 SCAD 547.

80

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guarantee the performance of the obligations prescribed for general guardians.79 However, a contract entered into in the name of another by one who ostensibly might have but who, in reality, had no real authority or legal representation, or who, having such authority, acted beyond his powers, would be unenforceable80 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. In Yao Ka Sin vs. Court of Appeals,81 where the president and chairman of a corporation entered into a contract with another corporation, but where such president and chairman had no authority under the law or the corporate bylaws to enter into such agreement, the Supreme Court ruled that the contract entered into by such corporate official was unenforceable under Article 1317. The Supreme Court reached this conclusion in the following manner: The respondent Court correctly ruled that Exhibit “A” is not binding upon the private respondent. Mr. Maglana, its President and Chairman, was not empowered to execute it. Petitioner, on the other hand maintains that it is a valid contract because Mr. Maglana has the power to enter into contracts for the corporation as implied from the following provisions of the By-Laws of private respondent: a) The power of the Board of Directors to “. . . enter into (sic) agreement or contract of any kind with any person in the name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of the corporation and the existing provisions of law” (Exhibit “8-A”); and b) The power of the Chairman of the Board of Directors to “execute and sign, for and in behalf of the corporation, all contracts or agreements which the corporation may enter into (Exhibit “I-1”).

And even admitting, for the sake of argument, that Mr.

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Maglana was not so authorized under the By-Laws, the private respondent, pursuant to the doctrine laid down by this Court in Francisco vs. Government Service Insurance System and Board of Liquidators vs. Kalaw, is still bound by his act for clothing him with apparent authority.

We are not persuaded.

Since a corporation, such as the private respondent, can act only through its officers and agents, “all acts within the powers of said corporation may be performed by agents of its selection; and, except so far as limitations or restrictions may be imposed by special charter, by-laws, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents when once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons. Moreover, “x x x a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred.” While there can be no question that Mr. Maglana was an officer — the President and Chairman — of private respondent corporation at the time he signed Exhibit “A,” the above provisions of said private respondent’s By-Laws do not in any way confer upon the President the authority to enter into contracts for the corporation independently of the Board of Directors. That power is exclusively lodged in the latter. Nevertheless, to expedite or facilitate the execution of the contract, only the President — and not all the members of the Board, or so much thereof as a required for the act — shall sign it for the corporation. This is the import of the words through the president in Exhibit “8-A” and the clear intent of the power of the chairman “to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into” in Exhibit “I-1.” Both powers presuppose a prior act of the corporation exercised through the Board of Directors. No greater power can be implied from such express, but limited, delegated authority. Neither can it

Art. 1317

Contracts General Provisions

be logically claimed that any power greater than that expressly conferred is inherent in Mr. Maglana’s position as president and chairman of the corporation. Although there is authority “that if the president is given general control and supervision over the affairs of the corporation, it will be presumed that he has authority to make contracts and do acts within the course of its ordinary business,” We find such inapplicable in this case. We note that the private corporation has a general manager who, under its By-Laws has, inter alia, the following powers: “(a) to have the active and direct management of the business and operation of the corporation, conducting the same according to the order, directives or resolutions of the Board of Directors or of the president.” It goes without saying then that Mr. Maglana did not have a direct and active hand in the management of the business and operations of the corporation. Besides, no evidence was adduced to show that Mr. Maglana had, in the past, entered into contracts similar to that of Exhibit “A” either with the petitioner or with other parties. Petitioner’s last refuge then is his alternative proposition, namely, that private respondent had clothed Mr. Maglana with the apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such power. The rule is of course settled that “[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a parti-cular branch of it, continuously and publicly, for a considerable time.” Also, “if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents.” This “apparent authority may result from (1) the general manner by which the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general, or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers.” It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana with the apparent power to execute Exhibit “A” or any similar contract. This could have been easily done by evidence of similar acts

317

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executed either in its favor or in favor of other parties. Petitioner miserably failed to do that. Upon the other hand, private respondent’s evidence overwhelmingly shows that no contract can be signed by the president without first being approved by the Board of Directors; such approval may only be given after the contract passes through, at least, the comptroller, who is the NIDC representative, and the legal counsel. The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly unavailing to the petitioner. In said cases, this Court found sufficient evidence, based on the conduct and actuations of the corporations concerned, of apparent authority conferred upon the officer involved which bound the corporations on the basis of ratification. In the first case, it was established that the offer of compromise made by plaintiff in the letter, Exhibit “A,” was validly accepted by the GSIS. The terms of the offer were clear, and over the signature of defendant’s general manager, Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. It was sent by the GSIS Board Secretary and defendant did not disown the same. Moreover, in a letter remitting the payment of P30,000 advanced by her father, plaintiff quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and kept silent about the telegram. This Court then ruled that: “This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393). ‘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.’ ”

In the second case, this Court found:

“In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contacts, but that board itself, by its acts and through acquiescence, practically laid aside the by-law require-ment of prior approval.

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319

Under the given circumstances, the Kalaw contracts are valid corporate acts.” The inevitable conclusion then is that Exhibit “A” is an unenforceable contract under Article 1317 of the Civil Code which provides as follows: ARTICLE 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 on whose behalf it has been executed, before it is revoked by the other contracting party.”

The unenforceable contract however can be ratified expressly or impliedly by the person on whose behalf it has been executed, before it is revoked by the other contracting party. In Regal Films vs. Concepcion,82 the agent of a certain movie actor entered into an agreement with Regal Films designed to constitute as an addendum to the original agreements between the movie actor and Regal Films so that the lawsuit between the movie actor and Regal Films will finally be settled. The movie actor however disavowed the agreement entered into by the agent contending that, by the time the agent transacted the addendum, she was not anymore his agent. Hence in the preliminary conference in court, Regal Films intimated to the movie actor that it was willing to release him from the original contracts instead of pursuing the addendum. Thereupon, the movie actor surprisingly manifested to the court that he was accepting the addendum. On the basis of this acceptance, a decision by way of a compromise agreement was entered by the court. On appeal to the Supreme Court by Regal Films, the Supreme Court ruled that the compromise agreement which was the basis of the decision cannot be enforced. The Supreme Court said: A compromise is an agreement between two or more persons who, for preventing or putting an end to a lawsuit, adjust their respective positions by mutual consent in the way they feel they can live with. Reciprocal concessions are the very heart and life of every compromise agreement, where each party approximates and concedes in the hope of gaining balanced by the danger of losing. It is, in essence, a contract. Law and jurisprudence recite three minimum elements for any valid contact — (a) consent; (b) object certain which is the subject matter of the contract; and (c) cause of the obligation which is established. Consent is manifested by the meeting of the offer and the acceptance upon the thing

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Art. 1317

and the cause which are to constitute the agreement. The offer, however, must be certain and the acceptance seasonable and absolute; if qualified, the acceptance would merely constitute a counter-offer. In this instance, the addendum was flatly rejected by the respondent on the theses (a) that he did not give his consent thereto nor authorized anyone to enter into the agreement, and (b) that it contained provisions grossly disadvantageous to him. The outright rejection of the addendum made known to the other ended the offer. When respondent later filed his Manifestation, stating that he was, after all, willing to honor the addendum, there was nothing to still accept. Verily, consent could be given not only by the party himself but by anyone duly authorized and acting for and in his behalf. But by respondent’s own admission, the addendum was entered into without his knowledge and consent. A contract entered into in the name of another by one who ostensibly might have but who, in reality, had no real authority or legal representation, or who, having such authority, acted beyond his powers, would be unenforceable. The addendum, let us then assume resulted in an unenforceable contract, might it not then be susceptible to ratification by the person on whose behalf it was executed? The answer would obviously be in the affirmative; however, that ratification should be made before its revocation by the other contracting party. The adamant refusal of respondent to accept the terms of the addendum constrained petitioner, during the preliminary conference held on 23 June 1996, to instead express its willingness to release respondent from his contracts prayed for in his complaint and to thereby forego the rejected addendum. Respondent’s subsequent attempt to ratify the addendum came much too late for, by then, the addendum had already been deemed revoked by petitioner.

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Contracts General Provisions

321

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Chapter 2

ESSENTIAL REQUISITES OF CONTRACTS General Provisions Article 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. (1261)

When the law uses the word “concur,” it means that all the three (3) requisites must be present. The absence of one requisite negates the existence of a contract. The requisites are discussed in more detail in the next sections. Absence of any one of the requisites creates an inexistent contract. It produces no effect. So also, inexistent contracts can be invoked by any person whenever juridical effects founded thereon are asserted against him. A transferor can recover the object of such contract by accion reinvidicatoria and any possessor may refuse to deliver it to the transferee, who cannot enforce the transfer.1

The rule on pari delicto as between the parties does not apply in cases of inexistent contracts.2

Modina vs. Court of Appeals, G.R. No. 109355, October 29, 1999, 115 SCAD 130, 317 SCRA 696. 2 Ibid. 1

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SECTION 1. — Consent Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a)

Article 1320. An acceptance may be express or implied. (n)

Consent is the concurrence of the wills of the offerer and the acceptor as to the thing and the cause which constitute a contract. An offer is a manifestation of a willingness to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.1 But even though the offer is made with the intention that its acceptance will create mutual obligations, it will not accomplish this purpose unless its terms are sufficiently complete. It must be so complete that its acceptance will form an agreement containing all the terms necessary and intended by the parties, for it is obvious that there can be no agreement until its terms are settled, and that an offer which is not complete is merely a step in the negotiations.2

Making an offer means inviting an acceptance which, if given, will finally create a contract. The offer therefore empowers the person offered to create a contract. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements 1 John D. Calamari and Joseph M. Perillo, The Law of Contracts, Third edition,

West Publishing Co., St. Paul., Minn., 1987, page 32, citing Restatement, Second, Contracts, 39. 2 William F. Elliott, Commentaries on the Law of Contracts, Volume 1, Indianapolis, The Bobbs-Merrill Company, 1913, Page 30. 323

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or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270).3

If there is no acceptance, there can be no concurrence of will and therefore no consent to form a contract. In Salonga vs. Farrales4 where, by way of compromise, the defendant merely offered the property but which offer was not accepted, the Supreme Court ruled that it is quite obvious that there was no consent and stated: It is elementary that consent is an essential element of the existence of a contract, and when it is wanting, the contract is non-existent. The essence of consent is the conformity of the parties on the terms of the contract, the acceptance by one, of the offers made by the other. The contract to sell is a bilateral contract. Where there is merely an offer by one party, without the acceptance of the other, there is no consent. It appears in this case that the offeree, the defendantappellee Julita B. Farrales not only did not accept, but rejected the offer of the plaintiffs-appellants, spouses Salonga, to buy the land in question. There being no consent, there is, therefore, no contract to sell to speak of.

Once there is acceptance, it must be absolute. It may be express or implied.5 In Adelfa Properties, Inc. vs. Court of Appeals,6 the Supreme Court had the occasion to explain how acceptance can be made particularly in a contract of sale, to wit: The rule is that except where a formal acceptance is so required, although the acceptance must be affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the offeror, it may be made either in a formal or an informal manner, and may be shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or determination to accept the offer to buy or sell. Thus, acceptance 3 Ang Yu Asuncion vs. Court of Appeals, G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602. 4 G.R. No. L-47088, July 10, 1981, 105 SCRA 359. 5 Limson vs. Court of Appeals, G.R. No. 135929, April 20, 2001, 147 SCAD 887. 6 G.R. No. L-111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565. 7 William F. Elliott, Commentaries on the Law of Contracts, Volume 1,

Arts. 1319-1320

Contracts Essential Requisites of Contracts Sec. 1 — Consent

325

may be shown by the acts, conduct or words of a party recognizing the existence of the contract of sale.

Acceptance must be unconditional. It must be identical to the terms of the offer. It must not vary from the proposal either by way of omission, addition or alteration.7 If it does, neither party is bound8 as the acceptance is qualified. But an acceptance is not conditional because the acceptor expresses dissatisfaction with the offer, yet nevertheless gives his unqualified assent, nor because he adds immaterial words.9 If the acceptance is qualified, it is considered by the law as a counter-offer and, space between “s” and “in” in this regard, both the modified acceptance and an unconditional assent after such modified acceptance are in effect nothing more than counter propositions that must be assented to by the original offerer before any binding obligation is fastened on the parties. In case the original proponent accedes to the modification imposed and gives notice to that effect, the contract is concluded. It is not necessary in every instance that an express assent to the modified acceptance be shown. If the parties proceed with their contract as if the condition of the acceptance were a part of it, this is as effectual as an acceptance as if the changes had been formally assented to.10

In Jardine Davies vs. Court of Appeals11 where the company accepted the bid or offer of a particular supplier based on the latter’s proposals and stated in its letter of acceptance that the awarding of the project to the said supplier was subject to certain basic terms and conditions such as: 1) payment shall be on a progress billing basis with a guarantee bond; 2) the project shall be undertaken pursuant to the attached specifications; 3) all materials that will be used in the project shall be brand new; 4) the project must commence immediately and completed within 20 working days; 5) the supplier must submit a performance bond and a contractor’s all-risk insu-rance; 6) there is a warranty of one year against defective material and/or workmanship, the Supreme Court said that the “terms and conditions” stated in the letter of acceptance were not tantamount to a qualified acceptance, thus: While the same letter enumerated certain “basic terms and conditions,” these conditions were imposed on the performance of the obligation rather than on the perfection of the contract. Thus Indianapolis, The Bobbs-Merrill Company, 1913, Page 46.

Id. Id., Pages 44-45. 10 Id., Pages 50-51. 11 G.R. No. 128066, June 19, 2000, 128 SCAD 20, 333 SCRA 684. 12 G.R. No. 124045, May 21, 1998, 94 SCAD 679, 290 SCRA 532; Romero vs. Court 8 9

326

Obligations and Contracts Text and Cases

Arts. 1319-1320

the first “condition” was merely a reiteration of the contract price and billing scheme based on the Terms and Conditions of Bidding and the bid or previous offer of respondent FEMSCO. The second and third “conditions” were nothing more than general statements that all items and materials including those excluded in the list but necessary to complete the project shall be deemed included and should be brand new. The fourth “condition” concerned the completion of the work to be done, i.e., within twenty (20) days from the delivery of the generator set, the purchase of which was part of the contract. The fifth “condition” had to do with putting up of a perfomance bond and an all risk insurance, both of which should be given upon commencement of the project. The sixth “condition” related to the standard warranty of one (1) year. In fine, the enumerated “basic terms and conditions” were prescriptions on how the obli-gation was to be performed and implemented. They were far from being conditions imposed on the perfection of the contract. In Babasa vs. Court of Appeals,12 we distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party options and/or remedies to protect interests. xxx

xxx

xxx

But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted a “conditional counter-offer,” respondent FEMCO’s submission of the performance bond and contractor’s all-risk insurance was an implied acceptance, if not a clear indication of its acquiescence to, the “conditional counter-offer,” which expressly stated that the performance bond and contractor’s all-risk insurance should be given upon the commencement of the contract. Corollarily, the acknowledgment thereof by petitioner PUREFOOD, not to mention its return of FEMSCO’S bidder’s bond, was a concrete manifestation of its knowledge that respondent FEMSCO indeed consented to the “conditional counter-offer.” After all, as earlier adverted to, an acceptance may be express or implied, and this can be inferred from the contemporaneous and subsequent acts of the contracting parties.

The law likewise provides that acceptance made by letter or telegram does not bind the offerer except from the time it came to his of Appeals, G.R. No.requirement 107207, November 23, 1995, 65 SCAD 621, 250the SCRA 223; Lim knowledge. The is that the person making offer must vs. Court of Appeals, G.R. No. 118347, October 24, 1996, 75 SCAD 574. 13 William F. Elliott, Commentaries on the Law of Contracts, Volume 1,

Art. 1321

Contracts Essential Requisites of Contracts Sec. 1 — Consent

327

have actual knowledge of the acceptance. Hence, if A offered to B his property and B, through telegram, sent his acceptance but, before A actually received the telegram, he informs B of the revo-cation of his offer, no contract can be perfected. Article 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (n) The offerer can indicate the manner of acceptance and the time when and the place where it should be made. The offerer will not be bound by an acceptance made by the acceptor in any other manner than that specified by the offerer unless the latter acquiesces in the change.13 In Matias vs. Court of Appeals14 where a subsequent new owner of a leased property offered to sell to the lessee the property subject of the lease but which offer was ignored by the lessee who instead filed a suit to compel the new subsequent owner to sell the property in an amount and in a manner which the lessee feels reasonable, the Supreme Court rejected the appeal of the lessee after he lost in the lower court by stating: During the early stages of the negotiations, petitioners have already been in arrears in the payment of rentals, which delinquency lasted up to the time of the consummation of the sale of the Hacienda. In spite of such failure, the new owner of the Hacienda gave them top priority to purchase their respective lots. This is a clear indication that the partnership complied with the conditions attached to the sale; otherwise, it could have right then and there demanded the ejectment of petitioners as delinquent tenants. Instead of discussing with the new owner the terms and conditions they wish to impose on the projected sale, petitioners insist on their claim that the price of the lots are exorbitant; and that their right to purchase the lot at a price fixed in the complaint was disregarded. Petitioners’ insistence as to the price of the lot rests on the false assumption that the fixing of the price of the lot they wanted to purchase is one of the rights granted to them by law. To sustain such idea would run counter to the provision of Article 1321 of the New Civil Code which states that “The person making the offer may fix the time, place and manner of acceptance, all of which must be complied with.”



In a contract of sale, the manner of payment of the purchase

Indianapolis, The Bobbs-Merrill Company, 1913, Page 32. 14 G.R. No. L-48436, January 30, 1986, 141 SCRA 217. 15 San Miguel Properties, Inc. vs. Huang, G.R. No. 137290, July 31, 2000, 130

328

Obligations and Contracts Text and Cases

Arts. 1322-1323

price is an essential element before a valid and binding contract of sale can exist.15 The parties must also meet on the terms or manner of payment of the price, otherwise there is no sale. An agreement on the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price.16 Hence, even if the parties have agreed as to the object of the sale and the purchase price but still has to agree on the manner of how and when the downpayment and the installments are to be paid, the contract is not perfected and there is no contract of sale.17 Article 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n) By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.18 The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.19 As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly.20 If the offer is made through an agent, acceptance of the offer can be made to such an agent. However, when a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing, otherwise the sale shall be void.21 Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n) If either party dies, suffers civil interdiction, or becomes insane or insolvent before acceptance is conveyed, there can be no contract not simply because there is no acceptance but, more importantly, because the offer has become ineffective. When an offer becomes ineffective, nothing can be accepted. The phrase “before acceptance is conveyed” means before acceptance has come to the actual knowledge of the offeror. Hence, a letter of acceptance may be sent by mail but SCAD 713; Navarro vs. Sugar Producers Cooperative Marketing Association, Inc., 1 SCRA 1161. 16 Toyota Shaw, Inc. vs. Court of Appeals, 61 SCAD 310, 244 SCRA 320. 17 Velasco vs. Court of Appeals, 51 SCRA 439; Uraca vs. Court of Appeals, G.R. No. 115158, September 5, 1997, 86 SCAD 734, 278 SCRA 702. 18 Article 1868 of the 1950 Civil Code. 19 Article 1910 of the 1950 Civil Code. 20 Id. 21 Article 1874 of the 1950 Civil Code. 22 G.R. No. L-114870, May 26, 1995, 61 SCAD 373.

Art. 1323

Contracts Essential Requisites of Contracts Sec. 1 — Consent

329

if, before such mail is received and actually read by the offeror, either the offeror or the acceptor died, there is still no contract because the offer has become ineffective. In Villanueva vs. Court of Appeals22 where a person offered to a particular bank the purchase of a certain foreclosed property, and where such offer was accepted by the bank through a board resolution which however was not relayed to the person making the offer, and which the latter was able to know after the bank was placed under receivership by the Central Bank as said bank became insolvent, the Supreme Court ruled that, in this particular case the offer became ineffective and therefore there was no contract created. Pertinently, the Supreme Court said: There is no doubt that the approval of Ong’s offer constitutes an acceptance, the effect of which is to perfect the contract of sale upon notice thereof to Ong. The peculiar circumstances in this case, however, pose a legal obstacle to his claim of a better right and deny support to the conclusion of the Court of Appeals. Ong did not receive any notice of the approval of his offer. It was only sometime in mid-April 1985 when he returned from the United States and inquired about the status of his bid that he came to know of the approval. It must be recalled that the PVB was placed under receivership pursuant to the MB Resolution of 3 April 1985 after a finding that it was insolvent, illiquid, and could not operate profitably, and its continuance in business would involve probable loss to its depositors and creditors. x x x Under Article 1323 of the Civil Code, an offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. The reason for this is that: The contract is not perfected except by the concurrence of two wills which exist and continue until the moment that they occur. The contract is not yet perfected at any time before acceptance is conveyed; hence, the disappearance of either party or his loss of capacity before perfection prevents the contractual tie from being formed. x x x In a nutshell, the insolvency of a bank and the consequent appointment of a receiver restrict the bank’s capacity to act especially in relation to its property. Applying Article 1323 of

23

Spouses Buot vs. Court of Appeals, G.R. No. 119679, May 18, 2001; Laforteza

330

Obligations and Contracts Text and Cases

Art. 1324

the Civil Code, Ong’s offer to purchase the subject lots became ineffective because the PVB became insolvent before the Bank’s acceptance of the offer came to his knowledge. Hence, the purported contract of sale between them did not reach the stage of perfection. Corollarily, he cannot invoke the resolution of the bank approving his bid as basis for his alleged right to buy the disputed properties.

Article 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n) An option is a contract granting a privilege to buy or sell at a determined price within an agreed time.23 In Ang Yu Asuncion vs. Court of Appeals,24 the Supreme Court summarized the rules in case the offerer has allowed the offeree a certain period, otherwise known as an option period, to accept the offer, to wit: (1)

If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror’s coming to know of such fact, by communicating that withdrawal to the offeree (See Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 132 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however must not be exercised whimsically or arbitrarily; otherwise it could give rise to a damage claim under Article 19 of the Civil Code which ordains that “every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.”

(2) If the period has a separate consideration, a contract of “option” is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option however is an independent contract vs. Machuca, G.R. No. 137552, June 16, 2000, 127 SCAD 798. 24 G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602. 25 G.R. No. 103338, January 4, 1994, 47 SCAD 55, 229 SCRA 60; See also Adelfa

Art. 1324

Contracts Essential Requisites of Contracts Sec. 1 — Consent

331

by itself, and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on the proposed contract (“object” of the option) since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of the option. In these cases, care should be taken of the real nature of the consideration given, for if, in fact, it has been intended as part of the consideration for the main contract with a right of withdrawal on the part of the optionee, the main contract could be deemed perfected; a similar instance would be an earnest money in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).

In Serra vs. Court of Appeals,25 the Supreme Court had the occasion to briefly discuss what an “option” contract founded on a separate consideration involves, thus: Jurisprudence has taught us that an optional contract is a privilege existing only in one party — the buyer. For a separate consideration paid, he is given the right to decide to purchase or not, a certain merchandise or property, at any time within the agreed period, at a fixed price. This being his prerogative, he may not be compelled to exercise the option to buy before the time expires. On the other hand, what may be regarded as a consideration separate from the price is discussed in the case of Vda. de Quirino vs. Palarca wherein the facts are almost on all fours with the case at bar. The said case also involved a lease contract with the option to buy where we had the occasion to say that “the consideration for the lessor’s obligation to sell the leased premises to the lessee, should he choose to exercise his option to purchase the same, is the obligation of the lessee to sell to the lessor the building and/or improvements constructed and/or made by the former, if he fails to exercise his option to buy said premises.” In the present case, the consideration is even more onerous on the part of the lessee since it entails, transferring of the building and/or improvements on the property to petitioner, should respondent bank fail to exercise its option within the Properties, Inc. vs. Court of Appeals, G.R. No. 111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565. 26 San Miguel Properties Philippines, Inc. vs. Huang, G.R. No. 137290, July 31, 2000, 130 SCAD 713, 336 SCRA 737.

332

Obligations and Contracts Text and Cases

Art. 1325

period stipulated.

Consideration in an option contract may be anything of value, unlike in sale where it must be the price certain in money or its equivalent.26 An option money in an option contract must be differentiated from an earnest money. Earnest money is considered part of the price in a contract of sale and can be a proof of the perfection of the contract of sale.27 However, it is not the giving of the earnest money per se, but the proof of the concurrence of all the essential elements of the contract of sale which establishes the existence of a perfected sale.28 Likewise, if the buyer and the seller agreed that an “earnest deposit” should be made by the seller merely to guarantee that the buyer will not back out from the sale, such earnest deposit is not earnest money that can be considered as proof of the perfection of the contract.29 Upon the expiration of the option period and the person given such option does not manifest his or her acceptance, the offeror may offer the intended contract to somebody else. Any contract perfected with such other person shall be considered to have been done in good faith.30 Article 1325. Unless it appears otherwise, business advertisement of things for sale are not definite offers, but mere invitations to make an offer. (n) Generally, advertisement of things for sale are mere invitations to make an offer. Thus, if a seller advertises that he intends to sell his house to any willing purchaser, it is an invitation for the purchaser to make an offer or to negotiate as to how he intends to buy the house. The offer of the purchaser should of course include all the essential requirements to make a valid contract such as the price of the house. The phrase “unless it appears otherwise” connotes that the advertisement may constitute an offer which is certain.

Article 1326. Advertisements for bidders are simply

27 Article 1482 of the Civil Code. 28 San Miguel Properties Philippines, Inc. vs. Huang, G.R. No. 137290, July 31, 2000, 130 SCAD 713, 336 SCRA 737. 29 San Miguel Properties Philippines, Inc. vs. Huang, G.R. No. 137290, July 31, 2000, 130 SCAD 713, 336 SCRA 737. 30 Limson vs. Court of Appeals, G.R. No. 135929, April 20, 2001, 147 SCAD 887. 31 G.R. No. 128066, June 19, 2000, 120 SCAD 20, 333 SCRA 684. 32 Executive Order No. 209 as amended which took effect on August 3, 1988. 33 Id., Article 234.

Arts. 1326-1327

Contracts Essential Requisites of Contracts Sec. 1 — Consent

333

invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n) A person who entertains an advertisement to bid does not automatically become the other party to a contract. He is only allowed to make his proposals or his offer. If he makes his bid, he thereby makes an offer which is not binding unless it is accepted. In Jardine Davies, Inc. vs. Court of Appeals,31 the Supreme Court said that when a company starts the process of a bidding and disseminates the document denominated the “Terms Conditions of the Bidding” to the bidders, the dissemination of the said documents constitutes an “advertisement” to bid in the project. The bid proposals or quotations submitted by the prospective suppliers are the offers. The favorable reply of the company to one of the prospective suppliers is the acceptance. Article 1327. The following cannot give consent to a contract: (1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a) Under the Family Code of the Philippines,32 emancipation takes place by the attainment of majority age33 and, unless otherwise provided, majority commences at the age of eighteen years. 34 Emancipation shall terminate parental authority over the person and property of the child who shall be qualified and responsible for all acts of civil life, save the exceptions established by existing laws in special cases.35 Any contract entered into by an unemancipated person is annulable or voidable. However, it must be important to point out that persons who are capable cannot allege the incapacity of those with whom they contracted36 to annul the contract. For instance, only the minor can invoke the ground that a contract is annulable because, at the time it was entered into, he was still a minor. Also, 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

Id. Id., Article 236. 36 Article 1397 of the 1950 Civil Code. 37 Article 1399 of the 1950 Civil Code. 34 35

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Art. 1327

insofar as he has been benefited by the thing or price received by him.37 Accordingly, if a person of age bought property from a minor and the latter received the purchase price, the person of age cannot file a case to annul the contract on the ground that the other party is a minor. If the minor, upon coming of age, timely files a case to annul the contract, he is not obliged to return that part of the purchase price which he had spent which did not redound to his benefit, such as losses from gambling, but he is obliged to pay or reimburse the other party for amounts which he has spent for his benefit like payment of tuition fees in school. In Braganza vs. De Villa Abrille38 where two minors signed a promissory note, without telling the creditor their ages, and where the debtor sought to enforce the promissory note against them, the Supreme Court ruled that the minors can set up the defense of minority to resist the claim, thereby overruling the decision of the Court of Appeals which based its decision on the case of Mercado vs. Espiritu39 holding that minors who misrepresent their ages cannot be absolved from the contract they entered into. Pertinently, the Supreme Court said in the Braganza case: x x x From the minors, ‘failure to disclose their minority in the same promissory note they signed, it does not follow as a legal proposition, that they will not be permitted thereafter to assert it. They had no juridical duty to disclose their inability. In fact, according to Corpus Juris Secundum, 43, p. 206; “* * *. Some authorities consider that a false representation as to age inducing a contract is a part of the contract and accordingly hold that it cannot be the basis of an action in tort. Other authorities hold that such misrepresentation may be the basis of such an action, on the theory that such misrepre-sentation is not a part of, and does not grow out of, the contract, or that the enforcement of liability for such misrepresentation as a tort does not constitute an indirect method of enforcing liability on the contract. In order to hold the infant liable, however, the fraud must be actual and not constructive. It has been held that his mere silence when making a contract as to his age does not constitute a fraud which can be made the basis of an action of deceit.” (Italics Ours) 38 G.R. No. L-12471, April 13, 1959, 105 Phil. 456. 39 G.R. No. 11872, December 1, 1917, 37 Phil. 215. 40 William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913 edition, Indianapolis, The Bobb-Merrill Company, Pages 469-470. 41 Id., Page 575.

Art. 1327

Contracts Essential Requisites of Contracts Sec. 1 — Consent

“The fraud of which an infant may be held liable to one who contracts with him in the belief that he is of full age must be actual not constructive, and mere failure of the infant to disclose his age is not sufficient.” (27 American Jurisprudence, p. 819) The Mercado case cited in the decision under review is different because the document signed therein by the minor specifically stated he was of age; here Exhibit A contained no such statement. In other words, in the Mercado case, the minor was guilty of active misrepresentation; whereas in this case, if the minors were guilty at all, which we doubt, it is of passive (or constructive) misrepresentation. Indeed there is a growing sentiment in favor of limiting the scope of the application of the Mercado ruling, what with the consideration that the very minority which incapacitated minors from contracting should likewise exempt them from the results of misrepresentation. We hold, at this point, that being minors, Rodolfo and Guillermo Branganza could not be legally bound by their signatures in Exhibit A. It is argued, nevertheless, by respondent that inasmuch as this defense was interposed only in 1951, and inasmuch as Rodolfo reached the age of majority in 1947, it was too late to invoke it because more than 4 years had elapsed after he had become emancipated upon reaching the age of majority. The provisions of Article 1301 of the Civil Code are quoted to the effect that “an action to annul a contract by reason of minority must be filed within 4 years” after the minor reached majority age. The parties do not specify the exact date of Rodolfo’s birth. It is undenied, however, that in October 1944, he was 18 years old. On the basis of such datum, it should be held that in October 1947, he was 21 years old, and in October 1951, he was 25 years old. So that when this defense was interposed in June 1951, four years had not yet completely elapsed from October 1947. Furthermore, there is reason to doubt the pertinency of the 4-year period fixed by Article 1301 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. For one thing, they have not filed in this case an action for annulment. They interposed an excuse from liability. Upon the other hand, these minors may not be entirely absolved from monetary responsibility. In accordance with the provisons of the Civil Code, even if their written contract is unenforceable because of non-age, they shall make restitution to the extent that they may have profited by the money they received. (Art. 1340) There is testimony that the funds delivered

335

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Obligations and Contracts Text and Cases

Art. 1327

to them by Villa Abrille 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 authoritatively established in the so-called Ballantine Schedule: in October 1944, P40.00 Japanese notes were equivalent to P1 of current Philippine money. Wherefore, as the shares of these minors was 2/3 of P70,000 or P46,666.66, they should now return P1,166.67. Their promise to pay P10,000 in Philippine currency (Exhibit A), can not be enforced, as already stated, since they were minors incapable of binding themselves. Their liability, to repeat, is presently declared without regard of said Exhibit A, but solely in pursuance of Article 1304 of the Civil Code.

Contracts entered into by insane or demented persons are likewise annullable. Such contracts are valid up to the time they are rendered ineffective by the courts. They are not void ab initio. The law therefore clearly presumes that the contract has been entered into by competent persons. To annul a contract, it is always important to prove the insanity of the other party at the time of the perfection of the contract. Persons suffering from a mental incapacity to a greater or less degree may be divided into three classes. They are: idiots, lunatics, and those who are not legally totally incapacitated, but are mentally weak. An idiot is one who has been insane from birth. A lunatic is one who was at one time sane, but who from some cause or other has lost use of his reason. The third class includes all forms of mental weakness which do not render the person affected totally incapable of transacting business or managing his affairs. The contract of one who is insane as to be unable to understand its nature and effect is voidable at his option, except for necessaries. This is a privilege personal to the insane party and the agreement cannot be avoided by the other party or a third person. However, it is generally true that when the insane person is not under a guardian or conservator and the other contracting party has no reasonable cause to believe him otherwise insane, the agreement is valid if equitable and beneficial to such insane person, and it has been so far executed that the other party cannot be placed in status quo. A person of unsound mind is liable on his contract for necessities. Nor does mere mental weakness from whatever cause, which does not totally destroy the ability to comprehend the nature and effect of the transaction, furnish ground for the avoidance of a contract entered into by such persons in the absence of evidence showing fraud, duress or undue

Art. 1328

Contracts Essential Requisites of Contracts Sec. 1 — Consent

337

influence.40 Moreover, the insanity alleged must have a direct bearing on the agreement. A monomania or delusion unconnected with the subject-matter of the contract or which does not prompt the agreement does not destroy its binding force. On the other hand, if the insane delusion is so connected with the subject-matter of the agreement as to render one of the parties thereto incapable of understanding the nature or effect of the contract, it is thereby rendered voidable at the option of the party so afflicted.41

Contracts entered into by deaf-mutes who do not know how to write is also annullable. The law is clear that being a deaf-mute alone is not enough to make the contract voidable. This is so because the success accomplished by modern methods in instructing those who are deaf-mute to understand what they are doing has enabled these persons to act reasonably with discernment in entering into transaction. For the contract to be annullable, the deaf-mute must likewise not know how to write. The provision is clearly designed to prevent fraud for the protection of handicapped people. Article 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (n) Lucid interval is that period of time when an insane person acts with reasonable understanding, comprehension and discernment with respect to what he is doing. Hence, lunacy may be intermittent in character; if so, a valid contract may be entered into during a lucid interval. However, where one is shown to have been mentally deranged at a recent period anterior to the execution of the contract, that condition is presumed to continue and the burden is on the other party to show that the agreement was entered into during a lucid interval or after recovery, provided the derangement is not caused by a temporary or transient ailment, such as fever, fits or the like.42

Contracts entered into in a state of drunkenness may like- wise be annulled. However, the intoxication must be of such a character as to perpetuate an undue advantage over the drunken person. Also,

Id., Pages 575-576. Id., Pages 650-651. 44 Id., Pages 651-652. 42 43

338

Obligations and Contracts Text and Cases

Art. 1328

it is now well settled that an agreement other than for necessities, made by a person when so drunk as to be incapable of understanding its nature and effect, is voidable at the intoxicated person’s option. The contracts of an intoxicated person may be voidable under any one of the following: first, when it appears that the drunkenness was brought about by the opposite party; second, that a fraudulent advantage was taken of it; and third, that the drunkenness was so complete as to deprive the party of his reason of an agreeing mind.43 The mere fact that one of the parties is drunk at the time the agreement is entered into is no ground for setting it aside unless one or more of the above-mentioned influences was or were operative at the time the minds of the parties met on the terms of the contract. Drunkenness which only clouds or darkens the reason does not render a contract entered into while in such a condition voidable unless procured under such circumstances as to justify the inference that it was obtained by fraud or circumvention. Intoxication which merely prevents the party from giving proper attention to what he is doing or from fully realizing the nature of his acts is insufficient to invalidate a contract. Mere intoxication unmixed with any inequitable conduct on the part of the other party to the agreement is insufficient to invalidate a contract entered into while in such condition unless the party so situated is so drunk as to be incapable of understanding the nature and effect of the agreement, or its consequences, that is to say, he must be rendered incapable of intelligent assent and deprived of the power to know what he is doing.44 It is well settled that if one party to a transaction procures the intoxication of the other and then takes advantage of his condition to obtain the contract or conveyance it will be voidable at the intoxicated person’s option, notwithstanding the degree of drunkenness may not have been excessive.45

A contract entered into during a hypnotic spell is likewise voidable. Hypnosis is an artificially induced state, resembling sleep, but characterized by exaggerated suggestibility and continued responsiveness to the voice of the hypnotist.46 Article 1329. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualification established in the laws. (1264) 45 Id., Pages 654-655. 46 The New Lexicon: Webster’s Dictionary, 1991 Edition, Lexicon Publishing, Inc., New York, Page 477. 47 17 Am Jur 2d 504, citing Klussman vs. Day, 107 Or 109, 213, P 787, 214 P

Arts. 1329-1331

Contracts Essential Requisites of Contracts Sec. 1 — Consent

339

Article 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a) To create a contract, the meeting of the mind must be free, voluntary, willful and with a reasonable understanding of the various obligations the parties intend to be bound. Mistake, violence, intimidation, undue influence and fraud as grounds to annul a contract have one thing in common: there is no real assent to the contract. Intimidation, violence and undue influence can be classified as acts of duress where, as a result of which, the coerced party is compelled to execute the contract against his will. Freedom of will is essential to the validity of an agreement. Where duress is exerted on one of the parties of such a kind as to overcome his will and compel a formal assent to an undertaking when he does not really agree to it, and so as to make that appear to be his act which is not his, but another’s, imposed on him through fear which deprives him of self-control, the agreement is not binding unless the other deals with him in good faith, in ignorance of the improper influence and in the belief that the party is acting voluntarily.47

A contract obtained through duress or mistake is voidable or annullable under Article 1390. Article 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. Mistakes as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its correction. (1266a) For mistake to make a contract voidable or annullable, the law states that the consent must either refer to the substance of the thing which is the object of the contract, or to those conditions which principally induced the parties to enter into a contract. The said conditions must not be mere incidents to the consideration.48 348; Gorringe vs. Reed, 116 Kans 374, 226 P 714. 48 De Leon vs. Court of Appeals, G.R. No. 80965, June 6, 1990, 186 SCRA 345. 49 Sherwood vs. Walker, 66 Mich. 568, 33 N.W. 919, 11 Am. St. 531 cited in Commentaries on the Law of Contracts by William F. Elliott, Volume 1, 1913 edition,

340

Obligations and Contracts Text and Cases

Art. 1331

Thus, where the contract for the sale of a cow was entered into, both parties believing her to be barren, which supposition proved to be untrue, it was held that mistake was not as to the mere quality of the animal sold, but went to the very nature of the thing and that the vendor had a right to rescind the agreement.49



It is also clear in the law of contracts that a unilateral mistake in the making of an agreement, of which the other party is entirely ignorant and to which he in no way contributes, will not affect the agreement or afford ground for its avoidance or rescission, unless it is such a mistake as goes to the substance of the agreement itself.50

In Spouses Heinzrich Theis and Betty Theis vs. Court of Appeals51 where the seller, via a deed of sale, sold to the buyer a pro-perty which was however not the one appearing in the deed of sale, and where the mistake was not the fault of the parties but was due to mistake in the survey made on the property, and where the seller, upon learning of this, immediately offered the buyer another property instead or a refund of money double the amount paid for the property, but which offer was unreasonably refused by the buyers prompting the seller to file for annulment of the contract based on mistake, the Supreme Court ruled that the contract can be invalidated on the basis of Article 1331 as it involved mistake as to the substance of the thing and the seller was in good faith. The Supreme Court, citing Tolentino,52 likewise stated that: mistake as contemplated under Article 1331 involved either ignorance which is the absence of knowledge with respect to a thing and mistake properly speaking, which is a wrong conception about said thing, or a belief in the existence of some circumstance, fact, or event, which in reality does not exist. The mistake committed by the private respondent in selling parcel No. 4 to the petitioner falls within the second type. Verily, such mistake invalidated its consent and as such, annulment of the deed of sale is proper.

Mistake can also refer to those conditions which have principally moved one or both parties to enter into the contract. Thus, if A lent Indianapolis, the Bobbs-Merill Company, Page 179. 50 17 Am Jur 2d 493. 51 G.R. No. L-126013, February 12, 1997, 79 SCAD 434. 52 Tolentino, Civil Code of the Philippines, p. 476, Vol. 4 (1992 ed.). 53 William F. Elliott, Commentaries on the Law of Contracts by Volume 1, 1913 edition, Indianapolis, The Bobbs-Merill Company, Page 172.

Art. 1331

Contracts Essential Requisites of Contracts Sec. 1 — Consent

341

money to X only because he was informed that it was the special request of Z to A, who owed Z a favor which A wanted to reciprocate, and only because there was an apparent assurance from Z that he will be a solidary debtor; and X knew that, had it not been for the request of A and his engagement as a solidary debtor, the loan would not have been consummated; and it eventually turned out that there was no request and no assurance coming from Z who, in reality merely vouched for the credit worthiness of X, the said loan agreement can be annulled by A on the ground that there was an invalid consent as the condition which principally moved both parties to enter into the contract was a mistake. The law also provides that mistakes 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. When the identity of one of the parties is a material element of the contract, a mistake in respect thereto invalidates the agreement. Mistakes as to the identity of the person with whom the contract is made arise where A contracts with X believing him to be M; that is, where the offerer has in contemplation a definite person with whom he intends to contract. One has the right to select the person with whom he wishes to contract, especially where the nature of the transaction is such that it is important that performance be had by a particular individual, as agreements with a painter, writer, or which call for the performance of any act requiring skill such as the one sought to be contracted with is supposed to possess. In such cases one may contract with whomever he may choose and the sufficiency of his reasons for so doing is immaterial. Thus, where one sends an order for goods or other proposal to another, a third person cannot without the knowledge of the one sending the order or making the proposal become a party to the agreement by accepting such proposal.53

A simple mistake of account shall give rise to its correction. A simple accounting error does not go into the essentials of a contract. Article 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. (n)



54

Torres vs. Court of Appeals, G.R. No. 134559, December 9, 1999, 117 SCAD

342

Obligations and Contracts Text and Cases

Art. 1332

In entering into a contract, the parties are presumed to have understood the terms of the contract they voluntarily signed especially when there is proof that they are educated.54 Courts are not authorized to extricate parties from the necessary consequences of their acts, and the fact that the contractual stipulations may turn out to be financially disadvantageous will not relieve parties thereto of their obligations. They cannot now disavow the relationship formed from such agreement due to their supposed misundertanding of its terms.55

However, the Article 1332 provides that, 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. Before the benefits of Article 1332 can be availed of, the person invoking the same must first prove that he has the conditions described in Article 1332. Thus, if he is unable to read or he does not understand the language of the contract, he must first prove such fact or circumstance. Only after sufficiently adducing evidence proving the fact that he cannot read or that he does not understand the language of the contract will the burden of proof shift to the one enforcing the contract to show that the terms thereof have been explained to the person who is unable to read or who does not understand the language of the contract.56 In Lustan vs. Court of Appeals,57 where the dispute was whether or not the Deed of Definite Sale was in reality an equitable mortgage wherein the subject property was merely intended to secure an existing debt by way of mortgage, the Supreme Court ruled that the document was an equitable mortgage based on the clear evidence supporting such contract and based on the finding that the illiterate owner of the same was made to understand that the deed of sale signed by her merely evidenced an indebtedness to the creditor, to wit:

Petitioner had no knowledge that the contract she signed

94, 320 SCRA 428. 55 Ibid. 56 Sales vs. Court of Appeals, G.R. No. 40145, July 29, 1992. 57 G.R. No. 111924, January 27, 1997, 78 SCAD 351. 58 G.R. No. 55201, February 3, 1994, 48 SCAD 28, 229 SCRA 616.

Art. 1332

Contracts Essential Requisites of Contracts Sec. 1 — Consent

343

is a deed of sale. The contents of the same were not read nor explained to her so that she may intelligently formulate in her mind the consequences of her conduct and the nature of the rights she was ceding in favor of Parangan. Petitioner is illiterate and her condition constrained her to merely rely on Parangan’s assurance that the contract only evidenced her indebtedness to the latter. When one of the contracting 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. Settled is the rule that where a party to a contract is illiterate or cannot read or cannot understand the language in which the contract is written, the burden is on the party interested in enforcing the contract to prove that the terms thereof are fully explained to the former in a language understood by him. To our mind, this burden has not been satisfactorily discharged.

In Lim vs. Court of Appeals58 where a Deed of Confirmation of Extrajudicial Partition written in English allegedly executed by an elderly woman, who did not even know English, was upheld by the lower court because fraud was not proven, the Supreme Court reversed the decision of the lower court and upheld the ruling of the Court of Appeals by explaining thus: We now determine the next crucial issue of fact, i.e., whether or not the above mentioned Deed of Confirmation of Extra Judicial Settlement of the Estate of Tan Quico and Josefa Oraa (Exhibit “E” or “1”) is valid. The respondent court, reversing the trial court, held that the evidence failed to establish that it was signed by the late Cresencia as a result of fraud, mistake or undue influence. We hold this ruling erroneous. In calibrating the credibility of the witnesses on this issue, we take our mandate from Article 1332 of the Civil Code which provides: x x x. This substantial law came into being due to the finding of the Code Commission that there is still a fairly large number of illiterates in this country, and documents are usually drawn up in English or Spanish. It is also in accord with our state policy of promoting social justice. It also supplements Article 24 of the Civil Code which calls on court to be vigilant in the protection of the rights of those who are disadvantaged in life. In the petition at bench, the questioned Deed is written in English, a language not understood by the late Crescencia, an illiterate. It was prepared by Lorenzo, a lawyer and CPA. For reasons difficult to divine, respondent Lorenzo did not cause the notarization of the Deed.

G.R. No. 123490, August 9, 2000, 131 SCAD 463, 337 SCRA 464. 17 Am Jur 2d 492. 61 25 N.W. 42; 64 Wis. 265. 62 17 Am Jur 2d 505. 59 60

344

Obligations and Contracts Text and Cases

Art. 1332

Petitioners alleged that the Deed was signed by the late Cresencia due to mistake, fraud or undue influence. They postulated that respondent Lorenzo took advantage of the late Cresencia’s trust and confidence. Testifying on the trust of the late Cresencia on respondent Lorenzo, petitioner Jose Lim declared:

xxx

“Q. Now, will you tell the Court how the relation between your mother and your uncle Lorenzo Tan before September 1967? A. My mother was so close to this brother, Lorenzo Tan. My mother always asked him advice because he is considered by my mother as God to her. x x x.” Considering the circumstance, the burden was on private respondents to prove that the content of the Deed was explained to the illiterate Crescencia before she signed it. In this regard, the evidence adduced by the respondents failed to discharge this burden.

In Arriola vs. Mahilum,59 a sister of an illiterate was able to have a document signed by the latter on the misrepresentation that properties other than his property awarded by a cadastral court to him will be partitioned among the heirs of their parent. It turned out however that the document included such property. The property was therefore fraudulently distributed to the other heirs. The illiterate filed suit to recover his property alleging fraud and misrepresentation. The Supreme Court sustained the cause of the illiterate and said: We agree with the Court of Appeals that the partition of the same lot was fraudulent. Rosario knew that there was no other way to obtain the partition of the subject property than having her brother Simeon sign a deed of partition, making the latter believe that the deed pertained to the three other lots. The scheme was simple enough considering that Simeon was illiterate. The law however requires that in case one of the parties to a contract is unable to read and fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. We are not persuaded that Rosario clearly and fully explained the contents of the deed of partition to her brother Simeon. Petitioners’ allegations are negated by the fact that Simeon not only strongly opposed the survey of the land in 1970 but also filed a complaint for annulment of reconstituted title in 1973. Consent, having been obtained by fraud, the deed

63

G.R. No. L-12035, March 29, 1961, 1 SCRA 876.

Art. 1333

Contracts Essential Requisites of Contracts Sec. 1 — Consent

345

entered into could be annulled. Hence, if the deed was null, the reconstituted title and transfer titles arising therefrom were also void.

Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (n) If the parties indicate an intention not to be bound unless certain facts exist, the performance of such facts prevents any contractual duty, such being intended to operate, and operating, as a condition precedent to the obligation. But where the parties to an agreement indicate an intention to be bound irrespective of the existence of certain facts and take the risk of their non-existence, the validity of their agreement is not at all dependent upon the existence of such facts. Where the parties are conscious that the existence of particular facts is doubtful and make their agreement on this assumption, the non-existence of such facts does not affect the validity of the agreement, the risk of their existence being taken by the parties. Where all the parties voluntarily enter into an agreement in the fact of their conscious, present want of knowledge of facts, which they all then manifestly concluded would not influence their action or induce them to refrain from entering into the agreement, whatever the facts might be, there is no such a mistake as affects the validity of the agreement. The view is taken that if the parties are conscious of their ignorance as to the existence of some facts, the non-existence of such facts is of no consequence; this is said to be predicated upon common experience that if people contract under such circumstances, they usually intend to abide by the resolution either way of the known uncertainty, and have insisted on, and received, consideration for taking that chance. There seems, however, to be some authority to the effect that where, although the parties must know that the existence of a fact is at least somewhat doubtful, they nevertheless make an agreement on the assumption that it exists, its nonexistence affects the validity of the agreement.60

An illustrative case is Wood vs. Boynton61 where a seller not knowing the nature of the stone he found sold it to a purchaser for only one dollar after they discussed their ignorance as to the quality and nature of the stone which they surmised to be probably a Topaz, but which eventually turned out to be a Diamond worth about US $1,000, the court ruled that the contract cannot be annulled or rescinded as there was legally no mistake as to the nature of the stone because when they transacted the purchase, there was conscious uncertainty and that the parties took the risk that it could have been some other

346

Obligations and Contracts Text and Cases

Arts. 1334-1335

valuable object capable of being sold at a higher price. Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (n) A unilateral mistake of law as to the legal effect of an agreement is generally not a ground to annul a contract. This is so because, in such a situation, the document embodying the agreement is drafted the way the parties have intended it to be such that only its legal effect is different from what the parties have assumed. However, a mistake of law may vitiate consent if the following requisites are present: first, the mistake as to the legal effect of the agreement must be mutual and, second, such mutual mistake frustrates the real purpose of the parties. Hence, if A leases to B a property where the latter will construct a four-story building but it turned out that such building cannot be erected in the said city because of an ordinance prohibiting the same, the contract can be annulled. Article 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. (1267a) There is total absence of free will in case a person is compelled to enter into a contract through violence. The violence must however be serious and irresistible. Thus, if A coerces B into a contract by continually beating him until he signs the contract, A, in effect, imposes his will on B and therefore, no valid consent is obtained from B. The contract is clearly annullable.

As to intimidation, the law states that there must be a reasonable



64 65

G.R. No. L-16590, January 30, 1965, 13 SCRA 27. William F. Elliot, Commentaries on the Law of Contracts, Volume 1, 1913

Art. 1335

Contracts Essential Requisites of Contracts Sec. 1 — Consent

347

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. It is necessary that the threats and circum-stances be of a character as to excite the reasonable apprehensions of a person of ordinary courage, and that the agreement be made under the influence of such threats or menace; the threat must be tangible and direct.62 Thus in Vda. De Lacson vs. Granada63 where it was contended that a contract entered into during the Japanese occupation should be nullified because one of the parties was constrained to enter the contract and to accept Japanese currency for fear that, if he would not do so, he might endanger his life and the life of his family, the Supreme Court rejected the notion that there was legally an intimidation enough to annul the contract because the duress or intimidation must be more than the “general feeling of fear” on the part of the occupied over the show of might by the occupant. In other words, aside from such “general” or “collective apprehension,” there must be specific acts or instances of such nature and magnitude as to have, of themselves, inflicted fear or terror upon the subject thereof that his execution of the questioned deed or act can not be considered voluntary. No such specific act of duress was cited — and none could be found — in the case at bar.

In the case of Laperal vs. Rogers64 where, during the Japanese occupation, a person was directly told by the Japanese military authorities that he should sell his house and warned him that his refusal to sell was bad because it will be considered as a sign of hostility to the Japanese, and where, fearing for his life and that of his family, he sold the house, the Supreme Court ruled that the contract can be annulled as the consent was coerced by direct intimidation and does not fall within the purview of “collective” or “general” duress. The law likewise provides that a threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent. In this regard, it is well-settled that ordinarily the institution or threatened institution of a civil suit, or ordinary legal proceedings to enforce a legal demand does not constitute duress, even though it may be made in a period of business depression. Thus, an agreement or settlement in-duced edition, Indianapolis, the Bobbs-Merill Company, Pages 257-259. 66 G.R. No. 80965, June 6, 1990, 186 SCRA 345.

348

Obligations and Contracts Text and Cases

Art. 1335

by a threat to commence legal proceedings for the removal of a dam, or for the collection of a debt contracted during infancy, to foreclose a chattel, or mortgage, to sue out a writ of attachment or levy executions, or a threat by an officer to arrest an execution debtor and take him to jail unless he secures the debt, the officer having in his possession at the time legal process requiring him to take the debtor into custody, has in each of the foregoing instances been held not to have been procured through duress. The mere threat to bring a good faith action, maintainable at law, does not amount to duress. If the party threatened would rather pay than resort to litigation he is remediless. However, if a civil proceeding actually begun or threatened is wrongful and oppressive in its nature and brought or threatened with the intention of coercing the adverse party and does in fact coerce such party into the payment of money or the formation of a contract, such payment or contract is made under duress and may be avoided. Thus a threat to institute receivership proceedings against a certain company at a time when it would ruin the company’s business and affect the reputation of the defendant, constitutes such duress as will avoid the defendant’s contract to pay a specified sum of money in order to save the business of the company and his own reputation. Likewise, it has been held that a bond given, or money paid from being falsely attached to release property seized in attachment proceedings oppressively instituted or conducted may be cancelled or recovered. It has also been held that when an invalid and unfounded claim for a lien upon real property is filed and the necessities of the defendant’s business require that this lien be immediately discharged, payment under such circumstances was made under duress and that it might be recovered. A threatened civil action may also amount to duress where the parties are not on an equal footing. Thus, threats made against a person of inferior intellect, or an aged weakened in body and mind to the effect that certain civil proceedings will be instituted, have been held such duress as will avoid a contract induced thereby. Threatening litigation while the defendant is ill, or to continue litigation when the circumstances are oppressive has been held to amount to duress.65

In De Leon vs. Court of Appeals66 where the mother claims that she was intimidated into entering a letter agreement by the estranged wife of her son because the said wife threatened to bring her son to court for support, to scandalize their family by filing baseless suits and, by agreeing to the agreement, the wife would pardon the said mother’s son for possible crimes of adultery and/or concubinage subject to the transfer of certain properties, the Supreme Court said that such

67

Parkers Admr. v. Parker, N.J. Eg. 224, 126 Atl. 537 cited in Commentaries on

Art. 1336

Contracts Essential Requisites of Contracts Sec. 1 — Consent

349

so-called threat did not fulfill the legal requirements to constitute intimidation, to wit: In order that the intimidation may vitiate consent and render the contract invalid, the following requisites must concur: (1) that the intimidation must be the determining cause of the contract, or must have caused the consent to be given; (2) that the threatened act must be unjust or unlawful; (3) that the threat be real and serious, there being an evident disproportion between the evil and the resistance which all men can offer, leading to the choice of the contract as the lesser evil; and (4) that it produces a reasonable and well-grounded fear from the fact that the person from whom it comes has the necessary means or ability to inflict the threatened injury.

Article 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (1268) The violence or intimidation may emanate not only from any of the contracting parties but also from third persons not a party to the contract. Indeed, the contracting party who is not the subject of the violence or the intimidation may not even know that the other party has been coerced. Thus, if A is coerced to enter into a contract with X because G threatens to kill all the children of A if he does not do so, such contract may be annulled whether or not X knew of the intimidation. Article 1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. (n) The law provides that 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. Annulling a contract based on undue influence “is based upon principles of highest morality, it reaches every case and grants relief where the Law of Contracts by William F. Elliott, Volume 1, 1913 edition, Page 241. 68 William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913 edition, Indianapolis, The Bobbs-Merill Company, Page 241. 69 G.R. No. L-30351, September 11, 1974, 59 SCRA 15.

350

Obligations and Contracts Text and Cases

Art. 1337

influence is acquired and abused, or where confidence is reposed and betrayed.”67 Hence, 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. However, not all influence is prohibited by law. The influence which the law not only refuses to recognize, but repudiates, is undue influence, denominated “undue” because it is unrighteous, illegal and designed to perpetrate a wrong. It must amount to fraud or coercion. The grantor must be overreached and deceived by some false representation, stratagem or by coercion, physical or moral. It is generally held that solicitations and entreaties, fair argument and persuasion, or appeals to the emotions or affections will not amount to undue influence unless they overcome the will of the person and take away his ability to act as a free agent.68

In Bañez vs. Court of Appeals69 where the respondent contended that the letter of a senator unduly influenced the People’s Homesite and Housing Corporation (PHHC) to approve the transfer of rights of a certain property not to him but to another person, the Supreme Court held that there was no undue influence enough to annul the contract, to wit: assuming that the letter was written by Senator Fernandez, it cannot be implied from the facts of the case that the transfer of rights from Basilio Laquihon to petitioners herein was approved solely on the strength of such letter, for the approval of the transfer was recommended as “extremely meritorious” by the Head Executive Assistant (Exh. “2”) and by the Homesite Sales Supervisor (Exh. F). Neither can it be said that the approval of the transfer by the Board of Directors was vitiated by undue influence or that it was illegal. That letter, even if it was written really by Senator Fernandez, could not destroy the free agency of the PHHC Board of Directors, and it could not have interfered with the exercise of the Board’s independent discretion. This Court has already said that 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 the consent of the others. 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.” (Martinez vs. Hongkong and 70

G.R. No. 130998, August 10, 2001. 71 William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913 edition, Page 135. 72 G.R. No. 37159, November 29, 1977, 80 SCRA 411.

Art. 1338

Contracts Essential Requisites of Contracts Sec. 1 — Consent

351

Shanghai Bank, 15 Phil. 252, 270).

In Marubeni Corporation vs. Lirag,70 where a consultancy agreement was obtained from a government agency because of the use of influence of executive officials, the Supreme Court declared the contract not only voidable but null and void, thus: Any agreement entered into because of the actual or supposed influence which the party has, engaging him to influence executive officials in the discharge of their duties, which contemplates the use of personal influence and solicitation rather than an appeal to the judgment of the official on the merits of the object sought is contrary to public policy. Consequently, the agreement, assuming that the parties agreed to the consultancy, is null and void as against public policy. Therefore, it is unenforceable before a court of justice.

Article 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (1269) Generally, fraud, either at law or in equity, is a false representation of a material fact made by word or conduct with knowledge of its falsehood or in reckless disregard of its truth, in order to induce and actually inducing another to act thereon to his injury.71 There must always be damage or injury in cases of fraud. For example, if A, an expert jeweler and in order to be able to sell his glass figurine, told X that such figurine is made of Diamond from South Africa and, on such false representation, X bought the figurine, the contract of sale can be annulled by X. In Rivero vs. Court of Appeals72 where a nephew of an old illiterate sickly woman took advantage of her predicament by making her believe that the “Kasulatan Sa Ganap na Bilihan” was a contract of mortgage, and where, knowing that the old woman merely wanted to borrow money secured by the mortgage of the property, again took advantage of the desperate condition of the illiterate woman by making her sign the Kasulatan where it appeared thereon that he was the buyer of the property, the Supreme Court ruled that the contract was annullable because the consent of the old woman was obtained thru fraudulent misrepresentation of the nephew that the contract she was signing was one of mortgage. 73 The Principles of the American Law of Contracts at Law and in Equity by John D. Lawson, Ll.D., 1905, 2nd Edition, Pages 291-292. 74 G.R. No. L-32116, April 21, 1981, 104 SCRA 151.

352

Obligations and Contracts Text and Cases

Art. 1339

Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n) Each party is bound to be as diligent and circumspect as possible in entering into a contract and therefore each party is not dutybound to make known to each other any fact which is both within their knowledge or within their opportunity to know. Also, the mere fact that one of the parties has superior knowledge of the value of the property subject of the transaction than the other party does not per se constitute fraud. There is only fraud when, under the special and peculiar circumstances of each case, a legal or equitable duty is imposed upon the dominant party to reveal certain facts material to the transaction or when there is a confidential relationship between the parties. Hence, an animal breeder has a duty to disclose to an ordinary buyer that the particular cow the buyer wants to buy is suffering from a disease not detectable to the naked eye. Also, a lawyer or an agent, because of his confidential and trust relation-ship with his principal or client, is duty bound to reveal facts impor-tant to the transaction; otherwise, non-disclosure will constitute fraud. Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n) The law recognizes the practice in trade that there are usual exaggerations employed by the parties to consummate a particular transaction. If a party is induced by such usual exaggerations, there may be fraud amounting to active misrepresentation. If it is within the means of the other party to investigate the truthfulness of such exaggeration and he does not do so, there will be no fraud despite the exaggerations. Article 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s special knowledge. (n) Opinions are generally not regarded as representation of facts. Hence, if the opinion turns out to be wrong, it is not considered legally

Elliott, supra, Page 135. Id. 77 Id. 75 76

Arts. 1340-1341

Contracts Essential Requisites of Contracts Sec. 1 — Consent

353

deceitful insidiously inducing a party to enter into a contract. There are times when, without really having any special knowledge as to the object of the contract, a person expresses an opinion about the same. At the same time, the other party to whom the opinion was relayed may equally have his own thoughts and observation that would affect his judgment. In such cases, the expression of an opinion will not vitiate consent. An illustration of the difference between opinion and representation is found in the difference between the vendor of property saying that it is worth so much, and his saying that he gave so much for it. The first is an opinion which the buyer may adopt if he will, the second is an assertion of fact which, if false to the knowledge of the seller, is fraudulent. Thus to say that the subject matter of the sale was “good oil land” or that a patent was a valuable or useful improvement, or that a certain land was suitable for building purposes, is not fraudulent; while to say that business is profitable, or that a building is “fire proof” or that a furnace will heat a house, or that a rival seller will sell for less, is.73

Under Article 1341, if the opinion is given by one who is thoroughly knowledgeable or is an expert in the field such that he knows for a fact that his opinion will turn out to be false and still induces the other party to enter into the contract on the basis of such false opinion, fraud can be invoked to annul the contract. In such a case, the opinion will be considered as a fact. Article 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (n) Misrepresentation by a third person vitiates consent only if it created substantial mistake and the same is mutual. In Rural Bank of Caloocan vs. Court of Appeals74 where a person induced an elderly woman to co-sign a promissory note as debtor and to mortgage her property, without said woman knowing the nature of the contract, and where the same person successfully misrepresented to the bank the qualification of the elderly woman to induce the bank to grant the loan, the Supreme Court said that the loan agreement signed by the elderly woman can be annulled on the ground of mistake in the giving of consent by the parties. Pertinently, the Supreme Court said: “Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias, both Castro and the bank committed mistake in giving their consents

354

Obligations and Contracts Text and Cases

Art. 1342

to the contracts. In other words, substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and the bank of the true qualifications of the loan applicant, it is evident that they would not have given their consents to the contracts.

Pursuant to Article 1342 of the Civil Code which provides: Article 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.

we cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00 for while the contracts may not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Velosos (31 Phil. 160), this Court declared that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract.

Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) Misrepresentation is, in the main, inclusive of the term fraud. Practically every fraud is a misrepresentation, but every misrepresentation is not fraudulent.75 Thus a misrepresentation as to the subject-matter of or parties to a contract may be innocently made, and, if so, it does not amount to fraud, but is a misrepresentation.76 Misrepresentations may be made without the knowledge of its falsity77 and therefore completely done in good faith. In such a case it may constitute merely an error. Article 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. 78 G.R. No. 89561, September 13, 1990, 189 SCRA 529. 79 G.R. No. 48194, March 15, 1990, 183 SCRA 1990. 80 See also J.R. Blanco vs. Quasha, G.R. No. 133148, November 17, 1999, 115 SCAD 522, 318 SCRA 373.

Arts. 1343-1344

Contracts Essential Requisites of Contracts Sec. 1 — Consent

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Incidental fraud only obliges the person employing it to pay damages. (1270) The fraudulent act must be serious. There must be an intention to injure and that damage or injury in fact resulted. The parties must not be in pari delicto. They must not have been mutually guilty of fraud. It must not be dolo incidente which is accidental and collateral fraud which does not necessarily bear on the decision of the party defrauded to enter into the contract. It must be dolo causante which refers to the very cause why the other party entered into the contract. Article 1345. Simulations of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n) In Umali vs. Court of Appeals78 where it was contended that the failure of one of the parties to pay the consideration proved that the contract was absolutely simulated and therefore null and void, the Supreme Court rejected such contention, to wit: The evidence of record, on an overall calibration, does not convince us of the validity of the petitioners’ contention that the contracts entered into by the parties are either absolutely simulated or downright fraudulent. There is absolute simulation, which renders the contract null and void, when the parties do not intend to be bound at all by the same. The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to either produce legal effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the tractor, subject matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the execution of the Agreement of Counter Guaranty with the Chattel/Real Estate Mortgage, lead to the conclusion that petitioners had every intention to be bound by these contracts. The occurrence of these series of transactions between petitioners and private respondents is a strong indication that the parties actually intended, or at least expected, to exact fulfillment of their respective obligations from one another.



Ibid. Tongoy vs. Court of Appeals, 123 SCRA 99. 83 See also J.R. Blanco vs. Quasha, G.R. No. 133148, November 17, 1999, 115 81 82

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Obligations and Contracts Text and Cases

Arts. 1345-1346

Article 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. (n) In Javier vs. Court of Appeals79 where a party assigned his timber license to another for a consideration of P120,000 but the Deed of Assignment dated February 15, 1966 stated that, for such amount of money, the assignee shall transfer his shares of stock in a corporation to be known as Timberwealth Corporation, and where the assignment was eventually implemented but the assignee did not fully pay the consideration, and where finally, to claim the balance, the assignor sued the assignee who contended that the contract was null and void because the corporation was never set up and there was no transfer to him of the shares of stock, the Supreme Court ruled that the assignee should be held liable considering that the assignment was a relatively simulated contract which, though containing a false consideration, was not null and void per se. It cited Article 1346 which pertinently provides that a relatively simulated contract, 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 agree-ment.80 In J.R. Blanco vs. Quasha,81 the owner of the property entered into a contract of sale of her property with a company payable in equal annual installments of P25,000 per year. Simultaneously, the company and the said owner entered into a contract of lease of the same property whereby the owner would lease the property from the company for 25 years for a monthly rental of P2,083.34 or P25,000.08 per year. The totality of the agreement was called a Sale-Lease-Back Agreement. It is contended that the sale-lease-back agreement was simulated and therefore void because no actual consideration passed from the buyer to the seller. The Supreme Court rejected this claim. It reasoned that although no actual exchange of money was made, yet the payment was effected between the vendee and the vendor by mutual agreement whereby the montly rental which was due the vendor was paid from the annual installment of P25,000 due from the vendee pursuant to the lease contract executed between them. The court found nothing wrong with this arrangement for the same is not contrary to law, morals, good customs, or public policy, but rather for SCAD 522, 318 SCRA 373. 84 G.R. No. 134992, November 30, 2000, 137 SCAD 932, 345 SCRA 233. 85 G.R. No. 136857, November 22, 2000, 138 SCAD 171, 345 SCRA 468.

Art. 1346

Contracts Essential Requisites of Contracts Sec. 1 — Consent

357

the convenience of both parties. 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. An absolutely simulated or fictitious contract is void. A relatively simulated contract, 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.82 The characteristic of simulation is the fact that the apparent contract is not really desired nor intended to produce legal effects nor in any way alter the juridical situation of the parties. Thus, a person, in order to place his property beyond the reach of his creditors, simulated 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.83

In Pua vs. Court of Appeals84 where it was proven that the person who allegedly entered into the contract was not even conceived at the time the contract was executed, the Supreme Court said that the contract was definitely absolutely simulated. In Velasquez vs. Court of Appeals,85 a debtor was lured by the creditor to make it appear that the debtor sold to the creditor the collateralized property of the debtor. The creditor told the debtor that this scheme was necessary so that the creditor can borrow money from a certain bank and make use of the property as collateral. After the loan was obtained, the creditor was supposed to execute a reconveyance of the property to the debtor who would then assume the loan from the bank and use the proceeds of the loan to pay off his loan to the creditor. In the implementation of the scheme, three documents were executed on the same day namely: 1) a deed of cancellation of the mortgage made by the debtor to the creditor; 2) a deed of sale of the property from the debtor to the creditor; and 3) a document purporting to re-sell the property to the debtor. It was contended by the creditors that the sale of the property was authentic after the debtor filed a case to annul all the said documents. The Supreme Court rejected the said contention of the creditor and stated the contract of sale was clearly simulated to facilitate the transaction with the bank as there was absolutely no consideration at all and the parties clearly did not intend to be bound by the deed of sale and its

86

G.R. No. 138774, March 8, 2001.

358

Obligations and Contracts Text and Cases

Art. 1346

accompanying documents. In Francisco vs. Francisco-Alfonso86 where the two illegitimate daughters claimed that they bought the two properties in 1983 from their deceased father via a “Kasulatan sa Ganap na Bilihan” in the total amount of P25,000 but evidence showed that, even with what they claimed as their respective jobs at that time, they could not possibly have any income to be able to have such amount of money at the time of the sale, the Supreme Court declared the contract as void for being simulated because there was no consideration for the same. In concluding that the sale was void, the Supreme Court said that it was impossible for one of the illegitimate daughters to have money on hand in the amount of P15,000 just selling goto or lugaw at the time of the sale. Likewise, the Supreme Court said that it was incredible for the other illegitimate daughter, who was engaged in the buying and selling of RTW, to have money on hand in the amount of P10,000 at the time of the sale. Aside from the fact that a family friend testified that the illegitimate daughters had no source of income at the time of the sale, they likewise did not even present any single witness to prove that the seller received the purchase price.

Art. 1346

Contracts Essential Requisites of Contracts Sec. 1 — Consent

359

360

Obligations and Contracts Text and Cases

SECTION 2. — Object of Contracts Article 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 in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. (1271) Any property or service can be the object of a contract provided that it is within the commerce of man. Hence, one cannot sell the Luneta or a public sidewalk as they are not within the commerce of man. In Maneclang vs. IAC,1 the Supreme Court ruled that: The stipulation contained in the Compromise Agreement partakes of the nature of an adjudication of ownership in favor of herein petitioners of the fishpond in dispute, which, as clearly found by the lower and appellate courts, was originally a creek forming a tributary of the Agno River. Considering that as held in the case of Mercado vs. Municipal President of Macabebe, 59 Phil. 592 [1934], a creek, defined as a recess or arm extending from a river and participating in the ebb and flow of the sea, is a property belonging to the public domain which is not susceptible to private appropriation and acquisitive prescription, and as a public water, it cannot be registered under the Torrens System in the name of any individual [Diego vs. Court of Appeals, 102 Phil. 494; Mangaldan vs. Manaog, 38 Phil. 455]; and considering further that neither the mere construction of irrigation dikes by the National Irrigation Administration which prevented the water from flowing in and out of the subject fishpond, nor its conversion into a fishpond, alter or change the nature of the creek as a property of the public domain, the Court finds the Compromise Agreement null and void, and of no legal effect, the same being G.R. No. L-66575, September 30, 1986, 144 SCRA 553.

1

360

Art. 1347

Contracts Essential Requisites of Contracts Sec. 2 — Object of Contracts

361

contrary to law and public policy.

An undertaking or service to assassinate a particular dignitary cannot be the object of a contract because it is contrary to law and public order. Future things that can be reasonably ascertained can be the object of a contract. In a contract of sale, things having a potential existence may be the object of such contract;2 and the efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come to existence.3 Hence, all future puppies of a particular pregnant dog can be the object of a contract although the puppies are not yet born. However, the sale of a vain hope or expectancy is void.4 Rights may likewise be the object of contracts provided they are transmissible. Hence, one can sell leasehold rights over a property provided that there is no contractual and legal stipulation prohibiting its transmissibility. Except in cases authorized by law, future inheritance cannot be the object of a contract because its extent, amount or quantity is not determinable. Future inheritance “is 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.”5 Indeed one cannot determine with certainty how much inheritance one would get from his father, mother, or any person from whom he is called upon to succeed or to inherit. This is so because, it may happen that the father, at the time of his death, may have some debts to pay and, under the rules of succession, these obligations have to be paid first to the creditors before the exact amount of the inheritance can be determined and distributed. Also, it may happen that, at the time of the death of the father or mother, there are no more properties to inherit. In Blas vs. Santos6 where the wife agreed to give whatever her share in the conjugal partnership property to her heirs once the husband dies, the Supreme Court said that such agreement does not involve future inheritance, to wit: It is not an obligation or promise made by the maker to transmit one-half of her share in the conjugal properties acquired with her husband, which properties are stated or declared to be conjugal properties in the will of the husband. x x x The promise does not refer to any properties that the maker would inherit Article 1461 of the 1950 Civil Code. Id. 4 Id. 5 Blas vs. Santos, G.R. No. L-14070, March 29, 1961, 1 SCRA 899. 6 Id., Pages 906-907. 2

3

362

Obligations and Contracts Text and Cases

Arts. 1348-1349

upon the death of the husband. The document refers to existing properties which she will receive by operation of law on the death of her husband, because it is her share in the conjugal assets.

Article 1348. Impossible things or services cannot be the object of contracts. (1272) One cannot be bound to do the impossible. Hence, a contract requiring a person to become a monkey on a particular date is impossible. It cannot be the object of a contract. Article 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. (1273) The object must be one that can be ascertained with reasonable certainty as to its kind. Hence, a contract engaging a certain person to perform a deed, without specifying what deed it is, does not make the service determinable and is therefore void. But a contract engaging a person to sing in his nightclub identifies the kind of deed which is to be performed and therefore valid. Likewise a contract requiring an obligor to deliver a fruit is so general but, if the contract is to deliver a kind of fruit such as a mango or guava, the contract is valid. The law likewise states that 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. Hence, a contract which engages a person to supply all the ice which a restaurant needs is valid because the quantity of ice is easily ascertainable without the need for a new contract.

363

SECTION 3. — Cause of Contracts Article 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274) Cause is one of the essential requisites for a contract to validly exist. “The cause of a contract is the essential or more proximate purpose which the contracting parties have in view at the time of entering into the contract” (8 Manresa, 697).1 It may or may not be tangible. It can take different forms, such as a prestation or promise of a thing or service by another.2 It can be the giving of a sum of money, an object or even an expectation of profits from a subdivision project.3 In Dihiansan vs. Court of Appeals,4 a corporation decided to sell its property along an avenue and gave the persons living near the said property a preferential right to buy the same. One of the persons given such right was approached by a certain individual who requested that he be allowed to buy the property with a commitment to re-sell the same to the said person who was originally given the preferential right. The latter agreed and an agreement was signed embodying this commitment. This scheme was done because, clearly, the corporation will not sell the property to any other person except those given a preferential right. Instead of re-selling to the person given that preferential right, the purchaser sold it to another. It was contended that the contract between the person given preferential right and the individual who requested to buy the property was without consideration and therefore null and void. The Supreme Court rejected this position by stating:

Petitioner’s allegation that Exhibit “A” is null and void for

Republic vs. Cloribel, G.R. No. L-27905, December 28, 1970, 36 SCRA 534. Torres vs. Court of Appeals, G.R. No. 134559, December 9, 1999, 117 SCAD 94, 320 SCRA 428. 3 Ibid. 4 G.R. No. L-49539, September 14, 1987, 153 SCRA 712. 1 2

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Art. 1351

lack of cause or consideration is untenable. The consideration as found by the lower court and affirmed by the Court of Appeals is private respondent’s preferential right to buy the property from the owner. The contract Exhibit “A” clearly stipulates that petitioner Dihiansan shall re-sell the disputed property to private respondent. The contract is the law between the parties. When the words of a contract are plain and readily under-standable there is no room for construction.

In an onerous contract, the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other. In Republic vs. Cloribel5 where a compromise agreement designed to terminate the case between litigating parties to a suit was entered into, the cause of the compromise was the mutual waiver and abandonment of the parties of their claims against each other. In reciprocal contracts, the obligation or promise of each party is the consideration for that of the other.6 In remuneratory contracts, the cause is the service or benefit which is remunerated. Thus, when a doctor agreed to diagnose a patient, the cause for engaging the doctor is for him to look at the patient and diagnose him. The fee to be received by the doctor for his diagnosis is the cause of the contract as far as the doctor is concerned. In contracts of pure beneficence, the mere liberality of the benefactor is the cause of the contract. It does not involve any material thing but rather it involves only the generosity of the benefactor. Thus, a scholarship contract given by a school where an indigent will not pay anything for his education in the said school has for its cause the liberality and generosity of the benefactor-school. Article 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n) Motive is different from cause. “Cause is the essential reason for the contract, while motive is the particular reason for a contracting party which does not affect the other party and which does not preclude the existence of a different consideration.”7 Hence, a contract of sale of a valuable relic has for its cause the payment of the purchase price on the part of the seller and the delivery of the thing sold on the part of the buyer. The seller may have been motivated by some Republic vs. Cloribel, G.R. No. L-27905, December 28, 1970, 36 SCRA 534. Penaco vs. Ruaya, G.R. No. L-28102, December 14, 1981, 110 SCRA 46. 7 Republic vs. Cloribel, G.R. No. L-27905, December 28, 1970, 36 SCRA 534. 5

6

Art. 1351

Contracts Essential Requisites of Contracts Sec. 3 — Cause of Contracts

365

expectation of profit while the buyer might have been motivated to purchase the relic by the beauty and rarity of the relic. Clearly, the motivation of the parties is independent from the cause of the contract and therefore does not form an essential part of it. In Philippine National Construction Corporation vs. Court of Appeals8 where the lessee sought to release itself from paying rentals and from the whole contract itself contended that the purpose for which it entered the contract did not materialize, the Supreme Court rejected such contention by stating: With regard to the non-materialization of the petitioner’s particular purpose in entering into the contract of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. As a general principle, motive or particular purpose of a party in entering into a contract does not affect the validity nor existence of the contract: an exception is when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. The exception does not apply here.

There are certain cases however where the cause is equated to the motive when it is clear that the motive predetermines the cause. This is exemplified in the case of E. Razon vs. Philippine Ports Authority9 involving a void contract because of an illegal cause. The pertinent portions of the decision are as follows: The Management Contract under consideration was executed by and between petitioner E. Razon, Inc. represented by its President, herein co-petitioner Enrique Razon, and respondent PPA, represented by its then General Manager, E.S. Baclig, Jr. on June 27, 1980 (Annex “A,” Petition, p. 18, Rollo). By petitioners’ own admission, at the time of the execution of the Management Contract, petitioner E. Razon, Inc. later known as Metro Port Services, Inc. was controlled by Alfredo “Bejo” Romualdez, brother-in-law of deposed President Marcos. Under Section 5 of the Anti-Graft and Corrupt Practices Act (R.A. No. 3019) Romualdez, by reason of his relationship with the then President of the Philippines, was prohibited from intervening, directly or indirectly, in any transaction or business with the government. Thus, the Management Contract, entered into by E. Razon, Inc., ostensibly owned by petitioner Enrique Razon, but in fact controlled by Alfredo Romualdez as 60% equity owner thereof, is null and void and of no effect, being one expressly G.R. No. 116896, May 5, 1997, 82 SCAD 377. G.R. No. L-75197, June 22, 1987, 151 SCRA 233.

8

9

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Obligations and Contracts Text and Cases

Art. 1351

prohibited by law (par. [7], Art. 1409, Civil Code of the Philippines). Furthermore, as will be shown later, the Management contract is the direct result of a previous illegal contract and, therefore, is itself null and void under Article 1422 of the Civil Code. Petitioners attempt to evade the consequences of the Romualdez connection by alleging that the 60% equity of petitioner E. Razon, Inc. was obtained thru force and duress and without any monetary consideration whatsoever. Otherwise stated, the transfer of the shares of stock to persons close to President Marcos, later disclosed to be Alfredo “Bejo” Romualdez was, at the very least, voidable for lack of consent, or altogether void for being absolutely fictitious or simulated. Verily, the transfer of the shares of stocks of petitioner E. Razon, Inc. representing 60% equity to persons fronting for Alfredo “Bejo” Romualdez was null and void. The invalidity springs not from vitiated consent nor absolute want of monetary consideration, but for its having had an unlawful cause-that of obtaining a government contract in violation of law. While the general rule is that the causa of the contract must not be confused with the motives of the parties, this case squarely fits into the exception that the motives may be regarded as causa when it predetermines the purpose of the contract. (Liguez vs. Court of Appeals, 102 Phil. 577). On the part of Romualdez, the motive was to be able to contract with the government which he was then prohibited by law from doing, and on petitioner Razon’s part, to be able to renew his management contract. For it is scarcely disputable that Enrique Razon would not have transferred said shares of stock to Romualdez without an assurance from the latter that he would be unduly favored with a renewal of the Management Contract. Thus, it came to pass that by transferring 60% of the shares in his company to Romualdez, petitioner Enrique Razon was able to secure an eight-year contract with respondent PPA and for six years before its cancellation benefit from the proceeds thereof. Petitioners’ attempt to dissociate or divorce themselves from the illegality of the transfer and, consequently, of the management contract, as well as their claim of innocence or being a victim of the Marcos regime must fail for the “view has been taken x x x that a party is a participant in the unlawful intention where he knows and intends that the subject matter will be used for an illegal purpose and there would seem to be no doubt that one may be deemed to be a participant in the other’s unlawful design if he shares in the benefits of the violation of law. However, whether he is to derive any benefit from the unlawful use of the subject matter is not the sole test. A test which has been said to

Art. 1351

Contracts Essential Requisites of Contracts Sec. 3 — Cause of Contracts

367

be more comfortable to sound morality is whether he intends to aid the other in the unlawful object. He may be deemed to be a participant in the unlawful purpose if, with knowledge thereof, he does anything which facilitates the carrying out of such purpose.” (17 Am Jur 2d 515-516). The transfer of the control of petitioner E. Razon, Inc. from petitioner Enrique Razon to Alfredo “Bejo” Romualdez, which we have resolved to be null and void, served as the direct link to petitioner company’s obtaining the Management Contract. Being the direct consequence and result of a previous illegal contract, the Management Contract itself is null and void as provided in Article 1422 of the Civil Code. Elementary in the law of contracts is the principle that no judicial action is necessary for the annulment of a void contract. Any such action would be merely declaratory. (Tolentino, Civil Code of the Philippines, Vol. IV, 1973 ed., p. 594). Thus, it was well within the rights of respondent PPA to unilaterally cancel and treat as avoided the Management Contract and no arbitrariness may be attached to its exercise of this right.

In Uy vs. Court of Appeals 10 where the National Housing authority purchased certain lots and thereafter cancelled the Deeds of Sale relative thereto considering that the lots turned out to be unsuitable for its housing project, the Supreme Court sustained the dismissal of the case for damages filed by the vendors. As to the claim of the vendors that NHA rescinded the contract without legal basis, the Supreme Court said that the NHA did not rescind the sale pursuant to Article 1191 of the Civil Code considering that there was no breach of trust committed by the sellers themselves who merely complied with their obligation to deliver the properties. Neither did NHA suffer any injury by the performance by the vendors of their obligation. The Supreme Court ruled that the cancellation was valid as it was based on the negation of the cause arising from the realization that the lands, which were the object of the sale, were not suitable for housing. The Supreme Court said that for the vendee, NHA, the cause was the acquisition of the land. For the seller, the cause was to obtain the price. The motive of the NHA, which was known to the seller, was to use said lands for housing. The Supreme Court thereafter stated that it is clear, and petitioners do not dispute, that NHA would not have entered into the contract were the lands not suitable for housing. In other words, the quality of the land was an implied

10

G.R. No. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69.

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Arts. 1352-1354

condition for the NHA to enter into the contract. On the part of the NHA, therefore, the motive was the cause for its being a party to the sale.11

Article 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. (1275a) Since cause is one of the essential elements of a contract, its absence does not create a contract as there can be no meeting of the minds. This is also true if the cause is unlawful. Hence a contract to engage a party to steal is unlawful as it is against the law. Likewise a contract between a husband and wife to have their respective paramours is contrary to morals. A contract to foment riots is contrary to public order and a contract waiving the right of an employee to receive what is due him under the law is contrary to public policy. Article 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276) The general rule provided by the law is that a false cause stated in a contract makes the contract void. Thus, a contract of sale, which states that the price of the object for sale is P500 when in fact no such price has been paid at all, is void.12 However, when a contract, though stating a false consideration, has in fact a real consideration, the contract is not void. Thus, when a contract stating the consideration of a ball pen is P1,000 but it is only sold for P500 which the seller accepted, the contract is valid. At the least, the contract is a relatively simulated one. Article 1354. Although the cause is not stated in the contracts, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277) In Liam vs. Olympic Sawmill Co.,13 a loan of P10,000 was entered into and, subsequently, another loan agreement was executed increasing the original amount of the previous loan by P6,000 “to answer for attorney’s fees, legal interest and other cost incident 11 12

G.R. No. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69. See Mapalo vs. Mapalo, G.R. No. L-21489, May 19, 1966, 17 SCRA 114.

Art. 1355

Contracts Essential Requisites of Contracts Sec. 3 — Cause of Contracts

369

thereto to be paid unto the creditor” upon the termination of the agreement. The debtor failed to pay and a case was filed. By way of summary judgment, decision was rendered ordering the defendantdebtor to pay the principal amount of P10,000 and the additional amount of P6,000. The latter amount was contested as being usurious. The Supreme Court ruled that, at the time of the tran-saction, the usury law was suspended and, moreover, it said: Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, “it is presumed that it exists and is lawful, unless the debtor proves the contrary.” No evidentiary hearing having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court’s finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of interest income, attorney’s fee and incidentals.

Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (n) In Auyong Hian vs. Court of Tax Appeals14 where the contract involving tobacco was assailed as invalid due to inadequacy of price, the Supreme Court said, Neither can the inadequate consideration, even if true, invalidate the sale to the CTIP. The other factor which, according to petitioner, militates against the validity of the sale is the measly sum of P1,500,000 paid by the CTIP for the tobacco which had a value, according to petitioner, of P7,000,000. What is really the value of the imported tobacco? According to the Tax Court, the records show that when the tobacco arrived in the Philippines, petitioner filed an Affidavit and Pro Forma Invoice giving the invoice value of the tobacco as US$103,453 and an appraised value, for tax purposes, of P227,675. Petitioner contends that this declaration is merely its invoice value and does not include the other expenses incurred in the importation. Because of these different declarations, the Tax Court confessed it was at a loss as to which of petitioner’s declaration was to be believed. When it suits petitioner’s purpose he claims that the tobacco was worth P227,675.00. For other purposes the value was P7,000,000. If the claim of petitioner

13



14

G.R. No. L-30771, May 28, 1984, 129 SCRA 439. G.R. No. L-28782, September 12, 1974, 59 SCRA 110.

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Obligations and Contracts Text and Cases

Art. 1355

that the tobacco was really worth P7,000,000, then there will be another cause for forfeiture which would be petitioner’s filing a false declaration under Section 2530(m) of the Tariff and Customs Code. We cannot say that the appraisal of the value of the tobacco was incorrect. According to the Tax Court, the Collector of Customs took precautionary measures to insure a correct appraisal of the tobacco. The appraisal was made by a competent appraiser of the Bureau of Customs, and both the Commissioner of Customs and the Secretary of Finance, who exercise supervisory authority over the Collector of Customs and who were consulted on the matter, approved the sale, or at least, interposed no objection to the sale. Anent this matter it has been said that an appraisal made by the Commissioner of Customs under Section 1377 of the Revised Administrative Code is presumed to be correct, unless the contrary is proven by the importer. (Lazaro vs. Commissioner of Customs, L-22511 and L-22343, May 16, 1966, 17 SCRA 36, 41 and cases cited there-in.) But, assuming arguendo, that the consideration paid for the forfeited tobacco was inadequate, such inadequate consideration is not a ground for the invalidity of a contract. Anent this matter Article 1355 of the Civil Code provides: “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.” Petitioner has not shown that the instant sale is a case exempted by law from the operation of Art. 1355; neither has petitioner shown that there was fraud, mistake or undue influence in the sale. Hence, this Court cannot but conclude with the Court of Tax Appeals that “in these circumstances, we find no reason to invalidate the sale of said tobacco to Consolidated Tobacco Industries of the Philippines.”

In Penaco vs. Ruava15 where the inadequacy of cause was again invoked to invalidate the sale of a house, the Supreme Court said, The appellants, nevertheless, contend that the consideration is for the house only since the lot on which it is constructed is public land which they cannot sell, and in view of the inadequacy of the price, the building alone having an assessed value of P1,500.00 and the land is too cheap for P5,000.00. Indeed, the lot on which the building sold a retro is constructed is public land and the appellants have no right to sell

15

G.R. No. L-28102, December 14, 1981, 110 SCRA 46.

Art. 1355

Contracts Essential Requisites of Contracts Sec. 3. — Cause of Contracts

it. What is sought to be transferred and ceded, however, is not the ownership of the land, but the rights, interests and participation of the appellants “as public land claimants thereof by virtue of the decision of the Bureau of Lands,” which rights could be waived, transferred or alienated. By their contract, the appellants have undertaken to effect legal transfer of all their rights over the lot to the vendee a retro and his assigns upon the consolidation of the title over the building in the vendee, and whether or not the herein appellee is qualified to acquire that land of the public domain claimed by the appellants depends upon the Director of Lands who has executive control over the concession and disposition of the lands of the public domain. For this reason the land should be raised in the administrative proceedings. The inadequacy of the price is not sufficient proof that the consideration of P1,000.00 was for the house alone. The vendee a retro could not have possibly bought the house alone without securing from the vendors a retro a specific and fixed arrangement regarding the lot on which the house is built, otherwise, he could be ejected therefrom at the will of the vendors a retro. Besides, “a valuable consideration, however small or nominal, if given or stipulated in good faith is, in the absence of fraud, sufficient. A stipulation in consideration of one dollar is just as effectual and valuable a consideration as a larger sum stipulated for or paid.”

371

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Chapter 3

FORMS OF CONTRACTS Article 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 indis-pensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a) In Dauden-Hernaez vs. De Los Angeles1 where a movie actress filed a suit to recover her compensation for her services as a leading lady in two motion pictures and where the producers resisted such claim on the ground that the contract was void or invalid as there was no written agreement to the same, the Supreme Court ruled in favor of the movie actress by upholding the contract, to wit: 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 “Ordamiento 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. Thus, the first cited provision prescribes: “Art. 315 Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law.” Concordantly, the first part of Article 1356 of the Code provides:

G.R. No. L-27010, April 30, 1969, 27 SCRA 1276. G.R. No. 132474, November 19, 1999, 115 SCAD 798, 318 SCRA 688. 372

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Art. 1356

Contracts Forms of Contracts

373

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. x x x.” These essential requisites last mentioned are normally: (1) consent, (2) proper subject matter, and (3) consideration or causa for the obligation assumed (Article 1318). So that once the three elements exist, the contract is generally valid and obligatory, regardless of the form, oral or written, in which they are couched. To this general rule, the Code admits exceptions, set forth in the second portion of Article 1356: “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. x x x.” It is thus seen that to the general rule that the form (oral or written) is irrelevant to the binding effect inter partes of a contract that possesses the three validating elements of consent, subject matter, and causa, Article 1356 of the Code establishes only two exceptions, to wit: a) Contracts for which the law itself requires that they be in some particular form (writing) in order to make them valid and enforceable (the so-called solemn contracts). Of these the typical example is the donation of immovable property that the law (Article 749) requires to be embodied in a public instrument in order “that the donation may be valid,” i.e., existing or binding. Other instances are the donation of movables worth more than P5,000.00 which must be in writing, “otherwise the donation shall be void” (Article 748); contracts to pay interest on loans (mutuum) that must be “expressly stipulated in writing” (Article 1956); and the agreements contemplated by Articles 1744, 1773, 1847 and 2134 of the present Civil Code. b) Contracts that the law requires to be proved by some writing (memorandum) of its terms, as in those covered by the old Statute of Frauds, now Article 1403(2) of the Civil Code. Their existence not being provable by mere oral testimony (unless wholly or partly executed), these contracts are excep-tional in requiring a writing embodying the terms thereof for their enforceability by action in court. The contract sued upon by petitioner herein (compensation for services) does not come under the exception. x x x.

In Cenido vs. Apacionado,2 the Supreme Court upheld the validity of a written contract of sale of real property even if it were not 3 G.R. Nos. 104805-07, January 13, 1993, 127essential SCRA 49. requisites of the in a public instrument because all the

374

Obligations and Contracts Text and Cases

Art. 1356

contract were proven. In addition, the Supreme Court made the following elucidation: Generally contacts are obligatory in whatever form such contracts may have been entered into, provided all the essential requisites for their validity are present. When however, the law requires that a contract be in some form for it to be valid or enforceable, that requirement must be complied with. A certain form may be prescribed by law for any of the following purposes: for validity, enforceability, or greater efficacy of the contract. When the form required is for validity, its nonobservance renders the contract void and of no effect. When the required form is for enforceability, non-compliance therewith will not permit, upon the objection of a party, the contract, although otherwise valid, to be proved or enforced by action. Formalities intended for greater efficacy or convenience or to bind third persons, if not done, would not adversely affect the validity or enforceability of the contract between the contracting parties themselves.

In Deloso vs. Sandiganbayan3 where the contract was assailed as anomalous on the ground that it was originally made orally and then later reduced into writing, the Supreme Court ruled that contracts can generally be made in whatever form, thus: It is not true that as the information state, said tractors were delivered to the lessees “without any agreement as to the payment of rentals for the use of said tractor” or that, as the Sandiganbayan avers, “the tractors were given out to these beneficiaries without thought of compensation for their use.” For all the witnesses of the defense as well as of the Government uniformly attested to the reality of verbal agreements between the Municipality and the tractor’s lessees, i.e., that all said lessees were made aware of the obligations they were assuming prior to the delivery thereof, they all bound themselves in writing “to all the terms and conditions which the Municipality of Botolan, Zambales may impose.” And the fact that the lease agreements were not initially reduced to writing, this having been done only some time later by the Sangguniang Bayan through a resolution adopted for that purpose, certainly does not make the transactions anomalous or felonious, nor preclude the generation of the contractual relation of lessor and lessee between the Municipality and the farmers. It is axiomatic that contracts may be entered into in any form, orally or in writing, or parol in part and written in part, it being needful merely that the essential requisites for their validity

G.R. Nos. L-46715-16, July 29, 1988, 163 SCRA 705. G.R. No. 132474, November 19, 1999, 115 SCAD 798, 318 SCRA 688.

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Art. 1357

Contracts Forms of Contracts

375

be present — a precept of general application unless “the law requires that a contract be in some form in order that it may be valid or enforceable.” Quite obviously, the lease of the tractors in this case is not one of those required by law to be in writing or other particular form in order that it may be valid or enforceable.

Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. (1279a) A party, who desires to have his contract reduced in the particular form required by law, can file an action to compel the other party to comply with such form. If the requirement of law is directory only and has no bearing on the validity or enforceability of the contract, the parties can enforce the contract and, at the same time, demand that it be reduced in the form required by law. In Zaide vs. Court of Appeals4 where an unregistered contract of sale was assailed as invalid, the Supreme Court ruled in favor of the validity of the sale by stating: However, although the first deed of sale (Exh. 1) was genuine, it was so far defective as to render it unregistrable in the Registry of Property. As already pointed out, it did not set forth the name of the vendee’s husband and was for this reason refused registration by the Register of Deeds. The defect was unsubstantial. It did not invalidate the deed. The legal dispositions are clear. Though defective in form, the sale was valid; and the parties could compel each other to do what was needful to make the document of sale registrable. The law generally allows a contract of sale to be entered into in any form, whether “in writing, or by word of mouth, or partly in writing and partly by word of mouth, or (even) inferred from the conduct of the parties,” but 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, but also that the writing be in the form of a “public document.” The law finally provides that “if the law requires a document or other special form, as in the acts and contracts enumerated in x x x (Article 1358), the contracting parties may compel each other to observe that form, once the contract has been perfected x x x

Tapec vs. Court of Appeals, G.R. No. 111952, October 26, 1994, 56 SCAD 356,

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Obligations and Contracts Text and Cases

Art. 1358

(and such) right may be exercised simultaneously with the action upon the contract.

Also in Cenido vs. Apacianado,5 the Supreme Court ruled in favor of the validity of a private conveyance of real property denominated as “Pagpapatunay” as between the parties, but said: The question as to whether the “Pagpapatunay” is suffi-cient to transfer and convey title to the land for purposes of original registration or the issuance of a real estate tax decla-ration in respondent spouses’ names, as prayed for by the respondent spouses, is another matter altogether. For greater efficacy of the contract, convenience of the parties and to bind third persons, respondent spouse have the right to compel vendor or his heirs to execute the necessary document to properly convey the property.

Article 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2 and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles 1403, No. 2 and 1405. (1280a) The failure to put in a public or private document or writing the transactions or matters enumerated in Article 1358 will not render the agreement void or invalid.6 They shall still be effective as between the parties. The requirement to put the agreement referred under 237 SCRA 749. Article 1358 in a public instrument is only for the purpose of greater

Art. 1358

Contracts Forms of Contracts

377

efficacy, of convenience or of binding third persons. Thus in the case of Dauden-Hernaez vs. De Los Santos,7 the Supreme Court ruled that Article 1358 nowhere provides that the absence of written form in this case will make the agreement invalid or unenforceable. On the contrary, Article 1357 clearly indicates that contracts covered by Article 1358 are binding and enforceable by action or suit despite the absence of writing.

In Dalion vs. Court of Appeals,8 the Supreme Court reiterated the jurisprudence laid down in previous cases that the requirement under Article 1358 is merely for convenience, thus: Assuming authenticity of his signature and the genuineness of the document, Dalion nonetheless still impugns the validity of the sale on the ground that the same is embodied in a private document, and did not thus convey title or right to the lot in question since “acts and contracts which have for their object the creation, transmission, modification or extinction of real rights over immovable property must appear in a public instrument.” (Art. 1358, par. 1, NCC) This argument is misplaced. The provision of Art. 1358 on the necessity of a public document is only for convenience, not for validity or enforceability. It is not a requirement for the validity of a contract of sale of a parcel of land that this be embodied in a public instrument. A contract of sale is a consensual contract, which means that the sale is perfected by mere consent. No particular form is required for its validity. Upon perfection of the contract the parties may reciprocally demand performance (Art. 1475, NCC), i.e., the vendee may compel transfer of ownership of the object of the sale, and the vendor may require the vendee to pay the thing sold. (Art. 1458, NCC) The trial court thus rightly and legally ordered Dalion to deliver to Sabesaje the parcel of land and to execute the corresponding formal deed of conveyance in a public document. Under Art. 1498, NCC, when the sale is made through a public instrument, the execution thereof is equivalent to the delivery of the thing. Delivery may either be actual (real) or constructive. Thus, delivery of a parcel of land may be done by placing the vendee in control and possession of the land (real) or by embodying the sale in a public instrument (constructive). G.R. No. L-27010, April 30, 1969, 27 SCRA 1276. G.R. No. 78903, February 28, 1990, 182 SCRA 872.

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378

Obligations and Contracts Text and Cases

Art. 1358

379

Chapter 4

REFORMATION OF INSTRUMENTS (n) Article 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. Reformation applies only to written contracts contained in an instrument or series of instrument. And, when the terms of an agreement have been reduced to writing, it is considered to be containing all the terms agreed upon and there can be, between the parties and their successorsin-interest, no evidence of such terms other than the contents of the written agreement, except when it fails to express the true intent and agreement of the parties thereto, in which case, one of the parties may bring an action for the reformation of the instrument to the end that such true intention may be expressed.1

Reformation connotes a valid contract. The parties are able to have a meeting of the minds but the instrument supposed to embody the contract does not conform to such contract. In actions for reformation what is reformed is the instrument embodying the contract and not the contract itself. Two fundamental matters therefore must be shown before reformation can be availed: first, that the instrument embodying the contract does not reveal the true intention of the parties and, second, the existence of a real and Tuason vs. Court of Appeals, G.R. No. 119794, October 3, 2000, 135 SCAD 28, 341 SCRA 707, citing National Irrigation Administration vs. Gamit, 215 SCRA 436. 1

379

380

Obligations and Contracts Text and Cases

Art. 1359

actual contract entered into by the parties. Failure to prove these two matters may lead to the creation of an entirely new contract not within the contemplation of the parties. Equity dictates that reformation of an instrument in order that the true intention of the contracting parties may be expressed. The courts by the reformation do not attempt to make a new contract for the parties, but to make the instrument express their real agreement. 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 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 effect of mistake, fraud, inequitable conduct, or accident.2

Reformation may be caused by mistake, fraud, inequitable conduct or accident of the parties. In actions for reformation, the onus probandi is upon the party who insists that the contract should be reformed.3 However, if these factors prevent a meeting of the minds, annulment and not reformation is the remedy. An action for reformation is in personam, not in rem, x x x even when real estate is involved. x x x It is merely an equitable relief granted to the parties where through mistake or fraud, the instrument failed to express the real agreement or intention of the parties. While it is a recognized remedy afforded by the courts of equity, it may not be applied if it is contrary to well-settled principles or rules. It is a long-standing principle that equity follows the law. It is applied in the absence of and never against statutory law. x x x Courts are bound by rules of law and have no arbitrary discretion to disregard them. x x x Courts of equity must proceed with outmost caution especially when rights of third parties may intervene.4

An action for reformation can be filed within ten (10) years from the time the cause of action accrues, since the suit is based on a written document.5 The cause of action accrues upon the knowledge Report of the Code Commission, Pages 55-56 cited in Naga Telephone Company vs. Court of Appeals, G.R. No. 107112, February 24, 1994, 48 SCAD 539, 230 SCRA 351. 3 Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD 281, 320 SCRA 625. 4 Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD 281, 320 SCRA 625; Toyota Motor Philippines Corporation vs. Court of Appeals, G.R. No. 102881, December 7, 1992, 216 SCRA 248. 2

Art. 1360

Contracts Reformation of Instruments (n)

381

of the ground for reformation,6 or from the date of the execution of the instrument embodying the contract if the cause or causes for reformation were already known at the time of the execution of the said instrument embodying the contract. Thus, in Rosello-Bentir vs. Leanda7 where it was contended that, at the time of the execution of the contract on May 5, 1968, there was a verbal agreement between the lessor and the lessee that the lessee will be given the right of first refusal should the lessor decide to sell his property, and where the lessee only filed the case for reformation on May 15, 1992 to reflect such intention of the parties, the Supreme Court ruled that the action for reformation has already prescribed. The 10-year period started from May 5, 1968.

Also, the action may be barred by laches.8

An action for reformation of instrument is instituted as a special civil action for declaratory relief under the Rules of Court.9 Since the purpose of an action for declaratory relief is to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof, or compliance therewith, and not to settle issues arising from an alleged breach thereof, it may be entertained only before the breach or violation of the law or contract to which it refers.10

Thus, an action for reformation instituted after the lessor allegedly breached the contract with the lessee giving the lessee a right of first refusal to buy the leased premises, and which right of first refusal was the subject of the action for reformation, cannot prosper.11 Article 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. Article 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, Article 1144 of the 1950 Civil Code. Naga Telephone Company, Inc. vs. Court of Appeals, G.R. No. 107112, February 24, 1994, 48 SCAD 539, 230 SCRA 351. 7 G.R. No. 128891, April 12, 2000, 125 SCAD 322, 330 SCRA 591. 8 Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322, 330 SCRA 591. 9 Section 1, Rule 63 of the 1997 New Rules of Civil Procedure. 10 Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322, 330 SCRA 591. 11 Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322, 330 SCRA 591. 5

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Obligations and Contracts Text and Cases

Arts. 1360-1361

said instrument may be reformed. For mistake to be a cause for reformation, the mistake must be mutual and must generally involve factual matters. This is consistent with the essential requisite in reformation that there must be a prior meeting of the minds between the parties. There must have been a valid existing agreement to which the erroneous document can be made to match or harmonize. In Gonzalez Mondragon vs. Santos12 where one of the parties to a contract contended that there was a mistake relative to the documentation of the contract because the real intent of the parties was for the sale by the hectare and not for a sum in gross as stated in the document of sale, but where there was no convincing evidence that the mistake was mutual, the Supreme Court denied the reformation of the contract of sale and stated: The plaintiff’s evidence being as it is, the integrity of the document Exhibit A will, of necessity, have to be maintained and equitable relief denied. This would be true even if there were doubts. Decisions of this court and of American courts abound in favor of the salutary doctrine that contracts solemnly and deliberately entered into may not be overturned by inconclusive proof or by reason of mistake of one of the parties to which the other in no way has contributed. Moran’s Comments on the Rules of Court, Vol. III, p. 195, summing up the rulings laid down in various decisions of this court and one of the United States Supreme Court, says: “Relief by way of reformation of a written agreement will not be granted unless the proof of mutual mistake is of the clearest and most satisfactory character. The amount of evidence necessary to sustain a prayer for relief where it is sought to impugn a fact in a document is always more than a mere preponderance of evidence.” In the case of Joaquin vs. Mitsumine (34 Phil. 858), this court held that “An alleged defect in a contract perfectly valid and binding on its face, must be conclusively proved. The validity and fulfillment of contracts can not be left to the will of one of the parties.”

In Atilano vs. Atilano13 where there was a mutual mistake in the designation of the particular lands owned by two brothers, the Supreme Court said that the remedy was reformation. However, if the correct properties were already in the possession of the persons to whom they should rightfully belong, there was no more need 12

13

G.R. No. L-1724, October 12, 1950, 87 Phil. 471. G.R. No. L-22487, May 21, 1969, 28 SCRA 231.

Arts. 1360-1361

Contracts Reformation of Instruments (n)

383

for reformation because the parties actually already implemented the true intention of the contract. Particularly, the Supreme Court said: The logic and common sense of the situation lean heavily in favor of the defendants’ contention. When one sells or buys real property — a piece of land, for example — one sells or buys the property as he sees it, in its actual setting and by its physical metes and bounds, and not by the mere lot number assigned to it in the certificate of title. In the particular case before us, the portion correctly referred to as Lot No. 535-A was already in the possession of the vendee, Eulogio Atilano II, who had constructed the residence therein, even before the sale in his favor; indeed, even before the subdivision of the entire Lot No. 535 at the instance of the owner, Eulogio Atilano I. In like manner, the latter had his house on the portion correctly identified, after the subdivision, as Lot No. 535-E, even adding to the area thereof by purchasing a portion of an adjoining property belonging to a different owner. The two brothers continued in the possession of the respective portions for the rest of their lives, obviously ignorant of the mistake in the designation of the lot subject of the 1920 sale until 1959, when the mistake was discovered for the first time. The real issue here is not possession, but the real intention of the parties to that sale. From all the facts and circumstances we are convinced that the object thereof, as intended and understood by the parties, was that specific portion where the vendee was already residing, where he reconstructed his house at the end of the war, and where his heirs, the plaintiffs herein, continued to reside thereafter; namely, Lot No. 535-A; and that its designation as Lot No. 535-E in the deed of sale was a simple mistake in the drafting of the document. The mistake did not vitiate the consent of the parties, or affect the validity and binding effect of the contract between them. The new Civil Code provides a remedy for such a situation by means of reformation of the instrument. This remedy is available 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 (Art. 1359, et seq.) In this case, the deed of sale executed in 1920 need no longer be reformed. The parties have retained possession of their respective properties conformably to the real intention of the parties to that sale, and all they should do is to execute mutual deeds of conveyance.

Article 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.

384

Obligations and Contracts Text and Cases

Arts. 1362-1364

If the mistake is unilateral and reformation is sought, it must be shown that the other party has acted fraudulently or inequitably resulting in the drafting of a document which does not correspond to the actual contract agreed upon by the parties. Also, a party may have known the facts of the case but is ignorant of or has been mistaken as to the legal consequences of the same. Generally, mistake of law or ignorance of the law is not a ground for reformation because parties must, as a rule, submit to the legal ramifications of their written contracts clearly pursuant to their true intent and meaning. But while mistake of law or ignorance of the law will not ordinarily relieve a party from the performance of his written contract where he executed the same with full knowledge of all the facts, yet, where, on account of misplaced confidence, and because of some artifice or deception fraudulently practiced upon him by the other party, a material part of the contract was omitted from the writing, or he was otherwise misled, equity will decree a reformation.14

Article 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. Knowledge by one party of the other’s mistake regarding the expression of the agreement is equivalent to mutual mistake.15 Hence, reformation of the contract can be sought by the injured party. Article 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. If the person drafting or typing the instrument is not able to come up with a correct written document embodying the contract of the parties because of failure to follow instructions or because of ignorance, lack of skill, negligence or bad faith, the mistake will be deemed to be mutual,16 and therefore reformation can be availed of. Hence, if the typist wrongly types the amount of consideration in a written instrument embodying the contract of sale, the instrument 14 William F. Elliot, Commentaries on the Law of Contracts, Volume 3, 1913 edition, Indianapolis, The Bobbs-Merrill Company, Page 543. 15 12 Am Jur 631, citing Columbian Nat. L. Ins. Co. vs. Black (C.C.A. 10th) 35 F. (2d) 571, 71 A.L.R. 128, quoting 3 Willston, Contracts, p. 2745.

Arts. 1365-1366

Contracts Reformation of Instruments (n)

385

may be reformed to conform to the real consideration agreed upon by the parties. In Huibonhoa vs. Court of Appeals17 where there was a failure to prove what costly mistake allegedly suppressed the intention of the parties prompting the petitioner to admit that there was an oversight in the drafting of the contract by her counsel, the Supreme Court rejected the propriety of reformation because, by such admission of the petitioner, oversight may not be attributed to all the parties to the contract and therefore, it cannot be considered a valid reason for the reformation of the same contract. Article 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. In Palileo vs. Cosio18 where the parties to a contract intended that the house subject of the agreement was to be a collateral for a particular loan but the agreement apparently states that the house was the subject of a conditional sale of residential building, the Supreme Court allowed the reformation of the agreement. In a subsequent case by the same parties, the Supreme Court said: In reforming instruments, courts do not make another contract for the parties (See Civil Code, Arts. 1359-1369 and the Report of the Code Commission, p. 56). They merely inquire into the intention of the parties and, having found it, reform the written instrument (not the contract) in order that it may express the real intention of the parties.

Article 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.



Any disposition in a will or an unconditional donation be-

16 William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913 edition, Indianapolis, The Bobbs-Merrill Company, Page 188. 17 G.R. No. 95897, December 14, 1999, 117 SCAD 281, 320 SCRA 625. 18 51 O.G. 6181 at 6184; also see Cosio vs. Palileo, G.R. No. L-18452, May 31, 1965, 14 SCRA 170. 19 See Second Paragraph of Section 1, Rule 63 of the 1997 New Rules of Civil

386

Obligations and Contracts Text and Cases

Arts. 1367-1369

queathing or donating something is an act of liberality. They are not cases where, prior to the drafting of the instrument embodying the will or the donation, there has been a prior negotiation where both parties mutually agree on the object of the contract. Wills and donations are gratuitous. They do not involve any meeting of the minds of the parties before the document is even drafted. Reformation implies that there must be a prior agreement between the parties. If such prior agreement is void, it cannot be given legal effect. Hence, the instrument embodying the void agreement cannot be made to conform to such void agreement which is non-existent as to its legal effect. Article 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. A party seeking to enforce an agreement necessarily acknowledges that the instrument embodies the contract intended by the parties and therefore, he is estopped from filing a case for reformation alleging that the contract does not contain the true intent of the parties. Article 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. This particular article provides the persons who are given legal standing to initiate an action for reformation. If the mistake is mutual, either party or his successor-in-interest may file the action. If the cause for reformation is on some other grounds, such as fraud or vitiated consent, the injured party or his heirs and assigns are the only persons given legal standing to sue. Article 1369. The procedure for the reformation of instruments shall be governed by rules of court to be promulgated by the Supreme Court. An action for reformation of instrument may be brought in accordance with the rules on filing a special civil action for declaratory relief.19 This is in accordance with Rule 63 of the 1997 New Rules of Civil Procedure specifically promulgated by the Supreme Court

Art. 1369

Contracts Reformation of Instruments (n)

387

which provides that, in an action for declaratory relief, any person interested under a deed, will, contract or other written instrument, or whose rights are affected by a statute, executive order or regulation, ordinance or any other governmental regulation may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to determine any question of construction or validity arising, and for the declaration of his rights and duties, thereunder.20 If before the final termination of the case, a breach or violation of an instrument should take place, the action may thereupon be converted into an ordinary action, and the parties shall be allowed to file such pleadings as may be necessary or proper.21

Procedure; Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322, 330 SCRA 591. 20 Section 1, Rule 63 of the 1997 New Rules of Civil Procedure. 21 Section 6, Rule 63 of the 1997 New Rules of Civil Procedure.

388

Obligations and Contracts Text and Cases

Chapter 5

INTERPRETATION OF CONTRACTS Article 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. (1281) The purpose of interpretation is to be able to know the intent of the parties so that the contract can be properly implemented. It is the agreement of the parties which must be enforced. Interpretation is the act of making intelligible what was before not understood, ambiguous, or not obvious. It is a method by which the meaning of language is ascertained. The interpretation of a contract is the determination of the meaning attached to the words written or spoken which make the contract. On the other hand, reformation is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties.1

The rules in statutory construction can likewise be applied as a guide in interpreting ambiguous provisions in a contract.2 Thus, in Finman General Assurance Corporation vs. Court of Appeals3 where the insurance policy procured by the insured did not include murder and assault as incidents exempting the insurance company from liability in case of the death of the inured, the Supreme Court applied the statutory construction rule of “expresso unius exclusio alterius” — the mention of one thing implies the exclusion of another thing — to make the insurance company pay the beneficiaries arising from the Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD 281, 320 SCRA 625; National Irrigation Administration vs. Gamit, G.R. No. 85869, November 6, 1992, 215 SCRA 436. 2 Oil & Natural Gas Commission vs. CA, G.R. No. 114323, July 23, 1998, 96 SCAD 480, 293 SCRA 26. 3 G.R. No. 100970, September 2, 1992. 4 Hanil Development Company vs. Court of Appeals, G.R. No. 113176, July 30, 1

388

Art. 1370

Contracts Interpretation of Contracts

389

death of the insured from stab wounds inflicted by unidentified men. Generally, the intention of the parties is reflected from the wordings of the contract and therefore as a general rule, the literal meaning of its stipulations shall control.4 In Adelfa Properties, Inc. vs. Court of Appeals5 where, from the various provisions of the contract, it can be clearly determined that what was entered into by the parties was not an option to purchase but a contract to sell, the Supreme Court pertinently stated: The important task in contract interpretation is always the ascertainment of the intention of the contracting parties and that task, is, of course, to be discharged by looking to the words they used to project that intention in their contract, all the words not just a particular word or two, and words in context not words in isolation. x x x In addition, the title of a contract does not necessarily determine its true nature. Hence, the fact that the document under discussion is entitled “Exclusive Option to Purchase” is not controlling where the text thereof shows that it is a contract to sell.

In Gaw vs. Intermediate Appellate Court,6 the Supreme Court pertinently stated that parties to a contract must be careful in examining the language or the wordings of their contract, and they must be diligent enough to read the same before entering into it so that no complications can arise in the future, to wit: Thus, in the interpretation of the provisions of a written contract, the literal meaning of its stipulations must prevail. It, therefore, behooves the parties to examine the terms of a contract thoroughly before signing the same, particularly a businessman like Gaw who may not, by any stretch of imagination, be considered a tyro in these matters. Had he given even an iota’s attention and care to scrutinize the subject contract, he would not have failed to detect that some provisions thereof contravened the terms and conditions of his exclusive dealership agreement with PWCC.

In Conde vs. Court of Appeals7 where the contract was written in the dialect known to the respondent, and where the encumbrance of the property subject of the contract was inscribed in the title, the 2001, 152 SCAD 47; Capital Insurance vs. Central Azucarera, G.R. No. 30770, April 7, 1993, 221 SCRA 98; Gonzales vs. Court of Appeals, 124 SCRA 630. 5 G.R. No. L-111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565. 6 G.R. No. 70451, March 24, 1993, 220 SCRA 405. 7 G.R. No. L-40242, December 15, 1982, 119 SCRA 245. 8 G.R. No. 93625, November 8, 1993, 227 SCRA 541.

390

Obligations and Contracts Text and Cases

Art. 1370

Supreme Court, in rejecting the positions of the respondent that he signed the contract merely to show his non-objection to the repurchase constituting the lien and that he never received the amount of P165.00 from the petitioner, ruled: Private respondent must be held bound by the clear terms of the Memorandum of Repurchase that he had signed wherein he acknowledged the receipt of P165.00 and assumed the obligation to maintain the repurchasers in peaceful possession should they be “disturbed by other persons.” It was executed in the Visayan language which he understood. He cannot now be allowed to dispute the same. “x x x If the contract is plain and unequivocal in its terms, he is ordinarily bound thereby. It is the duty of every contracting party to learn and know its contents before he signs and delivers it.”

In Santi vs. Court of Appeals8 where the lease contract provided that the “20-year period of lease being extendable for another period of 20 years” was interpreted by the lower court as giving the lessee an automatic renewal of the lease period, the Supreme Court said: In a wealth of cases and as provided for in Articles 1370 and 1372 of the Civil Code, we have ruled that when the terms and stipulations embodied in a contract are clear and leave no room for doubt, such should be read in this literal sense and that there is absolutely no reason to construe the same in another meaning xxx xxx To our mind, the stipulation “said period of lease being extendable for another period of twenty (20) years x x x” is clear that the lessor’s intention is not to automatically extend the lease contract but to give her time to ponder and think whether to extend the lease. If she decides to do so, then a new contract shall be entered into between the lessor and lessee for a term of another twenty years and a monthly rental of P220.00 This must be so, for twenty (20) years is rather a long period of time and the lessor may have other plans for her property. If the intention of the parties were to provide for an automatic extension of the lease contract, then they could have easily provided for a straight forty years contract instead of twenty.

In Fernandez vs. Court of Appeals,9 the Supreme Court likewise interpreted the provision as to the extension of the period of lease in accordance with the clear wordings of the contractual provision, thus: G.R. No. L-80231, October 18, 1990, 166 SCRA 577. G.R. No. 136913, May 12, 2000, 126 SCAD 492, 332 SCRA 151.



9



10

Art. 1370

Contracts Interpretation of Contracts

391

On 31 July 1973, respondent Miguel Tanjuanco, as lessor, and petitioner Celso A. Fernandez, as lessee, entered into a tenyear Contract of Lease over a piece of land situated along Kahilum Street, Pandacan, Manila, where petitioner would put up the then proposed New Zamora Market. The parties agreed that the lease, which was scheduled to end on 1 July 1983, would be “renewable for another ten (10) years at the option of both parties under such terms, conditions and rental reasonable at that time” and that, upon expiration of the lease, whatever improvements were then existing thereon should automatically belong to the lessor without having to pay the lessee. Before the agreed term ended, or on 19 April 1983, respondent wrote petitioner about the former’s intention not to extend further or renew the lease. Petitioner replied, through a letter dated 6 June 1983, that he had opted to renew the contract for another ten (10) years so that he could recover all the ex-penses he had incurred in the construction of the market. In another letter to petitioner dated 1 June 1983, respondent, through his lawyer, advised that respondent could not accept petitioner’s unilateral action to renew the lease because, under the contract, any renewal or extension thereof was possible only “at the option of both parties.” On 23 June 1983, petitioner commenced an action against respondent before the Regional Trial Court of Quezon City, Branch 84, alleging that petitioner was entitled to renew the lease contract, under paragraph 3, Section 2 thereof, for another ten (10) years, which paragraph in the contract should be construed in a liberal manner and with justice. In his prayer, he sought to compel respondent to renew the lease agreement for another term, or asked the court to consider the original contract renewed for another ten (10) years or to fix another period for the renewal of contract. xxx

xxx

xxx

The only issue here relates to the interpretation of the phrase “renewable for another ten (10) years at the option of both parties under such terms, conditions and rental reasonable at that time,” set out in paragraph (2) of the lease contract in question. The Court of Appeals read the above contract language as comprising, not technical terms or terms of legal art, but rather just plain and ordinary words. As such, the Court of Appeals understood the above language as requiring — “that the parties should mutually agree on a new contract which may not be the same as the original, under terms, conditions and rental reasonable at that time. It follows therefore that the plaintiff [petitioner] cannot renew the lease by his unilateral act of exercising his option. Simply stated, the option must be

392

Obligations and Contracts Text and Cases

Art. 1370

mutually and consen[s]ually exercised, and not unilaterally as was erroneously done by the plaintiff. Applied to the lease contract under consideration, it appears that the lease has expressed in clear, unmistakable and unambiguous terms the intention of the parties that if the lease contract was to be renewed, the option to renew should be made by both parties.” We agree with the respondent appellate court’s reading: the intention of the parties to the lease agreement is clearly discernible in the words of the agreement. The assent of both lessor and lessee is essential for another contract to spring into juridical existence upon expiration of the original one. The contract clause may be seen to consist of two (2) parts: first, the contract is stipulated to be “renewable” for another ten years “at the option of both parties”; second, the contract is specified to be “renewable under such terms, conditions and rental reasonable at that time.” The first part of the clause stresses that the option or faculty to renew was given, not to the lessee alone nor to the lessor by himself, but to the two (2) simulta-neously who hence must both exercise the option to renew if a new contract is to come about. The second portion of the contract clause addresses the future and directs the parties to negotiate and reach mutual agreement on the terms and conditions of the new contract, including the new rental rate, which terms and conditions must be reasonable under such situation as may be extent when the time for renewal arrives. The only term on which there has been some pre-agreement is the period of the new contract: “another ten years.” Clearly, the requirement of future mutual agreement as to renewal, has here been specified with adequate precision.

In Buce vs. Court of Appeals,10 the controversy centered on the interpretation of the provision stating: “This lease shall be for a period of fifteen (15) years effective June 1, 1979, subject to renewal for another ten (10) years, under the same terms and conditions.” One party interpreted the provision as allowing automatic renewal while the other party contended that there was an option to renew. In deciding the case, the Supreme Court said that “renewal of a contract” connotes the death of the old one and the birth or emergence of a new one. In such a case, there is an obligation to execute a new lease contract for the additional term. A clause providing for “extension of the period of lease,” on the other hand, operated of its own force to create an additional term. The Supreme Court said that there was nothing in the contract to show that automatic renewal was the 11

G.R. No. L-87245, April 6, 1990, 184 SCRA 273.

Art. 1370

Contracts Interpretation of Contracts

393

intention of the parties. The fact that the lessee was allowed to make improvements on the property was not indicative of the intention to automatically renew the lease. Since the contract was also unclear as to who may exercise the option to renew, the Supreme Court said that the period of the lease must be construed to be for the benefit of both parties and further stated: Renewal of the contract may be had only upon their mutual agreement or at the will of both of them. Since the private respondents were not amenable to a renewal, they cannot be compelled to execute a new contract when the old contract terminated on 1 June 1994. It is the owner-lessor’s prerogative to terminate the lease at its expiration. The continuance, effectivity, and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of lease and no equality exists between the lessor and the lessee since the life of the contract would be dictated solely by the lessee.

In Universal Textile Mills, Inc. vs. National Labor Relations Commission11 where a quasi-judicial body, namely the National Labor Relations Commission (NLRC) misread and therefore misapplied the provisions of a collective bargaining agreement, the Supreme Court said that “the NLRC, however cannot remake a contract by eviscerating it, by deleting from it words placed there by the parties. No court, no interpreter and applier of a contract, has such a prerogative.” It is a fundamental principle that a court may not make a new contract for the parties or rewrite their contract under the guise of construction. In other words, the interpretation or construction of a contract does not include its modification or the creation of a new or different one. It must be construed and enforced according to the terms employed, and a court has no right to interpret the agreement as meaning something different from what the parties intended as expressed by the language they saw fit to employ. A court is not at liberty to revise, modify, or distort an agreement while professing to construe it, and has no right to make a different contract from that actually entered into by the parties. Courts cannot make for the parties better or more equitable agreements than they themselves have been satisfied to make, or rewrite contracts because they operate 12

17 Am Jur 2d 627-629.

394

Obligations and Contracts Text and Cases

Art. 1371

harshly or inequitably as to one of the parties, or to alter them for the benefit of one party and to the detriment of the other, or, by construction, relieve one of the parties from terms which he voluntarily consented to, or impose on him those which he did not.12

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (1282) The reasons and surrounding circumstances behind a contract’s execution are of paramount importance to place the interpreter in the situation occupied by the parties concerned at the time of the writing.13 In Pingol vs. Court of Appeals14 where there was a dispute as to whether the purchase agreement was a contract to sell or an absolute sale, the Supreme Court had to look at the contemporaneous and subsequent acts of the parties. Pertinently, the Supreme Court explained: In Dignos vs. Court of Appeals, we held that a deed of sale is absolute in nature although denominated as a “Deed of Conditional Sale” where there is no stipulation in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor is there a stipulation giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period. Exhibit “A” contains neither stipulation. What is merely stated therein is that “the VENDEE agrees that in case of default in the payment of the installments due the same shall earn a legal rate of interest, and to which the VENDOR likewise agrees.” Furthermore, as found by the Court of Appeals, the acts of the parties, contemporaneous and subsequent to the contract, clearly show that an absolute deed of sale was intended, by the parties and not a contract to sell: Pursuant to the deed, the vendor delivered actual and constructive possession of the property to the vendee, who occupied and took such possession, constructed a building thereon, had the property surveyed and subdivided and a plan of the property was prepared and submitted to the Land Registration 13 Gonzales vs. Court of Appeals, G.R. No. 122611, March 8, 2001, 145 SCAD 384; Ridjo Tape & Chemical Corp. vs. Court of Appeals, 91 SCAD 892, 286 SCRA 544. 14 G.R. No. 102909, September 6, 1993, 44 SCAD 498, 226 SCRA 118. 15 G.R. No. 109680, July 14, 1995, 62 SCAD 801, 246 SCRA 323. 16 G.R. No. 72703, November 13, 1992, 215 SCRA 580.

Art. 1371

Contracts Interpretation of Contracts

395

Commission which approved it preparatory to segregating the same and obtaining the corresponding TCT in his name. Since the sale, appellee continuously possessed and occupied the property as owner up to his death on July 13, 1984 and his heirs, after his death, continued the occupancy and possession of the property up to the present. Those contem-poraneous and subsequent events are demonstrative acts that the vendor since the sale recognized the vendee as the absolute owner of the property sold. All those attributes of ownership are admitted by defendants in their answer, specially in paragraphs 7 and 9 of their special and affirmative defenses. The contract here being one of absolute sale, the ownership of the subject lot was transferred to the buyer upon the actual and constructive delivery thereof. The constructive delivery of the subject lot was made upon the execution of the deed of sale while the actual delivery was effected when the private respondents took possession of and constructed a house on Lot No. 3223-A.

In Rapanut vs. Court of Appeals15 where the controversy involved the interpretation of a contractual provision on the application of interest, the Supreme Court again looked at the contemporaneous and subsequent acts of the parties, thus: The controversial provision in the Supplemental Agreement reads: “x x x the VENDOR/MORTGAGEE is willing to sell said portion of her lot to the VENDEE/MORTGAGOR for a total price of P37,485.00 payable in monthly installments of P500.00 with an interest of 10% per annum on the remaining balance until the full amount is paid” (Rollo, pp. 25-26; Italics supplied). Private respondent’s view is that the 10% interest must be paid every year. Petitioner posits that the P500.00 monthly installments include the 10% interest. The interpretation of the provision in question having been put in issue, the Court is constrained to determine which interpretation is more in accord with the intent of the parties (cf. Capital Insurance & Surety Co., Inc. vs. Central Azucarera del Danao, 221 SCRA 98 [1993]). To ascertain the intent of the parties, the Court shall look at their contemporaneous and subsequent acts (Civil Code of the Philippines, Art. 1371). The Deed of Conditional Sale with Mortgage categorically provides for the date of payment of the P500.00 monthly installments, that is, not later than the fifth of every month, and of the P1,000.00 semi-annual installment, that is, on June 30 and December 31. The Supplemental Agreement was likewise 17

G.R. No. 48194, March 5, 1990, 183 SCRA 171.

396

Obligations and Contracts Text and Cases

Art. 1371

specific that petitioner shall pay private respondent “monthly install-ments, of P500.00 with an interest of 10% per annum on the remaining balance until the full amount is paid.” (Rollo, p. 26) A liberal interpretation of the contract in question is that at the end of each year, all the installment payments made shall be deducted from the principal obligation. The 10% interest on the balance is then added to whatever remains of the principal. Thereafter, petitioner shall pay the monthly installments on the stipulated dates. In other words, the interests due are added to and paid like the remaining balance of the principal. Thus, we must rule that the parties intended that petitioner pay the monthly installments at predetermined dates, until the full amount, consisting of the purchase price and the interests on the balance, is paid. Significant is the fact that private respondent accepted the payments petitioner religiously made for four years. Private respondents cannot rely on the clause in the contract stating that no demand is necessary to explain her silence for four years as to the 10% interest, as such clause refers to the P500.00 monthly installments. Even granting as acceptable private respondent’s theory that the monthly amortizations shall first be applied to the payment of the interests, we must still rule for petitioner. The contracts provided for private respondent’s right of rescission which may be exercised upon petitioner’s failure to pay installments for three months. Private respondent’s failure to exercise her right of rescission after petitioner’s alleged default constitutes a waiver of such right. Her continued acceptance of the installment payments places her in estoppel.

In Caltex vs. Intermediate Appellate Court16 where one of the parties to a deed of assignment contended that the obligation was limited only to the particular amount indicated in the deed of assignment notwithstanding the fact that said deed provided that the assignee shall be entitled to all funds which the assignor may be entitled from a certain administrative decision in payment of assignor’s outstanding obligation plus any applicable interest charges on overdue account, the Supreme Court ruled: Likewise, the then Intermediate Appellate Court failed to take into consideration the subsequent acts of the parties which clearly show that they did not intend the Deed of Assignment 18

G.R. No. 124791, February 10, 1999, 103 SCAD 258.

Art. 1371

Contracts Interpretation of Contracts

397

to totally extinguish the obligation — (1) After the execution of the Deed of Assignment on July 31, 1980, petitioner continued to charge respondent with interest on its overdue account up to January 31, 1981. x x x This was pursuant to the Deed of Assignment which provides for respondent’s obligation for “applicable interest charges on overdue account.” The charges for interest were made every month and not once did respon-dent question or take exception to the interest; and (2) In its letter of February 16, 1981 (Annex “J,” Partial Stipulation of Facts), respondent addressed the following request to peti- tioner: “Moreover, we would like to request for a consideration in the following: 1.

Interest charges be limited up to December 31, 1980 only; and

2.

Reduction of 2% on 18% interest rate p.a.

We are hoping for your usual consideration on this matter.” In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Art. 1253, Civil Code). The foregoing subsequent acts of the parties clearly show that they did not intend the Deed of Assignment to have the effect of totally extinguishing the obligation of private respondent without payment of the applicable interest charges on the overdue account.

In Javier vs. Court of Appeals,17 the Supreme Court, in stating that the contemporaneous and subsequent acts of the parties clearly indicated the intention of the parties, ruled: Petitioners contend that the deed of assignment conveyed to them the shares of stocks of private respondent in Timber-wealth Corporation, as stated in the deed itself. Since said corporation never came into existence, no share of stocks was ever transferred to them hence the said deed is null and void for lack of cause or consideration. We do not agree. As found by the Court of Appeals, the true cause or consideration of said deed was the transfer of the forest concession of private respondent to petitioners for P120,000.00. This finding is supported by the following consi-derations, viz.: 1. Both parties at the time of the execution of the deed of assignment knew that the Timberwealth Corporation stated

19

Gonzales vs. Previsora Filipina, 74 Phil. 165.

398

Obligations and Contracts Text and Cases

Art. 1371

therein was non-existent. 2. In their subsequent agreement, private respondent conveyed to petitioners his inchoate right over a forest concession covering an additional area for his existing forest concession, which area he had applied for, and his application was then pending in the Bureau of Forestry for approval. 3. Petitioners, after the execution of the deed of assignment, assumed the operation of the logging concession of private respondent. 4. The statement of advances to respondent pre- pared by petitioners stated: “P55,186.39 advances to L.A. Tiro be applied to succeeding shipments. Based on the agreement, we pay P10,000.00 every after (sic) shipment. We had only 2 shipments.” 5. Petitioners entered into a Forest Consolidation Agreement with other holders of forest concessions on the strength of the questioned deed of assignment. The aforesaid contemporaneous and subsequent acts of petitioners and private respondent reveal that the cause stated in the questioned deed of assignment is false. It is settled that the previous and simultaneous and subsequent acts of the parties are properly cognizable indicia of their true intention. Where the parties to a contract have given it a practical construction by their conduct as by acts in partial performance, such cons-truction may be considered by the court in construing the con-tract, determining its meaning and ascertaining the mutual intention of the parties at the time of contracting. The parties practical construction of their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential factor in determining the proper construction of the agreement.

In Carceller vs. Court of Appeals,18 the Supreme Court, as a rule of interpretation, said that analysis and construction, however, should not be limited to the words used in the contact, as they may not accurately reflect the parties’ true intent. The reasonableness of the result obtained, after said analysis, ought likewise to be carefully considered. In the same case, the Supreme Court also said that, in contractual relations, the law allows the parties reasonable leeway on the terms of their agreement, which is the law between them, and that contracts should not be interpreted in a harsh and in-equituous way. The import of the word ultimately depends upon a consideration of the entire provision, its nature, object and the consequences that would follow from construing it one way or the other. Thus, if a

Art. 1372

Contracts Interpretation of Contracts

399

provision demands a mandatory application, the word “may” can be construed as “shall.”19 Conversely, the word “shall” can be construed as “may” if the application demands a directory application. Article 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. (1283) Within the purview of this article are the maxims noscitur a sociis and ejusdem generis. Noscitur a sociis means that general and unlimited terms are restrained and limited by particular terms that follow.20 Ejusdem generis means that “a general term joined with a specific one will be deemed to include only things that are like, of the same genus as, the specific one.”21 However broad may be the terms of a contract, it extends only to those things concerning which it appears the parties intended to contract. The terms employed are servants, and not masters, of an intent; they are to be interpreted so as to subserve, and not to subvert, such intent. Words which admit of a more extensive or more restrictive signification must be taken in that sense which will best effectuate what it is reasonable to suppose was the real intention of the parties. Words are not to be taken in their broadest sense if they are equally appropriate in a sense limited to the object and the intent of the contract. The courts are sometimes required to restrict the meaning of the words, and to that end a word in the plural may be restricted to the singular.22

Article 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (1284) In Lao Lim vs. Court of Appeals23 where the contract of lease specifically provided that the term of the lease shall be renewed every three years retroacting from October 1979 to October 1982; after which the 20 Cebu Institute of Technology, et al. vs. Ople, G.R. No. L-58870, December 18, 1987. 21 John H. Jackson and Lee C. Bollinger, Contract Law in Modern Society, 1980 edition, St. Paul Minn., West Publishing Company, Page 1025; See also Go Tiaco vs. Hermanos vs. Union Insurance Society of Canton, 40 Phil. 40. 22 17 Am Jur 2d 639. 23 G.R. No. 87047, October 31, 1990, 191 SCRA 150.

400

Obligations and Contracts Text and Cases

Art. 1373

above-named rental shall be raised automatically by 20% every three years for as long as defendant needed the premises and can meet and pay the said increases, the defendant to give notice of his intent to renew sixty (60) days before the expiration of the term,

the Supreme Court ruled that the said provision can be interpreted as involving a potestative suspensive condition making the defendant stay in the premises for as long as he needed the same, but examining the provision in its entirety, the said provision is actually to the effect that the last portion thereof, which gives the private respondent sixty (60) days before the expiration of the term the right to give notice of his intent to renew, is subject to the first portion of said paragraph that “the term of the lease shall be renewed every three (3) years,” thereby requiring the mutual agreement of the parties. The use of the word “renew” and the designation of the period of three (3) years clearly confirm that the contract of lease is limited to a specific period and that it is not a continuing lease. The stipulation provides for a renewal of the lease every three (3) years; there could not be a renewal if said lease did not expire, otherwise there is nothing to renew. Resultantly, the contract of lease should be and is hereby construed as providing for a definite period of three (3) years and that the automatic increase of rentals by twenty percent (20%) will take effect only if the parties decide to renew the lease. A contrary interpretation will result in a situation where the continuation and effectivity of the contract will depend only upon the will of the lessee, in violation of Article 1308 of the Civil Code x x x. The compromise agreement should be understood as bearing that import which is most adequate to render it effectual. Where the instrument is susceptible of two interpretations, one which will make it invalid and illegal and another which will make it valid and legal, the latter inter-pretation should be interpreted.

In Caltex vs. Intermediate Appellate Court24 where the only issue was whether or not the deed of assignment entered into by the parties completely extinguished the obligation stated therein, the Supreme Court by applying one of the basic rule that provisions in the contract must be given a construction as will give effect to them, stated: In the instant case, the then Intermediate Appellate Court failed to take into account the following express recitals of the Deed of Assignment —

24

25

G.R. No. 72703, November 13, 1992, 215 SCRA 580. G.R. No. 126074, February 24, 1998, 91 SCAD 892, 286 SCRA 544.

Art. 1373

Contracts Interpretation of Contracts

401

“That Whereas, ASSIGNOR has an outstanding obligation with ASSIGNEE in the amount of P4,072,682.13 as of June 30, 1980, plus any applicable interest on overdue account (p. 2, Deed of Assignment) “Now therefore in consideration of the fore-going premises, ASSIGNOR by virtue of these presents, does hereby irrevocably assign and transfer unto ASSIGNEE any and all funds and/or Refund of Special Fund Payments, including all its rights and benefits accruing out of the same, that ASSIGNOR might be entitled to, by virtue of and pursuant to the decision in BOE Case No. 80-123, in payment of ASSIGNOR’s outstanding obligation plus any applicable interest charges on overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in its favor.” (p. 2, Deed of Assign-ment) (Italics supplied) Hence, it could easily be seen that the Deed of Assignment speaks of three (3) obligations — (1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2) the applicable interest charges on overdue accounts; and (3) the other avturbo fuel lifting and deliveries that the Assignor (private respondent) may from time to time receive from the assignee (Petitioner). As aptly argued by petitioner, if it were the intention of the parties to limit or fix respondent’s obligation to P4,072,682.13, they should have so stated and there would have been no need for them to qualify the statement of said amount with the clause “as of June 30, 1980 plus any applicable interest charges on overdue account” and the clause “and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE.” The terms of the Deed of Assignment being clear, the literal meaning of its stipulations should control. In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible to be adopted as will give effect to all. (Rule 130, Sec. 9, Rules of Court).

In Ridjo Tape & Chemical Corporation vs. Court of Appeals,25 it was held that construction of the terms of a contract which would amount to impairment or loss of right is not favored; conservation and preservation, not waiver, abandonment or forfeiture of a right, is the rule.

26

De Leon vs. Court of Appeals, G.R. No. 95511, January 30, 1992.

402

Obligations and Contracts Text and Cases

Art. 1374

Article 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. (1285) Just like in statutory construction, the various provisions of a contract must be read as a whole and not in isolation. Each provision must be related to each other in order to clearly know the total import and application of the law and so that a harmonious whole will be attained.26

In Ruiz vs. Sheriff of Manila,27 the mortgage contract provides: “WHEREAS, the parties of the FIRST PART, jointly and severally, has/have applied for and jointly and severally obtained from the party of the SECOND PART, a loan in the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine currency, to be amortized at the rate of not less than P300.00 including interest on unpaid balance, at the rate of 8% per annum, said interest and capital amortization to be effected at the end of each month. Failure to pay two successive monthly amortizations will cause this loan to be automatically due and payable in its entirety. Notwithstanding the foregoing, this loan shall not run for more than 5 years.”

For failure to pay their indebtedness, appellants’ property was foreclosed. They filed a suit in the lower court to annul the foreclosure but failed. Hence, they went up to the Supreme Court which affirmed the decision of the lower court. Pertinently, the Supreme Court said: x x x appellant lay stress on the following last two sentences of the provision of the mortgage contract quoted above, to wit: “x x x Failure to pay two successive monthly amortizations will cause this loan to be automatically due and payable in its entirety. Notwithstanding the foregoing, this loan shall not run for more than 5 years.” Interpreting the above stipulation, the appellants claim that despite the acceleration clause, they had five years from January 18, 1961 within which to pay their mortgage debt because of the phrase “notwithstanding the foregoing” in the last sentence. Since the five-year period had not yet expired when the mortgage was foreclosed, said foreclosure, they point out, was premature.



G.R. No. L-24016, July 31, 1960, 34 SCRA 83. G.R. No. L-10231, October 18, 1988, 166 SCRA 577. 29 G.R. No. 121158, December 5, 1996, 77 SCAD 125.

27

28

Art. 1374

Contracts Interpretation of Contracts

403

The appellants’ interpretation is totally without merit. To ascertain the meaning of the provision of the mortgage contract relied upon by the appellants, its entirety must be taken into account and not merely its last two sentences. A reading of the entire provision will readily show that while the appellants were allowed to amortize their loan at the rate of not less than P300.00 a month, they were under obligation to liquidate the same within a period of not more than five (5) years from the date of the execution of the contract; but if they should fail to pay two successive monthly amortizations, then the entire loan would be due and payable. It is obvious that the phrase “notwith-standing the foregoing” does not refer to the acceleration clause but to the stipulation that the loan had to be “amortized at the rate of not less than P300.00, including interest on unpaid balance, at the rate of 8% per annum, said interest and capital amortization to be effected at the end of each month.” There is nothing inconsistent between the acceleration clause and the last sentence. All that the parties meant is that while monthly amortizations could be as little as P300.00 the loan should anyway be paid within 5 years; and that failure to pay two successive amortizations would render the entire loan due and payable. Consequently, default having been committed for twelve months, the foreclosure of the mortgage was not premature.

In Fernandez vs. Court of Appeals28 where the only issue involved the interpretation of the phrase “renewable for another ten (10) years at the option of both parties under such terms and condi-tions and rental reasonable at that time,” the Supreme Court rejected the position that the word “renewable” means that the lessee can unilaterally renew the contract and that therefore the phrase “at the option of the parties” was just a superfluity. Pertinently, the Supreme Court said: x x x the intention of the parties to the lease agreement is clearly discernible in the words of that agreement. The assent of both the lessor and lessee is essential for another contract to spring into juridical existence upon expiration of the original one. xxx We do not believe that the use of either “extendible” or “renewable” should be given sacramental significance. The important task in contract interpretation is always the ascertainment of the intention of the contracting parties and that task is of course to be discharged by looking to the words they used to project that intention in their contract, all the words not just a particular word or two, and words in context not words standing alone. In the case at bar, the intent of the parties is observable with sufficient clarity and specificity in the language used.

404

Obligations and Contracts Text and Cases

Art. 1374

In China Banking Corp. vs. Court of Appeals,29 the Supreme Court, using Article 1374, interpreted the import and application of a mortgage, thus: Petitioners aver that the additional loans extended in favor of private respondents in excess of P6,500,000.00 and P3,500,000.00 — amounts respectively stipulated in the July 1989 and August 10, 1989 mortgage contracts — are also secured by the same collaterals or real estate properties, citing as bases the introductory paragraph (“whereas clause”) of the mortgage contracts, as well as the stipulations stated therein under the first and second paragraphs. Private respondents for their part argue that the additional loans are clean loans, relying on some isolated parts of the same introductory paragraph and first paragraph of the contracts, and also of the third paragraph. As both parties offered a conflicting interpretation of the contract, then judicial determination of the parties’ intention is thus, inevitable. Hereunder are the pertinent identical introductory paragraphs and 1 to 3 of the July 27, 1989 and August 10, 1989 mortgage contracts: “WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST INTERNATIONAL TRADING CORP. — hereinafter called the DEBTOR(S) credit facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00) Philippine Currency, and the MORTGAGEE had required the MORTGAGOR(S) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the MORTGAGOR(S) and/ or DEBTOR(S), or any one of them, in favor of the MORTGAGEE; “NOW, THEREFORE, as collateral security for the payment of the principal and interest of the indebtedness/obligations herein referred to and the faithful performance by the MORTGAGOR(S) of his (her, its) obligations hereunder, the MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the MORTGAGEE, free from all liens and encumbrances of any kind, that (those) certain parcel(s) of land, together with all the buildings/

31



32

G.R. No. L-32162, September 28, 1984, 132 SCRA 156. William F. Elliott, Commentaries on the Law of Contracts, Volume 2, 1913

Art. 1374

Contracts Interpretation of Contracts

machineries/equipment/improvements now existing thereon, and which may hereafter be placed thereon, described in the Schedule of mortgaged properties described hereunder and/or which is hereto attached, marked Exhibit “A” and made a part thereof. “1. It is agreed that this mortgage shall respond for all the obligations contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one of them, in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00) regard-less of the manner in which the said obligations may have been contracted/incurred by the MORT-GAGOR(S) and/ or DEBTOR(S) — whether by ad-vances or loans made to him (her, it) by the MORT-GAGEE, by the negotiation of mercantile documents, including trust receipts, by the execution by the MORTGAGOR(S) and/or DEBTOR(S) of money market instruments/ commercial papers, under-takings of guaranty of suretyship, or by endorsement of negotiable instrument, or otherwise, the idea being to make this deed a comprehensive and all embracing security that it is. “2. Payments on account of the principal and interest of the credit granted by the MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made from time to time, and as often as the MORTGAGOR(S) may elect; provided, however, that in the event of such payments being so made that the indebtedness to the MORTGAGEE may from time to time be reduced the MORTGAGEE may make further advances and all sums whatsoever advanced by the MORTGAGEE shall be secured by this mortgage, and partial payments of said indebtedness from time to time shall not thereby be taken to reduce by the amount of such payments the credit hereby secured. The said credit shall extend to any account, which shall, within the said limit of P6,500,000.00* exclusive of interest, be fluctuating and subject to increase or decrease from time to time as the MORTGAGEE may approve, and this mortgage shall stand as security for all indebtedness of the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, at any and all times outstanding, regardless of partial or full payments at any time or times made by the MORTGAGOR(S) and/or DEBTOR(S).

“3.

It is hereby agreed that the MORTGA-

405

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Obligations and Contracts Text and Cases

Art. 1374

GEE may from time to time grant the MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by this mortgage, without affecting the liability of the MORTGAGOR(S) under this mortgage up to the amount stipulated.” An important task in contract interpretation is the ascertainment of the intention of the contracting parties which is accomplished by looking at the words they used to project that intention in their contract, i.e., all the words, not just a particular word or two, and words in context, not words standing alone. Indeed, Article 1374 of the Civil Code, states that “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.” Applying the rule, we find that the parties’ intent is to constitute the real estate properties as continuing securities liable for future obligations beyond the amounts of P6.5 million and P3.5 million respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts. Thus, while the “whereas” clause initially provides that “the mortgagee has granted, and may from time to time hereafter grant to the mortgagors x x x credit facilities not exceeding six million five hundred thousand pesos only (P6,500,000.00)**” yet in the same clause it provides that “the mortgagee had required the mortgagor(s) to give collateral security for the payment of any and all obligations theretofore contracted/incurred and which may thereafter be contracted/incurred by the mortgagor(s) and/ or debtor(s), or any one of them, in favor of the mortgagee” which qualifies the initial part and shows that the collaterals or real estate properties serve as securities for future obligations. The first paragraph which ends with the clause, “the idea being to make this deed a comprehensive and all embracing security that it is” supports this qualification. Similarly, the second paragraph provides that “the mortgagee may take further advances and all sums whatsoever advanced by the mortgagee shall be secured by this mortgagee x x x.” And although it was stated that “[t]he said credit shall extend to any account which shall, within the said limit of P6,500,000.00 exclusive of interest,” this part of the second sentence is again qualified by its succeeding portion which provides that “this mortgage shall stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them, at any and all times outstanding . . .” Again, under the third paragraph, it is provided that “the mortgagee may from time to time grant the mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this mortgage x x x.” The fourth paragraph, in addition,

Art. 1374

Contracts Interpretation of Contracts

407

states that “x x x all such withdrawals, and payments, whether evidenced by promissory notes or otherwise, shall be secured by this mortgage” which manifestly shows that the parties principally intended to constitute the real estate properties as continuing securities for additional advancements which the mortgagee may, upon application, extend. It is well settled that mortgages given to secure future advancements or loans are valid and legal contracts, and that the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.

In Home Development Mutual Fund vs. Court of Appeals,30 the consultancy agreement particularly reads: “That this agreement takes effect on January 1, 1985 to December 31, 1985: Provided, however, That either party who desires to terminate the contract may serve the other party a written notice at least thirty (30) days in advance.”

It was the contention of the petitioner in the said case that the first clause was independent from the second clause such that after December 31, 1985, the contract is deemed terminated. Hence, the notice of termination given to the respondent nine days after December 31, 1985 was a compliance in good faith of the above-mentioned agreement. Petitioner likewise contended that, even before the expiration of the contract, it had served the respondent notice on December 26, 1985. It was shown however by concrete evidence that, since 1981, the practice of the petitioner and the respondent was that, without renegotiation, the consultancy contract was con-tinuously renewed so that the respondent continued to serve the petitioner even after the expiry date with the renewal-contract signed in the first few months of the year. Accordingly, applying Article 1374 of the Civil Code and the rule in contract interpretation that several provisions in a contract must be given a construction that will give effect to all, the Supreme Court ruled that the petitioner failed to comply with the 30-day notice requirement for terminating the contract and therefore, also considering the yearly practice of the petitioner and the respondent in the implementation and the renewal of their consultancy agreement, the said agreement must be deemed renewed. The Supreme Court said that the first clause relating to the term of the contract must be construed together with the second clause on the 30-day notice-requirement. The 30-day notice therefore should be

30

G.R. No. 118972, April 3, 1998, 93 SCAD 378, 288 SCRA 617.

408

Obligations and Contracts Text and Cases

Art. 1375

given prior to the expiration date of the contract which was December 31, 1985. This becomes more imperative especially considering that the notice relates to the termination of the contract. “Thus, the requirements of contract as to notice — as to the time of giving, form and manner of service thereof — must be strictly observed because in an obligation where a period is designated, it is presumed to have been established for the benefit of both the contracting parties. Thus, the unilateral termination of the contract in question by the herein petitioners is violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.” Article 1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. (1286)

In Pasay City Government vs. Court of First Instance of Manila,31

where a compromise agreement provided that the project was to be done in stages and that, in accordance with sub-paragraph B paragraph 1 of the agreement, the contractor was to submit “a new performance bond in the amount required by pertinent law, rules and regulations, in proportion to the remaining value or cost of the unfinished work of the construction as per approved plans and specifications,” and where there was a dispute as to whether the amount of the performance bond covered the whole unfinished project or only the next stage of work to be done, the Supreme Court ruled that the provision on the new performance bond read together with the stage-by-stage construction and payment approach, would inevitably lead to the conclusion that the parties to the compromise contemplated a divisible obligation necessitating therefore a performance bond “in proportion” to the uncompleted work. What is crucial in sub-paragraph B of paragraph 1 of the compromise agreement are the words, “in proportion.” If the parties really intended the legal rate of 20% performance bond to refer to the whole unfinished work, then the provision should have required the plaintiff contractor to submit and file a new performance bond to cover the remaining value/cost of the unfinished work of the construction. Using the words in proportion then significantly changed the meaning of the paragraph to ultimately mean a performance bond equal to 20% of the next stage of work to be done. Edition, Indianapolis, The Bobbs-Merrill Company, Pages 1055-1059.

Art. 1376

Contracts Interpretation of Contracts

409

Article 1376. The usage or customs of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. (1287) No principle of the law is better settled than the one that an express contract embodying in clear and positive terms the intention of the parties cannot be varied nor contradicted by evidence of usage or custom. The usage must be consistent with the contract. The office of the custom or usage is to explain the meaning of words and phrases used in a written contract and to annex thereto certain incidents which circumstances indicate the parties intended when the words used do not necessarily exclude the operation of such custom or usage but they may not be used to contradict nor vary the plain meaning of the contract. “Usage may be admissible to explain what is doubtful; it is never admissible to contradict what is plain.” “This rule,” says Mr. Justice Harlan, “is based upon the theory that the parties, if aware of any usage or custom relating to the subject-matter of their negotiations, have so expressed their intention as to take the contract out of the operation of any rules established by mere usage or custom.” “The proper office of a custom or usage in trade,” says Mr. Justice Davis, “is to ascertain and explain the meaning and intention of the parties to a contract, whether written or in parol, which could not be done without the aid of this extrinsic evidence. It does not go beyond this, and is used as a mode of interpretation on the theory that the parties knew of its existence, and contracted with reference to it. It is often employed to explain words or phrases in a contract of doubtful signification, or which may be understood in different senses, according to the subject-matter to which they are applied. But if it is inconsistent with the contract, or expressly or by necessary implication contradicts it, it cannot be received in evidence to affect it.” On the question of the right of one to invoke a custom or usage to vary or contradict an express contract it was said by Mr. Justice Story: “The true and appropriate office of usage or custom is to interpret the otherwise indeterminate intentions of the parties and to ascertain the nature and extent of their contracts, arising not from express stipulations, but from mere implications and presumptions, and acts of a doubtful or equivocal character. * * * But I apprehend, that it can never be proper to resort to any usage or custom to control or vary the positive stipulations in a written contract, and, a fortiori not in order to contradict them. An express contract of the parties is always admissible to supersede or vary, or control, a usage or custom; for the latter may always be waived at the will of the parties. But a written and express contract cannot be controlled, or varied, or contradicted by a usage or custom; for that would

410

Obligations and Contracts Text and Cases

Art. 1377

not only be to admit parol evidence to control, vary, or contradict written contracts; but it would be to allow mere presumptions and implications, properly arising in the absence of any positive expressions of intention, to control, vary or contradict the most formal and deliberate declarations of the parties.32

Article 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. (1288) Words or stipulations that are susceptible to different interpretations causing ambiguity in their application shall be construed against the person who chose to use such ambiguous words or phrases.33 This is based on the maxim verba accipiuntur fortius contra proferentem. The rule is called the contra proferentem rule. The expression means “against the profferer,” i.e., against the person who drafted or tendered the documents. If there is an ambiguity in a document which all the other methods of construction have failed to resolve so that there are two alternative meanings to certain words, the court may construe the words against the party who put forward the document and give effect to the meaning more favourable to the other party.34

Thus, in Capitol Insurance vs. Sadang,35 where an ambiguity as to the scope of the mortgage contract drafted by the lawyer of the insurance company led to a corresponding ambiguity in its application, the Supreme Court ruled against the liability of the mortgagor on the contract by stating that if the mortgage contract as actually drafted seems to be vague or ambiguous, the doubt must be resolved against appellant, whose lawyer prepared the document, and in accordance with the real intention of the parties as explained by defendant-appellees.

In Nacu vs. Court of Appeals36 where the dispute involved the application of a real estate mortgage to another loan, the Supreme Court, applying basic rules on the interpretation of contract said: Finally, if the parties intended the 1982 real estate mortgage to apply to the 1983 loan transaction, respondent Bank should have required petitioners spouses to execute the proper loan documents clearly and categorically constituting upon the same property a real estate mortgage. The respondent Bank failed in this regard and must therefore suffer the consequences.

33 Tuason vs. Court of Appeals, G.R. No. 119794, October 3, 2000, 135 SCAD 28, 341 SCRA 707; Villamil vs. Court of Appeals, 208 SCRA 643.

Art. 1377

Contracts Interpretation of Contracts

411

In Orient Air Services and Hotel Representatives vs. Court of Appeals, this Court upheld the doctrine that any ambiguity in a contract whose terms are susceptible of different interpretation, must be read against the party who drafted it.

Article 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. (1289) In Central Philippine University vs. Court of Appeals37 where the deed of donation to the donee required as a condition that the donee was to construct a medical school on the property donated, and where the donee did not comply with the condition but contended that the donation should nevertheless be made effective considering the length of time the donor did not seek the enforcement of the condition, the Supreme Court ruled in favor of the donor by decreeing the revocation of the donation for non-compliance with the condition, and stated: “Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring to incidental circumstances of a gratuitous contract should be resolved in favor of the least transmission of rights and interests.” In Castelo vs. Court of Appeals38 where the application of a provision relative to the payment of interest was interpreted by the Supreme Court, the latter applied the rule that, if the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. The Supreme Court pertinently ruled, thus: 34 Keating on Building Contracts, by The Hon. Sir Anthony May, M.A., Sweet and Maxwell, London, 1995 Page 47. 35 G.R. No. L-18857, December 11, 1967, 21 SCRA 1183; see also Nacu vs. Court of Appeals, G.R. No. L-108638, March 11, 1994, 49 SCAD 598, 231 SCRA 237; Coscolluela vs. Valderrama, L-13757, August 31, 1961, 2 SCRA 1095; Solis vs. Salvador, G.R. No. L-17022, August 14, 1965; Halili vs. Lloret, 95 Phil. 78. 36 G.R. No. L-108638, March 11, 1994, 49 SCAD 598, 231 SCRA 1994. 37 G.R. No. 112127, July 17, 1995, 63 SCAD 72, 246 SCRA 511. 38 G.R. No. 96372, May 22, 1995, 61 SCAD 175, 244 SCRA 180.

412

Obligations and Contracts Text and Cases

Art. 1378

The stipulation in the “Deed of Conditional Sale” requiring the payment of interest is not unlawful. The validity of the contract of conditional sale itself has not been put to question by private respondent dela Rosa and there is nothing in the record to suggest that the same may be contrary to law, morals, good custom, public order or public policy. Accordingly, the contractual stipulation must be regarded as binding and enforceable as the law between the parties. We turn, therefore, to the examination of the contractual stipulation on interest which we quoted in full earlier. Under the terms of the stipulation, private respondent was bound, and entitled, to pay the balance of P163,408.00 on or before 31 December 1982 without incurring any liability for any interest and penalty charges. During the grace period of six (6) months, that is, from 1 January 1983 to 30 June 1983, private respondent vendee was given the right to pay the said balance or any portion that had remained unpaid provided that “interest at the rate of 12% per annum shall be charged and 1% penalty charge shall be imposed on the remaining diminishing balance.” We observe that residual ambiguity infects this particular portion of the stipulation on payment of interest. The question is whether, during the period of 1 January 1983 up to 30 June 1983, 12% interest per annum plus 1% penalty charge a month was payable “on the remaining diminishing balance,” or whether during the period from 1 January 1983 to 30 June 1983, only 12% per annum interest was payable while the 1% per month penalty charge would in addition begin to accrue on any balance remaining unpaid as of 1 July 1983. We believe that the contracting parties intended the latter view of their stipulation on interest; for if the parties had intended that during the grace period from 1 January 1983 to 30 June 1983, interest consisting of 12% per annum plus another 12% per annum (equivalent to 1% per month), or a total of 24% per annum, was payable, then they could have simply said so. Instead, the parties distinguished between interest at the rate of 12% per annum and the 1% a month penalty charge. The interpretation we adopt is also supported by the principle that in case of ambiguity in contract language, that interpretation which establishes a less onerous transmission of rights or imposition of lesser burdens which permits greater reciprocity between the parties, is to be adopted.



In Gaite vs. Fonacier39 where Gaite transferred to Fonacier all



39



40

G.R. No. L-11827, July 31, 1961, 2 SCRA 830. G.R. No. L-60174, February 16, 1983, 120 SCRA 628.

Art. 1378

Contracts Interpretation of Contracts

413

his goodwill, rights and interest on the improvements he made on the area subject of the mining claim and the 24,000 tons of iron already extracted, all for a consideration of P75,000, P10,000 of which was paid upon the signing of the agreement, and where, according to paragraph (b) of the agreement, the balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will be paid from and out of the first letter of credit covering the first shipment of iron ores and of the first amount derived from the local sale of iron ore made by the Larap Mines & Smelting Co., Inc. its assigns, administrators, or successors-in-interest,

and where there was a dispute as to whether paragraph b provides a suspensive period or a suspensive condition, the Supreme Court ruled that since the rules of interpretation would incline the scales in favor of “the greater reciprocity of interest” in onerous contract, paragraph b must be interpreted as providing a suspensive period and not a suspensive condition. The Supreme Court pertinently stated: x x x there can be no question that greater reciprocity obtains if the buyer’s obligation is deemed to be actually existing, with only its maturity (due date) postponed or deferred, that if such obligation were viewed as non-existent or not binding until the ore was sold. The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but was intended merely to fix the future date of the payment.

The law likewise provides that 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. Hence, if the object of the contract is a particular house of the seller in Quezon City and he owns two houses in the said locality, the contract will be considered void if it cannot be determined which house is the object of the contract. Article 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. (n)

Rule 123 of the Rules of Court is now Rule 130 of the New Rules

414

Obligations and Contracts Text and Cases

Art. 1379

of Court. Relevantly, the latter provides the following provisions: Section 10. Interpretation of a writing according to its legal meaning. — The language of a writing is to be interpreted according to the legal meaning it bears in the place of its execution, unless the parties intended otherwise. (8) Section 11. Instrument construed so as to give effect to all provisions. — In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all. (9) Section 12. Interpretation according to intention; general and particular provisions. — In the construction of an instrument, the intention of the parties is to be pursued; and when a general and a particular provision are inconsistent, the latter is paramount to the former. So a particular intent will control a general one that is inconsistent with it. (10) Section 13. Interpretation according to circumstances. — For the proper construction of an instrument, the circumstances under which it was made, including the situation of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of those whose language he is to interpret. (11) Section 14. Peculiar signification of terms. — The terms of a writing are presumed to have been used in their primary and general acceptation, but evidence is admissible to show that they have a local, technical, or otherwise peculiar signification, and were so used and understood in the particular instance, in which the agreement must be construed accordingly. (12) Section 15. Written words control printed. — When an instrument consists partly of written words and partly of a printed form, and the two are inconsistent, the former controls the latter. (13) Section 16. Experts and interpreters to be used in explain-ing certain writings. — When the characters in which an instrument is written are difficult to be deciphered, or the language is not understood by the court, the evidence of persons skilled in deciphering the characters, or who understand the language, is admissible to declare the characters or the meaning of the language. (14) Section 17. Of two constructions, which preferred. — When the terms of an agreement have been intended in a different sense by the different parties to it, that sense is to prevail against either party in which he supposed the other understood it, and when different construction of a provision are otherwise equally proper, that is to be taken which is the most favorable to the party in

Art. 1379

Contracts Interpretation of Contracts

415

whose favor the provision was made. (15) Section 18. Construction in favor of natural right. — When an instrument is equally susceptible of two interpretation, one in favor of natural right and the other against it, the former is to be adopted. (16) Section 19. Interpretation according to usage. — An instrument may be construed according to usage, in order to determine its true character. (17)

In Felipe vs. Heirs of Maximo Aldon,40 the Supreme Court had occasion to say that the description that a contact is “invalid” is imprecise when used in relation to contracts because the Civil Code uses specific names in designating defective contracts, namely: rescissible (Art. 1380, et seq.), voidable (Art. 1390, et seq.), unenforceable (Art. 1403, et seq.), and void or inexistent (Art. 1409, et seq.).

416

Obligations and Contracts Text and Cases

Art. 1379

417

Chapter 6

RESCISSIBLE CONTRACTS Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) The rescissible contracts under Article 1380 are valid, but may subsequently be terminated on legal grounds. Their being rescissible is not principally premised on a breach of trust by the other party, but on some economic damage as a result of inequitable conduct by one party. If the contract is in fraud of creditors, which is a ground for rescission, but it is likewise simulated in that there is absolutely no consideration, the contract is not rescissible under this chapter but clearly void ab initio. In Dilag vs. Court of Appeals,1 a contract in fraud of creditors but completely simulated was considered void and not merely rescissible, thus: The appellate court ruled that the deed of sale was simulated since it was executed in fraud of creditors having been entered into during the pendency of Civil Case No. 8714. Said contract, being fictitious, is according to the appellate tribunal, inexistent and necessarily the adverse claim of private respondents is likewise a nullity because an inexistent contract cannot give life to anything at all. Hence, the filing of the present petition for certiorari by the Dilag children with the following issues: 1. Whether or not petitioners as plaintiffs below, are the owners of Lots 288 and 1927, of the Dumangas Cadastre at the time of the levy on execution in Civil Case No. 8714. 2. Whether or not the decision and the consequent writ of execution in Civil Case No. 8714 of the court below are operative against petitioners who admittedly were not parties to said civil case.

Petitioners’ contentions do not hold water.



It is not disputed that, at the time of the levy on execution G.R. No. L-72727, July 30, 1987, 152 SCRA 459.

1

417

418

Obligations and Contracts Text and Cases

Art. 1380

in Civil Case No. 8714, the Dilag spouses were still the registered owners of Lot 288 as shown in TCT No. 30137 and they were also the declared owners of Lot 1827 as shown in Tax Declaration No. 411900-3039. On the other hand, it is alleged by private respondent herein and not refuted by petitioners herein that the title in the name of herein petitioners was issued on August 14, 1981, several days ahead of the deed of sale, dated August 26, 1981 on which the new title in the name of the petitioners was based, and inscribed on August 27, 1981. Clearly, the Deed of Absolute Sale in favor of petitioners herein executed in 1974 after the filing of Civil Case No. 8714 was a simulated and fictitious transaction to defraud Arellano who obtained a money judgment against the parents of petitioners. The supposed sellers, spouses Pablo and Socorro Dilag who sold the lot in question to their children (petitioners herein) for an insufficient consideration continued exercising acts of ownership over Lot No. 288 by leasing the same to David Diancin and turning over material possession thereof to the latter as lessee. In fact, when the deed of sale in favor of Arellano was executed on August 30, 1982, by virtue of the failure of the former owners to redeem the property within the period prescribed by law, the actual possessor was David Diancin. He, however, recognized Arellano’s right of ownership when he was notified of the delivery of possession to Arellano by the Provincial Sheriff as evidenced by a signed delivery receipt, dated December 12, 1983. Diancin ceased performing acts of cultivation on the fishpond situated within the lot in question and he merely requested for an extension of his stay while he looked for another place to stay. Subsequently, Arellano sold the lot to Marcelino Florete and Leon Coo. When Diancin was paid the value of the fish fry he placed in the fishpond, he executed a Discharge and Release Claim in favor of Florete, one of the vendees, on July 2, 1983. When the Dilag children (petitioners herein) filed Civil Case No. 15085 on July 5, 1983, they were not in possession of the property in question. There was therefore no factual and legal basis for the restraining order dated July 8, 1983 of the lower court ordering Arellano and/or his agents to desist from entering Lot No. 288. Thus Rule 39, Sec. 13 relied upon by petitioners will not apply in the case at bar. Likewise it cannot be denied that in securing the cancellation of TCT No. 30137 covering Lot No. 288 in the names of Pablo and Socorro Dilag, petitioners had to rely on an another deed of absolute sale supposedly executed by their parents in their favor in 1981, instead of relying on the first deed of sale executed in 1974, an indication that petitioners do not really consider the 1974 Deed of Sale valid and legal.

The records of the case do not support petitioners’ contention

Art. 1381

Contracts Rescissible Contracts

419

that the obligation of spouses Pablo and Socorro Dilag was already extinguished when Arellano acknowledged the receipt of payment of the money judgment, by virtue of their own admission thru counsel in Civil Case No. 12832 that payment was only partial and did not cover the whole amount of the money judgment in Civil Case No. 8714. It is also an indisputable fact that the compromise agreement in Civil Case No. 8714 was denied by the trial court in its order of October 24, 1979. This order of denial had become final and executory because no appeal was taken by petitioners’ predecessors-interest. Furthermore, even assuming that petitioners became the valid and legal owners of the lot in question by virtue of the deed of sale executed in their favor in 1981, they nonetheless failed to avail themselves of their right as registered owners to redeem the property from the private respondent herein (buyer in the sale by public auction) within the period provided for by law.



Article 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 other manner collect the claim 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. (1291a)

Lesion implies an economic damage. In case of a guardian with respect to the properties of his ward, any act of ownership or disposition undertaken by the guardian on behalf of his ward without court approval is void. If there is court approval, the transaction is valid whether or not there is lesion. If the guardian, however, performs acts of administration, such as buying materials to repair the roof of the ward’s house, and the ward suffers economic loss because there

420

Obligations and Contracts Text and Cases

Art. 1381

was, in fact, no need to make a useless purchase, then the contract entered into by the guardian is rescissible provided that the ward suffers lesion by more than one-fourth of the value of the things which are the object of the contract. When a person disappears from his domicile, his whereabouts being unknown, and without leaving an agent to administer his property, the judge, at the instance of an interested party, a relative, or a friend, may appoint a person to represent him in all that may be necessary.2 This is a case of provisional absence. Two years having elapsed without any news about the absentee or since the receipt of the last news, and five years in case the absentee has left a person in charge of the administration of his property, his absence may be declared by the court. The court may appoint an administrator or a representative to manage the properties of the absentee.3 The same rule governing rescission of contract entered into by a guardian shall apply to administrators or representatives of absentees. A contract entered into in bad faith by the parties to the said contract, which was purposely designed to evade the due obligations in favor of creditors who have no other way to collect their debts, is considered done in fraud of creditors and therefore rescissible. In Bobis vs. Provincial Sheriff of Camarines Norte,4 the Supreme Court, in finding that there was no fraud, ruled as follows: In dismissing the complaint filed in the instant case, the trial court found that the sale of the land to Fermin Bobis and Emilia Guadalupe was tainted with fraud since the said sale was made during the pendency of Civil Case No. 273, and that the price was inadequate. The rule, however, is that fraud is not presumed. As fraud is criminal in nature, it must be proved by clear preponderance of evidence. In order that a contract may be rescinded as in fraud of creditors, it is essential that it be shown that both contracting parties have acted maliciously and with fraud and for the purpose of prejudicing said creditors, and that the latter are deprived by the transaction of all means by which they may effect collection of their claims. All these circumstances must concur in a given case. The presence of only one of them is not enough. In this particular case, there is no evidence that the spouses Rufina Camino and Pastor Eco connived with the spouses Fermin Bobis Article 381 of the 1950 Civil Code. Articles 383 and 387 of the 1950 Civil Code. 4 G.R. No. L-29838, March 18, 1983, 121 SCRA 28. 5 G.R. No. L-19160, December 26, 1963, 9 SCRA 783. 2 3

Art. 1381

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421

and Emilia Guadalupe to defraud Alfonso Ortega. Nor is there evidence to show that the sale of the land to Fermin Bobis and Emilia Guadalupe tended to deprive Alfonso Ortega of means to collect his claim from the spouses Rufina Camino and Pastor Eco. As a matter of fact, no oral or docu-mentary evidence was presented by the parties, and the trial court merely assumed that the sale to Fermin Bobis and Emilia Guadalupe was fraudulent because of the inadequacy of the price, and that the sale was executed during the pendency of Civil Case No. 273. While these circumstances may be considered badges of fraud, the sale cannot be considered in fraud of creditors in the absence of proof that the vendors Rufina Camino and Pastor Eco, had no other property except that parcel of land they sold to the spouses Fermin Bobis and Emilia Guadalupe. Besides, Alfonso Ortega knew of such sale and did nothing to have it annulled as in fraud of creditors. Nor did he cause a cautionary notice to be inscribed in the certificate of title to protect his interests. Moreover, the sale was not fictitious, designed to escape payment of the obligation to Alfonso Ortega. The tenacity by which Emilia Guadalupe had clung to her property to the extent of undergoing imprisonment is indicative of their good faith.

Also, the phrase “in fraud of creditors” necessarily refers to actual creditors of the debtor or obligee. In Marsman Investment Ltd. vs. Philippine Abaca Development Company,5 the Supreme Court, in disallowing the assertion that there was fraud of creditors, ruled: Nevertheless, the duly accredited waiver and release in 1959 (two years before the present action was filed by Marsman Investments Ltd. and Marsman & Co., Inc.) of the credits they held against defendant PADCO, and the absence of any allegation or evidence of invalidity of the corporate release, operate to deprive the rescissory action of any legal basis. Until and unless those releases are set aside, the plaintiff corporations ceased to be creditors of the transferor PADCO as of 1959, and were thereafter deprived of any interest in assailing the validity of the transfer of its properties to appellee Mary A. Marsman; for under the Civil Code, only actual creditors can ask for the rescission of the conveyance made by their debtors in favor of strangers. So that with the proof of the release executed by the creditors, plaintiffs appear to have no cause of action against defendants-appellees.

Another contract which is rescissible is that which refers to things under litigation, if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent 6 judicial authority. example, in117 a suit the G.R. No. 130722,For December 9, 1999, SCADfor 74, replevin 320 SCRA wherein 405.

422

Obligations and Contracts Text and Cases

Art. 1382

plaintiff seeks to recover personal property from the defendant, the latter, during the pendency of the suit, cannot sell in bad faith the property being litigated to any third person. If he does and the transferee also acts in bad faith, the contract is rescissible. In Litonjua vs. L.R. Corporation6 where the creditor lent the money to the debtor who, in turn, collateralized his property to secure the loan, the Supreme Court said that the failure of the debtor to recognize or implement the stipulated right of first refusal contained in the loan-mortgage agreement in favor of the creditor makes any sale of the property to a third person rescissible at the instance of the creditor. The right of first refusal means that, in the event debtor decides to sell his property, he must first offer the same to the creditor. The consideration for the loan-mortgage includes the consideration for the right of first refusal. To deprive the creditor of this right of first refusal will surely prejudice the creditor in his substantial interests to be able to own the property. A contract of sale therefore, entered into in violation of a right of first refusal of another person, while valid, is rescissible.7 Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were affected, are also rescissible. (1292) A debtor whose liabilities already exceed his assets and who can barely pay off his debts is considered in a state of insolvency. If he pays off a creditor whose credit has not yet become due, that payment can be rescinded. It is not necessary here that a prior judicial declaration of insolvency of the debtor is obtained. In De La Paz vs. Garcia8 where the transfer of property was made after an insolvency proceeding was filed with the competent court, and where such transfer was also claimed as in fraud of creditors, the Supreme Court held that the transfer was not rescissible under the Civil Code but void under the Insolvency Law. Article 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage Rosencor Development Corporation vs. Inquing, G.R. No. 140479, 76 SCAD 467, March 8, 2001, 145 SCAD 484; Guzman vs. Bonnevie, 206 SCRA 668; Equatorial Realty vs. Mayfair, 76 SCAD 407, 264 SCRA 483; Parañaque Kings Enterprises vs. Court of Appeals, 79 SCAD 936, 268 SCRA 727. 8 G.R. No. L-18500, November 24, 1966, 18 SCRA 779. 9 G.R. No. L-104234, June 30, 1995, 62 SCAD 228, 245 SCRA 485. 7

Art. 1383

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423

has no other legal means to obtain reparation for the same. (1294) A cause of action for rescission under this chapter can only be made in a proper and direct action filed for that purpose and not on a mere motion incidental to another case. In Air France vs. Court of Appeals,9 the Supreme Court pertinently ruled: Multinational Food and Iolani Dionisio, not being parties to the case, the property covered by TCT No. 353935 may not be levied upon to satisfy the obligations of private respondent spouses and the Multinational Travel Corporation. Petitioner’s contrary claim that the property belongs to private respondent spouses, if true, requires a rescissory action which cannot be done in the same case, but through the filing of a separate action. Recission 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 the contract may cause, or to protect some incompatible and preferential right created by the contract. Under Art. 1381 of the Civil Code, the following contracts are rescissible: x x x Rescissible contracts, not being void, they remain legally effective until set aside in a rescissory action and may convey title. Nor can they be attacked collaterally upon the grounds for rescission in a land registration proceeding. An action for rescission may not be raised or set up in a summary proceeding through a motion, but in an independent civil action and only after a full-blown trial. As Article 1383 of the Civil Code provides: “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.” Regarding contracts undertaken in fraud of creditors, the existence of the intention to prejudice the same should be determined either by the presumption established by Article 1387 or by the proofs presented in the trial of the case. In any case, the presumption of fraud established by this article is not conclusive, and may be rebutted by satisfactory and convincing evidence. To repeat, an independent action is necessary to prove that the contract is rescissible. 10

Khe Hong Cheng vs. Court of Appeals, G.R. No. 144169, March 28, 2001, 146

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Art. 1383

Under Article 1389 of the Civil Code, an “accion pauliana,” the action to rescind contracts made in favor of creditors, must be commenced within four years. Clearly, the rights and defenses which the parties in a rescissible contract may raise or set up cannot be properly ventilated in a motion but only in a full trial. The appellate court did not err in holding that the trial court acted with grave abuse of discretion in resolving these matters through mere motion of petitioner.

It is likewise subsidiary in that it must be the last remedy. If there are other means to claim reparation, such other means must be availed of before filing a case for rescission. An action to rescind or an accion pauliana must be of last resort.10 All possible ways to enforce the obligation, including the filing of a court case, must first be undertaken. And when the implementation of the decision of this court case fails, then a subsequent court case for rescission of the contract can be filed. An accion pauliana thus presupposes the following: 1) a judgment; 2) the issuance by the trial court of a writ of execution for the satisfaction of the judgment; and 3) the failure of the sheriff to enforce and satisfy the judgment of the court. It requires that the creditor has exhausted the property of the debtor. The date of the decision of the trial court is immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court against the debtor will retroact to the time when the debtor became indebted to the creditor.11

In Goquiolay vs. Sycip,12 the Supreme Court said: A final and conclusive consideration: The fraud charged not being one used to obtain a party’s consent to a contract (i.e., not being deceit or dolus in contrahendo), if there is fraud at all, it can only be a fraud of creditors that gives rise to a rescission of the offending contract. But by express provision of law (Article 1294, Civil Code of 1889; Article 1383, New Civil Code), “the action for rescission is subsidiary; it can not be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.” Since there is no allegation, or evidence, that Goquiolay cannot obtain reparation from the widow SCAD 587. 11 Ibid. 12 G.R. No. L-11840, December 10, 1963, 9 SCRA 663. 13 17 Am Jur 2d 995.

Arts. 1384-1385

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425

and heirs of Tan Sin An, the present suit to rescind the sale in question is not maintainable, even if the fraud charged actually did exist.

Article 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n) Since rescission presupposes a valid contract, it need not be rescinded totally considering the law provides that such remedy shall be only up to the extent necessary to cover the damages caused. For example, A is indebted to X for P5,000 and, to defraud X, A transfers his two houses each worth P5,000 to B who is also in bad faith. Rescission can be had only with respect to one house worth P5,000 because it is only up to this amount that X has been damaged. Article 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. (1295) In restitution, the parties shall be placed in the same position where they were before they entered into the assailed contract. The objective is to restore the parties to their original position. Not only should the parties return the object subject of the rescissible contract but also the fruits or interest, if any. If the object of the contract cannot be restored because of loss, damages may be claimed from the person responsible for the loss. An attempted restoration of the status quo is an essential part of the rescission of a contract, and in accordance with the general rule requiring restoration, a party cannot rescind and at the same time retain the consideration, or a part of the consideration, received under the contract. One cannot have the benefits of rescission without assuming its burdens.13

It must be noted, however, that rescission cannot 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. Hence, even

426

Obligations and Contracts Text and Cases

Arts. 1386-1387

if a father, with the intention to put beyond reach, his properties from his creditors, sold the property to his son for a valuable consi-deration but below the fair market value of the same, such a sale is valid and not even rescissible if the son was without any knowledge of the ulterior motive of his father to defraud his creditors. Mere inadequacy of price does not invalidate a contract. For the son therefore the consideration can still be considered a fair price. In short, the son was clearly in good faith and therefore the contract of sale cannot be rescinded. It is axiomatic that good faith is always presumed unless contrary evidence is adduced. A purchaser in good faith is one who buys the property of another without notice that some other person has a right or interest in such a property and pays a full and fair price at the time of the purchase or before he has notice of the claim or interest of some other person in the property.14

Article 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts. (1296a) Approval by the courts implies that the parties were given their day in court to justify to the court the necessity and reasonableness of the contract to be entered into. Hence, once judicially approved, such contract cannot anymore be the subject of rescission. Article 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 Rosencor Development Corporation vs. Inquing, G.R. No. 140479, March 8, 2001, 145 SCAD 484. 15 G.R. No. L- 25152, February 26, 1968, 22 SCRA 798. 16 Khe Hong Cheng vs. Court of Appeals, G.R. No. 144169, March 28, 2001, 146 14

Art. 1387

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427

the law of evidence. (1297a) Article 1387 provides rebuttable presumptions. Presumptions can only exist from facts or a set of facts. For example, B is indebted to D for P10,000, E for P7,000, and F for P13,000. All of the debts are due. B has money in the bank in the amount of P60,000. B donates P55,000 to X. The donation is presumed to be fraudulent as he has not reserved sufficient property to pay all debts contracted before the donation. If the debts are not yet due, it shall likewise be presumed fraudulent because the only requirements of the law are that the debts are contracted prior to the donation, and that there is no reservation of sufficient property to pay all debts contract before the donation. The maturity of the debts is not a requirement. The presumption, however, can be controverted by convincing evidence that the donation was not in fraud of creditors. Another set of facts which gives rise to a presumption of a fraudulent transaction is when alienation by onerous title has been made “by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued.” The presumption, however, can be rebutted by convincing evidence to the contrary. It must be observed that an alienation made during the pendency of a suit is not enough. There must already be a decision or a writ of attachment. For example, A is able to obtain a writ of attachment against debtor B. The attachment effectively places his property in Mandaluyong under the custody of the court so that, in the event A wins the case, such property, if necessary, can be sold to pay the judgment debt. Subsequently B sells his property in Laguna to Z. There is a presumption here of a fraudulent alienation even if the Laguna property is not the subject of the attachment. This is so because the attachment need not refer to the property alienated. A can seek the rescission of the sale by B to Z of the property in Laguna. Likewise, if a decision has been rendered against B in favor of another creditor X, and B sells the property in Laguna to M, there is also a presumption of fraudulent transaction, and A can file a case to rescind the sale even if the decision has not been obtained by him but by X. The case of Provincial Sheriff of Pampanga vs. Court of Appeals15 is an illustrative case where Article 1387 has been put in issue. The facts and the ruling of the Supreme Court are as follows: An action for recovery of a sum of money was filed on June 4, 1960, by Cirilo D. Cabral and Zacarias Perez against Elpidio Agustin and Manuel Flores in the Court of First Instance of Bulacan.

428

Obligations and Contracts Text and Cases

Art. 1387

At said time, Elpidio Agustin was then a furniture dealer under the business name and style “Modern Furniture Store” in Masantol, Pampanga. A big fire, however, broke out on January 9, 1961, and totally burned said furniture store of Elpidio Agustin and its contents of several pieces of furniture. As a result, Elpidio Agustin, on January 12, 1961, surrendered to the Municipal Treasurer his license to operate the store. Not long thereafter, said defendant’s brother, Marciano Agustin, put on the same site a new furniture store, adopting the name and style “Modern Furniture Store.” On February 20, 1961, for business purposes, Marciano Agustin secured a new license and privilege tax to operate the store. And on the same date, Elpidio Agustin verbally transferred “Modern Furniture Store” to his brother Marciano Agustin. Subsequently, on July 13, 1961, the Court of First Instance of Bulacan, in the aforementioned case, rendered judgment against Elpidio Agustin (who had confessed judgment) and Manuel Flores, jointly and severally, for P10,685.15 plus interest and P500.00 attorney’s fees. Subsequently, the Court of Appeals affirmed the decision and it became final and executory. A writ of execution was issued on April 20, 1963. Acting thereon, the Provincial Sheriff of Pampanga, on May 3, 1963, levied on the pieces of furniture found in “Modern Furniture Store.” Stating that said properties do not belong to judgment debtor Elpidio Agustin but to him, Marciano Agustin filed a third-party claim with the sheriff. An indemnity bond, however, was posted by the judgment creditors in the sheriff’s favor, so he issued notice that the properties levied upon will be sold at public auction on May 18, 1963. A day before that, on May 17, 1963, Marciano Agustin filed in the Court of First Instance of Pampanga the present action, against judgment creditors Cabral and Perez and the sheriff, to be declared owner of the pieces of furniture levied upon, with preliminary injunction and damages. A writ of preliminary injunction was issued enjoining the sheriff from proceeding with the sale. After the defendants answered and trial, the Court of First Instance rendered a decision that dismissed the complaint. Plaintiff appealed to the Court of Appeals. On July 29, 1965, the Appellate Court rendered a decision reversing the lower court, and declaring Marciano Agustin owner of the pieces of furniture listed in the complaint, ordering defendants to pay him jointly and severally P2,000.00 moral and actual damages, and P500.00 SCAD 887.

Art. 1388

Contracts Rescissible Contracts

429

attorney’s fees, and rendering permanent the injunction issued. Appeal therefrom was taken to Us by defendants. At issue here is: Does Article 1387 of the Civil Code on presumption of fraud apply? xxx

xxx

xxx

The provision in question applies only when there has in fact been an alienation or transfer, whether gratuitously or by onerous title. In the present case, the finding of the Court of Appeals, which is factual and therefore not proper for Us to alter in this appeal, is that the store of Marciano Agustin is a new and different one from that of Elpidio Agustin. True, Marciano Agustin testified that “Modern Furniture Store” was transferred, verbally, to him by Elpidio Agustin on February 20, 1961. As the Court of Appeals found, however, this referred to the business name and style, not to the store or its contents, as the store and contents were completely new, coming from the capital of Marciano Agustin, whereas Elpidio’s store and its contents of furniture were destroyed totally by the fire of January 9, 1961. Since there was in fact no transfer of the store or its furniture, Article 1387 aforementioned finds no application. And appellants do not contend that the transfer merely of the name and style “Modern Furniture Store” would be fraudulent. Such transfer has in the circumstances no effect on Marciano Agustin’s ownership of the pieces of furniture in question.

Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a) A transferee or buyer of a debtor’s property, who knows that the conveyance has been principally made to remove the property from the reach of the creditor in satisfaction of the debtor’s liability, shall be liable to the creditor for damages if it should be impossible for the transferee to return the subject property. The knowledge of the transferee of the evasive and fraudulent designs of the debtor makes the said transferee’s acquisition tainted with bad faith. He should have desisted from perfecting the fraudulent contract with the debtor when he learned of the purpose of the transaction. In the event that the transferee in bad faith transfers the property to a

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subsequent buyer who is likewise in bad faith, the latter shall have the obligation to return said property if it is still possible to do so. If not, he shall be liable for damages. However, if such buyer is in good faith, his purchase of the property is perfectly valid, thereby making it impossible for the first transferee to return the property, in which case such first transferee shall be liable for damages. Article 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known. (1299) The prescriptive period within which to file a case for rescis-sion is four years. The situations depend on the ground invoked but, in all these cases, the prescriptive period begins to run after the aggrieved party has unsuccessfully exhausted all possible remedies to enforce the obligation or to recover what has been lost,16 thus: 1)

For persons under guardianship, the period begins from the time the incapacity terminates and the aggrieved party has unsuccessfully exhausted all other legal remedies to be able to enforce his or her rights or recover what has been lost. Hence, if the person is a minor, the period begins from the time he reaches the age of majority which is 18 years of age17 and has unsuccessfully exhausted all legal remedies;

2)

For absentees, the period begins from the time learns of the contract and has unsuccessfully exhausted all other legal remedies to be able to enforce his rights or recover what has been lost. For the exercise of civil rights and the fulfillment of civil obligations, the domicile of natural persons is the place of their habitual residence.18 When the law creating or recognizing them, or any provision does not fix the domicile of juridical persons, the same shall be understood to be the place where their legal representative is established or where they exercise their principal function;19

3)

For contracts entered into in fraud of creditors, the period begins from the time of the discovery of the fraud and after he or she has unsuccessfully exhausted all other legal

Article 234 of the Family Code of the Philippines, Executive Order No. 209 as amended by Republic Act 6809. 18 Article 50 of the 1950 Civil Code. 17

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remedies to be able to enforce his or her rights or recover what has been lost; and 4)

19

For contracts entered into with respect to things under litigation without the knowledge and approval of the litigants or of competent judicial authority, the period begins from the time of knowledge of the transaction and unsuccessful exhaustion of all other legal remedies to be able to enforce his rights or recover what has been lost.

Article 51 of the 1950 Civil Code.

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VOIDABLE CONTRACTS Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n) Voidable contracts are the same as annullable contracts. They are valid until annulled. They are not invalid from the beginning unlike a void contract. Hence any defect or infirmity causing its annullable nature can be cured by the party aggrieved or injured. This process of curing the defect is called ratification. In Lim Tay vs. Court of Appeals,1 the Supreme Court ruled that the effects of an annulment operate prospectively and do not, as a rule, retroact to the time the contract, such as a sale, was made. The grounds enumerated in Article 1390 have already been explained in this book under Articles 1327 to 1344.

Significantly, damage need not exist in case of annulment.

Article 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 fraud, from103, the298 time of 634. the discovery G.R. No. 126891, Augustor 5, 1998, 97 SCAD SCRA 1

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of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a) A prescriptive period is the time within which an aggrieved party can file a case in court to make a claim or to assert a right or to correct a wrong. In annulling a contract, the prescriptive period is four years. The starting point of this period depends on the ground invoked as follows: 1) In case of intimidation, violence or undue influence, from the time the defect of the consent ceases. Hence if, to be able to lease his property to A, B coerces A to enter into the said lease contract by continually threatening A with serious bodily injury if he does not do so, A is excused from not filing a case for the annulment of the contract while the threat and intimidation are still existing. However, if B finally reforms and tells A that he apologizes for such threats and stops the same, the fouryear period for A to annul the contract will commence from the cessation of the threat and not from the time the contract was entered into. In Rodriguez vs. Rodriguez,2 where an annulment of contract was filed on the ground of duress, the Supreme Court, after resolving that there was no duress, ruled that even if there were duress, the circumstances of the case showed that the filing of the case had already prescribed, thus: 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; and the present action 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 already barred. 2) In case of mistake or fraud, from the time of discovery of the same. For example, if A, an expert jeweler, induces B in 1990 to buy a figurine from him knowingly misrepresenting to B that the figurine is made of diamond when in fact it is only made of glass and, as a result, B buys such figurine, B is obviously excused from filing an action to annul the contract during the G.R. No. L-23002, July 31, 1967, 20 SCRA 908.

2

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time when he is not aware of the fraud. If, in 1997, B discovers the fraud, the four year-period within which to file the action to annul the contract of sale shall start only in 1997. 3) When the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. Hence, if during A’s minority, his guardian, though obtaining a court order to sell the property of his minor ward, fraudulently transferred said minor’s property to a third party, A obviously cannot file a case for annulment while under guardianship because the guardian at that time is supposedly the one taking charge of his affairs. Once the guardianship ceases or if A reaches the age of majority, it is from that time when the prescriptive period will start for A to annul the contract. In Causapin vs. Court of Appeals3 where a sale of property was entered into by the petitioner when she was a minor and where said petitioner filed the case for recovery of property only in 1986 which was about 20 years after she reached the age of majority, the Supreme Court ruled that the action had already long prescribed.

It is a rule that an extra-judicial demand by a creditor shall interrupt the running of a prescriptive period.4 However, this rule only applies to a determinate conduct that can be demanded. If a contract of sale of property is alleged as voidable or annullable, and the aggrieved party who sold the property extra-judicially demands for the reconveyance of the property prior to the filing of the suit, the prescriptive period of four (4) years is not interrupted by such extra-judicial demand. A voidable contract is valid unless annulled by the proper court. A debtor-buyer, therefore, has no obligation to accede to a demand for the reconveyance by a creditor-seller precisely because the contract is valid unless annulled. In Miailhe vs. Court of Appeals,5 the petitioner claimed that, during the height of Martial Law under President Marcos, he was intimidated and forced to enter into a contract with the Development Bank of the Philippines (DBP), a government bank, that led to the forced conveyance of his property to DBP. It was shown that the cause for the vitiation of consent ceased on February 24, 1986, when President Marcos left the Philippines but the case for annulment of contract was filed only on March 23, 1990. The Supreme Court said that the action has prescribed. The action should have been filed on or before February 24, 1990. Petitioner contended that the demands made to the respondent to reconvey the G.R. No. 107432, July 4, 1994, 53 SCAD 13, 233 SCRA 615. Article 1155 of the Civil Code. 5 G.R. No. 108991, March 20, 2001, 146 SCAD 151. 6 G.R. No. 53820, June 15, 1992, 209 SCRA 763. 3 4

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property interrupted the prescriptive period. This was also brushed aside by the Supreme Court by saying that there was no obligation to reconvey on the part of the respondent, because the contract that allowed the respondent to own and possess the property was voidable, which means that it was valid unless the court annulled the same. Since there had been no annulment yet of the contract, there was therefore no determinate duty for the respondent to heed the demand to reconvey. The reconveyance of the property by the respondent could not be a determinate conduct that can be extrajudicially demanded while the contract is considered valid. Article 1392. Ratification extinguishes the action to annul a voidable contract. (1309a) Article 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a) Ratification is the act of curing the defect which made the contract annullable. It may be expressly or tacitly given. It extinguishes the action to annul a voidable contract. Hence, if A is coerced by B to lease the latter’s property and if, after the reason for the coercion ceased, A writes B a letter that he (A) will continue the lease, the defective contract will be considered as expressly ratified. If instead of writing B a letter, A willingly and continuously pays the rentals for the subject leased premises to be able to live in the same, the defect of the contract is tacitly cured. In both cases, there is ratification which completely erases the infirmity in the contract. An action therefore by A to annul the agreement, based on force and intimidation will not prosper even if it is filed within the four-year prescriptive period. In Yao Ka Sin Trading vs. Court of Appeals,6 the Supreme Court ruled that there can be no ratification by a corporation of acts performed by an officer if he has not been given apparent authority by the corporation, or if his acts are not later validated by the corporation. The Supreme Court likewise differentiated the case from another case which clearly shows ratification, thus:

G.R. Nos. 74938-39, January 17, 1990, 181 SCRA 84.

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The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly unavailing to the petitioner. In said cases, this Court found sufficient evidence, based on the conduct and actuations of the corporations concerned, of apparent authority conferred upon the officer involved which bound the corporations on the basis of ratification. In the first case, it was established that the offer of compromise made by plaintiff in the letter, Exhibit “A,” was validly accepted by the GSIS. The terms of the offer were clear, and over the signature of defendant’s general manager, Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. It was sent by the GSIS Board Secretary and defendant did not disown the same. Moreover, in a letter remitting the payment of P30,000 advanced by her father, plaintiff quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and kept silent about the telegram. This Court then ruled that: “This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393). ‘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.’ ”

In the second case, this Court found:

“In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid aside the by-law require-ment of prior approval.” Under the given circumstances, the Kalaw contracts are valid corporate acts.

Article 1394. Ratification may be effected by the guardian of the incapacitated person. (n)

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A guardian is tasked with the administration of the person and properties of the ward. He must see to it that they are protected, and that everything undertaken affecting the ward is for the latter’s best interest. Ratification of a defective contract can therefore be made by the guardian of an incapacitated person. For example, if an insane person entered into a contract with a carpenter to repair the roof of his house, this contract can be annulled as it has been entered into by a person who is incapacitated. However, the guardian can make an express or tacit ratification of the repair, especially if it will redound to the benefit of his incapacitated ward. Article 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (1312) Ratification is a unilateral act. It is generally done by the injured party and not by the party causing the injury. The consent of the injuring party is not required because such party normally desires the effectivity of the contract anyway from its inception. Indeed, if the injuring party is not interested in the contract in the first place, he would not have exerted fraud or intimidation for the innocent party to enter the contract. Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313) Ratification transforms the contract completely as one without infirmity. It cures the defect which initially made the contract voidable. This curing effect retroacts to the day when the contract was entered into. Hence, upon ratification, it is as if the contract has never been visited by any infirmity or defect at all. Article 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a) In the case of Malabanan vs. Gaw Ching,7 the Supreme Court had the occasion to discuss the parties who can file an annulment case, thus:

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The firmly settled rule is that strangers to a contract cannot sue either or both of the contracting parties to annul and set aside that contract. Article 1397 of the Civil Code embodies that rule in the following formulation: “Article 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.” Article 1397 itself follows from Article 1311 of the Civil Code which establishes the fundamental rule that: “Article 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. xxx

xxx

xxx.”

As long ago as 1912, this Court in Ibañez vs. Hongkong and Shanghai Bank, pointed out that it is the existence of an interest in a particular contract that is the basis of one’s right to sue for nullification of that contract and that essential interest in a given contract is, in general, possessed only by one who is a party to the contract. In Ibañez, Mr. Justice Torres wrote: “From these legal provisions 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 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.” (Decisions of the Supreme Court of Spain, of April 18, 1901, and November 23, 1903, pronounced in cases requiring an application of the preinserted Article 1302 of the Civil Code.) G.R. No. L-18210, December 29, 1966, 18 SCRA 1253.

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Mr. Justice Torres went on to indicate a possible qualification to the above general principle, that is, a situation where a non-party to a contract could be allowed to bring an action for declaring that contract null: “He who is not the party obligated principally or subsidiarily in a contract may perhaps be entitled to exercise an action for nullity, if he is prejudiced in his rights with respect to one of the contracting parties; but, in order that such be the case, it is indispensable to show the detriment which positively would result to him from the contract in which he had no intervention.” xxx xxx xxx.” There is an important and clear, albeit implicit, limitation upon the right of a person who is in fact injured by the very operation of a contract between two (2) third parties to sue to nullify that contract: that contract may be nullified only to the extent that such nullification is absolutely necessary to protect the plaintiff’s lawful rights. It may be expected that in most instances, an injunction restraining the carrying out of acts in fact injurious to the plaintiff’s rights would be sufficient and that there should be no need to set aside the contract itself which is a res inter alios acta and which may have any number of other provisions, implementation of which might have no impact at all upon the plaintiff’s rights and interests. What is important for present purposes is that respondent Gaw Ching, admittedly a stranger to the contract of sale of a piece of land between petitioners Malabanan and Senolos inter se, does not fall within the possible exception recognized in Ibañez vs. Hongkong & Shanghai Bank. In the first place, Gaw Ching had no legal right of preemption in respect of the house and lot here involved. The majority opinion of the appellate court itself explicitly found that the subject piece of land is located outside the Urban Land Reform Zones declared pursuant to P.D. No. 1517. Even assuming, for purposes of argument merely that the land here involved was in fact embraced in a declared Urban Land Reform Zone (which it was not), Gaw Ching would still not have been entitled to a right of preemption in respect of the land sold. In Santos vs. Court of Appeals, this Court held that the preemptive or redemptive rights of a lessee under P.D. No. 1517 exists only in respect of the urban land under lease on which he had resided for ten (10) years or more and that, in consequence, where both land and building belong to the lessor, that preemptive or redemptive right was simply not available under the law. Finally, we are unable to understand the respondent appellate court’s view that respondent Gaw Ching having been a long time tenant of the property in question, had acquired a

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preferred right to purchase that property. This holding is simply bereft of any legal basis. We know of no law, outside the Urban Land Reform Zone or P.D. No. 1517, that grants such a right to a lessee no matter how long the period of the lease has been. If such right existed at all, it could only have been created by contract, respondent Gaw Ching does not, however, pretend that there had been such a contractual stipulation between him and petitioners. In the second place, assuming once again, for present purposes only, that respondent Gaw Ching did have a preemptive right to purchase the land from petitioner Malabanan (which he did not), it must be stressed that petitioner Malabanan did thrice offer the land to Gaw Ching but the latter had consistently refused to buy. Since Gaw Ching did not in fact accept the offer to sell and did not buy the land, he suffered no prejudice, and could not have suffered any prejudice, by the sale of the same piece of land to petitioner Senolos. No fraud was thus worked upon him notwithstanding his insinuation that the sale of the land to petitioner Senolos had preceded the offer of the same piece of land to himself. In the third place, and contrary to the holding of the majority appellate court opinion, the fact that Gaw Ching had been lessee of the house and lot was simply not enough basis for a right to bring an action to set aside the contract of sale between the petitioners inter se. A lessee, it is elementary, cannot attack the title of his lessor over the subject matter of the lease. Moreover, the lease contract between petitioner Malabanan and respondent Gaw Ching must in any case be held to have lapsed when the leased house was condemned and the order of demolition issued.

In Armentia vs. Patriarca,8 the Supreme Court likewise discussed Article 1397 in connection with Article 1311, thus: Plaintiff was but a brother of the deceased Marta Armentia. True, he is an intestate heir of Marta; but he is not a forced heir. Upon the other hand, Marta was free to dispose of her properties the way she liked it. She had neither ascendants nor descendants. By Article 1397 of the Civil Code, “[t]he action for annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily.” This must be construed in conjunction with Article 1311 of the same code providing that “[c]ontracts 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 G.R. No. L-30351, September 11, 1974, 59 SCRA 15.

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provision of law,” and that “the heir is not liable beyond the value of the property he received from the decedent.” Plaintiff is not a forced heir. He is not obliged principally or subsidiarily under the contract. Marta Armentia did not transmit to him by devise or otherwise any right to the property, the subject thereof. On the contrary, Marta voluntarily disposed of it. No creditors are defrauded; there are none. No legitimes are impaired. Therefore, plaintiff has no cause of action to annul or to rescind the sale. In point is Concepcion vs. Sta. Ana, 87 Phil. 787. The facts there may well be analogized with those of the present. In the Concepcion case, plaintiff Monico Concepcion was the only surviving legitimate brother of Perpetua Concepcion, who died without issue and without leaving any will. In her lifetime, or more precisely, on June 29, 1945, said Perpetua Concepcion, “in connivance with the defendant and with intent to defraud the plaintiff, sold and conveyed three parcels of land for a false and fictitious consideration to the defendant, who secured transfer certificate of title of said lands issued under her name; and that the defendant has been in possession of the properties sold since the death of Perpetua Concepcion, thereby causing damages to the plaintiff in the amount of not less than two hundred (P200) pesos.” On motion to dismiss, the lower court threw the com-plaint out of court upon the ground that the “plaintiff is not a party to the deed of sale executed by Perpetua Concepcion in favor of the defendant;” that even on the assumption “that the consideration of the contract is fictitious, the plaintiff has no right of action against the defendant;” that under Article 1302 of the old Civil Code, “the action to annul a contract may be brought by any person principally or subsidiarily bound thereby;” that “plaintiff is not bound by the deed of sale executed by the deceased in favor of the defendant;” and that he has “no obligations under the deed.” The following reproduced in haec verba from the Concepcion opinion is illuminating: “(2) As to the appellant’s second and last contention, under the law action to annul a contract entered into with all the requisites mentioned in Article 1261 whenever they are tainted with the vice which invalidate them in accordance with law, may be brought not only by any person principally bound or who made them, but also by his heir to whom the right and obligation arising from the contract are transmitted. Hence, if no such rights, actions or obligations have been transmitted to the heir, the latter can not bring an action to annul the contract in representation of the contracting party who made it. In Wolfson vs. Estate of Martinez, 20 Phil. 340, this Supreme Court quoted with approval the judgment of the Supreme Court of Spain of April 18, 1901, in which it was held that ‘he who is not a party

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to a contract, or an assignee thereunder, or does not represent those who took part therein, has under Articles 1257 and 1302 of the Civil Code no legal capacity to challenge the validity of such contract.’ And in Irlanda vs. Pitargue (22 Phil. 283) we held that ‘the testamentary or legal heir continues in law as the juridical personality of his predecessor-in-interest, who transmits to him from the moment of his death such of his rights, actions and obligations as are not extinguished thereby.’ The question to be resolved is, therefore, whether the deceased Perpetua Concepcion has transmitted to the plaintiff any right arising from the contract under consideration in order that he can bring an action to annul the sale voluntarily made by her to the defendant with a false consideration. We are of the opinion and so hold, that the late Perpetua Concepcion has not transmitted to the plaintiff any right arising from the contract of conveyance or sale of her lands to the defendant, and therefore the plaintiff cannot file an action to annul such contract as representative of the deceased. According to the complaint the deceased, in connivance with the defendant and with intent to defraud the plaintiff, (that is, in order not to leave the properties above mentioned upon her death to the plaintiff) sold and conveyed them to the latter, for a false and fictitious consideration. It is, there-fore obvious, that the conveyance or sale of said properties to the defendant was voluntarily made by the deceased to said defendant. As the deceased had no forced heir, she was free to dispose of a thing which involves the right to give or convey it to another without any consideration. The only limitation established by law on her right to convey said properties to the defendant without any consideration is, that she could not dispose of or transfer her property to another in fraud of her creditors. And this court, in Solis vs. Chua Pua Hermanos (50 Phil. 636), through Mr. Justice Street, held that a ‘voluntary conveyance, without any consideration whatever, is prima facie good as between the parties, and such an instrument can not be declared fraudulent as against creditors in the absence of proof, that there was at the time of the execution of the conveyance a creditor who could be defrauded by the conveyance, 27 C.J. 4770.’

In Bañez vs. Court of Appeals,9 the Supreme Court further explained the exception to Article 1397 thus: Article 1397 of the Civil Code provides that the action for annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. Hence, strangers to the contract who are not bound thereby have neither the right

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nor the personality to bring an action to annul such contract. It cannot be gainsaid that respondent Pio Arcilla was a stranger to, and not bound principally or subsidiarily by, the conditional contract to sell executed on May 20, 1960 by the PHHC in favor of Cristeta L. Laquihon, and the transfer of rights over the same lot from Basilio Laquihon to Aurea V. Banez. Hence, respondent Pio Arcilla could not bring an action to annul the same. There is, however, an exception to the rule laid down in Article 1397. This Court, in Teves vs. People’s Homesite and Housing Corporation, L-21498, June 27, 1968, citing Ibañez vs. Hongkong and Shanghai Bank, held that “A person who is not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show the detriment which would positively result to him from the contract in which he had no intervention.” Pursuant to said doctrine, in order that respondent Pio Arcilla might bring an action for the nullity of the contracts aforesaid, he should have been not only prejudiced in his rights with respect to one of the contracting parties, but must have also shown the detriment which he would positively suffer from the contracts. It becomes, therefore, necessary to inquire, whether respondent Pio Arcilla’s rights were prejudiced by the aforesaid contracts, and as to what detriment, if any, he suffered because of those contracts. What rights of respondent Pio Arcilla were prejudiced? The Court of Appeals found that Pio Arcilla “makes no pretense that he entered into and built his land upon appellee PHHC’s land with the consent of the latter.” Pio Arcilla was, therefore, a trespasser or a squatter, he being a person who settled or located on land, inclosed or uninclosed with “no bona fide claim or color of title and without consent of the owner.” He began his material possession of the lot in bad faith, knowing that he did not have a right thereto, and it is presumed that his possession continued to be enjoyed in the same character in which it was acquired, i.e., in bad faith until the contrary is proved. And what right can a squatter have to the land into which he has intruded against the owner of the land? The answer is not hard to find. A squatter can have no possessory rights whatsoever, and his occupancy of the land is only at the owner’s sufferance, his acts are merely tolerated and cannot affect the owner’s possession. The squatter is necessarily bound to an implied promise, that he will vacate upon demand. This Court, in Bernardo, et al. vs. Bernardo and Court of Appeals, laid down the doctrine that: 10

Mercado vs. Espiritu, G.R. No. 11872, December 1, 1917, 37 Phil. 215.

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Art. 1397

“In carrying out its social readjustment policies, the government could not simply lay aside moral standards, and aim to favor usurpers, squatters, and intruders, unmindful of the lawful or unlawful origin and character of their occupancy. Such a policy would perpetuate conflicts instead of attaining their just solution. Respondent Pio Arcilla, having no possessory rights whatsoever, what detriment could he have suffered from the aforesaid contracts?”

The action for annulment cannot be filed by the person who caused the defect in the contract. Hence, the one who committed fraud or intimidation cannot annul the contract on the ground that there was fraud or violence when the contract was entered into. He is estopped from asserting the grounds for annulment which were principally initiated by him. Moreover, it is a general rule that a litigant cannot come to court with “unclean hands.” A case for annulment cannot likewise be filed by the person who is capacitated to enter into the contract if the ground to be invoked is the incapacity of the other party. Hence, if a minor and a person of age entered into a contract of sale of a particular car, the person of age cannot file a case to annul the contract based on the fact that the other contracting party was a minor. The minor, however can file a case upon reaching the age of majority because it is at this time when the guardianship of the parents ceases. However, if the case filed is not for annulment of contract but for the enforcement of the contract, the party who is capacitated may file such action against the minor. Whether or not the minor will be liable depends upon the kind of misrepresentation which the minor made in entering the contract and upon the extent of the benefit to the minor. If the misrepresentation is an active one, which means that the minor deliberately and intentionally undertakes to inform the other party and expressly declares in the contract that he is of majority age, when in fact he is not of age, the minor will be liable to pay whatever his obligation is under the contract as if his liability is that of a person who is of age.10 However, if the misrepre-sentation is a passive one, which means that the minor was able to enter into the contract without doing anything to declare his true age, such minor shall be liable only up to the extent that he has been benefited by the contract.11 Article 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which

Arts. 1398-1399

Contracts Voidable Contracts

445

have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. (1303a) Article 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304) When the annulment of the contract has been decreed, the contracting parties must be returned to their original position. Hence whatever has been given must be returned to the giver. In a contract of sale of a car, for example, the car must be returned to the ownerseller and the purchase money with the corresponding interest must be returned to the buyer. If the contract involves some service like the tutoring of a particular child, the value of the tutoring must be paid to the tutor by way of damages. However, the law states that 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. Hence, if part of the proceeds of a contract of loan entered into by a minor with a bank has been uselessly spent by said minor, the bank cannot recover such uselessly spent money even if a court decrees that the obligation should be annulled. The minor has no obligation to restore such money. The bank, however, can recover from the minor such part of the proceeds which turns out to be beneficial to him like money spent to be able to enroll in a school. It must be noted that the bank cannot even file a case against the minor. Hence, it can only recover by way of a counterclaim in a complaint for annulment filed by the minor when he reaches the age of majority. Article 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. (1307a) 11

Braganza vs. De Villa Abrille, G.R. No. L-12471, April 13, 1959, 105 Phil. 456.

446

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Arts. 1400-1401

When the object to be returned cannot be returned, because it was lost by the person obliged to return it due to the fault of the said person, the value of the object, its fruits, and interest shall be given instead to satisfy the order of restitution. Hence, if A is compelled by B to have an exchange of their respective cars, and the said contract of exchange is subsequently annulled, A and B must return what each of them has received from each other. If A cannot return the car obtained by way of the exchange because it has been lost through his fault, he shall undertake restitution by paying B an amount equivalent to the value of the car plus interest, if any. Article 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a) It is a rule that no one can come to court with unclean hands. Hence if A coerced B to sell to him a car, B can seek the annulment of the sale. However, if B lost the car by intentionally destroying it, he cannot file the annulment case as such right will be considered extinguished. If an incapacitated person, such as a deaf-mute who cannot read and write, purchases a car and later he files a case to annul the contract of sale, the mere fact that the car has been lost will not abate the proceedings for annulment. This is so because the incapacitated person is not obliged to make any restitution except when it has benefited him. Hence, since the object of the contract has been lost, no benefit can accrue in his favor. However, if the incapacitated person loses the car through his own fault, then the case will be dismissed. Article 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308) Restitution requires the return by the parties of what each has received from the other. If one of them cannot restore to the other what he has received from the said other, such other person cannot

Art. 1402

Contracts Voidable Contracts

447

be compelled to return what he, in turn, has received. However, if one of the parties is incapacitated, he is not obliged to return what he has received except insofar as he has been benefited by the thing or price received by him.

448

Obligations and Contracts Text and Cases

Chapter 8

UNENFORCEABLE CONTRACTS (n) Article 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; 448

Arts. 1403-1404

Contracts Unenforceable Contracts (n)

449

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract. Article 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book. A contract may have all the requisites for perfection but it may still be unenforceable. These unenforceable contracts are the ones treated in this chapter. Thus, if a contract has been entered into without authority, it cannot be enforced. This has been discussed under Article 1317. Non-authority is also governed by the principles of agency which are provided for in Article 1868 up to Article 1932 of the Civil Code of 1950.1 Another case of an unenforceable contract is when a contract is entered into by parties who are both incapacitated to enter into a contract. Hence, if a contract is entered into by a minor and by a deaf-mute who cannot read and write, such contract is unenforceable. If only one is incapacitated, the contract will only be voidable. Another instance of an unenforceable contract is when the contract does not comply with the Statute of Frauds. Basically, this statute mandates that for certain executory contracts to be enforceable in a court of law, the only evidence that can prove such contract is a written proof of the agreement like some notes or memoranda. The reason for this requirement is precisely to prevent fraud or perjury2 as it has always been regarded that “a written document speaks a uniform language but the spoken word could be notoriously unreliable.”3 The written evidence of the contract may not necessarily be in one document but in two or more notes or memoranda, which taken together or by reference with other writings, clearly reveal the essential requisites for the existence of a contract and also the signature of the party or parties charged or their agent.4 In Berg vs. Magdalena,5 the Supreme Court, citing jurisprudence in the United Book IV, Title 10 of the 1950 Civil Code. Shoemaker vs. La Tondeña, 68 Phil. 24. 3 Air France vs. Carrascoso, G.R. No. L-21438, September 28, 1966, 18 SCRA 155. 4 Berg vs. Magdalena Estate, G.R. No. L-3784, October 17, 1952, 92 Phil. 110. 1 2

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States, discussed the nature of a memorandum or note, thus: Before we proceed, it is important to state at this juncture some principles governing the meaning, extent and scope of the rule underlying the statute of frauds relative to the note or memorandum that may serve as proof to determine the existence of an oral contract or agreement contemplated by it, and for our purpose, it suffices for us to quote the following authorities: “No particular form of language or instrument is necessary to constitute a memorandum or note in writing under the statute of frauds; any document or writing, formal or informal, written either for the purpose of furnishing evidence of the contract or for another purpose, which satisfies all the requirements of the statute as to contents and signature, as discussed respectively infra Secs. 178-200, and infra Secs. 201-215, is a sufficient memorandum or note. A memorandum may be written as well with lead pencil as with pen and ink. It may also be filled in on a printed form.” (37 C.J. S., 653-654) “The note or memorandum required by the statute of frauds need not be contained in a single document, nor, when contained in two or more papers, need each paper be sufficient as to contents and signature to satisfy the statute. Two or more writings properly connected may be supplied or rendered certain by another, and their sufficiency will depend on whether, taken together, they meet the requirements of the statute as to contents and the requirements of the statute as to signature, as considered respectively (infra Secs. 179-200 and Secs. 201-215) “Paper connected. — The rule is frequently applied to two or more, or a series of, letters or telegrams, or letters and telegrams sufficiently connected to allow their consideration together; but the rule is not confined in its application to letters and telegrams; any other documents can be read together when one refers to the other. Thus, the rule has been applied so as to allow the consideration together, when properly connected, of a letter and an order of court, a letter and order for goods, a letter and a deposition, letters or telegrams and undelivered deeds, wills, correspondence and related papers, a check and a letter, a receipt and a check, deeds and a map, a memorandum of agreement and a deed, a memorandum of sale and an abstract of title, a memorandum of sale and a will, a memorandum of sale and a receipt, and a contract, deed, and instructions to a depositary in escrow. The number of papers connected to make out a memorandum is immaterial.” Id. G.R. No. L-23351, March 13, 1968, 22 SCRA 1000. 7 G.R. No. 118509, December 1, 1995, 66 SCAD 136, 250 SCRA 523. 5 6

Arts. 1403-1404

Contracts Unenforceable Contracts (n)

451

Thus, in Paredes vs. Espino,6 where the record shows that the defendant wrote the plaintiff a letter stating that he (the defendant) accepted the offer of the plaintiff as to the price and the object of the contract and that this was followed up by telegrams, the Supreme Court said that the documents presented constituted adequate memoranda of the transaction and therefore was removed from the operation of the Statute of Frauds. Also in Limketkai Sons Milling, Inc. vs. Court of Appeals,7 it was held: Moreover, under Article 1403 of the Civil Code, an exception for the unenforceability of contracts pursuant to the Statute of Frauds is the existence of a written note or memorandum evidencing the contract. The memorandum may be found in several writings, not necessarily in one document. The memorandum or memoranda is/are evidence that such a contract was entered into. xxx

xxx

xxx

While there is no written contract of sale of the Pasig property executed by BPI in favor of plaintiff, there are abundant notes and memoranda extant in the records of this case evidencing the elements of a perfected contract. There is Exhibit P, the letter of Kenneth Richard Awad addressed to Roland Aromin, authorizing the sale of the subject property at the price of P1,000.00 per square meter giving 2% commission to the broker and instructing that the sale be on cash basis. Concomitantly, on the basis of the instruction of Mr. Awad, (Exh. P), an authority to sell (Exh. B), was issued by BPI to Pedro Revilla, Jr., representing Assetrade Co., authorizing the latter to sell the property at the initial quoted price of P1,000.00 per square meter which was altered on an unaccepted offer by Technoland. After the letter authority was issued to Mr. Revilla, a letter authority was signed by Mr. Aromin allowing the buyer to enter the premises of the property to inspect the same (Exh. C). On July 9, 1988, Pedro Revilla, Jr., acting as agent of BPI, wrote a letter to BPI informing it that he had procured a buyer in the name of Limketkai Sons Milling, Inc. with offices at Limketkai Bldg., Greenhills, San Juan, Metro Manila, repre-sented by its Exec. Vice President, Alfonso Lim (Exh. D). On July 11, 1988, the plaintiff, through Alfonso Lim, wrote a letter to the bank, through Merlin Albano, confirming their transaction regarding the purchase of the subject property (Exh. E). On July 18, 1988, the plaintiff tendered upon the officials of the bank a check for P33,056,000.00 covered by Check No. CA510883, dated July 18, 1988. On July 1, 1988, Alfoso Vda. De Espiritu vs. Court of First Instance, G.R. No. L-30486, October 31, 1972, 47 SCRA 354. 9 Iñigo vs. Estate of Maloto, G.R. No. L-24383, September 28, 1967, 21 SCRA 8

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Zamora instructed Mr. Aromin in a letter to resubmit new offers only if there is no transaction closed with Assetrade Co. (Exh. S). Combining all these notes and memoranda, the Court is convinced of the existence of perfected contract of sale.

Clearly the Statute of Frauds only applies to executory contracts and not to contracts which have been consummated8 already or those which have been totally or partially performed.9 Hence, a contract of sale of real property in installment is not within the Statute of Frauds, even though it is not in writing, if the first installment has already been paid. In such a case, there has already been a partial performance of the contract by the buyer. In Babao vs. Perez,10 it has also been held that an oral contract partially performed must be proven clearly in court, thus: Assuming arguendo that the agreement in question falls also under paragraph (a) of Article 1403 of the new Civil Code, i.e., it is a contract or agreement for the sale of real property or of an interest therein, it cannot also be contended that that provision does not apply to the present case for the reason that there was part performance on the part of one of the parties. In this connection, it must be noted that this statute is one based on equity. It is based on equitable estoppel or estoppel by conduct. It operates only under certain specified conditions and when adequate relief at law is unavailable (49 Am. Jur., Statute of Frauds, Section 422, p. 727). And one of the requisites that need be present is that the agreement relied on must be certain, definite, clear, unambiguous and unequivocal in its terms before the statute may operate. Thus, the rule on this matter is as follows: “The contract must be fully made and completed in every respect except for the writing required by the statute, in order to be enforceable on the ground of part performance. The parol agreement relied on must be certain, definite, clear, unam-biguous, and unequivocal in its terms, particularly where the agreement is between parent and child, and be clearly established by the evidence. The requisite of clearness and definiteness extends to both the terms and the subject matter of the contract. Also, the oral 246, citing Almirol vs. Monserrat, 48 Phil. 67; Robles vs. Lizarraga Hermanos, 50 Phil. 387; Diama vs. Macalibo, 74 Phil.70; Arroyo vs. Azur, 76 Phil. 493; Facturan vs. Sabanal, 81 Phil. 512; Carbonnel vs. Poncio, 55 O.G. No. 14, Page 2415; Soriano vs. Heirs of Magali, L-15133, July 31, 1963. 10 G.R. No. L-8334, December 28, 1957, 102 Phil. 756. 11 Paterno vs. Jao Yan, G.R. No. L-12218, February 28, 1961, 1 SCRA 631; Khan vs. Asuncion, April 27, 1967, 19 SCRA 996; Ortega vs. Leonardo, 55 O.G. 8456. 12 G.R. No. L-12218, February 28, 1961, 1 SCRA 631. 13 Western Mindanao Lumber Co. vs. Medalla, 79 SCRA 708; Cruz vs. J.M.

Arts. 1403-1404

Contracts Unenforceable Contracts (n)

contract must be fair, reasonable, and just in its provisions for equity to enforce it on the ground of part performance. It would be inequitable to enforce the oral agreement, or if its specific enforcement would be harsh or oppressive upon the defendant, equity will withhold its aid. Clearly, the doctrine of part performance taking an oral contract out of the statute of frauds does not apply so as to support a suit for specific performance where both the equities and the statute support the defendant’s case.” (49 Am. Jur., p. 729) The alleged agreement is far from complying with the above requirement for, according to the complaint, Santiago Babao bound himself to convert a big parcel of forest land of 156 hectares into a veritable farm planted to coconuts, rice, corn and other crops such as bananas and bamboo trees and to act as administrator of said farm during the lifetime of Celestina Perez, while the latter in turn bound herself to give either to Santiago or his wife 1/2 of the land as improved with all the improvements thereon upon her death. This agreement is indeed vague and ambiguous for it does not specify how many hectares was to be planted to rice and corn, and what portion to bananas and bamboo trees. And as counsel for appellants puts it, “as the alleged contract stands, if Santiago Babao should plant one-half hectare to coconuts, one-half to rice, and another half hectare to corn, and the rest to bananas and bamboo trees, he would be entitled to receive one-half of 156 hectares, or 78 hectares, of land for his services. That certainly would be unfair and unheard of; no sane property owner would enter into such contract. It costs much more time, money and labor to plant coconut trees than to plant bananas and bamboo trees; and it also costs less to convert forest land to rice and corn land than to convert it into a coconut plantation. On the part of Celestina Perez, her promise is also incapable of execution. How could she give and deliver one-half of the land upon her death?” The terms of the alleged contract would appear more vague if we consider the testimony of Carlos Orense who claimed to have been present at the time the alleged agreement was made between Celestina Perez and Santiago Babao for apparently the same does not run along the same line as the one claimed by appellee. This is what Orense said: “You, Santiago, leave the Llana estate and attend to this lupang parang. Have it cleared and planted to coconuts, for that land will eventually fall in your hands” (as translated from Tagalog), which runs counter with the claim of appellee. The agreement being vague and ambiguous, the doctrine of part performance cannot therefore be invoked to take this case out of the operation of the statute.

453

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Arts. 1403-1404

“Obviously, there can be no part performance until there is a definite and complete agreement between the parties. In order to warrant the specific enforcement of a parol contract for the sale of land, on the ground of part performance, all the essential terms of the contract must be established by competent proof, and shown to be definite, certain, clear, and unambiguous. “And this clearness and definiteness must extend to both the terms and the subject-matter of the contract. “The rule that a court will not specifically enforce a contract for the sale of land unless its terms have been definitely understood and agreed upon by the parties, and established by the evidence, is especially applicable to oral contracts sought to be enforced on the ground of part performance. An oral contract, to be enforced on this ground must at least have that degree of certainty which is required of written contracts sought to be specifically enforced. “The parol conract must be sufficiently clear and definite to render the precise acts which are to be performed thereunder clearly ascertainable. Its terms must be so clear and complete as to allow no reasonable doubt respecting its enforcement according to the understanding of the parties.” (101 A.L.R., pp. 950-951) “In this jurisdiction, as in the United States, the existence of an oral agreement or understanding such as that alleged in the complaint in the case at bar cannot be maintained on vague, uncertain, and indefinite testimony, against the reasonable presumption that prudent men enter into such contracts will execute them in writing, and comply with the formalities prescribed by law for the creation of a valid mortgage. But where the evidence as to the existence of such an understanding or agreement is clear, convincing, and satisfactory, the same broad principles of equity operate in this jurisdiction as in the United States to compel the parties to live up to the terms of their contract.” (Cuyugan vs. Santos, 34 Phil. 100, 101)

Partial performance can also be manifested when improvements are made on the subject property pursuant to the contract, rentals are paid, taking possession on the basis of a verbal contract to purchase

Arts. 1403-1404

Contracts Unenforceable Contracts (n)

455

the property, payment of taxes and relinquishment of rights, tender of payment coupled with other acts indicating partial performance.11 In Paterno vs. Jao Yan,12 the Supreme Court applied the rule on partially executed contract as being beyond the ambit of the Statute of Frauds, thus: At the trial, defendant offered testimonial evidence to support his claim that the original written contract had been subsequently modified by oral agreement between the parties in the manner alleged in the answer; he also submitted documents filed with the City Engineer’s office, regarding the semi-concrete building, conformably to the modificatory oral agreement. The Court below sustained the plaintiff’s objections to such evidence and exclude it on the ground that its acceptance was barred by the Statute of Frauds [Rule 123, Sec. 21(a) and (c), Rules of Court], and rendered judgment for the lessors as prayed for in the amended complaint. Defendant duly appealed. We are of the opinion that the lower Court committed reversible error in excluding appellant’s oral evidence. It is an established doctrine in this jurisdiction that partial performance takes an oral contract out of the scope of the Statute of Frauds (27 C.J. 206; Hernandez vs. Andal, 78 Phil. 196). With particular reference to contracts over real property, this Court has decided that where an oral contract of sale has been partially executed by payment of the price, oral testimony is admissible to evidence the existence of the contract (Almiraol and Carino vs. Monserrat, 48 Phil. 67). The rule is entirely applicable to contract of lease, and the weight of authority supports the doctrine that — “The taking of possession by the lessee and the making of valuable improvements, and the like, on the faith of the oral agreement, may operate to take the case out of the prohibition of the statute, for it would be a gross fraud to permit the lessor in such a case to avoid the lease.” (49 Am. Jur., p. 809, Sec. 106, and cases cited)

It is likewise the rule that — “The expenditure of money by a tenant in making improvements on the premises on the faith of an oral agreement for a lease for a further term, may be viewed not only as constituting in itself an act of part performance but as furnishing strong if not conclusive evidence that possession is continued

Tuazon, 76 SCRA 543. 14 Rosencor Development Corporation vs. Inquing, G.R. No. 140479, March 8, 2001, 145 SCAD 484.

456

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Arts. 1403-1404

under the oral contract and not as a tenant holding under the original lease.” (49 Am. Jur. 810; 33 A.L.R. 1489, 1501). Accordingly, in Read Drug & Chemical Co. vs. Nattans, 129 Md. 67, 98 Atl. 158, it was held that a parol agreement of a landlord to extend a lease for a specified term of years and a specified rental, provided the tenant made certain extensive repairs to the property, was enforceable notwithstanding the Statute of Frauds, where the tenant fully performed his part of the agreement. This is precisely the case before us. The written contract of lease called for the erection, by the tenant, of a building of strong wooden materials, yet it is not contested that what he actually did construct on the leased lot was a semi-concrete edifice, at a much higher cost. Since modification is plainly referable to the oral agreement as claimed, and the same can not be explained on the record except as executed in reliance of the verbal modification of the original lease, and in performance thereof, as contended by the appellant, we are of the opinion that the Court below should have accepted and taken into account the offered testimony on the extension and modification of the original terms of the lease, instead of declaring the same unenforceable under the Statute of Frauds. x x x

The enumeration of the contracts under Article 1403(2) that must comply with the Statute of Fraud is exclusive.13 This means that any other contract not included in the enumeration is not within the operation of the Statue of Frauds. Thus, “ the right of first refusal” granted in a contract is not included.14 The right of first refusal is the right given to a person to be preferred in the sale of a property in case the owner decides to sell the same. Such right of first of first refusal is not even a contract but merely a grant contained in a contract.15 Likewise, the setting up of boundaries,16 the oral partition of real property,17 and an agreement creating a right of way18 do not fall under the Statute of Frauds. The first contract within the operation of the Statute of Frauds is an agreement that by its terms is not to be performed within a year from the making thereof. Hence, an agreement orally entered into in 1987, for a person to commence the painting of a portrait in 1989, cannot be enforced unless such contract is in writing. Also, if a contract stipulates that a certain type of activity shall be commenced within the year from the making of the contract, but can only be Ibid. Hernandez vs. Court of Appeals, 160 SCRA 321. 17 Simprosa Vda. De Espina vs. Abaya, 196 SCRA 312. 18 Western Mindanao Lumber Co. vs. Medalla, 79 SCRA 708. 19 Babao vs. Perez, G.R. No. L-8334, December 28, 1957, 102 Phil. 756. 15 16

Arts. 1403-1404

Contracts Unenforceable Contracts (n)

457

fully accomplished after one year from the same, it will fall within the Statute of Frauds. Thus, if the parties in January 1997 sign a contract for one of them to build a seven-story building to commence on November 1997, it cannot obviously be fully finished by January 1998. It can only be finished beyond the said period, and therefore this contract falls within the Statute of Frauds. However, if a contract is entered into where one party fully completed his undertaking within one year and the other party could only finish his undertaking beyond one year, the said contract shall be considered as removed from the ambit of the Statute of Frauds.19 Hence, in the example given, if one of the parties already fully paid the builder of the building the complete consideration for the construction of the same six months after the making of the contract, such contract does not anymore fall within the statute. In the case of Babao vs. Perez,20 the Supreme Court stated the rule thus: x x x Thus, the rule on this point is well settled in Corpus Juris in the following wise: “Contracts which by their terms are not to be performed within one year, may be taken out of the statute through performance by one party thereto. All that is required in such case is complete performance within one year by one party, however many years may have to elapse before the agreement is performed by the other party. But nothing less than full performance by one party will suffice, and it has been held that, if anything remains to be done after the expiration of the year besides the mere payment of money, the statute will apply. (Italics supplied). x x x “When, in an oral contract which, by its terms, is not to be performed within one year from the execution thereof, one of the contracting parties has complied within the year the obligations imposed on him by said contract, the other party cannot avoid the fulfillment of those incumbent on him under the same contract by invoking the statute of frauds because the latter aims to prevent and not to protect fraud.” (Shoemaker vs. La Tondeña, Inc., 68 Phil. 24) “The broad view is that the statute of fraud applies only to agreements not to be performed on either side within a year from the making thereof. Id. Arthur Corbin, Corbin on Contracts, One Volume Edition, 1952, St. Paul Publishing Co., Page 399. 22 Id., 400. 23 Id. 24 Id., 399. 20

21

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Arts. 1403-1404

Agreements to be fully performed on one side within the year are taken out of the operation of the statute.” (National Bank vs. Philippine Vegetable Oil, 49 Phil. 857, 858)

If the contract stipulates that the contract shall be executed immediately upon the signing of the agreement, although it has been reset to another date by agreement of the parties so that it can be finished only beyond one year, the contract is not within the statute. In any event, if initially, a contract should have been finished in one year, but due to the postponement agreed upon by the parties, the project could only be finished beyond one year from the date of the making of the contract, such contract does not fall under the Statute of Frauds. The second case, which must comply with the Statute of Frauds, is a special promise to answer for the debt, default or miscarriage of another. The word “special promise” is meant to limit the “statutory provision to express and tacit promises in fact made and does not apply in cases where the duties are created by law without any promissory assent.”21 A promise is not within this clause of the statute unless there is an obligation of some third person to the promisee, either already existing or subsequently existing.22 The promise must be made to the promisee and not to the debtor.23 The phrase “debt, default and miscarriages” includes all legal obligations under which a person can come, contractual or non-contractual, re-quiring a money payment or any other kind of performance.24 The commitment of the promisor to pay the debt of another should not immediately discharge the debtor from his debt at the time of the making of the promise; otherwise, there will be a novation which will not fall under the Statute of Frauds.25 The promise must be in the nature of a collateral or subsidiary obligation and not an original one. Hence, if one merely promises to pay the obligation of another once the debt becomes due, such promise does not fall under the Statute of Frauds. This is in effect an indemnity agreement, where the promissor is a principal and original debtor. However, if the promissor will pay only if the principal debtor cannot pay and this promise is not in writing, such a promise falls within the Statute of Frauds, and therefore must be in writing to be enforceable. Id., 404. Lawrence P. Simpson, Handbook of the Law of Contracts, St. Paul Publishing Co., 1954, Page 160. 27 Id., Page 169. 25 26

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459

It is very clear that a promisor cannot be made to answer for the debt or default of another unless someone else is primarily liable to the creditor. It is in this sense that the phrases “collateral obligation” and “original obligation” are properly used. If S promises C to answer for P’s debt, whether S’s promise is made simultaneously with the inception of P’s obligation and for the same consideration, or whether it is made after P had become indebted and for a separate consideration, S’s obligation is collateral to P’s and so within the statute unless some other factors are present. On the other hand, if no obligation exists between P and C, S’s promise is said to be original, “i.e., not within the statute, because he cannot be answering for another’s default. Here the distinction between original and collateral promises is properly made; but even here it expresses merely a result, and not a test of when a promise is or is not within the statute.26

In case the obligation is joint, there is no “special promise” as contemplated in the Statute of Frauds. However, in solidary obligations, it will depend on whether or not the promisor knew that only one of the solidary debtors will truly be benefited by the payment, thus: One is not considered as promising to pay the debt of another within the meaning of the statute, even though performance by him will operate to extinguish another’s debt, where his performance will also extinguish the promisor’s own “debt.” An obligation incurred jointly by two persons is not considered an undertaking by one to answer for the debt of the other, for the reason that only one obligation is created, although two persons are liable thereon. In joint promises there are not two obligations, one promissory and one debt, but only one obli-gation, the debt, for which two people are jointly liable. Therefore, the promise of the person who is not to receive the goods or the loan is not a “promise to answer for the debt” of the other person who is to receive them, but a promise to answer for his own debt, and this has been the conclusion that has always been reached by the courts. For example, P wishes to purchase a horse from C, but knowing that C will not sell on his credit alone, P induces S to become a surety. If P and S orally say to C, “we pro-mise to pay you $200 in six months,” and C delivers the horse to P, even though C knows that P is to own the horse and that S is only acting as surety, since the form of the promise is joint, the law is that only one obligation results, P and S being jointly lia-ble for a single G.R. No. 5447, March 1, 1910, 15 Phil. 167. Executive Order No. 209 as amended effective as of August 3, 1988. 30 Article 77 of the Family Code. 31 Hermosisima vs. Court of Appeals, G.R. No. L-14628, September 30, 1960. 28 29

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debt. The defense of the statute of frauds by S in a suit by C on the promise would be bad in law, for S is as much a debtor to C as is P even though as between P and S it was un-derstood that P was to have the horse and even though C knew this. Although the promise of S is a promise to pay P’s debt, in a certain sense, since payment by S in accordance with his promise extinguishes C’s claim against P as well as against S, yet it is also a promise to pay his own debt. According to the settled interpretation, the statute is inapplicable to a promise where its form and consideration for it make the promisor a debtor. Where the promises are not in form joint but are several or joint and several, more than one obligation results. Here the question in whose favor the consideration is to inure becomes determinative of whether the statute applies. If both promisors are the buyers or the borrowers, they both become debtors and their oral promises are as binding as their written ones would be. But if one of several promisors is to have the purchased goods or the borrowed money, the others lending their credit as security, and this is known to all parties, the latter are “answering for the debt of another within the statute.” This is just as true where the promise of the one who is merely lending his credit is in terms conditioned upon default by the one for whose benefit the consideration inures. A several promise of suretyship is as much within the statute of frauds as a promise of guaranty. So in the above illustration, if P and S say: “We and each of us promise to pay $200 in six months,” and P is to own the horse to the knowledge of C, the promises are joint and several, S is a surety for S’ debt and his defense of the statute of frauds is good.27

In Paul Reiss, et al. vs. Jose M. Memije,28 the Supreme Court also had occasion to explain the type of collateral contract which falls under the Statute of Frauds. The pertinent portion of the decision is as follows: Defendant appellant entered into a contract with one Buenaventura Kabalsa for the repair of a house in the City of Manila. The contractor undertook to furnish the necessary materials, including a considerable amount of lumber, to be used in the repairs. The contractor being a man of no commercial standing in the community was unable to secure credit therefor, and was compelled to pay cash for all purchases. Having no money and no credit he was unable to continue the purchase of the necessary lumber, plaintiffs, with whom he was dealing, absolutely refusing to allow any lumber to leave their yard without payment in advance. The work on the house being delayed for the lack of the necessary materials, defendant accompanied

Martinez vs. Court of Appeals, G.R. No. 123547, May 21, 2001, 148 SCAD 666.

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the contractor to plaintiff’s lumber yard, and after satisfying plaintiffs as to his own financial responsibility, and that as a property owner and an attorney in active practice in the City of Manila, he was good for the amount of lumber needed in the repair of his house, he entered into an agreement with them whereby they were to deliver the necessary lumber to the contractor for use in the repair of his house. In pursuance of and in accordance with the directions of the defendant, plaintiffs delivered to Kabalsa a considerable amount of lumber which was used in the repairs upon defendant’s house, and judgment in this action was rendered in favor of the plaintiffs for the proven amount of the unpaid balance of the purchase price of this lumber. xxx

xxx

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Section 335 of Act No. 190 is as follows:

“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 can not be received without the writing, or secondary evidence of its contents: ***** “2. A special promise to answer for the debt, default, or miscarriage of another;” ***** An immense amount of litigation has arisen in England and the United States over the construction of similar provisions which are found in most, if not all, of the so-called statutes of fraud which have been enacted in those jurisdictions, and many courts and text writers have acknowledged their inability to find anything like uniform rules of construction in the conflicting decisions which have been rendered, applying the statute to the infinite variety of facts which have presented themselves; so that it has been said by some that the law upon the subject is in a state of hopeless confusion. 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 33

Cenido vs. Apacianado, G.R. No. 132474, November 19, 1999, 115 SCAD 798,

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collateral to the agreement of another and the promisor becomes thereby merely a surety, the promise must be in writing. (Gull vs. Lindsay, 4 Exch. 45; and other cases cited under note 2, p. 906, Encyclopedia of Law, Vol. 29) 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 a 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 to be collateral, or promises deemed prima facie collateral may be adjudged original.” (Encyclopedia of Law, 2nd ed., Vol. 29, p. 207 and many cases there cited.) If goods are sold upon the sole credit and responsibility of the party who makes the promise, then, even though they be delivered to a third person, there is no liability of the third person to which that of the party promising can be collateral, and consequently such a promise to pay does not require a memorandum in writing; and on the same principle it has been held that when one advances money at the request of another (on his promise to repay it) to pay the debt of a third party, as the payment creates no debt against such third party, not being made at all upon his credit, the liability of the party on whose request and promise it was made is original and not collateral, and not within the Statute of Frauds. (Pearce vs. Blagrave, 3 Com. Law, 338; Prop’rs of Upper Locks vs. Abbot, 14 N. H., 157.) But it has been said that if the person for whose benefit the promise is made was himself liable at all, the promise of the defendant must be in writing. (Matson vs. Wharam, 2 T.R., 80) And the text writers point out that if this rule be understood as confined to cases where a third party and the defendant are liable in the same way, and to do the same thing, one as principal and the other as surety, it may be accepted as the uniform doctrine of all the cases both in England and in the United States. (Browne on the Statute of Frauds, par. 197, and cases there cited.) In such cases, the defendant is said to come in aid to procure the credit to be given to the principal debtor, and the question, therefore, ultimately is “upon whose credit the goods

Arts. 1403-1404

Contracts Unenforceable Contracts (n)

were sold or the money advanced,” or whatever other thing done which the defendant stands in the relation to the third party of surety to principal “if any credit at all be given to the third party, the defendant’s promise is required to be in writing as collateral.” (Browne on the Statute of Frauds, p. 227, and notes 2 and 4) But it must be clearly recognized that these principles are applicable only where the parties are liable in the same way to do the same thing, one as principal and the other as surety, for if the credit is given to both jointly, since neither can be said to be surety for the other to the creditor, their engagement need not be in writing. As has been said before, it is frequently a matter of difficulty to determine to whom the credit has actually been given, whether to the defendant alone, in which case the debt is his own and his promise is good without writing; or in part to the third party, in which case the defendant’s promise being collateral to and in aid of the third party’s liability, requires a writing to support it, or to both jointly, in which case as has been said their engagement need not be in writing. This must be determined from the language and expressions used by the parties promising, and from an examination of the circumstances showing the understanding of the parties. The unexplained fact that charges were made against a third party on the plaintiff’s books, or that the bill was presented to the original debtor in the first instance, unqualified by special circumstances tends to prove that the credit was given in whole or in part to him, and that the defendant’s promise is a collateral one. (Larson vs. Wyman, 14, Wend, [N.Y.], 246; Pennell vs. Pentz, 4 E.D. Smith [N.Y.], 639) But it is evidently quite impossible to specify any one fact or set of facts on which the question as to whom the plaintiff gave credit is to be determined. In the language of Buchanan, C.J., in Elder vs. Warfield (7 Harris & J. [Md.] 937), “the extent of the undertaking, the expression used, the situation of the parties, and all the circumstances of the case should be taken into consideration.” Application of these principles has been made in many cases where owners of buildings going up under contract enter into agreements upon which subcontractors or others have continued to supply labor or material after the principal contractor has become either actually or probably unable to pay. In these cases, the question is whether the services for which the action is brought against the owner of the building were performed solely upon the credit of his promise, to be himself responsible and to pay for the materials and labor furnished, or whether the subcontractors and laborers continued to furnish labor and materials to the principal contractor relying upon his obligation guaranteed by the promise of the owner. (Gill vs. Herrick, 111 Mass., 501; Walker vs. Hill, 119 Mass., 249; Clifford vs. Luhring, 69 III., 401; Rawson vs. Springteen, 2 Thomp. & C. [N.Y.], 416;

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Belknap vs. Bender, 6 Thomp & C. [N.Y.], 611; Jefferson County vs. Slagle, 66 Pa. St., 97; Haverly vs. Mercur, 78 Pa. St., 257; Weyand vs. Critchfield, 3 Grant [Pa.] 113; Lakeman vs. Mountstephen, L. R. 7 H. L., 17) Taking into consideration all the circumstances of the case at bar, we are satisfied that the credit for the lumber delivered by the plaintiffs to defendant’s contractor was extended solely and exclusively to the defendant under the verbal agreement had with him, and therefore, that the provisions of the statute did not require that it should be made in writing. Defendant admitted on the stand that his contractor had no commercial credit or standing in the community, and it appears that plaintiffs, after investigation, absolutely refused to extend him any credit whatever upon any conditions and that the defendant was well aware of that fact. From the testimony of the contractor himself, it seems clear that when the agreement for the delivery of lumber was made, the credit was extended not to the contractor but to the defendant. It appears that both plaintiffs and defendant exercised special precautions to see that all the lumber was delivered on defendant’s lot, and that before each bill of lumber was delivered, defendant carefully examined the invoice, which by agreement was submitted to him, and that no lumber was delivered without his approval. The precise language in which the verbal agreement was made does not appear from the evidence, and while it is true that one of the plaintiffs in his deposition, made in the United States, refers to the agreement as one whereby defendant “guaranteed” payment for the lumber, we are satisfied from all the evidence that the word was not used by this witness in its technical sense, and that he did not mean thereby to say that defendant guaranteed payment by the contractor, but rather that after satisfying plaintiffs as to his own financial responsibility, he obligated himself to pay for the lumber delivered to his contractor for use in his house. The only evidence in the whole record which tends to put our conclusion in this regard in doubt, is the testimony of plaintiffs’ acting manager during plaintiffs’ absence in the United States who stated that he sent a statement of account and a bill for the lumber to the contractor; but this fact, which under ordinary circumstances would be strong evidence that the credit was originally extended to the contractor and merely guaranteed by the defendant, was satisfactorily and sufficiently explained by proof that the plaintiff were compelled to leave for the United States quite unexpectedly, with no opportunity to go over the accounts with their acting manager, who was left in charge, so that the latter having no knowledge whatever as to plaintiffs’ agreement with defendant, and learning that lumber had been delivered to the contractor,

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supposed that it had been sold to him, and only discovered his mistake on later investigation and correspondence with his principals, after the contractor had notified him as to the true nature of the transaction. The judgment appealed from should be affirmed with the costs of this instance against the appellant. So ordered.

The third contract that must comply with the Statute of Frauds is an agreement made in consideration of marriage other than a mutual promise to marry. Hence, ante-nuptial agreements or marriage settlements must be in writing to be enforceable. However, this rule has been modified by Article 77 of the Family Code,29 which provides that ante-nuptial agreements or marriage settlements or any modifications thereof shall be in writing, signed by the parties and executed before the marriage.30 This legal requirement is mandatory in nature. Hence, violation of this mandatory provision of the Family Code will make the marriage settlement not only unenforceable but null and void pursuant to Article 5 of the Civil Code, which pertinently provides that acts executed against the provision of mandatory laws shall be void. On the other hand, a mutual promise to marry will not fall under the Statute of Frauds because a breach of such promise per se is not actionable.31 The fourth contract within the Statute of Frauds is an agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos. Hence, a contract of sale of a fountain pen worth P5,000.00 must be in writing to be enforceable. However, if one has paid the said pen, the contract has already been partially performed and therefore it is removed from the ambit of the Statute of Frauds. In an auction sale, the recording of the sale in the sales book is enough memorandum so as to remove the contract from the Statute of Fraud. The fifth contract within the Statute of Frauds is an agreement for the leasing for a longer period than one year or the sale of real property or an interest therein. Thus, a contract of lease for two years must be in writing to be enforceable. A sale of real estate must likewise be in writing to be enforceable, but it need not be notarized32 to be effective between the parties. Notarization is needed only to bind third persons, and so that the proper registry of property can accept the deed or contract for registration.33 318 SCRA 688. 34 G.R. 118509, December 1, 1995, 66 SCAD 136, 250 SCRA 523. 35 G.R. No. L-29264, August 29, 1969, 29 SCRA 419.

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The sixth contract within the Statute of Frauds is a representation as to the credit of a third person. Under Article 21 of the Civil Code, it is provided that “every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due and observe honesty and good faith.” A representation therefore of the creditworthiness of another, which turns out to be untrue may be a cause of action for damages if the same were given in bad faith. But if the untrue representation has been done in good faith and the other party has all the opportunity to investigate the truth of the same, no damages can be awarded. Because the nature of the liability really depends on the intent of the representation, which is not an easy task to prove and which is susceptible to error, the law requires that the proof of such repre-sentation must also be in writing. Thus, if A represents to G that X is a millionaire who happens to be without cash at the moment and G lends X money, such representation by A must be in writing. Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them. In Limketkai Sons Milling, Inc. vs. Court of Appeals,34 the Supreme Court applied and explained the rule that contracts infringing the Statute of Frauds are ratified by the failure to object to the presentation of oral evidence thus: In the case at bench, the allegation of NBS that there was no concurrence of the offer and acceptance upon the cause of the contract is belied by the testimony of the very BPI official with whom the contract was perfected. Aromin and Albano concluded the sale for BPI. The fact that the deed of sale still had to be signed and notarized does not mean that no contract had already been perfected. A sale of land is valid regardless of the form it may have been entered into (Claudel vs. Court of Appeals, 199 SCRA 113, 119 [1991]). The requisite form under Article 1458 of the Civil Code is merely for greater efficacy or convenience and the failure to comply therewith does not affect the validity and binding effect of the act between the parties (Vitug, Compendium of Civil Law and Jurisprudence, 1993 Re-vised Edition, p. 552). If the law requires a document or other special form, as in the sale of real property, the contracting parties may compel each 36 Eusebio vs. Sociedad Agricola de Balarin, L-21519, March 31, 1966, 16 SCRA 569; Facturan vs. Sabayan, 81 Phil. 512; Almirol vs. Monserrat, 48 Phil. 67. 37 G.R. No. 23717, September 28, 1925, 48 Phil. 67. 38 G.R. No. L-4002, May 12, 1952, 91 Phil. 257.

Art. 1405

Contracts Unenforceable Contracts (n)

other to observe that form, once the contract has been perfected. Their right may be exercised simultaneously with action upon the contract (Article 1359, Civil Code). Regarding the admissibility and competence of the evidence adduced by petitioner, respondent Court of Appeals ruled that because the sale involved real property, the statute of frauds is applicable. In any event, petitioner cites Abrenica vs. Gonda (34 Phil. 739 [1916]) wherein it was held that contracts infringing the Statute of Frauds are ratified when the defense fails to object, or asks questions on cross-examination. The succinct words of Justice Araullo still ring in judicial cadence. As no timely objection or protest was made to the admission of the testimony of the plaintiff with respect to the contract; and as the motion to strike out said evidence came to late, and furthermore, as the defendants themselves, by the cross-questions put by their counsel to the witnesses in respect to said contract, tacitly waived their right to have it stricken out, that evidence, therefore, cannot be considered either inadmissible or illegal, and court, far from having erred in taking it into consideration and basing his judgment thereon, notwithstanding the fact that it was ordered to be stricken out during the trial, merely corrected the error he committed in ordering it to be so stricken out and complied with the rules of procedure hereinbefore cited. (at p. 748) In the instant case, counsel for respondents cross-examined petitioner’s witnesses at length on the contract itself, the purchase price, the tender of cash payment, the authority of Aromin and Revilla, and other details of the litigated contract. Under the Abrenica rule (reiterated in a number of cases, among them Talosig vs. Vda. De Nieba, 43 SCRA 472 [1972]), even assuming that parol evidence was initially inadmissible, the same became competent and admissible because of the crossexamination, which elicited evidence proving the evidence of a perfected contract. The cross-examination on the contract is deemed a waiver of the defense of the Statute of Frauds (Vitug, Compendium of Civil Law and Jurisprudence, 1993 Revised Edition, supra, p. 563). The reason for the rule is that as pointed out in Abrenica “if the answers of those witnesses were stricken out, the cross-

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examination could have no object whatsoever, and if the questions were put to the witnesses and answered by them, they could only be taken into account by connecting them with the answers given by those witnesses on direct examination.” (pp. 747-748)

In Rodriguez vs. Court of Appeals,35 where a particular sale was questioned and only receipts were introduced as evidence to prove the sale, without any showing in the said receipts of the basic elements of a contract, the Supreme Court nevertheless removed the transaction from the Statute of Frauds for failure of the other party to object to the presentation of oral evidence to prove the sale, thus: A legion of receipts there are of payments of the purchase price signed by Nieves Cruz. True, these receipts do not state all the basic elements of a contract of sale for they do not expressly identify the object nor fix a price or the manner of fixing the price. The parties, however, are agreed — at least the plaintiff has not questioned the defendants’ claim to this effect — that the object of the sale referred to in the receipts is Nieves Cruz’ share in the land she co-owned with her brother Emilio and that the price therefor is P1.60 per square meter. At all events, by failing to object to the presentation of oral evidence to prove the sale and by accepting from the defendants a total of P27,198.60 after January 5, 1959, the plaintiff thereby ratified the oral contract, conformably with Article 1405 of the Civil Code, and removed the partly executed agreement from the operation of the Statute of Frauds.

Another form of ratification removing the contract from the purview of the Statute of Frauds is when benefits are already obtained from the agreement. Thus, if A sold to G a particular real property and A benefited from the transaction by already obtaining the purchase price, the contract of sale of the real property can be enforced even if the same was not in writing. The Statute of Frauds may only be invoked in a case for violation of contracts or for specific performance. Hence, if the only purpose of the suit is to prove lawful possession of a real property for purposes of registration, the absence of a written evidence to prove such real interest over real property in order to prove violation of the Statute of Frauds cannot be invoked.36 Article 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.

Art. 1406

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469

When the agreements provided in Article 1403(2) are in writing and therefore enforceable, and the law requires that the said written document should be transformed into a public document for its registration in the Registry of Property, the contracting parties may compel each other to observe the form once the contract has been perfected. They may exercise this right simultaneously with the action upon the contract. In Almirol vs. Monserrat37 where by virtue of a verbal sale, the applicant came into actual possession of the land, and where said applicants sought the registration of the subject lot already in their possession, and where the oppositors claimed that oral proof of the contract cannot be adduced in court where the registration was being questioned, the Supreme Court held that, “as in this case, parol evidence of sale is adduced not for the purpose of enforcing performance thereof, but on the basis of the lawful possession of the applicants entitling them to have the land thereby sold registered in their name, the statute of fraud is not applicable.” In Pascual vs. Realty Investment, Inc.,38 a mere tenant in the subject property cannot invoke the doctrine in the Almirol case. Article 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception. In case both contracting parties are incapacitated, and the guardians of one of the incapacitated persons ratifies the contract, the same shall be transformed into a voidable or annullable contract. If ratification is made by the parents or guardian of both parties, the contract shall be completely valid as if it has not been visited by any defect or infirmity at all. Article 1408. Unenforceable contracts cannot be assailed by third persons.

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It is useless for a third person to assail an unenforceable contract as it cannot be executed anyway. Besides, they are not even parties to the contract.

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Chapter 9

VOID AND INEXISTENT CONTRACTS Article 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) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law. These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. A contract which is void is no contract at all. In De Leon vs. Court of Appeals,1 where the parties stipulated that, “in consideration for a peaceful and amicable termination of relations between the undersigned and her lawful husband,” the parties agreed to give some properties to the wife, monthly support for the children, and for the wife, to agree to a judicial separation of property plus the amendment of the divorce proceedings initiated by the wife in the United States to conform to the agreement, the Supreme Court sustained the lower court’s ruling that the agreement is contrary to law and Filipino morals and public policy, because the consideration of the agreement G.R. No. 80965, June 6, 1990, 186 SCRA 345.

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was the termination of the marriage by the parties, which they cannot do on their own and without any legal basis. In Gardner vs. Court of Appeals,2 where a contract purporting to be a sale of land was really without consideration, but was actually intended merely to protect a party to a joint venture for the cash advances he was to make for the realty subdivision that the parties wanted to put up, the Supreme Court ruled that the contract was absolutely simulated and therefore null and void. A similar finding was also stated in Carino vs. Court of Appeals.3 In Prudential Bank vs. Panis4 where a grantee of a government sales patent mortgaged the same within the prohibition provided by the Public Land Act that no encumbrance or alienation should be made of the property subject of the patent within 5 years from the issuance thereof, the Supreme Court ruled that the mortgage was null and void for being in violation of law. In Maharlika Publishing Corporation vs. Tagle5 where the wife of a GSIS official, acting for her husband who was an influential Division Chief of the GSIS, was allowed to bid on a foreclosed property, and where she eventually won the bidding, the Supreme Court declared the bidding and the contract of sale resulting therefrom as null and void as they violated Article 1491 of the Civil Code prohibiting public officers and employees from purchasing property under their administration in an auction sale. The Supreme Court pertinently said: A Division Chief of the GSIS is not an ordinary employee without influence or authority. The mere fact that he exercises ample authority with respect to a particular activity, i.e., retirement, shows that his influence cannot be lightly regarded. The point is that he is a public officer and his wife acts for and his name in any transaction with the GSIS. If he is allowed to participate in the public bidding of properties foreclosed or confiscated by the GSIS, there will always be the suspicion among other bidders and the general public that the insider official had access to information and connections with his fellow GSIS officials as to allow him to eventually acquire the property. It G.R. No. L-59952, August 31, 1984, 131 SCRA 585. G.R. No. L-47661, July 31, 1987, 152 SCRA 529. 4 G.R. No. L-50008, August 8, 1987, 153 SCRA 390; Heirs of Leandro Oliver vs. Court of Appeals, G.R. No. L-107069, July 21, 1994, 53 SCAD 453, 234 SCRA 367. 5 G.R. No. L-65594, July 9, 1986, 142 SCRA 553; Rubias vs. Batiller, G.R. No. L-35702, May 29, 1973, 51 SCRA 120. 2 3

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is precisely the need to forestall such suspicions and to restore confidence in the public service that the Civil Code now declares such transactions to be void from the beginning and not merely voidable (Rubias vs. Batiller, 51 SCRA 120). The reasons are grounded on public order and public policy. We do not comment on the motives of the private respondents or the officers supervising the bidding when they entered into the contract of sale. Suffice it to say that it falls under the prohibited transactions under Article 1491 of the Civil Code, and therefore, void under Article 1409.

In Cui vs. Arellano University6 where a law student scholar, who decided to move to another law school, was required to refund the amount of his free tuition fee based on a scholarship granted to him by the school on the basis of a contract, which he signed, stating that: “In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having refunded to the University the equivalent of my scholarship cash,” the Supreme Court ruled that the refund cannot be properly demanded because the waiver was against public policy and quoted the opinion of the Director of Private Schools, to wit: There is one more point that merits refutation and that is whether or not the contract entered into between Cui and Arellano University on September 10, 1951 was void as against public policy. In the case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: ‘In determining a public policy of the State, courts are limited to a consideration of the Constitution, the judicial decisions, the statutes, and the practice of government officers.’ It might take more than a government bureau or office to lay down or reestablish a public policy, as alleged in your communication, but courts consider the practices of government officials as one of the four factors in determining public policy of the state. It has been consistently held in America that under the principles relating to the doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold a transaction which in its object, operation, or tendency, is calculated to be prejudicial to the public welfare, to sound morality, or to civic honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heidng vs. Gallaghere, 64 LRA 811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real essence of scholarships and the motives which prompted this office to issue Memorandum No. 38, s. 1949, it should not have entered into a contract of waiver with Cui on September 10, 1951, which is a direct violation of our Memorandum and an open challenge to the authority of the G.R. No. L-15127, May 30, 1961, 2 SCRA 205.

6

474

Obligations and Contracts Text and Cases

Art. 1409

Director of Private Schools because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel vs. Monte de Piedad, Off. Gazette Supp., Dec. 6, 1941, p. 67 we read: ‘In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals or tends clearly to undermine the security of individual rights. The policy enunciated in Memorandum No. 38, 1949 is sound policy. Scholarships are awarded in recognition of merit and to keep outstanding students in school to bolster its prestige. In the understanding of that university scholarships award is a business scheme designed to increase the business potential of an educational institution. Thus, conceived it is not only inconsistent with sound policy but also good morals. But what is morals? Manresa has this definition. It is good customs; those generally accepted principles of morality which have received some kind of social and practical confirmation except in some private institutions as in Arellano University. The University of the Philippines which implements Section 5 of Article XIV of the Constitution with reference to the giving of free scholarships to gifted children, does not require scholars to reimburse the corresponding value of the scholarships if they transfer to other schools. So also with leading colleges and universities of the United States after which our educational practices or policies were patterned. In these institutions scholarships are granted not to attract and to keep brilliant students in school for their propaganda value but to reward merit or help gifted students in whom society has an established interest or a first lien.

In Marubeni Corporation vs. Lirag7 where a cosultancy agreement was obtained from a government agency through the use of influence of executive officials, the Supreme Court declared the contract void and stated: Any agreement entered into because of the actual or supposed influence which the party has, engaging him to influence executive officials in the discharge of their duties, which contemplates the use of personal influence and solicitation rather than an appeal to the judgment of the official on the merits of the object sought is contrary to public policy. Consequently, the agreement, assuming that the parties agreed to the consultancy, is null and void as against public policy. Therefore, it is unenforceable before a Court of Justice.

A stipulation in a contract prohibiting a mortgagor to sell the property mortaged is void as being contrary to the express provision 7 G.R. No. 130998, August 10, 2001, 152 SCAD 668. of Article 2130 Civil Code, which provides that9,“a stipulation 8 Litonjua vs. of L &the R Corporation, G.R. No. 130722, December 1999, 117 SCAD

Art. 1409

Contracts Void and Inexistent Contracts

475

forbidding the owner from alienating the immovable mortgaged shall be void.” However, a stipulation prohibiting the re-mortgage to another of the same property already mortgaged to the creditormortgagee is valid.8 The non-payment of the purchase price of a valid contract of sale is not among the instances where the law declares a contract null and void. At most, the non-payment gives a cause of action for rescission of the contract or specific performance on the part of the creditor.9 The defect in a void contract is permanent and incurable. Hence, no amount of subsequent actions of the parties can cure or ratify the defect or infirmity in a void contract. A void agreement will not be rendered operative by the parties’ alleged partial or full performance of their respective prestations.10 It produces no legal effects at all.11 A contract which the law denounces as void is necessarily no contract whatever, and the acts of the parties in an effort to create one can in no wise bring about a change of their legal status. The parties and the subject matter of the contract remain in all particulars just as they did before any act was performed in relation thereto.12

Thus, if A and V enter into a contract for the sale of opium, which A delivers but which V does not want to initially pay, the later payment of V does not make the contract valid. It is still void. Also in Arsenal vs. Intermediate Appellate Court,13 where a person in 1957 bought from a grantee of a homestead patent a property subject of the patent within the prohibitory period provided by law, which therefore made the same void as being against public policy, and where he was in possession of the said property even up to 1974 when the case was filed, the Supreme Court refused to award the property to the said individual even if another contract was executed after the prohibitory period ratifying the previous sale, considering that a void contract can never be confirmed nor ratified. Neither can the infirmity be cured by equity, thus: 74. Peñalosa vs. Santos, G.R. No. 133749, August 23, 2001. Chavez vs. PCGG, G.R. No. 130716, May 19, 1999, 106 SCAD 752, 307 SCRA

9

10

394. Ibid.; Yuchengco, Inc. vs. Velayo, 115 SCRA 307; Tongoy vs. Court of Appeals, 123 SCRA 99. 12 Development Bank of the Philippines vs. Court of Appeals, G.R. No. 110053, October 16, 1995, 65 SCAD 82, 249 SCRA 331. 13 G.R. No. L-66693, July 14, 1986, 143 SCRA 40. 14 E. Razon, Inc. vs. Philippine Ports Authority, G.R. No. L-75197, June 22, 1997, 11

476

Obligations and Contracts Text and Cases

Art. 1409

At first blush, the equities of the case seem to lean in favor of the respondent Suralta who, since 1957, has been in possession of the land which was almost acquired in an underhanded manner by the petitioners. We cannot however gloss over the fact that the respondent Suralta was himself guilty of trans-gressing the law. It is a long standing principle that equity follows the law. Courts exercising equity jurisdiction are bound by rules of law and have no arbitrary discretion to disregard them. Equitable reasons will not control against any well-settled rule of law or public policy. (McCurdy vs. County of Shiawassee, 118 N.W. 625). Thus equity cannot give validity to a void contract. If on the basis of equity, we uphold the respondent Suralta’s claim over the land which is anchored on the contracts previously executed we would in effect be giving life to a void contract. Lastly, in cases where the homestead has been the subject of void conveyances, the law still regards the original owner as the rightful owner subject to escheat proceedings by the State. In the Menil and Monzano cases earlier cited, this court awarded the land back to the original owner notwithstanding the fact that he was equally guilty with the vendee in circumventing the law. This is so because this Court has consistently held that “the pari delicto doctrine may not be invoked in a case of this kind since it would run counter to an avowed fundamental policy of the State, that the forfeiture of a homestead is a matter between the State and the grantee or his heirs, and that until the State had taken steps to annul the grant and asserts title to the homestead the purchaser is, as against the vendors or his heirs, no more entitled to keep the land than any intruder.” (Acierto, et al. vs. De los Santos, et al., 95 Phil. 887; De los Santos vs. Roman Catholic Church of Midsayap, et al.). x x x We see however, a distinguishing factor, in this case that sets it apart from the above cases. The original owners in this case, the respondent Palaos and his wife, have never disaffirmed the contracts executed between them and the respondent Suralta. More than that, they expressly sustained the title of the latter in court and failed to show any interest in recovering the land. Nonetheless, we apply our earlier rulings because we believe that as in pari delicto may not be invoked to defeat the policy of the State neither may the doctrine of estoppel give a validating effect to a void contract. Indeed, it is generally considered that as between parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or against public policy (19 Am. Jur. 802). It is not within the competence of any citizen to barter away what public policy by law seeks to preserve. (Gonzalo Puyat & Sons, Inc. vs. De los Amas and Alino, 74 Phil. 3).

Arts. 1410-1411

Contracts Void and Inexistent Contracts

477

Article 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. There is no need to judicially file an action to make the contract void. A case is filed merely to declare that the contract, which is already void, is in fact void.14 Thus, if A and B enter into a contract, where it is stipulated that, for a valuable consideration to be given by B, A is to construct a three-storey building in three days, such a contract is void because it contemplates an impossible service. B can just treat it as void even without a court action making such contract void. However, B can file a case to declare that the contract is void so that he can get back what he has given as valuable consideration to A. The filing of a case to declare the nullity of a void contract or to set up such a defense has no prescriptive period. It can be filed anytime. The law does not give any limitation as to when it should be filed or asserted as a defense. The doctrine of laches cannot even apply to resist an imprescriptible legal right, such as the right to file an action to declare a contract null and void.15 Considering that a void contract is inexistent, restitution should generally apply. It has been held in Development Bank of the Philippines vs. Court of Appeals16 that in a void contract, if both parties have no fault or are not guilty, the restoration of what was given by each of them to the other is consequently in order. This is because the declaration of nullity of a contract which is void ab initio operates to restore things to the state and condition which they were found before the execution thereof.

Article 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 par-ties

233 SCRA 515. 15 Heirs of Romana Injugtiro vs. Casals, G.R. No. 134718, August 20, 2001, 153 SCAD 421. 16 G.R. No. 110053, October 16, 1995, 65 SCAD 82, 249 SCRA 331. 17 Modina vs. Court of Appeals, G.R. No. 109355, October 29, 1999, 115 SCAD

478

Obligations and Contracts Text and Cases

Art. 1412

is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305) The rule enunciated in this article applies the maxim: Ex dolo malo non oritur actio and in pari delicto potior est conditio defendentis. The law will not aid either party to an illegal agreement; it leaves the parties where it finds them. If A and B enters into a contract whereby A is to kidnap X to be placed in the custody of B, and the car to be used for the kidnapping shall thereafter be given to A as the latter’s payment, the cause of the contract is clearly void and even constitutes a criminal offense. If A is successful in kidnapping X, and B does not give the car, A has no action against B for the delivery of the car. If B already delivers the car and A does not fulfill his obligation, B has no right to go against A. Clearly, both of them are in pari delicto. Both A and B shall be prosecuted for kidnapping, and the car will be disposed of as an instrument of the crime in accordance with the Revised Penal Code. Article 1411 and the subsequent Article 1412 do not apply to inexistent contracts.17 The in pari delicto doctrine only applies to contracts with illegal consideration or subject matter, whether the attendant facts constitute an offense or misdemeanor, or whether the consideration involved is merely rendered illegal.18 Thus, if a contract has absolutely no consideration at all, or there is total absence of consent, or there is absence of an object, such contract is really an inexistent contract and therefore the rule on pari delicto will not apply.19 Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the 130, 317 SCRA 696. 18 Ibid. 19 Ibid. 20 G.R. No. L-64693, April 27, 1984, 129 SCRA 79.

Art. 1412

Contracts Void and Inexistent Contracts

479

contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise. (1306) In Lita Enterprises, Inc. vs. Intermediate Appellate Court,20 the Supreme Court annulled all judicial proceedings of a claimant under a void contract, thus: Unquestionably, the parties herein operated under an arrangement, commonly known as the “kabit system,” whereby a person who has been granted a certificate of convenience allows another person who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege conferred by the government. Abuse of this privilege by the grantees thereof cannot be countenanced. The “kabit system” has been identified as one of the root causes of the pre-valence of graft and corruption in the government transportation offices. In the words of Chief Justice Makalintal, “this is a pernicious system that cannot be too severely condemned. It constitutes an imposition upon the good faith of the government.” Although not outrightly penalized as a criminal offense, the “kabit system” is invariably recognized as being contrary to public policy and, therefore, void and inexistent under Article 1409 of the Civil Code. It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but will leave them both where it finds them. Upon this premise, it was flagrant error on the part of both the trial and appellate courts to have accorded the parties relief from their predicament. Article 1412 of the Civil Code denies them such aid. x x x The defect of inexistence of a contract is permanent and incurable, and cannot be cured by ratification or by prescription. As this Court said in Eugenio v. Perfido, “the mere lapse of time cannot give efficacy to contracts that are null and void.” The principle of in pari delicto is well known not only in this jurisdiction but also in the United States where common law prevails. Under American jurisprudence, the doctrine is stated thus: “The proposition is universal that no action arises, in equity or at law, from an illegal contract; no suit can be main-tained for its specific performance, or to recover the property agreed to be sold or delivered, or damages for its violation. The rule has sometimes been laid down as though it was equally universal, that where the parties are in pari delicto, no affirmative relief of 21

G.R. No. L-45255, November 14, 1986, 145 SCRA 541.

480

Obligations and Contracts Text and Cases

Art. 1412

any kind will be given to one against the other.” Although certain exceptions to the rule are provided by law, We see no cogent reason why the full force of the rule should not be applied in the instant case.

In Heirs of Marciana G. Avila vs. Court of Appeals21 where a teacher bought property in violation of the Administrative Code prohibiting public officials from purchasing property sold by the government for non-payment of taxes, and where such purchase was nullified in the lower court prompting the teacher to appeal to the Supreme Court to overturn the lower court’s decision so that he can retake the property, the Supreme Court ruled that since the contract was void because it was contrary to law, the teacher, as a party to an illegal transaction cannot recover what she gave by reason of the contract or ask for the fulfillment of what had been promised her pursuant to Article 1412 of the Civil Code. In Compania General De Tabacos De Filipinas vs. Court of Appeals22 where a purchaser and a seller of certain sugar quota, which was previously mortgaged to certain banks, entered into a contract of sale purposely intending to negate the lawful rights and claim of the banks, which foreclosed on the mortgage, and where the buyer claimed that it should be reimbursed of what it gave the seller in the event that it was ordered to reconvey the sugar quota to the banks, the Supreme Court ruled: One final question remains to be resolved, that posed by TABACALERA, to wit: if it reconveys the sugar quota acquired from San Carlos Planters’ Association, or pay its value, should not it be reimbursed therefor by the latter, upon its implied and express warranty against eviction? The answer will have to be in the negative. They, the vendor and vendee, are in pari delicto. At the time of the transaction between them they were well aware of the encumbrance on the property dealt with; they had the common intention of negating the rights that they knew had earlier and properly been acquired by the mortgagee of the property they were treating of; they were both consequently acting in bad faith. The object or the purpose of their contract was “contrary to law, morals and good customs, public order, or public policy.” The law says that in such a case, where “the unlawful or forbidden cause consists does not constitute a criminal offense, x x x and the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand 22 23

G.R. No. 59534, May 10, 1990, 185 SCRA 284. G.R. No. L-23002, July 31, 1967, 20 SCRA 908.

Art. 1413

Contracts Void and Inexistent Contracts

481

the performance of the other’s undertaking.” No relief can be granted to either party; the law will leave them where they are.

In Rodriguez vs. Rodriguez,23 where a mother sold property to her daughter who later sold the property to her father, for the purpose of converting the paraphernal property of the mother to conjugal property, thereby vesting half interest on the husband and evading the prohibition against donations from one spouse to another during coverture, and where the wife, contending that the sale was a circumvention of the said prohibition and therefore void according to law, filed a case for the nullification of the transactions, the Supreme Court, while not considering the transactions as simulated ones, nevertheless regarded the same as a circumvention of the legal prohibition against donations between spouses but refused to grant relief on the ground that, while the cause involved an illicit consideration, all the parties were guilty and therefore no one can recover what was given by virtue of the contract. It applied the rule in pari delicto non oritur actio, denying all recovery to the guilty parties inter se. However, the law likewise provides that 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. Article 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. Under the Usury Law, in case of usurious interest, the whole interest will be recoverable. The phrase “interest paid in excess of the interest allowed by the usury laws” provided in Article 1413 has been interpreted by the Supreme Court in Angel Jose vs. Chelda Enterprises24 as contemplating the whole amount of the interest, thus: 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 the payment.” Article 1413, in speaking of “interest paid in excess of the interest G.R. No. L-25704, April 24, 1968; Briones vs. Cammayo, G.R. No. L-23559, October 4, 1971, 41 SCRA 404. 24

482

Obligations and Contracts Text and Cases

Art. 1414

allowed by the usury laws” means the whole usurious interest; that is, in a loan of P1,000, with interest of 20% per annum or P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is this case that the law does not allow division. The whole interest as to interest is 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 stipulation on void 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 the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury.

Article 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. In De Leon vs. Court of Appeals25 where the parties entered into a void contract as the consideration was the termination of marital relationship and where the husband’s mother, who already previously gave P380,000 to the wife pursuant to the void contract, resisted the attempt by the wife to enforce the other provisions of the agreement on the ground that the contract was void, and where the lower court ruled that no enforcement can be made because the parties are in pari delicto, and therefore the mother cannot recover the P380,000, the Supreme Court allowed the mother to recover by stating: In the ultimate analysis therefore, both parties acted in violation of the laws. However, the pari delicto rule, expressed in the maxims “Ex dolo malo non oritur actio” and “In pari delicto potior est conditio defendentis,” which refuses remedy to either G.R. No. 80965, June 6, 1990, 186 SCRA 245. G.R. No. L-23303, September 25, 1968, 25 SCRA 153; See also Philippine National Bank vs. De Los Reyes, G.R. Nos. 46898-99, November 28, 1989, 179 SCRA 619. 25

26

Arts. 1415-1416

Contracts Void and Inexistent Contracts

483

party to an illegal agreement, and leaves them where they are does not apply in this case x x x Article 1414 of the Civil Code, which is an exception to the pari delicto rule, is the proper law to be applied. x x x Since the Letter-Agreement was repudiated before the purpose has been accomplished and to adhere to the pari delicto rule in this case is to put a premium to the circum-vention of the laws, positive relief should be granted to Macaria. Justice would be served by allowing her to be placed in the position in which she was before the transaction was entered into.

Article 1415. Where one of the parties to an illegal con-tract is incapable of giving consent, the courts may, if the interest of justice so demands, allow recovery of money or pro-perty delivered by the incapacitated person. This provision is another exception to the, in pari delicto rule. Thus, if A is a minor and he enters into a contract with B, whereby the latter sells to the said minor prohibited drugs, the court may allow the minor to recover the money he paid B in purchasing the illegal drugs. This is, however, within the discretion of the court. If the court does not find that public policy will be served by the return of the money, it could opt to issue an order precisely not to return the money. Article 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. In Ras vs. Sua26 where a property acquired from the government pursuant to a law designed to give land to the landless was, in violation of the spirit of said law, leased to third parties who refused to have the property reconveyed to the possession of the owner-grantee despite violation of the lease agreement, and where the third-party possessors claimed that repossession cannot be made because the parties were in pari delicto and that the proper party to file the suit was the government who granted the land to the owner, the Supreme Court affirmed the decision of the lower court allowing the owner to repossess the property and ruled: The above contentions are without merit; they being premised on the assumption that upon the plaintiff’s violation of Republic Act 477 he automatically loses his rights over the land and said rights immediately revert to the State. That is not

484

Obligations and Contracts Text and Cases

Art. 1416

correct. In the first place, it is worthwhile to note that, unlike in a transfer of the applicant’s rights made before the award or signing of the contract of sale, which is specifically declared null and void and disqualifies such applicant from further acquiring any land from the NAFCO, Republic Act 477 is silent as to the consequence of the alienation or encumbering of the land after the execution of the contract of sale, but within 10 years from the issuance of the corresponding certificate of title. Considering that the aim of the government in allowing the distribution or sale of disposable public lands to deserving applicants is to enable the landless citizens to own the land they could work on, and the reversion of these lands to the government is penal in character, reversion cannot be construed to be implied from the provision making certain acts prohibited. Whereas in this case, the interest of the individual outweighs the interest of the public, strict construction of a penal provision is justified. Article 1416 of the Civil Code of the Philippines prescribes as follows: Article 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. Secondly, under Section 9, Republic Act No. 477, the disposition of lands by the NAFCO (National Abaca and Other Fibers Corporation) is to be governed by Public Land Act (C.A. 141); and it has been ruled, in connection with the same, that a disregard or violation of the conditions of the land grant does not produce automatic reversion of the property to the State, nor work to defeat the grantee’s right to recover the property he had previously disposed of or encumbered. This was made clear by this Court when it said: “x x x Similar contentions were made in the case of Catalina de los Santos vs. Roman Catholic Church of Midsayap, et al., 94 Phil. 405, 50 Off. Gaz. 1588, but they were overruled, this Court holding that the pari delicto doctrine may not be invoked in a case of this kind since it would turn counter to an avowed fundamental policy of the State that the forfeiture of the homestead is a matter between the State and the grantee or his heirs, and that until the State has Olea vs. Court of Appeals, G.R. No. 109696, August 14, 1995, 63 SCAD 579, 274 SCRA 247. 28 Bañez vs. Court of Appeals, G.R. No. L-30351, September 11, 1974, 59 SCRA 27

Arts. 1417-1418

Contracts Void and Inexistent Contracts

485

taken steps to annul the grant and asserts title to the homestead, the purchaser is, as against the vendor or his heirs, no more entitled to keep the land than an intruder. (Acierto vs. De los Santos, 95 Phil. 887).

Article 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. If the law provides the highest amount possible that can be charged from a buyer of certain commodities, it is illegal to charge an amount higher than the statutory ceiling. Such an excess from the limit shall be recoverable. Article 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. This provision is designed to prevent exploitation of employees or laborers. Hence, if an employer and employee enter into a contract where the employee shall work only eight hours a day for a particular and specified compensation, such employee cannot be forced to work beyond the said time and, if he is required to do so, he should be paid for the extra time. Overtime pay is now regulated by the Labor Code of the Philippines. Article 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. This is for the protection of labor. Hence, if according to law A is to receive P200.00 a day, and he enters into an employment contract providing that he is to get P150.00 a day, such a contract is void as the same is against the law and so A can demand the difference of P50.00. Article 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

486

Obligations and Contracts Text and Cases

Arts. 1419-1421

If a void provision in a contract directly affects the entirety of the contract, the contract can be considered void. However, if the provision is independently separable from the other provisions, such provision alone shall be considered void. Thus, in a contract of loan secured by a collateral of the debtor’s property which, as stipulated in the contract, shall automatically be owned by the creditor in the event of non-payment of the debt, the loan itself is valid but the security is void. This is pactum commissorium, which is against the law, because for the forfeiture to be valid in case of non-payment the collateral must be foreclosed and sold at auction to the highest bidder.27 This is also true in case the interest is against the legal rate. Article 1421. The defense of illegality of contracts is not available to third persons whose interests are not directly affected. As a general rule, there can only be mutuality of obligations in a contract which affects the parties involved therein. Hence, even if the contract is illegal, such a general rule is still followed. However, if a third person is greatly prejudiced as his interest is directly affected, he may file a case for the nullification of a contract or set the same as a defense28 even if such prejudiced person is not a party to the void contract. Hence, if A and B enters into a contract of sale of real property, where A sells a particular land which he does not own to B for an illegal consideration, such a contract is void and if the particular land area sold encroaches on the property of X, a third person, he can seek the nullification of such contract as it directly affects his interest. Article 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent. A void contract is inexistent. Hence, if a subsequent contract proceeds from such inexistent contract, the former contract is likewise void.29

15. E. Razon vs. Philippine Ports Authority, G.R. No. L-75197, June 22, 1987, 133 SCRA 515. 29

Art. 1422

Contracts Void and Inexistent Contracts

487

488

Obligations and Contracts Text and Cases

TITLE III. — NATURAL OBLIGATIONS Article 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. The 1947 Code Commission which inserted this Title in the Civil Code stated the rationale of the provisions on natural obligations in its report, thus: In all the specific cases of natural obligation recognized by the present 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 a 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, 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? To recapitulate: because they rest upon morality and because they are recognized in some leading civil codes, natural obligations have again become part and parcel of the Philippine 488

Arts. 1424-1427

Natural Obligations

489

law.1

Article 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. For example, the law provides that the prescriptive period to file a case based on a written agreement is ten years from the time the right of action accrues. Hence, if a creditor, by virtue of a written loan contract, does not collect the amount of the loan after ten years from the time it should be paid, such creditor can no longer collect from the debtor as the time within which to file the case has already prescribed. However, if the debtor, despite the lapse of the prescriptive period and knowing that the debt has already prescribed, pays the creditor, such debtor can no longer recover such payment. Article 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. For example, A is indebted to Z but the collection of such debt has already prescribed and therefore can no longer be collected. If M pays the debt to Z, and, later on, A voluntarily reimburses M, such payment shall be considered valid and A cannot recover such amount from Z on the ground that M should not have paid him. Article 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. Article 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. (1160a) Report of the Code Commission, Pages 58-59.

1

490

Obligations and Contracts Text and Cases

Arts. 1428-1430

The law provides that an incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. A person who is “between eighteen and twenty-one years of age” is not anymore a minor because the age of majority today, pursuant to Republic Act No. 6809 is 18 years of age. However, if ever the law is still to apply, it means that a minor, who voluntarily makes payment or restitution of what he has obtained by contract even though he has no legal obligation to make payment or restitution, can no longer recover what he has returned. Article 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. For example, if A is indebted to B for P1,000 and a civil suit is filed to collect the amount but such suit is dismissed, A need not pay the said amount but, if he voluntarily makes payment, he can no longer recover such payment. Article 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. For example, A is indebted to X for P10,000. A later dies, with M as his heir who is entitled only to P5,000 from the estate of A. If M voluntarily pays X P10,000, M can no longer recover such an amount. Article 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. For example, M provided in his holographic will that his car shall go to his driver X. Later, the holographic will turns out to be partly type-written and therefore it is void as such will should be wholly hand-written by the testator. If, despite the nullity of the will, M’s heir, Z, still voluntarily gives the legacy of the car to X, it shall be valid and cannot be revoked anymore.

Art. 1430

Natural Obligations

491

492

Obligations and Contracts Text and Cases

TITLE IV. — ESTOPPEL (n) Article 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. In Beronilla vs. Government Service Insurance System,1 the Supreme Court said that the doctrine of estoppel having its origin in equity, its applicability to any particular case depends, to a very large extent, upon the special circumstances of the case.

However, in each case, estoppel must be determined after carefully considering the material facts of the case lest injustice may result. Thus in Kalalo vs. Luz,2 the Supreme Court succinctly cautioned thus: Estoppel has been characterized as harsh and odious, and not favored in law. When misapplied, estoppel becomes a most effective weapon to accomplish an injustice, inasmuch as it shuts a man’s mouth from speaking the truth and debars the truth in a particular case. Estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence.

It is a rule, however, that estoppel is not applicable against the government suing in its capacity as sovereign or asserting governmental rights. Estoppel likewise does not apply if a law or public policy will be violated.3 Thus in Republic vs. Go Bon Lee4 where the government, through the Office of the Solicitor General, filed in 1951 a petition in court to cancel the certificate of naturalization of a certain G.R. No. L-21723, November 20, 1976, 36 SCRA 44. G.R. No. L-27782, July 31, 1970, 34 SCRA 337. 3 Auyong Hian vs. Court of Tax Appeals, G.R. No. L-28782, September 12, 1974, 59 SCRA 110. 4 G.R. No. L-11499, April 29, 1961, 1 SCRA 1166; Go Tian An vs. Republic, G.R. No. L-19833, August 31, 1966, 17 SCRA 1053; United Christian Missionary Society vs. Social Security System, G.R. L-26712, December 27, 1969, 30 SCRA 982; Republic vs. Philippine Rabbit Bus Lines, Inc., 32 SCRA 211. 1 2

492

Art. 1431

Estoppel (n)

493

Chinese who was granted citizenship in 1941 by a lower court in Cebu, and who took his allegiance in 1942, and where the Chinese claimed, among others, that his citizenship cannot be reopened anymore on the ground that the government was already in estoppel, the Supreme Court rejected the claim of estoppel and ruled: It is well settled that the doctrine of estoppel or of laches does not apply against the Government suing in its capacity as Sovereign or asserting governmental rights. It had been held that the Government is never estopped by mistakes or errors on the part of its agents (Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803, 807), and that estoppel cannot give validity to an act that is prohibited by law or is against public policy (Benguet Consolidated, etc. vs. Pineda, 52 O.G. No. 4, p. 1961; Eugenio vs. Perdido, G.R. No. L-7083, May 19, 1955).

Also, the government cannot be estopped by the mistake and errors of its officers.5 Thus in Collector of Internal Revenue vs. McGrath6 where the issue involved the collection of taxes, the Supreme Court ruled: x x x any error made by a tax official in the assessment or computation of taxes does not have the effect of relieving the taxpayer from the full amount of liability as fixed by law. Errors of tax officers or officials of the Government do not bind the Government or prejudice its right to the taxes or dues collectible by it from its citizens.

Estoppel likewise applies to questions of fact only, not of law, about the truth of which the other party is ignorant.7 Hence, it has been held that if an act, conduct or misrepresentation of the party sought to be estopped is due to ignorance founded on innocent mistake, estoppel will not arise.8

Article 1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with the provisions of this Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803. G.R. No. L-12721, February 28, 1961, 1 SCRA 639, citing Canlubang Sugar Estate vs. Standard Alcohol Co. (Phil.), Inc., G.R. No. L-10887, April 16, 1958; Philippine American Drug Co. vs. Collector of Internal Revenue, et al., G.R. No. L-13032, August 31, 1959; Teodore Lewin vs. Emilio Galang, G.R. No. L-15253, October 31, 1960. 7 Tañada vs. Cuenco, G.R. No. L-10520, February 28, 1957. 8 Kalalo vs. Luz, G.R. No. 27782, July 31, 1970, 34 SCRA 337, citing Ramiro vs. Grano, 54 Phil. 744, 750; Coleman vs. Southern Pacific Co., 141 Cal App 2d 121, 296 P2d 386. 9 28 Am Jur 2d 602-603. 5 6

494

Obligations and Contracts Text and Cases

Arts. 1432-1433

Code, the Code of Commerce, the Rules of Court and special laws.

Article 1433. Estoppel may be in pais or by deed.

The concept of estoppel was introduced in the Philippines by the Americans and, in this regard, jurisprudence in the United States can be very helpful, thus: Estoppel by deed is a bar which precludes one party to a deed and his privies from asserting as against the other party and his privies any right or title in derogation of the deed, or from denying the truth of any material facts asserted in it. Estoppel by deed is technical in nature and such an estoppel may conclude a party without reference to the moral equities of his conduct. Generally, estoppel is based upon equitable considerations. In other words, it rests upon the inequity of allowing the party estopped from asserting a contrary position. The principle is that when a man has entered into a solemn engagement by deed, he shall not be permitted to deny any matter which he has asserted therein, for a deed is a solemn act to any part of which the law gives effect as the deliberate admission of the maker; to him it stands for truth, and in every situation in which he may be placed with respect to it, it is true as to him. It has been stated that it is a mistake to liken an estoppel by deed to an estoppel in pais. It has also been stated, speaking of estoppel by deed in general, that the true principle of estoppel, as applicable to deeds , is to prevent circuity of actions, and to compel party to fulfill their contracts. But where estoppel by deed arises, it is generally limited to an action on the deed itself; in a collateral action, there is ordinarily no estoppel.9 Equitable estoppel, or estoppel in pais, is a term applied usually to a situation where, because of something which he has done or omitted to do, a party is denied the right to plead or prove an otherwise important fact. The term has also been variously defined, frequently by pointing out one or more of the elements of, or prerequisites to, the application of the doctrine or the situation in which the doctrine is urged. The most comprehensive definition of equitable estoppel or estoppel in pais is that it is the principle by which a party who knows or should know the truth is absolutely precluded, both at law and in equity, from denying, or asserting the contrary of, any material fact which by his words or conduct, affirmative or negative, intentionally or culpable negligence, he has induced another, who was excusably ignorant 10

Id., Pages 627-628.

Arts. 1432-1433

Estoppel (n)

495

of the true facts and who had a right to rely upon such word or conduct, to believe and act upon them thereby, as a consequence reasonably anticipated, changing his position in such a way that he would suffer injury if such denial or contrary assertion was allowed. In the final analysis, however, an equitable estoppel rests upon the facts and circumstances of the particular case in which it is urged, considered in the framework of the elements, requisites, and grounds of equitable estoppel, and consequently, any attempted definition usually amounts to no more than a declaration of an estoppel under those facts and circumstances. The cases themselves must be looked to and applied by way of analogy rather than rule.10

In Manacling vs. Bun,11 the Supreme Court differentiated the concepts of estoppel by deed, estoppel in pais, prescription, and laches, thus: Under Article 1431 of the Civil Code, 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. In estoppel by pais, as related to the party sought to be estopped, it is necessary that there be a concurrence of the following requisites: (a) conduct amounting to false representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (b) intent, or at least expectation that this conduct shall be acted upon, or at least influenced by the other party; and (c) knowledge, actual or constructive of the actual facts. In estoppel by conduct, on the other hand: (a) there must have been a representation or concealment of material facts; (b) the representation must have been with knowledge of the facts; (c) the party to whom it was made must have been ignorant of the truth of the matter; and (d) it must have been made with the intention that the other party would act upon it. As to prescription, this Court ruled in the Bonaga case that “[a]ctions to declare the inexistence of contracts do not prescribe (Art. 1410, N.C.C.), a principle applied even before the effectivity of the new Civil Code. (Eugenio, et al. vs. Perdido, et al., supra, citing Tipton vs. Velasco, 6 Phil. 67, and Sabas vs. Germa, 66 Phil. 471).” Laches is different from prescription. As this Court held in Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., the defense of laches applies independently of prescription. 11 12

G.R. No. 27876, April 22, 1992, 208 SCRA 179. G.R. No. L-24419, July 15, 1968, 24 SCRA 59.

496

Obligations and Contracts Text and Cases

Art. 1434

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 fixed time, laches is not. The essential elements of laches are the following: (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 barred.

Article 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. An illustration of the provision is as follows: if A, who is not the owner of a car sells the same to B, the sale is unenforceable because A has no authority to sell the property. However, if A himself delivers the property to B, and later A buys the same from the real owner N, A cannot claim the property as his on the ground that when he sold it to B, he was not the owner of the same. B shall be preferred by the law and will treat the sale as completely valid even though at the time it was actually made, the seller is not the owner. In Estoque vs. Pajuimula12 where a co-owner sold a land which he co-owned with two other owners and such sale was assailed as invalid because the seller could not have sold the interest of the other co-owners without their consent, the Supreme Court ruled that the sale was valid by applying Article 1434, thus: While on the date of the sale to Estoque (Annex A) said contract may have been ineffective, for lack of power in the vendor to sell the specific portion described in the deed, the transaction was validated and became fully effective when the next day 13

Article 1935 of the 1950 Civil Code.

Arts. 1435-1437

Estoppel (n)

497

(October 29, 1951) the vendor, Crispina Perez, acquired the entire interest of her remaining co-owners (Annex B) and thereby became the sole owner of Lot No. 802 of the Rosario Cadastral survey (Llacer vs. Muñoz, 12 Phil. 328). Article 1434 of the Civil Code of the Philippines clearly prescribes: x x x

Article 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. For example, if A constituted B as his agent to sell a car and the car was in fact sold by B, A cannot later on claim that he was the owner to invalidate the transaction. Article 1436. A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor. An illustration of the provision is as follows: the lessee cannot claim ownership over the property he is leasing precisely because, by a contract of lease, the lessee acknowledges the fact that he is not the owner of the property and he has only the peaceful possession thereof under such terms and conditions as the owner and the lessee have mutually agreed. On the other hand, a bailee in commodatum merely acquires the use of the thing loaned but not its fruits.13 A bailee likewise acknowledges the fact that he is not the owner of the nonconsumable object delivered to him for his use for a certain period of time with the obligation to return the same at the expiration of said period. Article 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 14

Article 2093 of the 1950 Civil Code.

498

Obligations and Contracts Text and Cases

Art. 1438

facts; and (4) The party defrauded must have acted in accordance with the misrepresentation. An illustration of the provision is as follows: A and B have a contract of lease where A, the lessee, has been given a preferential right to buy the property in the event that B, the lessor, decides to sell the property. A approaches Z, and tells him that the property is his (A’s) already because he (A) has already exercised his preferential right, and that only the documentation is to be done. A also tells Z that the property is being eyed by a corporation, which intends to buy the same. This representation is made to entice Z to buy the property and then later resell it to said corporation, thereby giving him enormous profit. However, the real owner, in fact, has not yet offered the property for sale such that A could not have exercised his preferential right. Also there is really no corporation intending to buy the property. Because A is a seasoned real estate broker, Z relied on A’s fraudulent representation and buys the property. Therefore B ratified the sale. Later on A cannot assert a claim on the property contending that the sale is unenforceable for not having the consent of the true owner, B, at the time it was sold. Article 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. A thing pledged must be placed in the possession of the creditor, or of a third person by common agreement.14 A pledge is constituted by the absolute owner of the thing pledged to secure the fulfillment of a principal obligation.15 It is important that the person constituting the thing pledged has the free disposal of his property, and in the absence thereof, he is legally authorized for the purpose.16 An illustration of the provision is as follows: A does not want to be known as the owner of a Mercedez Benz. He tells everybody that said car is owned by B. B knows of this representation of A and goes along with it. A even gives B the authority to sell, encumber or alienate the property. B decides to pledge the property for a loan he 15

Article 2085(1) and (2) of the 1950 Civil Code.

Art. 1439

Estoppel (n)

499

obtains from X. The proceeds of the loan however goes to A who, in the first place, has instructed B to obtain the loan. As pledgee, X now is in possession of the car. The loan becomes due. X warns B that if no payment is made, the pledge will be foreclosed. Learning of this legal threat by X, A cannot resist the foreclosure by claiming that the pledge of the car is invalid because B does not actually own it. A is estopped. Article 1439. Estoppel is effective only as between the parties thereto or their successors-in-interest. The law provides that estoppel is effective only as between the parties thereto or their successors-in-interest. It is a general rule that in order to be effective, an equitable estoppel must be mutual and reciprocal. Unless both parties to a transaction are bound by an estoppel, neither is bound. Mutuality being requisite, an estoppel operates neither in favor of, nor against, strangers — that is, persons who are neither parties nor privies to the transaction out of which the estoppel arose. Thus, a grantor is not estopped by his deed as against one who is neither a party thereto nor in privity with a party.17

In Castrillo vs. Court of Appeals,18 where the lower court applied Article 1434 on estoppel in a case where Isabel Miranda sold her 1/3 share of Lot No. 188 to Doroteo Dimaranan in 1932 at the time when she was not yet the owner thereof and that she acquired ownership only when her sister Crispina executed a formal deed of sale in her favor in 1934, covering an area of 252 square meters, thereby rendering unquestionable the ownership of Dimaranan and where the heirs of Crispina assailed the application of estoppel provided for in Article 1434, the Supreme Court said: x x x if any body at all may be heard to challenge the application of the doctrine of estoppel in favor of respondents (Dimaranan), it is only the party against whom it may be invoked — in this case the vendor, Isabel Miranda, from whom they acquired the disputed property. Crispina Miranda having conveyed the same to Isabel, neither she nor her successors may raise the point to their advantage. For them to do so would in effect be to deny the rights of Isabel Id. 28 Am Jur 2d 774-775. 18 G.R. No. L-18046, March 31, 1964, 10 SCRA 549. 16 17

500

Obligations and Contracts Text and Cases

Miranda herself, acquired by virtue of two documents executed by Crispina in her favor, one in 1929 (Exh. A) and the other in 1934 (Exh. C). This obviously petitioners cannot be permitted to do.

Art. 1439

501

TITLE V. — TRUSTS (n) Chapter 1

GENERAL PROVISIONS Article 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. Article 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. In Ramos vs. Ramos,1 the Supreme Court, quoting jurisprudence in the United States, defined trust and its kinds as follows: In its technical legal sense, a trust is defined as the right enforceable solely in equity, to the beneficial enjoyment of property, the legal title to which is vested in another, but the word ‘trust’ is frequently employed to indicate duties, relations, and responsibilities which are not strictly technical trusts. (89 CJS 712) x x x x x x Express trusts are those which are created by the direct and positive acts of the parties, by some writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust (89 CJS 722). 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 CJS 724). They are ordinarily subdivided into resulting and constructive trusts (89 CJS 722).

A resulting trust is broadly defined as a trust which is G.R. No. L-19872, December 3, 1974, 61 SCRA 284.

1

501

502

Obligations and Contracts Text and Cases

Arts. 1440-1441

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 CJS 725). Examples of resulting trusts are found in Articles 1448 to 1455 of the Civil Code. x x x 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 CJS 729-727). 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 (Gayondato vs. Treasurer of the P.I., 49 Phil. 244; see Article 1456, Civil Code). There is a rule that a trustee cannot acquire by prescription the ownership of property entrusted to him (Palma vs. Cristobal, 77 Phil. 712), or that an action to compel a trustee to convey property registered in his name in trust for the benefit of the cestui que trust does not prescribe (Manalnag vs. Canlas, 94 Phil. 776; Cristobal vs. Gomez, 50 Phil. 810), or that the defense of prescription cannot be set up in an action to recover property held by a person in trust for the benefit of another (Sevilla vs. De los Angeles, 97 Phil. 875), or that property held in trust can be recovered by the beneficiary regardless of the lapse of time (Marabilles vs. Quito, 100 Phil. 64; Bancairen vs. Diones, 98 Phil. 122, 126; Juan vs. Zuniga, 62 O.G. 1351, 4 SCRA 1221; Jacinto vs. Jacinto, L-17957, May 31, 1962. See Tamayo vs. Callejo, 147 Phil. 31, 37). That rule applies squarely to express trust. The basis of the rule is that the possession of a trustee is not adverse. Not being adverse, he does not acquire by prescription the property held in trust. Thus, Section 38 of Act 190 provides that the law of prescription does not apply “in the case of a continuing and subsisting trust” (Diaz vs. Gorricho and Aguado, 103 Phil. 261, 266; Laguna vs. Levantino, 71 Phil. 566; Sumira vs. Vistan, 74 Phil. 138; Golfeo vs. Court of Appeals, 63 O.G. 4895, 12 SCRA 199; Caladiao vs. Santos, 63 O.G. 1956, 10 SCRA 691). The rule of imprescriptibility of the action to recover property held in trust may possibly apply to resulting trusts as long as the trustee has not repudiated the trust (Heirs of

Arts. 1440-1441

Trusts (n) General Provisions

503

Candelaria vs. Romero, 109 Phil. 500, 502-503; Martinez vs. Grano, 42 Phil. 35; Buencamino vs. Matia, 63 O.G. 11033, 16 SCRA 849). The rule of imprescriptibility was misapplied to constructive trusts (Geronimo and Isidro vs. Nava and Aquino, 105 Phil. 145, 153. Compare with Cuison vs. Fernandez and Bengzon, 105 Phil. 1235, 1239; De Pasion vs. De Pasion, 112 Phil. 403, 407). Acquisitive prescription may bar the action of the beneficiary against the trustee in an express trust for the recovery of the property held in trust where: (a) the trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the cestui que trust; and (c) the evidence thereon is clear and conclusive (Laguna vs. Levantino, supra; Salinas vs. Tuason, 55 Phil. 729. Compare with the rule regarding co-owners found in last paragraph of Article 494, Civil Code; Casanas vs. Rosello, 50 Phil. 97; Gerona vs. De Guzman, L-19060, May 29, 1964, 11 SCRA 153, 157). With respect to constructive trusts, the rule is different. The prescriptibility of an action for reconveyance based on constructive trust is now settled (Alzona vs. Capunitan, L-10228, February 28, 1962, 4 SCRA 450; Gerona vs. De Guzman, supra; Claridad vs. Henares, 97 Phil. 973; Gonzales vs. Jimenez, L-19073, January 30, 1965, 13 SCRA 80; Bonanga vs. Soler, 112 Phil. 651; J.M. Tuason & Co. vs. Magdangal, L-15539, January 30, 1962, 4 SCRA 84). Prescription may supervene in an implied trust (Bueno vs. Reyes, L-22587, April 28, 1969, 27 SCRA 1179; Fabian vs. Fabian, L-20449, January 29, 1968; Jacinto vs. Jacinto, L-17957, May 31, 1962, 5 SCRA 371). And whether the trust is resulting or constructive, its enforcement may be barred by laches (90 CJS 887-889; 54 Am. Jur. 449-450; Diaz vs. Gorricho and Aguado, supra. Compare with Mejia vs. Bampona, 100 Phil. 277).

In Salvatierra vs. Court of Appeals,2 the Supreme Court ruling on the prescriptibility of implied trust pertinently said: An action for reconveyance of registered land based on an implied trust may be barred by laches. The prescriptive period for such actions is ten (10) years from the date the right of action accrued. We have held in the case of Armamento vs. Central Bank that an action for reconveyance of registered land based on implied trust, prescribes in ten (10) years even if the decree G.R. No. 107797, August 26, 1996, 73 SCAD 586, 261 SCRA 45.

2

504

Obligations and Contracts Text and Cases

Art. 1442

of registration is no longer open to review. In Duque vs. Domingo, especially, we went further by stating: “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 registration. Such registration is deemed to be a constructive notice that the alleged fiduciary or trust relationship has been repudiated. It is now settled that an action on an implied or constructive trust prescribes in ten (10) years from the date the right of action accrued.”

In Cuaycong vs. Cuaycong3 where there was a conflict as to whether or not the allegations in the complaint referred to an express or an implied trust, the Supreme Court ruled that there was an express trust because the allegations clearly stated that the owner of the property expressly told the defendants of his intention to establish a trust. The Supreme Court likewise took the occasion to distinguish an express trust from an implied trust, thus: Our Civil Code defines an express trust as one created by the intention of the trustor or the parties, and an implied trust as one that comes into being by operation of law. 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. On the other hand, 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. 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.

Article 1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted.

G.R. No. L-21616, December 11, 1967, 21 SCRA 1192.

3

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Chapter 2

EXPRESS TRUSTS Article 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence. Parol evidence refers to oral evidence. To prove an express trust over immovable properties or any interest therein, there must always be a showing of some documents proving the same. In Pascual vs. Meneses1 where certain properties were claimed by different persons, and some of the heirs contended that there was allegedly an express trust over some of the real estates constituted by some claimant as co-owners who however did not present any documentary proof of the same, the Supreme Court rejected such claim by merely pointing out to the requirement of Article 1443 that no express trust concerning an immovable or any interest therein may be proved by parol evidence. In Ramos vs. Ramos2 where the evidence showed that the properties claimed to be held in trust was actually the subject of a partition, the Supreme Court ruled that there was no express trust by stating: The plaintiffs did not prove any express trust in this case. The expediente of the intestate proceeding, Civil Case No. 217, particularly the project of partition, the decision and the manifestation as to the receipt of shares (Exhs. 3, 4 and 6) negatives the existence of an express trust. Those public documents prove that the estate of Martin Ramos was settled in that proceeding and that adjudications were made to his seven natural children. A trust must be proven by clear, satisfactory, and convincing evidence. It cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations (De Leon vs. Peckson, 62 O.G. 994). As already noted, an express trust cannot be proven by parol evidence.



Article 1444. No particular words are required for the G.R. No. L-18838, May 25, 1967, 20 SCRA 219. G.R. No. L-19872, December 3, 1974, 61 SCRA 284.

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Obligations and Contracts Text and Cases

Arts. 1444-1446

creation of an express trust, it being sufficient that a trust is clearly intended. For as long as the intention to establish a trust is very clear from the proofs, whether by some writing or deed or will or by words, an express trust is created.3 Article 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. An express trust clearly indicates that a trustor is delivering his property to a trustee for the benefit of a beneficiary. This clear intention must be implemented even if the trustee appointed declines the designation. In case of refusal to accept the trust by the trustee, the court will appoint a trustee. However, if the appointment of the trustee is a material provision, the trustor can provide that a refusal of the trustee to accept the trust shall result in the failure or nullification of the same. Article 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. Trust property is designed to benefit a cestui que trust or a beneficiary. If the beneficiary does not want the trust, the trustor will not be estopped from deciding on another beneficiary. The acceptance of the beneficiary may be express or implied. However, the law says that if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary. An onerous condition is one which the beneficiary is required to perform to make the trust effective or is one which should be done for as long as the trust exists. Hence, if there is no such onerous condition, it is in a sense an act of gratuity or liberality and therefore the acceptance of the beneficiary shall be presumed. This presumption is in consonance with the ordinary scheme of things that a person who is given a gift normally accepts the same.

Cuaycong vs. Cuaycong, G.R. No. L-21616, December 11, 1967, 21 SCRA 1192.

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Chapter 3

IMPLIED TRUSTS Article 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. The situations giving rise to implied trust provided under this Chapter are not exclusive. There may be others. Implied trusts may either be resulting or constructive trusts, both coming into being by operation of law.1 Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines the equitable title or interest and are presumed always to have been contemplated by the parties. They arise from the nature or circumstances of the consideration involved in a transaction whereby one person thereby becomes invested with legal title but is obligated inequity to hold his legal title for the benefit of another. On the other hand, constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or hold the legal right to property, which he ought not, in equity, and good conscience, to hold. However, it has been held that a trust will not be created when for the purpose of evading the law prohibiting one from taking or holding real property, he takes conveyance thereof in the name of a third person.2

Thus when, under a homestead law, a certain person is disqualified from obtaining a homestead patent over a certain property, it cannot be contended that the actual possessor of the property is Saltiga vs. Court of Appeals, G.R. No. 109307, November 25, 1999, 116 SCAD 170, 319 SCRA 180. 2 Ibid. 3 Ibid. 507 1

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Obligations and Contracts Text and Cases

Art. 1447

merely a trustee of the disqualified person who claims to be the real beneficiary of the homestead patent. This is so because the alleged trust is of doubtful validity considering that it would promote a direct violation of the provisions of the Public Land Act as regards the acquisition of a homestead patent. A homestead applicant is required by law to occupy and cultivate the land for his own benefit, and not for the benefit of someone else.3 Even if the situation falls under any of the provisions of this chapter, it is not considered an implied trust if there is an express intention of the trustor to create a trust,4 thereby making it an express trust. Hence, if a document exists clearly involving a situation under Article 1453 but the same document states that the trustor is constituting an express trust to the beneficiary, such trust will not be considered an implied trust but an express trust.5 The principles of the general law of trust, in so far as they are not in conflict with the Civil Code, the Code of Commerce, the Rules of Court and special laws are likewise applicable as limitations to implied trusts.6 In Policarpio vs. Court of Appeals,7 where a representative of the tenants of an apartment, instead of negotiating the sale of the apartment for and on behalf of the tenants as he was tasked to do under their association, bought the property for himself to the detriment of the tenants, the Supreme Court ruled that an implied trust was created and ordered the representative to execute a deed of conveyance to the particular tenant who went to it for redress. Pertinently, the Supreme Court said: The conclusion we thus reach in this case, finding constructive trust under Article 1447 of the New Civil Code, rests on the general principles on trust which, by Article 1442 have been adopted or incorporated into our civil law, to the extent that such principles are not inconsistent with the Civil Code, other statutes and the Rules of Court. This Court has ruled in the case of Sumaoang vs. Judge, RTC, Br. XXXI, Guimba, Nueva Ecija that:

4

Cuaycong vs. Cuaycong, G.R. No. L-21616, December 11, 1967, 21 SCRA

1192. Id. Article 1442 of the 1950 Civil Code. 7 G.R. No. 116211, March 7, 1997, 80 SCAD 302. 8 G.R. No. L-31569, September 28, 1973, 53 SCRA 168. 9 Castrillo vs. Court of Appeals, G.R. No. L-18046, March 31, 1964, 10 SCRA 5 6

Art. 1447

Trust (n) Implied Trusts

“A constructive trust, otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son tort, an involuntary trust, or an implied trust, is a trust by operation of law which arises contrary to intention and in invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity or good conscience, hold and enjoy. It is raised by equity to satisfy the demands of justice. However, a constructive trust does not arise on every moral wrong in acquiring or holding property or on every abuse of confidence in business or other affairs; ordinarily such a trust arises and will be declared only on wrongful acquisitions or retentions of property of which equity, in accordance with its fundamental principles and the traditional exercise of its jurisdiction or in accordance with statutory provision, takes cognizance. It has been broadly ruled that a breach of confidence although in business or social relations, rendering an acquisition or retention of property by one person unconscionable against another, raises a constructive trust. And specifically applicable to the case at bar is the doctrine that ‘A constructive trust is sub-stantially an appropriate remedy against unjust enrichment. It is raised by equity in respect of property, which has been acquired by fraud, or where although acquired originally without fraud, it is against equity that it should be retained by the person holding it.’ The above principle is not in conflict with the New Civil Code, Codes of Commerce, Rules of Court and special laws. And since We are a court of law and of equity, the case at bar must be resolved on the general principles of law on constructive trust which basically rest on equitable considerations in order to satisfy the demands of justice, morality, conscience, and fair dealing and thus protect the innocent against fraud. As the respondent court said, “it behooves upon the courts to shield fiduciary relations against every manner of chicanery or detestable design cloaked by legal technicalities.” Although the citations in the said case originated from American jurisprudence, they may well be applied in our

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Art. 1448

jurisdiction. “Since the law of trust has been more frequently applied in England and in the United States than it has been in Spain, we may draw freely upon American precedents in determining the effects of trusts, especially so because the trust known to American and English jurisprudence are derived from the fidei commissa of the Roman Law and are based entirely upon civil law principles.” Having concluded that private respondent wilfully violated the trust reposed in him by his co-tenants, we consider it a serious matter of “justice, morality, conscience and fair dealing” that he should not be allowed to profit from his breach of trust. “Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.” Thus, petitioner is granted the opportunity to purchase the property which should have been his long ago had private respondent been faithful to his trust.

Article 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial in-terest 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 dis-putably presumed that there is a gift in favor of the child. An illustration of the situation under this article is as follows: A sold to B his shares of stock in a corporation. While the property is in the name of B, it is X who pays the property so that he can make use of the benefits of the shares of stock like the dividends. B is the trustee while X is the beneficiary. If X expressly tells A and B that he intends to create a trust-relationship from the transaction, it is clearly an express trust. However, if he does not do so, the law nevertheless considers it an implied trust. If B is the legitimate or illegitimate child of X, no trust is implied by law, it being disputably presumed that a gift has been made to B by X. In Padilla vs. Court of Appeals,8 a mortgagor sold the mortgaged property to a third party who did not know that, by the time he bought it, it was already foreclosed and consolidated in favor of the mortgagee. The latter later allowed the reselling of the property to the original 549.

Arts. 1449-1450

Trust (n) Implied Trusts

511

owner, but it was the third-party-buyer who paid the price in order that his purchase of the same will push through. Subsequently, the original owners confirmed their sale to the third-party buyer. The Supreme Court ruled that under this situation an implied or resulting trust existed, thus: x x x If the resale by the Government Service Insurance System upon payment of the price of redemption by Nadera was made in favor of the Padilla spouses, it was purely a matter of form since they were the mortgage debtors, and the least that can be said under the circumstances is that they should be considered as trustees under an implied or resulting trust for the benefit of the real owner, namely, respondent Nadera. Article 1448 of the Civil Code says that “there is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property . . . “The concept of implied trusts is that from the facts and circumstances of a given case the existence of a trust relationship is inferred in order to effect the presumed (in this case it is even expressed) intention of the parties or to satisfy the demands of justice or to protect against fraud.

Article 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 neverthe-less is either to have no beneficial interest or only a part thereof. An illustrative case is as follows: A donation of a lot and the apartment on it was made by M to N. However, despite the donation, M was still to get all the rentals of the apartment. This is an implied trust where the trustee is the donee and the beneficiary is the donor. This is a case of a resulting trust. Article 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. An illustration of this kind of implied trust is as follows: A wanted to buy the property of Z. X made the payment using his own money for the benefit of A. The money was a loan to A. When the purchase was made, the property was placed under the name of X.

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Obligations and Contracts Text and Cases

Arts. 1451-1453

This was done so that X will have an assurance that the debt of A can be paid. In this case, the trustee is the lender. A can later redeem the property by paying X the money paid for the property. Thereafter, A can compel X to convey the property. Article 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. An illustration of this kind of implied trust is as follows: A is the only compulsory heir of M who dies. After payment of the debt of M, the net estate of M should go to A. However, if A causes the title to the estate to be placed in the name of Z, an implied trust is created for the benefit of A. Article 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. An illustration of this kind of implied trust is as follows: A, B and C are co-owners of a particular land in equal parts but, by agree-ment of all of them, the whole of the property is registered under the name only of C. In this case, C is the trustee of the respective 1/3 shares of A and B. C is the trustee for the other co-owners.9 Article 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated. An illustration of this implied trust is as follows: A told B that the property sold should be in his name because he shall only hold it for the benefit of X, the real owner. An implied trust is created in favor of X. Article 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance

G.R. No. L-19073, January 30, 1965, 13 SCRA 80; see also Fabian vs. Fabian, G.R. No. L-20449, January 29, 1968, 22 SCRA 231; Bueno vs. Reyes, G.R. No. L-22587, 10

Arts. 1454-1456

Trust (n) Implied Trusts

513

of the property to him. An illustration of this implied trust is as follows: M is indebted to N. A particular property was conveyed to N by M to secure such indebtedness. N holds the property only in trust for M. N is the trustee. Upon payment of the debt, M can demand that the property be returned to his name. Article 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. An illustration of this implied trust is as follows: N constituted B as the trustee of his funds for the benefit of Z. B, using the trust fund, purchased property and placed it under his name or under the name of X. A trust is created and the trustee is either B or X and the trust is in favor of Z. Article 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. An illustration of this implied trust is as follows: A fraudulently made X sign an alleged loan agreement which actually turned out to be an absolute sale of X’s property. The sale is voidable and a trust is deemed created by force of law. The trustee is A and therefore is merely holding the property for the benefit of X. Also in Gonzales vs. Jimenez10 where the buyer bought a property from the seller who subsequently fraudulently caused the issuance of a patent and a certificate of title to his son over the same property, the Supreme Court held that the situation falls under Article 1456 and therefore an implied trust is created in favor of the buyer. The seller and his son are deemed to hold the property in trust for the benefit of the buyer who is the person prejudiced by the fraudulent act.

April 28, 1969, 27 SCRA 1179; De Ocampo vs. Zaporteza, 53 Phil. 442; Gayondato vs. Treasurer of the P.I., 49 Phil. 244; Gemora vs. De Guzman, G.R. No. L-19060, May 29, 1964. 11 Ramos vs. Ramos, G.R. No. L-19872, December 3, 1974, 61 SCRA 284.

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Obligations and Contracts Text and Cases

Art. 1457

Article 1457. An implied trust may be proved by oral evidence. An implied trust can be proven by oral evidence precisely because “it is deducible from the nature of the transactions as matters of intent or which are superinduced on the transaction by operation of law, independently of the particular intention of the parties.”11

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TITLE XVII. — EXTRA-CONTRACTUAL OBLIGATIONS Chapter 1

QUASI-CONTRACTS Article 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. (n) A quasi-contract is not an implied contract. There is no meeting of the minds between parties. A juridical relation is created by a quasi-contract so that nobody shall enrich himself at the expense of another. Article 2143. The provisions for quasi-contracts in this Chapter do not exclude other quasi-contracts which may come within the purview of the preceding article. (n) In Leung Ben vs. O’Brien,1 the Supreme Court described what types of quasi-contracts are provided in the old Civil Code which discussion likewise applies to the 1950 Civil Code provisions on quasicontracts, thus: The two obligations treated in the chapter devoted to quasicontracts in the Civil Code are: (1) the obligation incident to the officious management of the affairs of other persons (gestion de negocios ajenos) and (2) the recovery of what has been improperly paid (cobro de lo indebido). That the authors of the Civil Code selected these two obligations for special treatment does not signify an intention to deny the possibility of the existence of other quasi-contractual obligations. As it is well said by the commentator Manresa: G.R. No. 13602, April 6, 1918, 38 Phil. 182.

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Obligations and Contracts Text and Cases

Art. 2143

“The number of the quasi-contracts may be indefinite as may be the number of lawful facts, the generations of the said obligation; but the Code, just as we shall see further on, in the impracticableness of enumerating or including them all in a methodical and orderly classification, has concerned itself with two only — namely the management of the affairs of other persons and the recovery of things improperly paid — without attempting by this to exclude the others.” (Manresa, 2nd ed., Vol. 12, p. 549) It would indeed have been surprising if the authors of the Code, in the light of the jurisprudence of more than a thousand years, should have arbitrarily assumed to limit the quasi-contracts to two obligations. The author from whom we have just quoted further observes that the two obligations in question were selected for special treatment in the Code not only because they were the most conspicuous of the quasi-contracts, but because they had not been the subject of consideration in other parts of the Code. (Opus citat., p. 550) It is well recognized among civilian jurists that the quasicontractual obligations cover a wide range. The Italian jurist, Jorge Giorgi, to whom we have already referred, considers under this head, among other obligations, the following: payments made upon an existing consideration which fails; payments wrongly made upon a consideration which is contrary to law, or opposed to public policy; and payments made upon a vicious consideration or obtained by illicit means. (Giorgi, Teoria de las Obligaciones, Vol. 5, Art. 130)

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SECTION 1. — Negotiorum Gestio Article 2144. Whoever voluntarily takes charge of the agency or management of the business or property of another, without any power from the latter, is obliged to continue the same until the termination of the affair and its incidents, or to require the person concerned to substitute him, if the owner is in a position to do so. This juridical relation does not arise in either of these instances: (1) When the property or business is not neglected or abandoned; (2) If in fact the manager has been tacitly authorized by the owner; In the first case, the provisions of Articles 1317, 1403, No. 1, and 1404 regarding unauthorized contracts shall govern. In the second case, the rules on agency in Title X of this Book shall be applicable. (1888a) Negotiorum gestio is a quasi-contract which should not be performed for profit. An illustration of this situation is as follows: A abandons his property, a Mango plantation, and his business therein. B decides to manage the business and the property so that the business will earn upon harvest time. B does this without any authority from A. B therefore becomes an officious manager without expectation of any profit or remuneration. B must continue managing the property or the business until it is terminated. He can also require A to have him (B) substituted if A is in a position to do so. If the property is not abandoned, all acts of A unauthorized and any contract entered into by him shall be generally unenforceable. If B were authorized, the law on agency shall apply. In Sison and Azarraga vs. Balgos,1 where the guardian of certain minors died without paying the redemption price on behalf of the minors with respect to a certain property to which the said minors G.R. No. L-10305, September 5, 1916, 34 Phil. 885.

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Art. 2144

were entitled, and where the uncle of the said minors took upon himself to deposit the redemption price in court so that the period to redeem will not prescribe, and where the authority of the said uncle was questioned, the Supreme Court ruled that there was a quasicontract created, and therefore the act of the uncle in preserving the property of the minors was valid. Pertinently, the Supreme Court ruled: In the lamentable situation in which these poor children were left from the 2nd of May, when their guardian Isidro Azarraga died, until the 17th of the same month, on which date the period for redemption expired, the law was not obliged to abandon them to their faith. Leodegario Azarraga was reduced to the expedient of voluntarily undertaking to carry out a business matter for another and effected the redemption by depositing the price thereof. “The following are circumstances under which one may undertake to carry out a business matter for another (gestion de negocios ajenos)” says Manresa, “and complete the juridic conception which we have just given of such undertaking: (1) That they relate to determined things or affairs, and that there be no administrator or representative of the owner who is charged with the management thereof; (2) that it be foreign to all idea of express or tacit mandate on the part of the owner, for it very often may happen even without his knowledge; it is authorized by Law 26, title 12, of the 5th Partida and continues to be authorized by the Code, which latter, in fulfillment of base 21, aforecited, of the law of May 18, 1888, maintained the doctrine sanctioned by the old law; and (3) that the actor be inspired by the beneficent idea of averting losses and damages to the owner or to the interested party through the abandonment of the things that belong to him or of the business in which he may be interested, that is, that administration is not for profit, or, as stated in Law 29, of the title and Partida cited, with the avaricious idea of gain. ‘Without these circumstances,’ says Sanchez Roman, ‘the quasi-contract with which we are now dealing does not exist; and, on the contrary, reduced to its just and natural limits, it is of unquestionable utility’ (12 Manresa, 547 and 548).’ ”

On the following page, 549, he adds: “And as the law cannot and should not presume that the administrator undertakes the venture for unlawful and immoral purposes, but simply for the good of the owner or of the persons who are interested in the things or affairs affected, it confers upon the administrator the capacity of mandatory, and in such capacity requires of him that he fulfills his trust

Art. 2144

Extra-Contractual Obligations Quasi-Contracts Sec. 1 — Negotiorum Gestio

519

under conditions similar to those under which the mandatory would fulfill his own * * *”

In effect, Article 1888 of the Civil Code provides: “A person who voluntarily takes charge of the agency or administrator of the business of another, without authorization, is obliged to continue to manage the same until the business and its incidents are terminated, or to notify the interested person in order that the latter may come to substitute him in his management, should he be in a condition to do so for himself.”

That is what Leodegario Azarraga did. He took steps to do what was most indispensable, namely, to deposit the redemption price in order to prevent the action from prescribing, and as the minors or owners of the land could not themselves provide for its continuance, Azarraga called upon the guardian ad bona, Tomas Sison, to undertake the matter in addition to his own duties as guardian for the persons of the minors, in which capacity Azarraga had also been appointed on the 24th of the same month of May 1991. And these two are the persons who continued the action for redemption after the prescription of the action had been prevented by means of the deposit of the price of the redemption in conformity with Section 465 of the Code of Civil Procedure. The defendant’s third defense is without merit. It consists in the assertion that the minors could not contract nor bind themselves with Azarraga because Article 1893 of the Civil Code expressly provides that: “The owner of property or a business who avails himself of the advantages of the administration of another, even when he has not expressly ratified it, shall be liable for the obligations contracted for his benefit, and he shall indemnify the administrator for the necessary and useful expenses which he may have in charge of his duties. The same obligation shall pertain to said owner when the object of said administration should have been to avoid any imminent or manifest damage, even when no profit results therefrom.” Furthermore, the minor, although usually incapable of contracting or binding himself, cannot disavow the efficacy of the contracted obligation when it redounds to his benefit, because of the principle that no one may enrich himself to the prejudice of another.

Article 2145. The officious manager shall perform his duties with all the diligence of a good father of a family, and pay the damages which through his fault or negligence may be suffered by the owner of the property or business under

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Obligations and Contracts Text and Cases

Arts. 2145-2146

management. The courts may, however, increase or moderate the indemnity according to the circumstances of each case. (1889a) The law requires that the degree of diligence to be exercised by the officious manager is that exercised by a good father of a family. This means the ordinary degree of care which a reasonable and prudent person will do given the same circumstances the officious manager is in. If he causes damage to the property of the owner, he shall be liable to such owner. An officious manager is in a sense an intruder in the business or the property of the owner. However, if his intrusion is with the objective of preserving, managing and taking care of the property without any intent to gain, a quasi-contract is created. He cannot escape liability by stating that there was no obligation on his part to take over the property or business in the first place. Once he takes over, he is charged with the responsibility to take care of it. On the other hand, if indeed the owner suffers damage due to the negligence or fault of the officious manager, the court can increase or moderate the indemnity according to the circumstances. Article 2146. If the officious manager delegates to another person all or some of his duties, he shall be liable for the acts of the delegate, without prejudice to the direct obligation of the latter toward the owner of the business. The responsibility of two or more officious managers shall be solidary, unless the management was assumed to save the thing or business from imminent danger. (1890a) The officious manager can delegate the management of the properties to another. However, he will be responsible for the acts of the said delegate. Such person to whom the management has been delegated shall likewise be directly responsible to the owner. The liability of two or more officious managers is solidary. The owner can seek the full amount of damages from anyone of the officious managers. Article 2147. The officious manager shall be liable for any fortuitous event: (1) If he undertakes risky operations which the owner was not accustomed to embark upon;

(2) If he has preferred his own interest to that of the

Art. 2147

Extra-Contractual Obligations Quasi-Contracts Sec. 1 — Negotiorum Gestio

521

owner; (3) If he fails to return the property or business after demand by the owner;

(4) If he assumed the management in bad faith. (1891a)

Generally, the happening of a fortuitous event affecting an obligation excuses the person charged from performing the obligation. In case of negotiorum gestio, Article 2148 does not excuse the officious manager from liability due to fortuitous event. The first case is when the officious manager undertakes risky operations which the owner is not accustomed to embark upon. Thus, if the business of the owner is simply providing a warehouse for dolls and other toys, and the officious manager decides to allow the storing of highly inflammable materials in the warehouse, the officious manager shall be liable if the warehouse is burned due to a fortuitous event, such as the striking of lightning. The second case is when the officious manager has preferred his own interest to that of the owner. For example, the officious manager takes over the business of the owner of warehousing goods. In the meantime, the officious manager also stores some of his goods in the warehouse. In the event that a flood occurs, and he first saves his goods, before the goods of the owner and the latter’s clients, from being destroyed, the officious manager will be liable for the loss due to the fortuitous event. The third situation is when the officious manager fails to return the property or business after demand by the owner. Once the owner demands the return of the business, the officious manager should readily return it. He has no right to keep it for himself. Hence, if the property is destroyed by fortuitous event, the officious manager will be held liable for his act of unduly retaining what is not his. The fourth situation is when the officious manager assumes the management in bad faith. For example, the officious manager takes over the warehousing business of the owner so that he can get the clients of the owner for his (officious manager’s) own warehousing business. Such officious manager shall be liable for the loss of the warehousing business of the owner caused by a fortuitous event. Article 2148. Except when the management was assumed to save the property or business from imminent danger, the officious manager shall be liable for fortuitous events:

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Obligations and Contracts Text and Cases

Arts. 2148-2150

(1) If he is manifestly unfit to carry on the management;

(2) If by his intervention he prevented a more competent person taking up the management. (n) The officious manager has no business taking over the abandoned property or business of somebody if he has no knowledge or is not competent to undertake the management. Hence, if a teacher takes on the farming business of another, he shall be liable for any damage caused by a fortuitous event. He should have been prudent enough to know that he cannot possibly undertake something which he has no competence in. If another person who is competent to take over the farming business decides to manage the same and the said teacher prevents him from doing so on the ground that he has been there first, such teacher will be liable if the property is destroyed by a fortuitous event. However, if the said teacher manages the said farming business to save it from imminent danger, he will not be liable for damages caused by a fortuitous event. Article 2149. The ratification of the management by the owner of the business produces the effects of an express agency, even if the business may not have been successful. (1892a) Ratification means that the owner agrees to whatever the officious manager has done. It cures even the defects which the officious manager has committed. If ratification happens, the law on agency applies and even if the business is not successful, such agency by virtue of ratification shall be recognized. Article 2150. Although the officious management may not have been expressly ratified, the owner of the property or business who enjoys the advantages of the same shall be liable for obligations incurred in his interest, and shall reimburse the officious manager for the necessary and useful expenses and for the damages which the latter may have suffered in the performance of his duties. The same obligation shall be incumbent upon him when the management had for its purpose the prevention of an imminent and manifest loss, although no benefit may have been derived. (1893) The owner must always reimburse the officious manager for all expenses which have inured for the benefit or advantage of the owner. Hence, if the officious manager pays taxes on the property so

Arts. 2151-2152

Extra-Contractual Obligations Quasi-Contracts Sec. 1 — Negotiorum Gestio

523

that it will not be foreclosed, the owner must reimburse the officious manager for the payment made by the latter. Even if no benefit has been derived but the officious manager takes over to save the property or business from imminent loss, the officious manager should likewise be reimbursed for obligations incurred for the owner’s interest, including useful and necessary expenses. Article 2151. Even though the owner did not derive any benefit and there has been no imminent and manifest danger to the property or business, the owner is liable as under the first paragraph of the preceding article, provided:

(1) The officious manager has acted in good faith, and

(2) The property or business is intact, ready to be returned to the owner. (n) Whether or not there is benefit and whether or not there is imminent danger are immaterial for purposes of reimbursing the officious manager of useful and necessary expenses and of payment made in furtherance of the owner’s interest if the officious manager has acted in good faith and the property or business is intact, ready to be returned to the owner. The very fact that the property is intact means that the officious manager has prudently and with due diligence managed the property. Article 2152. The officious manager is personally liable for contracts which he has entered into with third persons, even though he acted in the name of the owner, and there shall be no right of action between the owner and third persons. These provisions shall not apply: (1) If the owner has expressly or tacitly ratified the management; or (2) When the contract refers to things pertaining to the owner of the business. (n) If the officious manager decides to manage the property or business, and for this reason, he buys some decorations to be placed in the property, such officious manager shall be the only one responsible for the payment of such decorations even if he acts in the name of the owner. The seller of the decorations has no right of action against the owner in the event the officious manager does not pay for them. However, the owner shall pay for them if he has expressly or tacitly ratifies the act of the officious manager. If the buying and selling of

524

Obligations and Contracts Text and Cases

Art. 2153

decoration is the very object of the business of the owner, the owner shall be liable.

Article 2153. The management is extinguished:



(1) When the owner repudiates it or puts an end thereto;

(2) When the officious manager withdraws from the management, subject to the provisions of Article 2144; (3) By the death, civil interdiction, insanity or insol-vency of the owner or the officious manager. (n) The management is extinguished if the owner repudiates it or puts an end to it. The owner still has the power of dominion over his property or his business. Hence his decision must prevail over that of the officious manager. If owner does not want the officious manager, this decision should prevail. In Benedicto vs. Board of Adminis-trators,2 the Supreme Court had the occasion to apply the rules on negotiorum gestio especially the occasion when it should be terminated thus: After the February Revolution in 1986, the properties, assets, and business of Broadcast City were abandoned, leaving no one to look after them. When the PCGG was created in February 1986, its chairman, now Sen. Jovito Salonga, requested the Ministry of National Defense and the Ministry of Infor-mation, in the interest of national security, to sequester Broadcast City pending clarification of its uncertain financial condition, as well as its legal and beneficial ownership. In compliance with the PCGG’s recommendation, the Ministry of National Defense on March 6, 1986, requested the Minister of Information to immediately undertake the management and administration of the sequestered facilities. On April 8, 1986, President Corazon C. Aquino issued Executive Order No. 11 creating a Board of Administrators “to manage and operate the business and affairs of Broadcast City.” Executive Order No. 11 provided that the Board of Administrators shall “function in all respects like a Board of Directors of a corporation under the Corporation Code,” exercise “all the powers imposed on trustees under the principles of the general law on trust and officious managers under the law on extracontractual obligations” (Sec. 3), and fixed its term existence to G.R. No. 87710, March 31, 1992, 207 SCRA 659.

2

Art. 2153

Extra-Contractual Obligations Quasi-Contracts Sec. 1 — Negotiorum Gestio

be “coterminous with the investigation of the seized assets by the Presidential Commission on Good Government and until final disposition of the seized assets in accordance with the findings of the Commission.” (Sec. 7) The members of the board were to hold office “at the pleasure of the President.” Pursuant to Section 1 of Executive Order No. 11, the Minister of Information appointed the members of the Board of Administrators on April 11, 1986. The petitioner filed in the Supreme Court an action against the PCGG to annul the sequestration, and to recover the management, of Broadcast City (G.R. No. 74974 entitled, “Roberto S. Benedicto vs. PCGG, et al.”). This case was transferred to, and is now pending in, the Sandiganbayan. On December 18, 1986, the petitioner and the PCGG allegedly entered into an agreement to reorganize and reinstate the Boards of Directors of RPN, BBC, IBC and other related media corporations. Two-thirds (2/3) of the members of the reorganized Boards of Directors would be nominees of the petitioner. Said boards of directors would “exercise all powers of administration and management of the sequestered com-panies.” Pursuant to that agreement, a reorganized Board of Directors was elected for each of the Broadcast City corporations. xxx However, the respondent Board of Administrators refused to relinquish the management, operation, and control of Broadcast City to the reorganized Boards of Directors. This petition for prohibition and mandamus was filed against the Board of Administrators by Benedicto, as controlling stockholder of the “Broadcast City” corporations. In the light of this ruling, which we reiterated in the Cojuangco cases, and in view of the reorganization of the Boards of Directors of the RPN, IBC and BBC television stations to administer and manage those sequestered Broadcast City companies, the authority of the Board of Administrators as “trustee and officious manager” of the same corporations, has become functus oficio. In negotiorum gestio, the authority of the officious manager of a property or business is extinguished when the owner demands the return of the same (Art. 2153, Civil Code). With the reorganization of the respective Boards of Directors of the Broadcast City companies, where PCGG controls 2/3 of the board membership, the Board of Administrators has become a supernumerary. The reason for its existence has ceased. This view is bolstered by the fact that Broadcast City is not a purely commercial venture but a media enterprise covered by

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Art. 2153

the freedom of the press provision of the Constitution, and that under our ruling in Liwayway Publishing, Inc., et al. vs. PCGG, et al. (160 SCRA 716) the Government, through the PCGG, may not lawfully intervene and participate in the management and operations of a private mass media to maintain its freedom and independence as guaranteed by the Constitution (Art. XVI, Sec. 11, 1987 Constitution).

The officious manager can withdraw from the property or the business and this will put an end to his management. However, he must require the person concerned or the owner to substitute him if such owner is in a position to do so. If the owner is not in a position to do so, he must continue and withdraw only upon the termination of the affair and its incidents. By the death of the officious manager, his duty naturally ceases. Civil interdiction is an accessory penalty to a principal penalty as punishment for the commission of a crime and it deprives the offender during the time of his sentence of the rights of parental authority, or guardianship, either as to the person or property of any ward, of marital authority, of the right to manage his property and of the right to dispose of such property by any act or any conveyance inter vivos.3 Insanity and insolvency clearly restrict the capacity to act of an individual. Insanity deprives the person of reason, while insol-vency deprives the person of the financial liquidity to manage his affairs as his liabilities surpass his assets.

Article 34 of the Revised Penal Code of the Philippines.

3

527

SECTION 2. — Solutio Indebiti Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. (1895) Article 2154 deals with solutio indebiti. In Velez vs. Balzaraza1 where it was found out that an obligor paid money which did not constitute either payment of rentals or interest and therefore was not due, the Supreme Court, applying Article 1895 of the Old Civil Code which is now Article 2154 of the present Civil Code, ruled that there was solutio indebiti and further explained: The liability of plaintiff to return the excess payments is in keeping with Article 1895 of the Civil Code which provides that, “when something is received which there is no right to collect, and which by mistake has been unduly delivered, the obligation to restore it arises.” The two requisites are present: (1) there is no right to collect these excess sums; and (2) the amounts have been paid through mistake by defendants. Such mistake is shown by the fact that the parties in their contracts never intended that either rents or interest should be paid, and by the further fact that when these payments were made, they were intended by defendants to be applied to the principal, but they overpaid the amounts loaned to them. Article 1895 of the Civil Code above quoted, is therefore applicable. This legal provision, which determines the quasicontract of solutio indebiti, is one of the concrete manifestations of the ancient principle that no one shall enrich himself unjustly at the expense of another. In the Roman Law Digest the maxim was formulated thus: “Jure naturae acquum est, neminem cum alterius detrimento et injuria fieri locupletiorem.” And the Partidas declared: “Ninguno non deue enrique cerse tortizeramente con dano de otro.” Such axiom has grown through the centuries in legislation, in the science of law and in court decisions. The lawmaker has found it one of the helpful guides in framing statutes and codes. Thus, it is unfolded in many articles G.R. No. 48389, July 27, 1942, 73 Phil. 630.

1

527

528

Obligations and Contracts Text and Cases

Art. 2154

scattered in the Spanish Civil Code. (See for example, Articles 360, 361, 464, 647, 648, 797, 1158, 1163, 1295, 1303, 1304, 1893 and 1895, Civil Code). This time-honored aphorism has also been adopted by jurists in their study of the conflict of rights. It has been accepted by the courts, which have not hesitated to apply it when the exigencies of right and equity demanded its assertion. It is a part of that affluent reservoir of justice upon which judicial discretion draws whenever the statutory laws are inadequate, because they do not speak or do so with a confused voice.

In City of Cebu vs. Judge Piccio, etc. & Caballero,2 the Supreme Court again had the occasion to restate the indispensable requisites of the juridical relation of solutio indebiti as follows: a) he who paid was not under obligation to do so; and (b) that the payment was made by reason of an essential mistake of fact (Hoskyn vs. The Goodyear Tire, etc., CA, 40 Off. Gaz., Supp. 11, 245; Velez vs. Balzarza, 73 Phil. 630).

In Adres vs. Manufacturers Hanover & Trust Corp.,3 the Supreme Court decided an interesting case which dealt on the issue of solutio indebiti. The pertinent portions of the case are as follows: Petitioner, using the business name “Irene Wearing Apparel,” was engaged in the manufacturer of ladies garments, children’s wear, men’s apparel and linens for local and foreign buyers. Among its foreign buyers was Facets Funwear, Inc. (hereinafter referred to as FACETS) of the United States. In the course of the business transaction between the two, FACETS from time to time remitted certain amounts of money to petitioner in payment for the items it had purchased. Sometime in August 1980, FACETS instructed the First National State Bank of New Jersey, Newark, New Jersey, U.S.A. (here-inafter referred to as FNSB) to transfer $10,000.00 to petitioner via Philippine National Bank, Sta. Cruz Branch, Manila (here-inafter referred to as PNB). Acting at said instruction, FNSB instructed private respondent Manufacturers Hanover and Trust Corporation to effect the above-mentioned transfer through its facilities and to charge the amount to the account of FNSB with private respondent. Although private respondent was able to send a telex to PNB to pay petitioner $10,000.00 through the Pilipinas Bank, where petitioner had an account, the payment was not effected immediately because the payee designated in the telex G.R. Nos. 48389 and L-14876, December 31, 1960, 110 Phil. 558. G.R. No. 82670, September 15, 1989, 177 SCRA 618.

2 3

Art. 2154

Extra-Contractual Obligations Quasi-Contracts Sec. 2 — Solutio Indebiti

529

was only “Wearing Apparel.” Upon query by PNB, private respondent sent PNB another telex dated August 27, 1980 stating that the payment was to be made to “Irene’s Wearing Apparel.” On August 28, 1980, petitioner received the remittance of $10,000.00 through Demand Draft No. 225654 of the PNB. Meanwhile, on August 25, 1980, after learning about the delay in the remittance of the money to petitioner, FACETS informed FNSB about the situation. On September 8, 1980, unaware that petitioner had already received the remittance, FACETS informed private respondent about the delay and at the same time amended its instruction by asking it to effect the payment through the Philippine Commercial and Industrial Bank (hereinafter referred to as PCIB) instead of PNB. Accordingly, private respondent, which was also unaware that petitioner had already received the remittance of $10,000.00 from PNB instructed the PCIB to pay $10,000.00 to petitioner. Hence, on September 11, 1980, petitioner received a second $10,000.00 remittance. Private respondent debited the account of FNSB for the second $10,000.00 remittance effected through PCIB. However, when FNSB discovered that private respondent had made a duplication of the remittance, it asked for a credit of its account in the amount of $10,000.00. Private respondent complied with the request. Private respondent asked petitioner for the return of the second remittance of $10,000.00 but the latter refused to pay. On May 12, 1982 a complaint was filed with the Regional Trial Court, Branch CV, Quezon City which was decided in favor of petitioner as defendant. The trial court ruled that Art. 2154 of the New Civil Code is not applicable to the case because the second remittance was made not by mistake but by negligence and petitioner was not unjustly enriched by virtue thereof [Records, p. 234]. On appeal, the Court of Appeals held that Art. 2154 is applicable and reversed the RTC decision. xxx

xxx

xxx

The sole issue in this case is whether or not the private respondent has the right to recover the second $10,000.00 remittance it had delivered to petitioner. The resolution of this issue would hinge on the applicability of Art. 2154 of the New Civil Code which provides that: Art. 2154. If something received when there is no right to demand it, and it was unduly deli-vered through mistake, the obligation to return it arises. x x x

x x x

xxx

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Obligations and Contracts Text and Cases

Art. 2154

For this article to apply the following requisites must concur: “(1) that he who paid was not under obligation to do so; and (2) that payment was made by reason of an essential mistake of fact” [City of Cebu vs. Piccio, 110 Phil. 558, 563 (1960)]. It is undisputed that private respondent delivered the second $10,000.00 remittance. However, petitioner contends that the doctrine of solutio indebiti does not apply because its requisites are absent. First, it is argued that petitioner had the right to demand and therefore to retain the second $10,000.00 remittance. It is alleged that even after the two $10,000.00 remittances are credited to petitioner’s receivables from FACETS, the latter allegedly still had a balance of $49,324.00. Hence, it is argued that the last $10,000.00 remittance being in payment of a preexisting debt, petitioner was not thereby unjustly enriched.

The contention is without merit.

The contract of petitioner, as regards the sale of garments and other textile products, was with FACETS. It was the latter and not private respondent which was indebted to petitioner. On the other hand, the contract for the transmittal of dollars from the United States to petitioner was entered into by private respondent with FNSB. Petitioner, although named as the payee was not privy to the contract of remittance of dollars. Neither was private respondent a party to the contract of sale between petitioner and FACETS. There being no contractual relation between them, petitioner had no right to apply the second $10,000.00 remittance delivered by mistake by private res-pondent to the outstanding accounts of FACETS. Petitioner next contends that the payment by respondent bank of the second $10,000.00 remittance was not made by mistake but was the result of negligence of its employees. In connection with this the Court of Appeals made the following findings of facts. The fact that Facets sent only one remittance of $10,000.00 is not disputed. In the written interrogatories sent to the First National State Bank of New Jersey through the Consulate General of the Philippines in New York, Adelaide C. Schachel, the investigation and reconciliation clerk in the said bank testified that a request to remit a payment for Facets Funwear, Inc. was made in August, 1980. The total amount which the First National State Bank of New Jersey actually requested the plaintiff-appellant Manufacturers Hanover & Trust Corporation to remit to Irene’s Wearing Apparel was US$10,000.00. Only one remittance was requested by First National State Bank of New

Art. 2154

Extra-Contractual Obligations Quasi-Contracts Sec. 2 — Solutio Indebiti

531

Jersey as per instruction of Facets Funwear (Exhibit “J,” pp. 4-5). That there was a mistake in the second remittance of US$10,000.00 is borne out by the fact that both remittance have the same reference invoice number which is 26380. (Exhibits “A-1-Deposition of Mr. Stanley Panasow” and “A-2-Deposition of Mr. Stanley Panasow”). Plaintiff-appellant made the second remittance on the wrong assumption that defendant-appellee did not receive the first remittance of US$10,000.00. [Rollo, pp. 26-27] It is evident that the claim of petitioner is anchored on the appreciation of the attendant facts which petitioner would have this Court review. The Court holds that the finding by the Court of Appeals that the second $10,000.00 remittance was made by mistake, being based on substantial evidence, is final and conclusive. xxx

x x x

xxx

Petitioner invokes the equitable principle that when one of two innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss. The rule is that principles of equity cannot be applied if there is a provision of law specifically applicable to a case Phil. Rabbit Bus Line, Inc. vs. Arciaga, G.R. No. L-29701, March 16, 1987, 148 SCRA 433; Zabat, Jr. vs. Court of Appeals, G.R. No. L-36958, July 10, 1986, 142 SCRA 587; Rural Bank of Parañaque, Inc. vs. Remolado, G.R. No. 62051, March 18, 1985, 135 SCRA 409; Cruz vs. Pahati, 98 Phil. 788 (1956). Hence, the Court in the case of De Garcia vs. Court of Appeals, G.R. No. L-20264, January 30, 1971, 37 SCRA 129, citing Aznar vs. Yapdiangco, G.R. No. L-18536, March 31, 1965, 13 SCRA 486, held: . . . The common law principle that where one of two innocent persons must suffer by a fraud perpetrated by another, the law imposes the loss upon the party who, by his misplaced confidence, has enabled the fraud to be committed, cannot be applied in a case which is covered by an express provision of the new Civil Code, specifically Article 559. Between a common law principle and a statutory provision, the latter must prevail in this jurisdiction. [at p. 135] Having shown that Art. 2154 of the Civil Code, which embodies the doctrine of solutio indebiti, applies in the case at bar, the Court must reject the common law principle invoked by petitioner.

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Obligations and Contracts Text and Cases

Art. 2155

Finally, in her attempt to defeat private respondent’s claim petitioner makes much of the fact that from the time the second $10,000.00 remittance was made, five hundred and ten days had elapsed before private respondent demanded the return thereof. Needless to say, private respondent instituted the complaint for recovery of the second $10,000.00 remittance well within the six years prescriptive period for actions based upon a quasi-contract [Art. 1145 of the New Civil Code].

Article 2155. Payment by reason of a mistake in the construction or application of a doubtful or difficult question of law may come within the scope of the preceding article. (n) Solutio indebiti, generally involves only a mistake of fact. However, under Article 2155, a mistake of law is allowed if the mistake is brought about by the construction or application of a doubtful or difficult question of law. In Gonzalo Puyat and Sons, Inc. vs. City of Manila where the appellee, by mistake paid taxes which were not due as the appellant was exempted from the same, and the said mistake in payment was, among others, the result of a complicated correlation and application of various municipal and national laws, the Supreme Court ruled that there was solutio indebiti by stating: In refutation of the above stand of appellants, appellee avers that the payments could not have been voluntary. At most, they were paid “mistakenly and in good faith” and “without protest in the erroneous belief that it was liable thereof.” Voluntarines is incompatible with protest and mistake. It submits that this is a simple case of “solutio indebiti.” Appellants do not dispute the fact that appellee-company is exempted from the payment of the tax in question. This is manifest from the reply of appellant City Treasurer stating that sales of manufactured products at the factory site are not taxable either under the Wholesalers’ Ordinance or under the Retailers’ Ordinance. With this admission, it would seem clear that the taxes collected from appellee were paid, thru an error or mistake, which places said act of payment within the pale of the new Civil Code provision on solutio indebiti. The appellant City of Manila, at the very start, notwithstanding the Ordinance imposing the Retailer’s Tax, had no right to demand payment thereof. “If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises” (Art. 2154, NCC).

Art. 2155

Extra-Contractual Obligations Quasi-Contracts Sec. 2 — Solutio Indebiti

Appellee categorically stated that the payment was not voluntarily made (a fact found also by the lower court), but on the erroneous belief, that they were due. Under this circum-stances, the amount paid, even without protest is recoverable. “If the payer was in doubt whether the debt was due, he may recover if he proves that it was not due” (Art. 2156, NCC). Appellee had duly proved that taxes were not lawfully due. There is, therefore, no doubt that the provisions of solutio indebiti, of the new Civil Code, apply to the admitted facts of the case. With all, appellant quoted Manresa as saying: “x x x De la misma opinion son el Sr. Sanchez Roman y el Sr. Galcon, et cual afirma que si la paga se hizo por error de derecho, ni existe el cuasicontrato ni esta obligado a la restitucion el que cobro, aunque no se debiera lo que se pago” (Manresa, Tomo 12, paginas 611-612). This opinion, however, has already lost its persuasive-ness, in view of the provisions of the Civil Code, recognizing “error de derecho” as a basis for the quasi-contract, of solutio indebiti. “Payment by reason of a mistake in the construction or application of a doubtful or difficult question of law may come within the scope of the preceding article.” (Art. 2155) There is no gainsaying the fact that the payments made by appellee was due to a mistake in the construction of a doubtful question of law. The reason underlying similar provisions, as applied to illegal taxation, in the United States, is expressed in the case of Newport vs. Ringo, 37 Ky. 635. 636; 10 S.W. 2, in the following manner: It is too well settled in this state to need the citation of authority that if money be paid through a clear mistake of law or fact, essentially affecting the rights of the parties, and which in law or conscience was not payable, and should not be retained by the party receiving it, it may be recovered. Both law and sound morality so dictate. Especially should this be the rule as to illegal taxation. The taxpayer has no voice in the imposition of the burden. He has the right to presume that the taxing power has been lawfully exercised. He should not be required to know more than those in authority over him, nor should he suffer loss by complying with what he bona fide believes to be his duty as a good citizen. Upon the contrary, he should be promoted to its ready performance by refunding to him any legal exaction paid by him in ignorance of its illegality; and certainly, in such a case, if be subject to a penalty for non-payment, his

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Arts. 2156-2157

compliance under belief of its legality, and without awaiting a resort to judicial proceedings should not be regarded in law as so far voluntary as to affect his right of recovery.” “Every person who through an act or performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal grounds, shall return the same to him” (Art. 22, Civil Code). It would seem unedifying for the government (here the City of Manila), that knowing it has no right at all to collect or to receive money for alleged taxes paid by mistake, it would be reluctant to return the same. No one should enrich himself unjustly at the expense of another.

Article 2156. If the payer was in doubt whether the debt was due, he may recover if he proves that it was not due. (n) For example, a debtor pays a creditor prematurely because he is not sure whether the debt is already due. The creditor accepts it . The debtor can recover what he has paid prior to the due date of the debt provided that the demand for reimbursement is not made after the debt has become due. This is a case of solutio indebiti. Article 2157. The responsibility of two or more payees, when there has been payment of what is not due, is solidary. (n) An illustration of this article is as follows: A is indebted to B and C for P2,000. The obligation is of a solidary nature such that A can pay only to one of them the whole obligation, and the debt is considered paid as to both. Thus, if A pays B the amount of P2,000, the debt is considered paid. It is up to C to claim from B his share of the credit which is P1,000. If there is payment by mistake, A can recover from either B or C the amount which he has paid. This is true, even if in the meantime, C has not yet obtained his P1,000. Article 2158. When the property delivered or money paid belongs to a third person, the payee shall comply with the provisions of Article 1984. (n) An illustration of this article is as follows: A is obliged to pay B his obligation by giving B a watch. Despite the fact that the payment is not yet due, A gives B the watch which turns out to be stolen from X. At the time of his receipt of the watch, B has no obligation to ask A questions as to who owns the watch. However, if B later finds out that X really owns the watch, B must advise X that he (B) is in possession

Arts. 2158-2159

Extra-Contractual Obligations Quasi-Contracts Sec. 2 — Solutio Indebiti

535

of his (X’s) watch. X must claim the watch within one month from the advice. If X does not claim the watch, B is excused from all liability if, A, because of solutio indebiti, claims back the watch, and B gives back the watch to A. However, if at the time A gives the watch of B, the latter has reasonable grounds to believe that it has been acquired unlawfully, B can return the same to A. The above situation is pursuant to Article 1984 of the 1950 Civil Code which provides: Article 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited. Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit. If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same.

Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits. If the creditor knows that the payment is not yet due and payment is tendered to him, he must inform the debtor that payment is not yet due. Should the creditor accept such premature payment, he is therefore in bad faith and shall be liable for interest from the time he accepts payment up to the time he returns it upon demand of the debtor. Article 2160. He who in good faith accepts an undue payment of a thing certain and determinate shall only be responsible for the impairment or loss of the same or its accessories and accessions insofar as he has thereby been benefited. If he has alienated it, he shall return the price or assign the action to collect the sum. (1897) An illustration of this article is as follows: A is obliged to give B a house on January 1, 1997. Believing that it was due on August 1, 1996, A delivered the house on said date. B likewise did not know that the house was still due on January 1, 1997. B was in good faith. On November 1996, the house was rented in the amount of P2,000 per

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Arts. 2160-2161

hour by a movie producer for a particular motion picture and, while shooting, the kitchen was accidentally burned. After the shooting of the motion picture, B was paid the rent in the amount of P30,000 for 15 hours. On December 1996, A discovered that the house was not yet due and demanded its return. B can return the house and pay the amount of the kitchen which has been impaired, because he (B) has been benefited by the house when he had it rented. Article 2161. As regards the reimbursement for improvements and expenses incurred by him who unduly received the thing, the provisions of Title V of Book II shall govern. (1898) Title V of Book II of the 1950 Civil Code governs, among others, the rights of a possessor in good faith and bad faith as to the improvements and expenses. Pertinently, it provides the following rules: Article 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof. Article 547. If the useful improvements can be removed without damage to the principal thing, the possessor in good faith may remove them, unless the person who recovers the possession exercises the option under paragraph 2 of the preceding article. Article 548. Expenses for pure luxury or mere pleasure shall not be refunded to the possessor in good faith; but he may remove the ornaments with which he has embellished the principal thing if it suffers no injury thereby, and if his successor in the possession does not prefer to refund the amount expended. Article 549. The possessor in bad faith shall reimburse the fruits received and those which the legitimate possessor could have received, and shall have a right only to the expenses mentioned in paragraph 1 of Article 546 and in Article 443. The expenses incurred in improvements for pure luxury or mere pleasure shall not be refunded to the possessor in bad faith; but he may remove the object for which such expenses have been incurred, provided that the thing suffers no injury thereby, and that the lawful possessor does not prefer to retain them by paying

Art. 2162

Extra-Contractual Obligations Quasi-Contracts Sec. 2 — Solutio Indebiti

537

the value they may have at the time he enters into possession. Article 550. The costs of litigation over the property shall be borne by every possessor. Article 551. Improvements caused by Nature or time shall always inure to the benefit of the person who has succeeded in recovering possession. Article 552. A possessor in good faith shall be liable for the deterioration or loss of the thing possessed, except in cases in which it is proved that he has acted with fraudulent intent or negligence, after the judicial summons. A possessor in bad faith shall be liable for deterioration or loss in every case, even if caused by fortuitous event. Article 553. One who recovers possession shall not be obliged to pay for improvements which have ceased to exist at the time he takes possession of the thing.

Article 2162. He shall be exempt from the obligation to restore who, believing in good faith that the payment was being made of a legitimate and subsisting claim, destroyed the document, or allowed the action to prescribe, or gave up the pledges, or cancelled the guaranties for his right. He who paid unduly may proceed only against the true debtor or the guarantors with regard to whom the action is still effective. (1899) An illustration of this rule is as follows: A is indebted to B in the amount of P1,000. It is an oral contract of loan and hence it prescribes in 6 years from the time it falls due. X is the guarantor of the indebtedness. As guarantor, X will only pay B if B has unsuccessfully exhausted all efforts to collect from A upon the maturity of the debt. The debt becomes due and A fails to pay B. B has not yet exhausted all efforts to collect from A. Believing that he is principally liable also for the debt, X pays B on the fifth year since the debt has become due. B also believed in good faith that he could collect from X and hence accepts the payment from X. In the meantime, more than six years have already lapsed since the debt has become due. B does not demand from A anymore because he has already been paid by X on the fifth year. In this case, X paid B by mistake. X cannot recover the money paid by mistake from B because, if this is allowed, B cannot anymore recover payment from A as B’s cause of action against A has prescribed. X can only recover from A , the true debtor. Since a quasicontract of solutio indebiti exists from the time X made the payment

538

Obligations and Contracts Text and Cases

Art. 2163

on the fifth year, he has six years from such payment within which to file an action against A, the principal debtor. This is so because, considering that a quasi-contract prescribes after six years from the time the cause of action accrues, the action to collect from A is still effective. Article 2163. It is presumed that there is a mistake in the payment if something which had never been due or had already been delivered was delivered; but he from whom the return is claimed may prove that the delivery was made out of liberality. A debtor who pays in solutio indebiti may recover what he has paid by mistake. However, the person to whom the payment has been made can show that such payment is a gift or a donation by showing the proper evidence like a valid deed of donation.

539

SECTION 3. — Other Quasi-Contracts Article 2164. When, without the knowledge of the person obliged to give support, it is given by a stranger, the latter shall have a right to claim the same from the former, unless it appears that he gave it out of piety and without intention of being repaid. (1894a) Article 2164 was adopted in Article 206 of the Family Code of the Philippines1 which now provides: Article 206. When, without the knowledge of the person obliged to give support, it is given by a stranger, the latter shall have a right to claim the same from the former, unless it appears that he gave it without the intention of being reimbursed.

In the case of De Marcaida vs. Redfern2 where a spouse borrowed a sum of money on different occasions from her sister and where the sister and her husband sued the husband of the borrowing spouse for reimbursement, the Supreme Court explained the application of Article 1894 of the Old Civil Code which is the precursor of Article 2164 of the 1950 Civil Code and Article 206 of the Family Code, thus: The case falls squarely within the provisions of the first paragraph of Article 1894 of the Civil Code. This Article provides: “When, without the consent of the person who is bound to give support to a dependent, a stranger supplies it, the latter shall be entitled to recover the same from the former, unless it appears that he gave it out of charity, and without expectation of recovering it.” For one to recover under the provisions of Article 1894 of the Civil Code, it must be alleged and proved, first, that support has been furnished a dependent of one bound to give support but who fails to do so; second, that the support was supplied by a stranger; and third, that the support was given without without the knowledge of the person charged with the Executive Order No. 209 which took effect on August 3, 1988. 49 Phil. 489 cited in Persons and Family Relations Law by Melencio S. Sta. Maria, Jr., 2nd edition, Rex Printing Company, Inc., 84 P. Florentino St., Quezon City, page 530. 3 Article 195 of the Family Code of the Philippines, Executive Order No. 209 1 2

539

540

Obligations and Contracts Text and Cases

Art. 2165

duty. The negative qualification is when the support is given the expectation of recovering it. With special reference to the combined facts and law, it may be conceded that Mr. and Mrs. Ramirez did not support Mrs. Redfern with money out of charity. The third requisite of the law is also taken out of consideration since Mr. Redfern is the first to acknowledge that the money was handed to his wife by Mr. and Mrs. Ramirez without his knowledge. We think, however, that there is a failure of proof as to the first essential, and possibly the second essential, of the law. The first requisite of the law has a legal introduction, but ends as a question of fact. The husband and the wife are mutually bound to support each other. By support is under-stood all that is necessary for food, shelter, clothing and medical attendance, according to the social standing of the family. Parents are also required to bring up and educate their children. But in this connection, the point of interest is that the wife accepted the assistance from another, when it is not shown that she had ever made any complaint to her husband or any of his agents with regard to her allowance. The testimony of the husband is uncontradicted that he had given his English agent instructions to furnish his wife with any reasonable sum she needed bearing in mind his financial condition, but she never took advantage of this offer. Mr. Redfern’s reason for reducing the allowance, he says, was his precarious financial situation in 1921 and 1922. Before one can tender succor to the wife of another with an expectation of recouping himself for the loan, the husband should be given an opportunity to render the needful assistance. With reference also to the first requirement of the law abovementioned, it is clear that there is evidence in the record which corroborates the finding of the trial judge that the defendant was amply providing for his wife and children in London. But a wife’s fortune and a husband’s fortune coincide. For children of proper age to be made to look after themselves, is not always hardship. As to the £600 (pounds) first advanced to Mrs. Redfern, this was not primarily for support because she retained it for sometime before using it.

Article 2165. When funeral expenses are borne by a third person, without the knowledge of those relatives who were obliged to give support to the deceased, said relatives shall reimburse the third person, should the latter claim reimbursement. (1894a) The following are obliged to support each other: 1) the spouses; 2) legitimate ascendants and descendants; 3) parents and their

Arts. 2166-2167

Extra-Contractual Obligations Quasi-Contracts Sec. 3 — Other Quasi-Contracts

541

legitimate children and the legitimate and illegitimate children of the latter; 4) parents and their illegitimate children and the legitimate and illegitimate children of the latter; and 5) legitimate brothers and sisters, whether of full or half-blood.3 Whenever two or more persons are obliged to give support, the liability shall devolve upon the following persons in the following order: 1) the spouse; 2) the descendants in the nearest degree; 3) the ascendants in the nearest degree; and 4) the brothers and sisters.4 An illustration of the rule provided in this provision is as follows: A was the daughter of X and Y. A died. G was the one who shouldered the expenses for A’s funeral. If G did this benevolent act as an act of charity, X and Y need not reimburse him. If G intended to be reimbursed, he can only be paid after demanding payment from X and Y. Article 2166. When the person obliged to support an orphan, or an insane or other indigent person unjustly refuses to give support to the latter, any third person may furnish support to the needy individual, with right of reimbursement from the person obliged to give support. The provisions of this article apply when the father or mother of a child under eighteen years of age unjustly refuses to support him. Article 2166 has been adopted by Article 207 of the Family Code of the Philippines which provides: Article 207. When the person obliged to support another unjustly refuses or fails to give support when urgently needed by the latter, any third person may furnish support to the needy individual, with right of reimbursement from the person obliged to give support. This Article shall particularly apply when the father or mother of a child under the age of majority unjustly refuses to support or fails to give support to the child when urgently needed.

Article 2167. When through an accident or other cause a person is injured or becomes seriously ill, and he is treated or helped while he is not in a condition to give his consent to a contract, he shall be liable to pay for the services of the physician or other person aiding him, unless the service has been rendered out of pure generosity. which took effect on August 3, 1988. 4 Id., Article 199.

542

Obligations and Contracts Text and Cases

Arts. 2168-2170

For example, A is bumped by a car and is seriously injured. He becomes unconscious. X sees A and brings him to the hospital. A’s injuries need immediate treatment but, since he is in coma, he cannot give his consent. The doctor nevertheless treats his injuries lest it becomes more serious. When A recovers, he has the obligation to pay the services of the doctor unless the latter does not want to be paid. Article 2168. When during a fire, flood, storm or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation. For example, the house of A starts to catch fire but A is not in the house. When the garage of the house is already on fire, Z goes inside the burning garage and pushes the car of A out of the same without the knowledge of A. The car is saved from destruction. In this case, A is bound to pay Z just compensation unless Z does not want to accept it. Article 2169. When the government, upon the failure of any person to comply with health or safety regulations concerning property, undertakes to do the necessary work, even over his objection, he shall be liable to pay the expenses. For example, a municipal ordinance prohibits the throwing of spoiled food outside of the house in a waste can without any plastic bag. A does not abide by the said ordinance and continually throws spoiled food in a wooden garbage container. To prevent the spread of disease, the municipal government can put the spoiled food inside a plastic bag first and then provide the owner of the house with a garbage can at the owner’s expense even if he does not want to. Article 2170. When by accident or other fortuitous event, movables separately pertaining to two or more persons are commingled or confused, the rules on co-ownership shall be applicable. The commingling here is unintentional as it is the result of an accident or fortuitous event. Article 2171. The rights and obligations of the finder of lost personal property shall be governed by Articles 719 and 720.

Arts. 2171-2172

Extra-Contractual Obligations Quasi-Contracts Sec. 3. — Other Quasi-Contracts

543

With respect to lost personal property, this provision provides that Articles 719 and 720 will apply. These provisions provide: Article 719. Whoever finds a movable, which is not treasure, must return it to its previous possessor. If the latter is unknown, the finder shall immediately deposit it with the mayor of the city or municipality where the finding has taken place. The finding shall be publicly announced by the mayor for two consecutive weeks in the way he deems best. If the movable cannot be kept without deterioration, or without the expenses which considerably diminish its value, it shall be sold at public auction eight days after publication. Six months from the publication having elapsed without the owner having appeared, the thing found, or its value, shall be awarded to the finder. The finder and the owner shall be obliged, as the case may be, to reimburse the expenses. Article 720. If the owner should appear in time, he shall be obliged to pay, as a reward to the finder, one-tenth of the sum or of the price of the thing found.

Article 2172. The right of every possessor in good faith to reimbursement for necessary and useful expenses is governed by Article 546. The provision refers to Article 546 insofar as the right of every possessor in good faith to reimbursement for necessary and useful expenses are concerned. Article 546 provides: Article 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of re-funding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason there-of.

Article 2173. When a third person, without the knowledge of the debtor, pays the debt, the rights of the former are governed by Articles 1236 and 1237. Articles 1236 and 1237 are provisions on the law of obligations especially on the matter of payment or performance. They provide:

Article 1236. The creditor is not bound to accept payment

544

Obligations and Contracts Text and Cases

Arts. 2173-2175

or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. Article 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.

Article 2174. When in a small community a majority of the inhabitants of age decide upon a measure for protection against lawlessness, fire, flood, storm or other calamity, any one who objects to the plan and refuses to contribute to the expenses but is benefited by the project as executed shall be liable to pay his share in the expenses. For example, the people of a certain barrio decide to engage a security force to protect their community because of rampant lawlessness. For this reason, the people agree to contribute to the expenses of this security force. G however refuse to make any contribution. In the event that the security force apprehend robbers intending to rob the house of G, G should pay his share in the expenses for the community’s engagement of the security force to protect the people from criminals. Article 2175. Any person who is constrained to pay the taxes of another shall be entitled to reimbursement from the latter. For example, A is the neighbor of G whose property is about to be forfeited to the government because of unpaid real estate taxes. A can pay the taxes but G must reimburse him.