Notes On OBLICON

OBLIGATIONS AND CONTRACTS
BUDDY NOTES
LECTURES OF ATTY.
JOSEPH SAN PEDRO (SY 2015-2016)
Prepared by:
BLOCK 1-F
Acuyong, Alcantara, Baclao, Barroso, Benitez, Bernardo, Bilog, Borromeo, Chan, Contreras, Cura, De la Paz, De La Rosa, De Luna,
Deslate, Farcon, Fernandez, Fulgencio, Gutierrez, Gubatan, King, Lao, Lee, Lee, Lim, Limjoco Lopez, Magsaysay, Poblete, Rase, Rodis,
Santos, See, Sison, Soriente, Soriano, Soriano, Tambaoan, Uy, Uy, Yap
OBLIGATIONS 1 DACION EN PAGO 110 VOIDABLE CONTRACTS 228
SOURCES 3 CONSIGNATION 115 UNENFORCEABLE CONTRACTS 236
DEFAULT LEGAL REMEDIES 10 LOSS OF THING DUE 123 VOID CONTRACTS 244
DELAY/DEFAULT 23 CONDONATION OR REMISSION OF 128 NATURAL OBLIGATIONS 245

DEBT
DEMAND 25 ESTOPPEL 246
CONFUSION OR MERGER OF RIGHTS 129
RECIPROCAL OBLIGATION 32 LACHES 247
COMPENSATION 129
FORTUITOUS EVENTS 35 TRUST 248
SUBROGATION 143
USURIOUS INTEREST 38 PRECRIPTION 256
NOVATION 145
PRESUMPTIONS WITH RESPECT TO 38
PAYMENT CONTRACTS 149
DIFFERENT KINDS OF OBLIGATIONS 41 PRINCIPLES OF A CONTRACT 153
CONDITIONS 43 TORTIOUS INTERFERENCE 164
RESOLUTION 54 STIPULATION POR ATRUI 166
OBLIGATIONS WITH A PERIOD 62 ELEMENTSOF A CONTRACT 168
ALTERNATIVE OBLIGATIONS 68 CONSENT 168
JOINT AND SOLIDARY OBLIGATIONS 70 OPTION CONTRACTS 172
DIVISIBLE AND IDIVISIBLE 83 VICES OF CONSENT 182

OBLIGATIONS
OBJECT 197
OBLIGATIONS WITH A PENAL CLAUSE 83
CAUSE 198
EXTINGUISHMENT OF OBLIGATIONS 89
REFORMATION 205
PAYMENT 92
INTERPRETATION OF CONTRACTS 210
INFLATION 107
RESCISSION 212
APPLICATION OF PAYMENT 109
OBLIGATIONS & CONTRACTS
San Pedro Lecture Transcript
TUESDAY, 26 JANUARY 2016
HOW DOES A LAW DEFINE AN OBLIGATION?

Prestation
• Act or omission that has to be done by the obligor/debtor
Art. 1156. An obligation is a juridical necessity to give, to do or not to do.
• Example: Marriage contract
Trilateral prestation: there is an obligation to give, to do and not to do.
Juridical – required by law; something legal
Juridical necessity
• Contemplates a juridical relationship between two parties, and involves one
1. Obligation to give
of the sources of an obligation
Example: Sale
• Subject to sanctions
When you have a contract of sale, you have the seller, and you have the buyer – this is
• Arises from the juridical tie element
what you call a reciprocal obligation, where each party has a prestation to fulfill.
of an obligation
SOURCES OF AN Seller conveys the property; buyer pays the price. So, in exchange for one prestation
Juridical tie
(conveyance of the property) the buyer does another prestation (payment of the price)
• Juridical – legal; something to do OBLIGATION
– these are called obligations to give.
with the law
• Tie – something that binds 1. CONTRACT
2. LAW 2. Obligation to do
• Compelling element of an obligation
3. QUASI-CONTRACT Example: Legal profession
• Something that forces the obligor/
4. DELICT It is a profession because a lawyer only works for money; you don’t pay a lawyer, he
debtor to perform the obligation
5. QUASI-DELICT doesn’t give you anything.
• Refers to the sources of an
obligation
3. Obligation not to do
Example 1: Case of Lalicon v. NHA
NHA prohibits the disposition of a housing unit acquired under its housing programs
ELEMENTS OF AN OBLIGATIONS
to preserve ownership in the hands of the beneficiaries.
Example 2: Agrarian reform laws

Normally there will be a prohibition there that any beneficiary under the agrarian
ELEMENTS OF AN OBLIGATION reform program cannot dispose of properties received under the program within a
certain period.
1.JURIDICAL TIE
2.PRESTATION Example 3: Loan contracts
3.DEBTOR Sometimes you will have negative covenants – these are undertaking not to do. For
4.CREDITOR example, a company borrows from a bank; the bank will prohibit the company from
lending. Another is prohibition of a mortgage of a specific property.
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IlLLUSTRATION 1: CONTRACT OF SALE AS A RECIPROCAL OBLIGATION DEFAULT LEGAL REMEDIES OF A CREDITOR
PROPERTY
BUYER There are other legal remedies, but
SELLER PRICE DEFAULT LEGAL REMEDIES
these are the default remedies.
1. SPECIFIC PERFORMANCE (WITH OR
A reciprocal obligation is an obligation wherein each party has a prestation to
WITHOUT DAMAGES)
fulfill.
2. RESOLUTION ( WITH OR WITHOUT
In a contract of sale, there are two prestations:
DAMAGES)
(1) conveyance of the property;
3. DAMAGES
(2) payment of the price.
With respect to the conveyance of the property (prestation 1), the seller is the
debtor, and the buyer is the creditor. With respect to the payment of the price
Specific Performance
(prestation 2), the buyer is the debtor, and the seller is the creditor.
To require, by final action, the debtor to perform the mandated prestation – the
prestation mandated by the obligation
Prestation 1: Conveyance of the property
Example: Contract of Sale
The seller is the debtor, because the seller is the one obliged to convey the
Buyer pays the price; seller does not deliver. The buyer sues the seller to compel the
property; and the buyer, the one who pays the price, is the creditor, because
seller to convey the property, pursuant to the contract of sale
the buyer is entitled to demand the conveyance.
Resolution/Rescission
Prestation 2: Payment of the price
The contract being resolved, meaning as if abrogated
The buyer is the debtor, because the buyer is the one obliged to pay the
Remedy under Art. 1191 (term used here is rescission)
amount due under the contract of sale; and the seller is the creditor, because
Example: Contract of Sale
the seller is entitled to demand the payment of the price.
Buyer pays the price; seller does not deliver. Buyer gets the payment back, and there
will be an award of interest by way of damages; or just return of the payment. There is
WHAT IS AN OBLIGATION? a cancellation of contract.
Damages
May be invoked, if there is negligence, fraud, delay/default, and any other
OBLIGATION contravention of the tenor of the obligation or the moment there is a breach of an
obligation
1. A legal/juridical relation between a debtor and a creditor whereby the
creditor can demand a specific conduct, and the conduct is what you call a
Example 1: Double Sale
prestation - to give, to do, or not to do
Seller does a double sale in which he sells a property to X, and then sold it again to B.
2. Should there be a default or a failure to fulfill the prestation, there will be
This is an example of fraud.
consequent legal remedies
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What are the elements of contract in this case?

Example 2: Contract of Sale
Creditor (the one entitled to demand the performance of the prestation or the
Seller does not convey the property. This is an example of default.
specific conduct of the debtor): Lender
Example 3: Loan Contract
Debtor (the one mandated under the obligation to perform the prestation):
On Day 1 (commencement of transaction), lender lends 1 million to borrower.
Borrower
Borrower, on Day 2, (due date of payment) should pay the borrower. Day 2 does not
Object (subject matter of the obligation): Loan
mean the next day. On due date, despite the demand of the lender, borrower
Prestation: To give
defaulted. Borrower sues. Let’s assume lender will get a judgment – it will be
Juridical Tie (source of the obligation): Loan Contract
collection, so this is an action for specific performance: lender is demanding borrower
to pay 1 million. There will also be a claim for damages because there was a breach,
In a loan contract, you cannot have a resolution, because it does not make sense.
specifically, a contravention of the tenor of minimum of the obligation: the borrower
You cannot cancel the loan contract; it’s either you collect, and then you just get
did not pay on due date, upon demand by the lender. Since this is a loan, the court
damages. There is no resolution of a loan contract.
will award interest by way of damages (6% per annum).
RECAP: WHAT IS AN OBLIGATION?

SOURCES OF AN OBLIGATION
Obligation is a juridical/legal relationship whereby a person called a creditor can
demand performance of a specific conduct – what we call a prestation (to give, to do,
or not to do) – from the debtor; and in case of breach/default by the debtor, the
debtor shall be liable for certain sanctions, and the basic sanctions/remedies are: Art. 1157. Obligations arise from:
(1)specific performance with/without damages; 1) Law;
(2) resolution with/without damages; and 2) Contracts;
(3) damages. 3) Quasi-contracts;
There are other remedies under the law, but basically, these three are the default 4) Acts or Omissions punished by law; and
remedies. 5) Quasi-delicts
Illustration 2: LOAN CONTRACT The list is exclusive. If you look at the enumeration, the sources can be categorized
into two obligations:
LOAN (1) laws; and (2) contracts.
DEBTOR CREDITOR
The other three exist because there are specific laws made for them.
If there is no law, it does not exist; we don’t have a common law. It must be enacted
In a loan contract, you have a judicial relation between the parties whereby the by congress for it to be a law.
borrower, as the debtor, is obliged to pay the loan to lender, as creditor, on due
date. Should borrower default, as debtor, lender will have recourse against the
borrower. In this example, specific performance and/or damages.
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The reverse is true when it comes to tax exemption. A tax exemption is

Art. 1158. Obligations derived from law are not presumed. Only those strictly construed against the taxpayer because when you claim an exemption,
expressly determined in this Code or in special laws are demandable, and shall there is already a presumed obligation, meaning the taxpayer should pay the
be regulated by the precepts of the law which establishes the,; and as to what tax. It’s an exemption from the obligation clearly mandated by the law.
has not been foreseen, by the provisions of this Book.
ILLUSTRATION 4: BUILDING CODE

1. LAW
An obligation based on law is not presumed There is a Building Code - a law requiring building owners to provide parking
If a party will invoke an obligation based on law, there must be a clear legal for a certain ratio of area.
provision mandating the obligation We have this mall; it has several thousands of square meters.
Example: Support of a Stranger Under the Building Code, there should be specific number of parking slots in
There is no law that you have to support a stranger. It may be morally correct, but you the building. The legal provision is the ratio that the number of parking slots
can just turn your back. No need to support a stranger even if he/she is dying, should be in proportion of the area of the building.
because there is no law obligating to support a stranger.
There was this guy who sued; he said that the law should provide parking slots
following a certain ratio, therefore, the mall owners should not charge parking
ILLUSTRATION 3: OBLIGATION TO PAY TAXES
fees. Supreme Court said that yes, they are obliged to provide parking slots,
In Statutory Construction, there are two rules with regard to tax statutes:
but the law did not say that they should provide them for free.
(1) tax statutes are strictly construed against the taxing authority, and liberally
The law only stated, provide parking slots following the given ratio, but not
in favor of the taxpayer; while
for free.
(2) tax exemptions are strictly construed against the taxpayer.
This is an example of an obligation arising from law is not presumed.
The civil code provision exactly mirrors the rule on tax statutes.
There is a strict construction of statutes against the taxing authority (rule 1)
In this example, the obligation is to provide parking spaces in proportion to
because an obligation based on law is not presumed.
the area of the building, but the law did not state that the provision of the
So if you’re a taxpayer, you’re being obliged to pay, there must be a clear legal
parking spaces should be for free. Supreme Court said that yes, they are
mandate for you to pay the tax.
obliged to provide, but that’s not for free, because the obligation to provide
For example, you should pay a documentary stamp tax. A documentary stamp
for free could not be presumed from the law; the law did not mandate that
tax is paid when you execute certain documents; you have to pay a
obligation.
documentary stamp tax. Let’s say Contract of Sale of land, you have to pay
documentary stamp tax. Shares of stock in a company, you have to pay
documentary stamp tax. Let’s say you execute a waiver, you have to pay
documentary stamp tax, but it’s not among the list, so you don’t have to pay. So Art. 1159. Obligations arising from contracts have the force of law between
in this case, if there is no legal obligation to pay in the tax statute, there is no the contracting parties and should be complied with in good faith.
obligation to pay the tax.
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2. CONTRACT
Illustration 5: Unjust Enrichment to Estafa
A contract is a Debtor’s source of an obligation
When you have a contract, you can control it; only the parties may set the rules on Let’s say I owe you 10,000. I issue a check worth 1 million.
how to go about a transaction We don’t have a contract for you to issue me the excess, it is also not a
You can stipulate anything as long it does not conflict with the law, it governs the felony, but there is still an obligation to give me the excess. This is an
parties, therefore it is like the law between the parties and must be complied with in example of quasi-contract – the rule against unjust enrichment. You are
good faith holding money, you’re keeping it and you’re not entitled to it. It can develop
into a crime depending how you manipulate the facts, but generally this is an
Example: Contract of Sale example of unjust enrichment – there is overpayment and it wasn’t refused.
Seller sells a specific car to B. In exchange, B will pay the price. The price will be done
on Day 1, and Day 2 will be the delivery. There is a contract of sale, so there is already The moment I learn that I overpaid, I demand now a return to refuse, there
conveyance, but delivery will be done on Day 2. The parties can stipulate anything will be another obligation, aside from the obligation arising from a quasi-
(due date, penalty, etc.), as long as the contract does not contravene the law, public contract, which is a criminal liability of estafa. It is estafa because, in effect,
policy, public morals, and other standards set forth by the law. Also, there is an you receive money in trust form from me, meaning it’s not yours, you’re just
obligation to perform in good faith – that is implied in every contract, you do not have keeping it for me in the mean time. If I make a demand, and you do not
to stipulate that. Let’s say on Day 2, seller should deliver. Delivery in good faith means return, you are actually appropriating money and trust, therefore that will
it should be delivered on the condition contemplated under the contract. qualify as estafa. So, it is possible for you to manipulate that situation into a
case for estafa.
3. QUASI-CONTRACT
Art. 1160. Obligations derived from quasi-contracts shall be subject to the 4. DELICT
provisions of Chapter 1, Title XVII, of this Book.
Art. 1161. Civil obligations arising from criminal offenses shall be governed
by the penal laws, subject to the provisions of Article 2177, and of the
There is no contract; there is no negligence, so there is no quasi-delict; it is lawful –
pertinent provisions of Chapter 2, Preliminary Title, on Human Relations,
there is no crime, but there is still an obligation provided under the civil code.
and of Title XVIII of this Book regulating damages.
Example: ‘Solutio Indebiti’ or Unjust Enrichment 

Let’s say there is a calamity, and then there is a property that needs to be taken care Delicts are another term for crime - acts or omissions punished by law
of. A good person took over the property, spent money to preserve the property. That Example: Homicide
person will be entitled to reimbursement from the owner, the one who gets the There are two obligations that may arise from committing the crime: (1) criminal
benefit, based on that rule against unjust enrichment. liability; and (2) civil liability. Criminal liability, an obligation by itself, is imprisonment.
Civil liability is payment of damages.
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5. QUASI-DELICT Let’s say a party wants to file a legal action, a case in court. So there must be a cause
of action anchored on an obligation. So that cause of action must relate to one of the
sources.
Art. 1162. Obligations derived from quasi-delicts shall be governed by the
provisions of Chapter 2, Title XVII of this Book, and by special laws.
ILLUSTRATION 7: HOMICIDE RESULTING FROM RECKLESS IMPRUDENCE
A quasi delict is a tort liability– liability arising from an act of negligence
X, the accused, died before conviction. The death of X will result to the
At the same time, it can be a felony
extinction of criminal liability – the obligating arising from criminal laws.
Example: Car accident
Let’s say you’re driving recklessly, and you hit somebody else. There’s no contract but
X has a house of lot, which is part of his estate. Y, family of X, can go after the
you will be liable because of your negligence. Your negligence, per say, will be the
house and lot.
basis of your liability – it is a tort liability.
Y can still proceed against X, even if X is dead, but the claim of Y will not be
However, there are instances when different sources of an obligation can arise from a
based on homicide, but based on negligence/quasi-delict.
single event.
In this case, there is now a civil obligation enforced against the estate of X.
ILLUSTRATION 6: CAR ACCIDENT
Two Obligations
Driving recklessly can be also be a basis of a criminal liability, which can be This is why you have to find the source among the five sources of obligations. If it’s
reckless imprudence resulting to damage of property. One act can result to not among the five sources, then there is no obligation. However, one act can
two obligations: one based on crime or criminal law; and one based on tort or result to several obligations from different sources.
quasi-delict.
Three Obligations
If you’re an Uber driver and your passenger was hurt, your passenger will have ILLUSTRATION 8: TELEGRAM
a claim based on contract – contract of carriage. Your passenger can also sue
you based on criminal negligence, or just for negligence/tort. In a telegram, you have two terminals: one will type in one terminal, it will
appear in the second terminal. And then, there will now be a message, which is
like text. The second terminal will now deliver that message to the intended
Besides the five sources of obligations, are there other sources of obligations? recipient. So you have the sender, the telecoms company, and the recipient of
the message.
The list of sources of obligation is exclusive. If it is not found among the five,
The sender went to the telecoms company. Telecoms will send a message to
then there is no obligation.
the recipient. The message, of course, came from the recipient.
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So in this case, there was a message. The two persons manning the two terminals added GENERAL RULE
a running joke between them. Every time they send a message, they will add another
message. Now, the message and the added message containing the joke reached the
• If the parties do not stipulate, the standard of care is due or ordinary
recipient. So the recipient didn’t get the joke, and sued the telecoms company. diligence
• DILIGENCE OF A GOOD FATHER: ORDINARY DILIGENCE
The two employees manning terminal one and terminal two did the message, but the
recipient sued the telecoms company because, if you’re going to litigate, when you sue,
you go after the one with the deep pocket. The recipient sued the telecoms company Of course there could be a higher standard of care by agreement or by law like when
because the company employed these guys, who are agents of this company. Their act it comes to airlines.
was the act of the telecoms company.
RIGHTS OF A CREDITOR
The basis would be the service contract. If the telecoms company did not deliver the
correct message, there is a breach. The sender is the one entitled to sue the breach of
ILLUSTRATION 9: HOMICIDE RESULTING FROM RECKLESS IMPRUDENCE
contract because the sender is the contracting party; therefore, the recipient cannot sue
for breach of contract (but in this case, Supreme Court said the recipient could have sued
X, the accused, died before conviction. The death of X will result to the
for breach of contract also). However, the recipient could sue based on tort liability – a extinction of criminal liability – the obligating arising from criminal laws.
negligent act resulting in damages to the recipient.
X has a house of lot, which is part of his estate. Y, family of X, can go after the
In this case, the Supreme Court said the recipient could sue base on: house and lot.
(1) negligence; and
(2) breach of contract arising from negligence. Y can still proceed against X, even if X is dead, but the claim of Y will not be
But if you look at it, it’s only the sender who can sue base on breach of contract and base
based on homicide, but based on negligence/quasi-delict.
on tort/quasi-delict. Recipient cannot sue base on breach of contract because, but only
quasi-delict.
In this case, there is now a civil obligation enforced against the estate of X.
OBLIGATIONS OF A DEBTOR
ILLUSTRATION 10: CONTRACT OF SALE
Seller sells a specific car with license plate ABC1234 to buyer. In exchange,
Art. 1163. Every person obliged to give something is also obliged to take care there should be payment of the price. Under the contract, buyer should pay on
of it with the proper diligence of a good father, of a family, unless the law or Day 1. On Day 2, there should be delivery. The contract only mentioned these
the stipulation of the parties requires another standard of care. three things, nothing more.
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What are the obligations presumed of the debtor in this (even if it’s not
stipulated in the contract?
1. Deliver the car in good faith
2. Deliver the accessories and accessions
3. Take care of the thing using ordinary diligence unless there is a stipulation
in the contract
What are the rights of the creditor in this case?

1. Demand for specific performance, meaning delivery of the car
2. Resolution in case of breach
3. Damages in either case or just damages
On Day 2, upon delivery, there will be a real right. This means, ownership will
vest on the buyer – that’s the real right. Meaning on Day 2, upon receiving the
property, buyer can now enforce ownership against anyone. Before the delivery,
buyer only has a personal right over the fruits. Based on the contract, seller has a
right of the fruits, but it is only personal, meaning it’s not enforceable against
anyone because ownership has not vested yet to buyer because there was not
delivery yet.
Art. 1164. The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it until
the same has been delivered to him.
(to be continued next meeting)
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THURSDAY 28 JANUARY 2016
REVIEW: ELEMENTS OF AN OBLIGATION ILLUSTRATION 3: PROMISSORY NOTE
I issue a promissory note; I promise to pay bearer. It’s not a named creditor,
ELEMENTS OF AN OBLIGATION but based on the face of the document, you will know to whom the obligation
should be paid – the one holding the instrument upon maturity. I will pay
1. CREDITOR bearer because it’s the bearer’s instrument. So that’s the requirement.
2. DEBTOR
3. PRESTATION/OBJECT
4. JURIDICAL TIE If a party – a creditor or debtor – cannot be identified, then you won’t have an
obligation.
Especially if have a contract, you cannot identify who is the creditor or debtor in a
contract, then there will be no obligation.
WHAT ARE THE REQUISITES OF AN OBLIGATION?
With respect to the parties- the creditor and the debtor- the law requires that creditor PRESTATION
and the debtor should identifiable at the very least
1. TO GIVE
2. TO DO
ILLUSTRATION 1: INCOME TAX 3. NOT TO DO
Let’s say you have an obligation arising from law.
Who is obliged to pay income tax?
Of course, those earning within a certain a taxable year an amount within the JURIDICAL TIE
threshold for the payment of income tax. A juridical tie is the efficient cause of the obligation 
So this is an example where the parties are determinate or determinable. The law What is the efficient cause?
does not name the obligor; but based on the standards set forth by the law, you It is that element of the obligation that compels or forces the debtor to perform.
will know who should pay income tax after a given taxable year. If there is non-performance, then there will be corresponding sanctions or reliefs
accorded to the creditor
The juridical tie arises from the various sources of an obligation – there are five
So as said, the minimum sources, and these sources are exclusive ( law contract, quasi contract, delict, quasi
ILLUSTRATION 2: LOAN CONTRACT
requirement, based on an delict).
Let’s say you have a loan contract. Readily,
obligation, the creditor or o You can narrow it down to two: (1) law; and (2) contracts because the other sources,
you can see there who are the parties –
debtor should be identifiable they are really there because the law provides them as sources of an obligation
lender and borrower. Let’s say lender will be
– not necessarily named like
BPI; borrower will be Mr. X. So you now have
in a contract.
clearly identified parties to an obligation.
REVIEW: SOURCES OF AN OBLIGATION
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Juridical Tie: There’s no contract, but it will be based on tort or quasi-delict

1. Obligation arising from law Prestation: Pay damages
Example: National Internal Revenue Code; Payment of Income Tax If there’s a breach, you have to remember the remedies.
You have the obligor and you have the obligee.
The obligor will be the taxpayer; obligee will be the state or the government. WHAT ARE THE REMEDIES? 
Obligor will be obliged to pay the tax, whatever tax may be.
Of course you learned last time that for it to be an obligation arising from law, it must
DEFAULT LEGAL REMEDIES
be clearly set forth in the law. If there is vagueness in the law, then an obligation will
not be presumed, that’s why we referred to the rules in STATCON with respect to 1. SPECIFIC PERFORMANCE (WITH OR WITHOUT DAMAGES)
construction of a tax statute as against construction of a tax exemption. 2. RESOLUTION ( WITH OR WITHOUT DAMAGES)
Parties – taxpayer as the obligor (obligor not debtor because later on you will 3. DAMAGES
learn that a tax is not really a debt) and you have the state as the obligee;
Prestation- payment of tax
Juridical tie- tax statue
2. Obligation arising from a contract Let’s say you have a Contract of Sale. Seller sells property to buyer on Day 1.
Seller fulfilled conveyance of the property – delivered property to buyer.
Example: Loan Contract; Promissory Note Under the contract, buyer should pay the price on Day 2. Buyer defaults,
Borrower obliged with a payable to lender pursuant to a loan contract. Borrower meaning failed to pay the price despite demand of the seller. So you have here
should pay an X amount on a given due date pursuant to the terms of a loan contract a contract whereby with respect to the payment of the price:
or a promissory note. Debtor (the one obliged to perform the prestation) – Buyer
Debtor (the one obliged to perform the prestation) – Borrower Creditor – Seller
Creditor (the party entitled to demand performance) – Lender Prestation – Payment of the price  
Prestation – Payment of the amount Juridical Tie – Contract of Sale
Juridical Tie – Contract  
So here, you have all the elements of an obligation.
3. Obligation arising from a quasi-delict Following the definition under jurisprudence, you have a legal relation;
Example: Overspeeding in Rockwell Drive a juridical relation between a creditor entitled to the prestation from buyer, and in
Let’s say X was overspeeding in Rockwell Drive hit a pedestrian. Then, you have a case of default, go after the assets of the buyer.
negligent act. There’s no contract between them, but there will be a liability – his The consequences of default - you have the basic remedies of a creditor in case of
payment of damages. X, because of the negligent act of hitting the pedestrian, will be breach by the debtor of an obligation
liable to pay damages to the pedestrian.
Debtor – X Seller already conveyed the property; there was non-payment of the price. What
Creditor – Pedestrian could seller do?
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1. Seller could sue the buyer to collect the price. So that would be specific When you have a contract to sell, let’s say I’m selling my property to you. I’m the seller
performance.   we entered into a contract to sell. I’ll sell to you my property but you pay the price in
2. In alternative, seller could ask for the resolution, meaning setting aside the installments.
contract of sale; it will be cancelled, and buyer should re-convey/return the property After full payment of the price, let’s say 12- monthly installments, I will now convey the
to seller and then buyer will no longer pay the price.   property to you.
3. Seller could claim damages together with the specific performance. Let’s say, So it’s a two-step process, you have a contract to sell, after full payment of the price;
collect the price plus interest   we will have a contract of sale or Deed of Absolute Sale.
4. Seller could get back the property, by way of resolution, and then collect damages So, it’s not automatic.
again based on the breach There will be another document saying that there’s now conveyance.
If it’s a contract of sale, who owns the property?
Normally, these are the default remedies. If you have an obligation, these would be The buyer immediately owns the property because it’s a contract of sale; there’s
the available remedies. already conveyance, even if there’s no full payment of the price.
Specific Performance and Resolution – they are alternative remedies; you cannot have Later on you will learn that in a contract to sell, payment of the price is a suspensive
them at the same time. Damages can be combined with either. condition to the conveyance of Title, meaning the seller will be obliged to convey the
Title only upon full payment of the price.
In a contract of sale, there’s immediate conveyance of Title, even if the price will be
CASES ( ARTS 1156-1170) paid in installments, however non-payment of the price will be considered a default
characterized as a resolutory condition, meaning it will result in a resolution of the
contract.
1. AYALA LIFE V. RAY BURTON
What was Ayala trying to enforce? What was the specific performance?
No remedy of specific performance because there is no obligation
Ayala wanted the buyer to fully pay the price, in exchange there will be conveyance of
property.
There was a contract to sell between seller (Ayala) and buyer (Ray Burton).
In short, Ayala wanted the parties to enter to a contract of a sale. Remember there’s a
What were the terms of the Contract to Sell? What was the principle undertaking the
two-step process in a contract to sell: you have a contract to sell upon full-payment of
contract to sell?
the price, there’s another step, which is the execution of contract of sale.
There was an undertaking to sell the property in exchange for payment of the price.
Ayala was actually forcing buyer to execute the contract of sale; so buyer should pay
Remember it’s a contract to sell; there was no sale yet, meaning Ayala agreed to
the price and Ayala should convey.
sell a certain property to the buyer in exchange for payment of the price.
So there was a downpayment and installments, there’s default.
Supreme Court said there was no cause of specific performance because there
Ayala sued Ray Burton for specific performance, meaning compel Ray Burton to pay
was a peculiar provision in the contract.
the price. Ayala filed a collection case against Ray Burton.
What was peculiar in this case?

The Court distinguished between a contract to sell and a contract of sale.
There’s a forfeiture clause.
If there’s a contract to sell or CTS, there’s retention of ownership.

Why?
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Under the contract to sell, there’s a forfeiture clause: “in case of default by the So don’t be fooled that if it’s a contract to sell, you cannot have a specific
buyer, the seller could only retain 25% of all payments and the rest should be performance.
refunded to the buyer”.
So, Supreme Court said Ayala could not force the payment of the price, which is a You cannot have a specific performance with respect to conveyance of the property,
specific performance, because it could be done only if there’s an obligation. there’s no payment of the price yet or vice versa.
Remedies will be available if there’s an obligation. Now in this case, if seller forfeited the entire payment, buyer could have sued to
In this case, there’s no conveyance yet, so there can be no compulsion for the enforce the contract.
payment of the price. The Supreme Court said there is no obligation yet to enforce. And what would that action be?
What obligation? It will be an action for specific performance, because the buyer will now be
The obligation to pay the price because there was already conveyance, but there is no enforcing the obligation of the seller under the contract to sell - to refund
conveyance yet. anything in excess of the 25%.
Besides, there was that peculiar provision. The Supreme Court said the provision
stated the consequence of default. The consequence of default would be: forfeiture 2. CANNU V. GALANG
of 25% and the balance should go to the buyer. And there you see the nuance. Violation of a monetary provision as a substantial breach .
If I ask you true or false, can you have an action for specific performance in a contract
to sell? There was this Buyer 1 (Galang) who bought property from a seller, and the seller sold
TRUE. property and buyer is obliged to pay the price.
So in this case, Supreme Court said specific performance is not proper in a contract to What was the price?
sell. Is that true always? NO. There were two amounts being thrown in the case:
(1) 120,000 and
If it’s an obligation, the creditor will always have the default remedies in case of (2) 250,000.
breach by the debtor. It was explained earlier that Supreme Court said there could be Did buyer pay the entire price?
no specific performance because Not yet, there was partial payment.
in the context there is no Specific performance is possible in this case
obligation arising from a contract because of the peculiar clause requiring 25% to To ensure the payment of the balance, there was a real estate mortgaged, meaning
of sale yet. be retained by the creditor. Just because it is a the mortgaged was constituted on the property.
But when the Supreme Court contract to sell, does not necessarily mean What does that mean?
said, “besides there is that specific performance is not an appropriate If there is non-payment of the price, the mortgagee can go after the property and sell
provision – the forfeiture remedy. it, and then the proceeds will be applied to the payment of the obligation.
clause”. If you look at it, that So this was the transaction originally.
statement of the Supreme So there was a buyer, who bought property, was supposed to pay the balance of the
Court basically it’s an action property secured in the mortgage.
for specific performance. Buyer 1 sold this property to Buyer 2 (Cannu).
What were the terms of the contract?
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Consignation. What’s substantial breach?

What was the form of the contract? The Court mentioned in this case a mathematical formula, although by way of obiter,
Contract of sale. but nevertheless good enough. You have a contract of sale, if you don’t pay the price
According to the Supreme Court, the price is 120,000. that would be a breach.
How much was paid by Buyer 2? 75,000. Where would that be a substantial breach according to this case?
What happened to the mortgage? Supreme Court said that the price is really 120,000 and you have a balance of 45,000
This is the usual transaction: you are buying a property, mortgage to bank. You – so that’s around 1/3 or 33%, so Supreme Court said that’s substantial breach.
purchase the property and you assume the mortgage. You have to pay a smaller In fact the Supreme Court said by way of obiter that even if it were 250,000, it would
amount as compared to buying the property without the mortgage, because you are still be substantial breach, and somehow established a threshold: non-payment of at
assuming another obligation – but that’s a separate obligation. least 18% would be substantial breach, if you have a contract of sale.
Was there complete payment? So this is a good case.
None, but Buyer 2 issued checks to Buyer 1. What did the court say about the checks? What do we mean by resolution then?
The checks were insufficient. A primary requirement of a resolution is there must be a substantial breach – there are
What was the nature of the check? two kinds of breaches: (1) substantial; or (2) slight or casual.
Manager’s check.
What’s a manager’s check?
It’s a check issued by the bank against itself. SUBSTANTIAL BREACH SLIGHT BREACH
The bank is saying “I will pay you X amount”.
In this case, the seller can cancel the It’s a breach but somehow not material
That’s why it’s as good as cash because for you to get that manager’s check, you’re
contract and get the property back- so to the performance of the obligation.
actually using the name of the bank to somehow insure that the check will be honored
thats resolution The creditor can require the debtor to
when presented for encashment.
pay the remaining balance, and possibly
The Supreme Court said the payment of the manager’s check was insufficient because
claim damages,
it was only tender of payment.
What does that mean?
Let’s say I have a check, here is my payment, and it was refused - that’s not payment; it So resolution can only be done if there’s substantial breach.
was just tender of payment because it was not accepted. So how do you make a
payment, if there’s refusal by the creditor? You go to court and you consign. So tender Supreme Court said that’s substantial breach – when the buyer fails to pay 33%.
of payment will only be payment only if there’s consignation. But that’s not the issue Even if it’s 18%, Supreme Court finds that that should be substantial breach.
here.
There was a balance of 45,000.
Was there payment of the 45,000? 3. LALICON V. NHA
None. So there was resolution of the contract. Violation of an essential term or condition can be considered substantial breach
So what was the issue? Could there be resolution?
Yes, because for there to be resolution there should be substantial breach. National Housing Authority (NHA) (seller) sold land to the Alfaros (buyer). In
Supreme Court said non-payment of the 45,000 was a substantial breach. exchange, there was payment of the price.
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Was there a contract of sale or contract to sell? This case illustrates what substantial breach is. It is not necessarily a violation of
Contract of sale. To secure the payment of the price, there was a real estate a monetary provision. Basically, it’s a violation of an essential term or condition
mortgage. NHA conveyed the land to the Alfaros, buyers paid a certain amount, in a contract. It may be not monetary; it may be just an undertaking that was a
balance will paid pursuant to a certain schedule, and to ensure payment, buyers primary consideration of the creditor.
mortgaged the land in favor of NHA, meaning if there’s default, NHA could sell the
land following the procedures mandated by law and get the proceeds in payment of 4. CATHAY PACIFIC V. VAZQUEZ
the balance. Violation of exact prestation as a breach of an obligation
Was there a peculiar provision in the contract?
In the contract, it was stipulated that within 5 years after the release of the Spouses Vazquezes with their maid and their two friends went to Hong Kong from
mortgage, the property could not be sold except for hereditary successions. Manila, and then returned from Hong Kong to Manila. Vazquezes booked tickets for
What happened here? Business Class, friends also booked for Business Class, while the maid was booked for
During the subsistence of the mortgage, there was a sale – that could be done Economy – going to Hong Kong they followed this arrangement. However, on the
because NHA already conveyed ownership, so far as the Alfaros would pay way back to Manila, they booked with the same arrangement but on the boarding
notwithstanding the mortgage. What would happen would be the transferee, the son, gate, a representative of Cathay informed Vazquezes that they have been upgraded
the property will still be subject to the mortgage. to First Class. There are three sections in a plane: First Class, Business, and Economy/
The only facts material to our case are: and transfer of the property to the son Coach. Vazquezes insisted the upgrade to be good hosts but the Business Class
(sale 1); selling of property during subsistence of the mortgage (sale 2). section was already overbooked. Eventually, the Vazquezes accepted the upgrade.
Eventually, when there was a discharge of the mortgage, what was done?
When they came back they wrote a letter to the country manager of Cathay Pacific,
There was full payment of the price and there was discharge of the mortgage. and Cathay replied that they were going to investigate. Cathay did not follow up to
So why was there a substantial breach? the Vazquezes so the Vazquezes sued them for damages.
There was a substantial breach, not necessarily a violation of a monetary provision, Was Cathay liable for damages?
but there was a substantial breach because they violated this particular provision on Yes, Cathay was liable for damages because they breached the contract.
conveyance of a property within a certain period.
There was a substantial breach because this provision was an essential What was the breach?
consideration of NHA – NHA having the mandate of giving housing to those They carried the Vazquezes from Hong Kong to Manila First Class rather than Business
needing them and ensuring that the units given are preserved in the hands of Class.
the beneficiaries. Who was the creditor – Cathay or Vazquezes?
Vazquezes were entitled to demand the prestation.
So when there was a violation by the Alfaros by conveying to the son, then there was What was the prestation here?
a neglect of an essential consideration or requirement of NHA. NHA would not have Prestation that they be transported from Hong Kong to Manila in Business Class.
entered into the contract if it knew that from the get-go that the Alfaros will just give Supreme Court held that they may be entitled to damages.
the property. What kind of damages?
Nominal or token damages.
Why only token damages? What does the law allow with respect to booking?
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The law only allows an airline to be overbooked by 10%. So if there were 100 seats, In the two cases – Cannu and NHA – these are cases illustrating the remedy of
you can only sell 110 seats. Supreme Court said that’s not really bad because they resolution. When you have resolution, a creditor is trying to undo the obligation or a
were allowed by law to overbook, it’s something legal. contract, and the basis of that is the breach of the debtor, and the breach must be
substantial – that’s the first requirement for there to be resolution. And a
However, Supreme Court said there was a breach because if there is a prestation substantive breach is a violation of an essential term or condition or
mandated by an obligation, the exact prestation should be performed. If there is consideration of the creditor in entering into the obligation.
a deviation from that required prestation, then you have a breach. And because
there’s a breach, there will be a consequence. And the consequence will be? You have this case of Cathay an example of the moment there’s a breach, there will
Damages because there can be no specific performance or resolution. The moment be no liability for damages at the minimum.
there is a breach, there will always be an entitlement to damages on the part of the
creditor.
ILLUSTRATION 5: INSURANCE COMPANY
Let’s say there’s an insurance company. An insurance company insures someone
REVIEW
from an accident. The insurance company acts through agents. So the insurance
Remedies:
company issued a policy in favor of X, the insured.
1. Specific Performance
A policy against accidents: for a given certain period, let’s say Day 1 to Day
2. Resolution
365, there will be an insurance of insured against accidents. In exchange,
3. Damages
insured should pay a premium. The premium should be paid quarterly within
this period.
You have to learn that in specific performance, there must be an obligation that could
be enforced.
The insured remitted the payments through the agent. However, the agent did
So in the case of Ayala, there was no contract of sale yet, so there’s no obligation to
not remit the payment to the principal – the insurance company. Because of
pay the price in full; there could be no compulsion. The contract to sell has a peculiar
that, the insurance company cancelled the contract during the third quarter.
provision, so if there’s default, this is the only remedy of the seller. Technically you can
When the insured learned of that cancellation, insured made a demand to the
also collect. If you have a contract to sell and there’s nonpayment, you can collect, but
insurance company to reinstate. Insured said, “I paid the agent, it’s the fault of
nobody does that, because normally if there’s nonpayment, they just forfeit
your agent. The act of your agent is your act therefore you should be liable for
everything.
the payment”. So the insurance company said “No, I will reinstate then. You are
But the rule is, if there is no obligation, that specific performance has no place. There
insured until 365. In fact, since there was cancellation for a quarter, I will
must be an obligation and there should be a breach before there can be specific
extend it by another quarter”.
performance.
As said earlier, if it’s a contract to sell, specific performance can still be available on
the part of the creditor, let’s say enforcement of a specific provision of a contract to Would that be enough? Would the insurance company have any liability to the
sell. insured?
Yes, there was no accident but there is still a breach of obligation so damages should
be awarded.
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This is similar to Cathay; there was no harm because there was no accident. FRAUD
But the Supreme Court said the insurance company should have continuous coverage
during the 365 days. If there was an interruption through the fault of the insurance
Art. 1171. Responsibility arising from fraud is demandable in all obligations.
company, then there is a breach; consequently, there will be liability for damages. But
Any waiver of an action for future fraud is void.
because of the measures taken by the insurance company, just like in the Cathay case,
Supreme Court only awarded nominal damages as a consolation prize for the breach.
Here, we are dealing with fraud in performance. So there’s an obligation and debtor
At the minimum, In case there is a breach, the minimum damages will be performs or commits an act of fraud in the performance of the obligation. There will
awarded to the creditor. be a liability, at the minimum, for damages. Fraud is when there is misrepresentation,
bad faith, malice, deceit and ill will.
BASES OF DAMAGES
So when you are dealing with fraud, it is a state of mind, but of course there will
be manifestations.
Art. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the How do you prove fraud?
tenor thereof, are liable for damages You have to show circumstances that if they are put together, you can prove a
deceitful scheme; there’s a fraudulent scheme.
Example: 
BASES OF DAMAGES On Day 1, he sold the property to X. On Day 2, he sold it again to Y. On Day 3, he
sold it to Z.
1. NEGLIGENCE
2. FRAUD If you just show one transaction, that’s not fraud. You have to show a confluence of
3. DELAY factors that will lead someone to infer that there was this scheme – a fraudulent
4. ANY OTHER CONTRAVENTION OF THE TENOR OF THE CONTRACT scheme.
When you have any of those, what is the minimum liability of the debtor? In certain cases, the law provides the presumption.
Minimum liability for damages.
If the breach amounts to substantial breach? What does that mean?
Then the debtor will be liable to resolution. If you commit a certain act given by the law on a given circumstance, the law
  presumes fraud unless you rebut the presumption. So there’s a rebuttal of
Of course specific performance will always be there. presumption.
When is there a delay? So generally, you have to show a lot of facts to establish fraud of performance, unlike
If there’s non-performance on due date, upon demand of the creditor, there’s a in negligence.
delay or what you call a legal default.
There are two kinds of fraud:
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(1) causal fraud or dolo causante; and Let’s say there were misrepresentations made but these misrepresentations
(2) fraud in performance or dolo incidente. were not really the inducements for the buyer to enter into the contract, then
What’s the difference? that would be incident fraud.
I’ll give you examples. It can be a liability for damages but not a basis for annulment of the contract.
ILLUSTRATION 6: CAUSAUL FRAUD

Let’s say you have a seller and you have a buyer. Seller is jeweler in a mall. CAUSAL FRAUD INCIDENTAL FRAUD
Seller told you “I have this ring, made of gold, and there’s a 1 carat diamond”.
Fraud in a material consideration of a Fraud in the performance of the
Buyer, relying on the representation of the seller, buyer paid the price. It
contract contract
turned out the ring was fake.
In this case, what kind of fraud do you have?
Causal fraud, because the buyer would not have entered into this contract NEGLIGENCE
were it not for the fraud. That’s why it’s causal fraud – it’s the cause of the
buyer’s consent, the buyer was induced to agree into this contract because of Art. 1172. Responsibility arising from negligence in the performance of
the fraud perpetrated by the seller. So that’s causal fraud, meaning it’s the every kind of obligation is also demandable, but such liability may be
basis for the consent; that’s not the fraud being discussed in the early articles regulated by the courts
of the Civil Code.
What’s the status of the contract?
This contract will be voidable because there is vitiated consent. Buyer ILLUSTRATION 8: UBER DRIVER
consented without complete information. Let’s say you accredited as an Uber driver and then you’re carrying passengers.
You drove here along Rockwell Drive. It’s a clear day, not much traffic, you
drove on a speed of 70 kph, and you lost control, you hit a post, and your
passenger was injured. Rockwell Drive has a speed limit of 30 kph.
ILLUSTRATION 7: INCIDENTAL FRAUD Would you be liable? Yes, based on negligence. Why were you negligent? I was
Let’s say they entered into the same contract. Let’s say there’s no negligent because negligence is established. Unlike fraud, you establish fraud
misrepresentation, but when delivered the ring, the seller removed a stone by marshaling your facts – you show certain facts and then make a story. You
from the ring – that would be an example of fraud in performance. So seller did are negligent because you were not careful. Your standard of care is 30 kph.
not act in good faith, therefore there will be liability. The moment you exceed, you are violating a law and you are presumed to be
What’s the status of the contract? negligent.
The contract will be valid because the consent was freely given with complete
information, but the difference is, there was now fraud in the completion of the How do you establish negligence?
transaction or fraud in performance. You look for the standard of care.
What would be the liability?
As we learned, damages at the minimum. If it’s substantial breach, there can be,
resolution.
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Just like in the case of Cathay, how did Cathay show that it acted with due diligence; What was the contract between FEU and Saludaga?
that it was not abusive? By showing that they were actually allowed to overbook by X FEU will provide a safe environment for its student and then Saludaga in return will
%. follow the rules of the school. The basis for the breach was the act of the security
guard.
Example 1: Lawyer – Rules of Professional Ethics How will you categorize that act? What would be the source of the act of the guard to
You just check how should a lawyer should act based on the rules of professional Saludaga?
ethics. The moment you violate, and then you are not conducting yourself in It was a negligent act.
accordance with the standards. So, you are negligent.
Example 2: Doctor/Dentist – Malpractice Why not go after the security guard?

You just show the correct procedure for doing this surgery. You show the steps and Saludaga could go after the security guard based on two sources of obligation.
describe what was done by the doctor, for example, an omission of an important step. One, tort liability; the negligent act is a quasi-delict.
In negligence, you just compare the acts done by the debtor with the standards, Two, it could be a felony; his reckless imprudence resulting into physical injuries.
which is easier to prove. Against the agency?
Only for tort but not criminal liability, because the criminal liability will be personal to
Negligence is easier to prove, but in actual practice, fraud is used more in the guard.
litigation because negligence is like a science, you just show a formula, while in Against FEU?
fraud, being a state of mind, you just have to show facts. Same theory – based on tort and breach of contract, because the school has an
That theory of a debtor committing fraud is very malleable; you can just generate the obligation to provide a stress-free environment in a conducive place for learning.
facts. These are the facts, and based from these facts, you can gather a fraudulent But here in Ateneo, you are stressed, so can you sue me?
intent or fraudulent performance, and sometimes you will do that . NO.
So Saludaga went after FEU for the negligent act of the guard and the negligent act
of FEU by not checking the qualifications and simply relying on the screening done by
CASES the agency.
ARTS. 1171-1173
As far as Saludaga was concerned, the security guard and the agency were
agents of FEU.
1. SALUDAGA V. FEU (student shooting)
But FEU itself committed a negligent act; there was no verification of the
Negligence
qualifications of the guards.
 
So you have here a breach of contract arising from a negligent act.
Saludaga was accidentally shot by a guard, we don’t know how, but we will assume it
Which could have been a separate basis of a legal action? An action based on
was by an accident. Saludaga sued FEU and then FEU included Galaxy, the security
negligence but this time for tort laws.
agency, as a third party.
What was the theory of Saludaga in filing the case?
Breach of contract between FEU and Saludaga.
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This is like the case of the Telegram Company as discussed last time. It was an act of There was a contract where Meralco will provide power to Ramoy in exchange for
negligent that was the cause of the breach, but that negligent act could be also be payment of fees.
independent basis of liability pursuant to tort laws or quasi- delicts. What was the relationship between Ramoy and (NPC)? Did NPC sue Ramoy?
There was an action against Ramoy where NPC alleged that Ramoy was occupying a
So what was the liability here? placed within NPC’s property.
Moral damages. Take note that during this time, you cannot stay around the towers or below the
Who paid? transmission lines – that’s an area exclusive to the power company. So NPC was asking
FEU paid Saludaga, but the agency also has to pay FEU for what he paid for to remove Ramoy. To remove Ramoy, NPC had this tactic.
Saludaga. What was the tactic?
Why cannot the agency pay directly Saludaga? NPC would ask Meralco (because they had a business relationship) to cut off the
Because they were only dragged in by FEU as a third party. power supply of Ramoy. NPC gave this ostensible reason to cut off the power
supply, which is the Judgment Order by the court against Ramoy, and Meralco
Look at this case, that’s your ideal lawyer; knew how to sue, and won. When you’re relied on that one to cut the power supply.
already a lawyer, you already won this case; got an award and you sued the correct Did Meralco breach its contract with Ramoy?
person – the one with a deep pocket, FEU rather than go after the security guard. Yes, because Meralco was negligent in relying on a court order given by NPC.
Theory was correct because there was a breach of contract that is very easy to prove. The court order must have been final and executory. So the Court said Meralco
was negligent because it relied on the representation of NPC that this was a final and
Why was it easy to prove the breach of contract? What do you have to establish? executory order; there was no verification of the order.
The obligation to provide a safe environment. Saludaga was shot in campus.
Definitely that’s not a safe environment. So that’s just two facts that should be
sufficient: (1) proof of contractual obligation to provide a safe environment; and
(2) shooting of Saludaga whether accidental or otherwise.
2. MERALCO V. RAMOY (Electricity Line)

Negligence
Ramoy was a resident of a property owned by National Power Corporation (NPC).

NPC ordered Meralco to disconnect the power supply of Ramoy along with his
lessees. So what Meralco did was they went to the place and forcibly cut the
connection of Ramoy despite the pleas that their property was not within the property
of NPC.
Who is the client of Meralco?
Ramoy.
What was the relationship of Meralco and Ramoy?
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TUESDAY 2 FEBRUARY 2016
REVIEW: SOURCES OR CAUSES OF BREACH OF AN OBLIGATION damages but basically the consequence will be the contract will be voidable due to a
vice of the consent. On the other hand, you have only fraud in performance or
Last time, we discussed the default of the debtor and then we discussed also the incidental fraud meaning there is already a contract and the debtor does not perform
sources or causes of breach of the obligation. by committing an act of fraud. Let's say the debtor is a seller and instead, after into
We reiterate that in case of breach by the debtor of the debtor's obligation, the entering a contract of sale, the seller sold the property to somebody else. That will be
creditor has the default remedy of: an act of fraud that will entitle the creditor at the minimum, damages or possibly
resolution or specific performance. So take note of those four. Those are the four
1. specific performance, with or without damages: which means the enforcement of usual causes of breach: fraud, negligence, default or any other contravention of the
the mandated prestation tenor of the obligation. In short, any violation of the obligation.
2. resolution, with or without damages, which is basically the setting aside of the
obligation or just damages.
3. Damages: if its a slight breach only but still a breach nonetheless CAUSAL FRAUD INCIDENTAL FRAUD
Fraud that induces a party to enter into a There is already ac contract and the
Then we discussed what are the causes usually of breach. And somehow, the Civil
contract or the reason why the party debtor does not perform by committing
Code neatly classified the sources or causes of breach into four:
entered into a contract in the first an act of fraud
1. fraud,
place.
2. negligence,
It is fraud in the constitution of the
3. default or legal delay
obligation
4. or any other contravention of the obligation
 
Take note: When we speak of fraud, negligence in this context, we are dealing When we speak of fraud, we are dealing with a mental state of the debtor. There's the
with negligence and fraud as a breach of an obligation, it's not as an intent, the malicious intent to violate the contract. So we explain last time that for you
independent source of an obligation, like a quasi-delict or a tort. to sustain a theory of fraud, you have to show facts that will be the basis for, let's say,
  a court to infer that there is really a evil scheme on the part of the debtor to violate
Example:   the contract.
A debtor violates a contract by committing an act of negligence or by committing an
act of fraud so it will result to the minimum to the entitlement of the creditor to Example: Double Sale
damages. Seller turns around and sells the same property another party in violation of the
This is why last time we distinguish between causal fraud and incidental fraud or fraud obligation. You can show the sequence of events leading to that conclusion.
in performance.
So fraud as I say, manipulable, very malleable to suit your theory if you are going after
Causal fraud is the fraud that induces a party to enter into a contract, meaning it is the a party to an obligation and you want to just sue. Fraud will be an easier theory to
reason for the consent of the party to the contract. When you have causal fraud, it's manipulate unlike negligence. Negligence will have corresponding standards.
not fraud in the performance, it is fraud in the constitution of the obligation or the That's why when we speak of negligence of a debtor, the law provides that you have
contract. What could be the consequence? Of course, there would be liability for
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to look at the context of the transaction. And if you have the context, then Example: Banks are required a greater degree of care
immediately you will have normally a set of standards of care.
A bank, by law, is required to exercise a greater degree of care. Normally, when you
Example: Buses in EDSA are dealing with a land covered by a certificate of title, you have the right to rely on
the certificate of title. So if the title shows that it is clean, meaning there is no
That bus, did you see that bus? Racing in EDSA, and then struck the barriers. Easily, encumbrance or any annotation on the title, then you are acting in good faith. That's
will that be a negligent act? Yes! First, you hit the barrier. Clearly you are not within the general rule.
your lane. [Goes on ranting about those driving outside the lanes in EDSA] Anyway, But if you are a bank and you are involved in a contract of loan or mortgage and there
that's an example. How do we establish negligence? is a title involved, the law requires the bank to exercise a greater degree of diligence.
Clearly, there's negligence because the driver occupied or swerved on another lane It is not enough to rely on the title which is the ordinary diligence. Jurisprudence
and in fact, hit a barrier. You are not supposed to hit the barrier, maybe over- requires the bank to conduct an ocular inspection, set a credit investigator, the works.
speeding, racing against each other. Clearly that will be a breach. What a bank usually does before entering into a loan or mortgage transaction.
A breach of what?  
Breach of the contract of carriage. And WAIVERS ON FUTURE FRAUD ARE PROHIBITED
speaking of the contract in between the
“The law imposes a higher
passenger and the bus company. That the bus
company should safely transport the passengers. standard of care for Art. 1171. Responsibility arising from fraud is demandable in all obligations.
What is the standard of care? common carriers. The Any waiver of an action for future fraud is void.
The law imposes a higher standard of care for standard of care is
common carriers. The standard of care is
extraordinary diligence” Illustration 1: Waiver of Future Fraud in double sale
extraordinary diligence. 
Of course, what's the default rule? The default ! CAR

rule is ordinary diligence or due diligence. There are exceptions. As I said, the
SELLER BUYER
diligence required of common carriers, the one we discussed, the Meralco, the
diligence required of public utilities. There's a greater degree of care. They had to
verify first whether there is indeed a basis to cut off the power supply based on that
decision furnished by Napocor. They should have asked for a final and executory
PRICE "
order. The contract authorises the seller to sell again the same property notwithstanding
the conveyance of the car pursuant to this contract of sale. All the seller will have to
do is return the price.
Art. 1163. Every person obliged to give something is also obliged to take care
of it with the proper diligence of a good father of a family, unless the law or
the stipulation of the parties requires another standard of care. Is there a problem with this provision?
21
The agreement is not valid because it will constitute future fraud. a waiver of future fraud. It is a waiver of an action based on a fraud already
committed by the seller.
Example 2 So, the requirement is that it must be a waiver of future fraud. A fraud still to be
Lets say instead of the stipulation, the seller sold the car again to another person committed.
without the knowledge of the buyer. Later on, the buyer heard of the sale and said Why is that prohibited by law?
that its fine and they just cancel the contract, give back the money, and the seller can The prohibition has nothing to do with justice or fairness. It has to do with the juridical
proceed with the sale to the other person. tie, an element of an obligation. That element compelling performance of the
Is there a problem? prestation by the debtor.
No since this is not a waiver of a future fraud. If there is a stipulation for waiver of future fraud,
what is the effect? It is as if there is no “A waiver of future fraud is
Example 3 obligation. The seller can say "I can just turn
the negation of the
But what if buyer and seller agreed that prior to delivery of the car on , S can use the around, sell the same car to another party and I
car to race with two buses and if it should hit the barrier, S shall not be liable will have no liability since buyer agreed juridical tie that binds
whatsoever. Will that be valid? beforehand that I can do so without impunity." both parties”
The agreement is not valid because this will constitute future fraud. The law prohibits it because it negates the
juridical tie. It allows the seller not to fulfill the
Why can’t the creditor waive an action obligation. So that is the reason behind the prohibition of a waiver of an action based
based on future fraud? What is the on future fraud. It's not allowed because it negates the juridical tie and so the
underlying reason behind this REQUISITES obligation. The effect is as if there is no contract at all because seller can do anything
prohibition? OF A VALID WAIVER without liability.
Whats the answer? Justice? Fairness? It 1.There must be a right IS GROSS NEGLIGENCE TANTAMOUNT TO FRAUD?
will be unfair to the buyer? On the first 2. There must be a waiver
example where the seller is allowed to or renunciation of a right
sell the car to another person, such 3. There must be knowledge that Art. 1173. The fault or negligence of the obligor consists in the omission of
stipulation is void because it is a waiver that diligence which is required by the nature of the obligation and
such right it deliberately being
of future fraud. Take note, the corresponds with the circumstances of the person of the time an d of the
given
operative word is future. place. When negligence shows bad faith, the provisions of Art. 1171 and 2201
  up paragraph 2 shall apply.
In Example 2, where seller engages in
double sale without the knowledge of If the law or contract does not state the diligence which is to be observed in
the first buyer and buyer learns of the the performance, that which is expected of a good father of a family shall be
double sale and tells the seller to proceed with the sale to another buyer and to required.
return the down-payment, is this valid? Yes, such waiver is valid because this is not
22
  justice. It's really to be consistent with the nature of the civil obligation. It must
In Example 3, that stipulation implies that the seller can commit an act of gross be capable of enforcement. There must be that element of juridical tie.
negligence (it's not simple negligence), will such example covered by the prohibition
on future fraud? Can there be a waiver of an action based on future gross negligence? Lets now go to the third cause of breach, delay, legal delay, or default
The answer is no because under the law, gross negligence translates to bad faith,
therefore tantamount to fraud. In effect, it will have the same consequences as the WHAT IS DELAY?
stipulation waiving future fraud. It will negate the juridical tie. It is as if the seller can
commit any act of gross negligence and will not have any liability under the contract Art. 1169. Those obliged to deliver or to do something incur in delay from the
of sale. So, in the end, if you have that stipulation allowing a future act of gross time the obligee judicially or extrajudicially demands from them the fulfilment
negligence by the debtor, then it is as if the debtor has no obligation to perform. of their obligation.
So, question now, can you waive simple negligence? Yes but not gross because However, the demand by the creditor shall not be necessary in order that
simple negligence will not be tantamount to fraud. delay may exist:
Example: Contract of Sale 1) When the obligation or the law expressly so declares; or
In a contract of sale, seller shall not be liable for scratches and other dings that may 2) When from the nature and the circumstances of the obligation it appears
be done to the car prior to delivery. That's fine. 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
Always, when you have that kind of waiver, as a rule, you carved out the two of the contract; or
instances, waiver based on an action of future fraud or future act of gross 3) When demand would be useless, as when the obligor has rendered it
negligence. beyond his power to perform
In reciprocal obligations, neither party incurs in delay if the other does not
Example: Service Contract comply or is not ready to comply in a proper manner with what is incumbent
In service contracts where X will render service to Y (operation of a hotel, upon him. From the moment one of the parties fulfils his obligation, delay by
management of a company), they will provide a clause where the service provider the other begins.
shall not be liable for any and all acts done pursuant in the performance of the
operation of the business provided that it does not arise from willful misconduct or
gross negligence.
Is that valid? CASE

Yes! Because clearly, it carves out the two exceptions.
The prohibition against waiver of an action based on future fraud or future gross Art 1169
negligence. In that provision, the law is not interested in justice and fairness. There is
some efficiency. The law prohibits it not because it is for the pursuit of equity or
1. PANTALEON V. AMEX # (Credit Card)
Delay not present in credit card transactions
23
Illustration 2: Loan Contract

The Pantaleons went on a tour and during the tour, the wife bought jewelry from a
store. Pantaleon paid for the purchase using his Amex card. There was a long process
of verification and approval. When they went back, the other tourists were angry
because they missed another schedule. This is decision granting a motion for
reconsideration. The first decision of SC was reversed in favor of Amex.  LOAN (day 1)
  CREDITOR DEBTOR
Ruling: There is a contract between the two - the credit agreement. Amex would
extend a credit facility to Pantaleon which he could use subject to approval by Amex
per transaction. On other hand, Pantaleon, in exchange of the credit facility agreed to Payment (day 2)
pay all amounts drawn from the facility for the purchases using the credit card. But,
Amex is not under any obligation to approve. Amex could decide to approve or
disapprove any transaction. Amex was not in default because there is no
obligation to approve the purchase in the first place. Only upon approval would Debtor did not pay on day 2 as stipulated. Is he in default? There was no demand so
Pantaleon have a loan liability. For each transaction, Pantaleon was offering to no. There must be a demand to place the debtor in default.
borrow money to pay this purchase - an offer to borrow. When Amex approves, it's
an agreement by Amex to lend the money to be used for the purchase. Then when A demand may be made judicially or extrajudicially. In an extrajudicial demand, you
Amex lends, Pantaleon, in exchange, undertakes to pay whatever may be due under just send a letter. For e example a Creditor sent an email stating
the credit card account. Amex also did not abuse its right since Amex in verifying if “ May I request your payment today?”,
the transaction is legitimate - an exercise of due diligence. Otherwise, Amex will be is not a demand but a request. An extrajudicial demand would say
liable in case it is a false purchase.  “ This is to formally demand your payment today, the due date. Should you not pay, I
  will be constrained to take the corresponding legal action…”
For there to be default, the first requirement is there must be an obligation. Because if
there is no obligation, there is no prestation to be demanded from the debtor. A judicial deman on the other hand is when you file a complain in court. A complaint
Whether or not there is judicial or extrajudicial demand, nothing will happen. There for collection.
will be no default. The general rule: for a debtor may be placed in default by the
creditor, there must be a demand - judicial or extrajudicial demand on the given When you speak of default or mora, you are generally referring to the default of the
due date of performance. Without demand, the debtor will not be in default.  debtor. There are different kinds of default. Default on the part of the debtor, default
on the part of the creditor, or default on the part of both debtor or creditor. Default
means generally the failure of a debtor to perform on the given due date upon
demand of creditor. As explained in this case of Pantaleon, default presupposes an
GENERAL RULE obligation. There is no obligation then there could be no default. The obligation must
be due and demandable meaning it is determined or liquidated and it can be
There must be a demand ( judicial or extra-judicial) to place a debtor in demanded by the creditor. 
default.
24
Going back to the loan contract illustration, if it provided for example that on due There are exceptions to that general rule. When there is no need to make a demand
date, should the borrower fail to pay, the borrower shall have additional sixty days to place a debtor in default.
within which to pay the money.
The question now is: Is there a need for the borrower to make a demand on the WHEN IS DEMAND NOT NECESSARY?
lender to make that additional sixty days available to the debtor?
That additional period is a grace period. It is not an obligation. It is more of a right 1. When the parties expressly stipulate:
of the borrower. Again, for there to be default, there must be an obligation. If
It is not enough that the parties stipulate a due date. You have to state there that
what is involved is a right, then there is no need to make a demand.
debtor should pay on due date and then you dispense with the need of demand.
Automatically, borrower will have the grace period upon arrival of Day, an "Without need of a demand from the creditor” or "Without need of any notice or
additional sixty day period. demand from the creditor.”
The purpose of that is on due date, if there is no payment automatically the borrower
will be on default.
KINDS OF FRAUD An alternative is by imposing a penalty. It means that there is penalty on due date
and that is why a penalty is being triggered. Remember that a penalty is being
MORA SOLVENDI MORA ACCIPIENDI COMPENSATIO triggered. Remember that penalty is a consequence of default.
( DEFAULT BY THE (DEFAULT BY THE MORAE
2. When the law says so
DEBTOR) CREDITOR) ( BOTH PARTIES IN
DEFAULT) Example:
Payment of taxes and filing of income tax returns (April 15), SSS contributions, reports
Default may be on the part of the debtor which is mora solvendi. If it is on the part of required by gov't agency. Non-payment of taxes will be in default. The consequence
the creditor, mora accipiendi. If both parties, compensatio morae. As a general rule, of such default is liability for interest and other surcharges. When the law provides
the creditor places the debtor in default by making a demand on the given due date. for a deadline, the law dispenses of demand. There must be payment on the given
due date. Otherwise you are automatically in default. Reports required by gov't
agency, for example, corporations are required annually to file a general information
sheet. GIS should be filed within 30 days from the annual stockholders' meeting. If
you don't file within the 30-day period, automatically you are in default, you will liable
DEMAND NOT to penalties that may be imposed by the SEC.
NECESSARY WHEN ( ART 1169):
1.The parties expressly stipulate in the obligation

2. When it is provided by law
3. When time is of the essence
4. When demand would be useless
25
store ought to have known that the only way you are delivering there is if work ought
3. When time is of the essence to be done on the same day because no one would be staying there after a certain
time. And so in short, the SC said that there was a place and that place was very
peculiar and no person would be waiting there or staying there overnight - and the
workers were there. If Barzaga only mentioned the workers were there and not that
CASE
they were waiting in the cemetery, then maybe that would not be enough to really let
2. BARZAGA v. CA (funeral) the store know that time is of the essence kind of obligation. But here, there was
What is considered time is of the essence? mention of the cemetery.
In the case of Barzaga, his ill wife who was dying requested to be buried before
Christmas in the event that she dies. As faith would have it, the wife indeed died Illustration 3: BIRTHDAY CAKE $
before Christmas and Barzaga, to fulfill her wish, went to the hardware store of Alviar
to purchase the necessary materials in constructing a niche for his wife's internment. Now let’s go back to our example of the cake. In our example, would there be
He told the hardware store worker that the materials should be delivered the default if I do not deliver on the next day?
following day at 8am in the cemetery because he has workers there waiting for the
materials. DEPENDS. There would only be default the moment you provide the date of the
However, Barzaga failed to mention to the store owner and the clerk that the materials birthday - February 3….Happy Birthday, Mr. X. If it was delivered on February 4, it
being delivered were going to be used to bury the wife before Christmas. All he did will be useless so time is of the essence.
was stipulate the delivery date, time and place of the materials.
So when the store failed to deliver on the date stipulated, was the store owner in
default?
MORAL LESSON: It's not because it would be useless to deliver after a certain
YES. Because there is stipulated due date and time. Also, they knew that there would date...in both cases the creditor informed the debtor that performance needs to be
be workers in the cemetery waiting to receive the delivery and to issue the payment exact. How? In the case of Barzaga, by
so in that case time is of the essence in the performance of the obligation. But yet the mentioning the cemetery and the waiting
date passed. workers and the time and date of delivery. In “There must be
the case of the birthday cake, the information to the debtor
Why should it be different in Barzaga (as compared to Pantaleon v. AMEX)? Why is it birthday...when would be the birthday. So the
time is of the essence? and the debtor must
information was sufficient to allow the store
owner or the cake maker to know that the somehow accept the
Here, there will be workers waiting in the cemetery. Barzaga said deliver on this date, delivery/performance should be exact. obligation knowing full
this time at cemetery X where workers will be waiting without mentioning the plan to That is what is required. well the required exact
bury the wife before Christmas. SC said, time is of the essence because in this case,
Barzaga stated that the materials were to be delivered in the cemetery waiting so the performance”
26
3. LORENZO SHIPPING CORP VS. BJ MARTHEL (cylinder lines) The cylinders were to be used to fix their shipping vessel which was in the dry dock.
There must be information in Time is of the Essence exceptions Everyday that the ship is parked in the dry dock, everyday they have to pay parking
fees. That is why it is for the best interest of the ship to immediately turn around once
In the case of Lorenzo v. Marthel, Lorenzo Shipping ordered cylinder lines from they are in a dry dock because the longer they stay, the more they pay just for using
Marthel starting the term of payment to be 25% upon delivery without really stating that port. The same here. As much as possible, the shipping company wanted the
the date of the cylinder's delivery. There was an order for the spare parts supposedly delivery to be exact because they would be incurring costs. They would have the ship
to fix Lorenzo's shipping vessel; therefore for them, the delivery was time is of the there waiting for repair and work could not have been done because the cylinders
essence. have yet to arrive.
But nevertheless, the SC said that time was not of the essence in this case because
So was it really time is of the essence in the performance of the obligation? Lorenzo failed to specify those facts (the repair, the need for the parts). They were
never mentioned. Lorenzo just placed an order and gave a due date. If somehow
NO. Lorenzo never shared this information to Marthel - that the parts were needed Lorenzo told Marthel that the cylinders should be delivered on this date because they
right away to fix their shipping vessel. could not proceed with the repair then time would be of the essence in the
performance of the obligation. Yet in this case, the SC said this obligation did not
SC said in this case that it is not a time is of the essence kind of obligation because by require exact performance as to time. However, it could have been otherwise if only
just stating the due date, like the date and time of payment or delivery, that will not Lorenzo informed Marthel of the special consideration or circumstances in this case.
be enough to make the obligation a time is of the essence kind. Performance need
not be exact. There will still be a requirement of demand to place a debtor in default.
Illustration 4: WEDDING GOWN %
GENERAL RULE This is why you will encounter normally the wedding gown example. Bride ordered
the wedding gown from X to be delivered on February 14. Is time is of the essence?
If the parties only stipulate the due date, it will still require a demand. It will not Again, depends. The creditor should inform the debtor when the use will be.
be an exception…it will not be a time is of the essence kind of obligation. For the
Otherwise, time will not be of the essence in the performance of the obligation.
time is of the essence exception to be valid, there must be information from the
creditor to the debtor and the debtor must agree to the exact performance.
(DEMAND RULE) What is crucial is not that it would be useless if delivered after a given date. What is
crucial is there is information being given by the creditor to the debtor and the
debtor agreed to perform as per requirement of the creditor.
Aside from the fact that for it to be a time is of the essence kind of obligation that due
date and time is given, what else is required?
None of that was existing in the case of Lorenzo.
There must be permission from the creditor (buyer) and the debtor (seller) that the
deliver should be exactly on a given date and time because of a special set of
considerations like for example, we are paying for the dry dock, we are paying for the
workers, etc.
27
4. When demand is useless buyer so theoretically the buyer can just make the demand and the sellers could have
repurchased the property from X. Demand would not have been useless in this case.
So how is demand really useless in this case? Is it really useless?
CASE
NO. The obligation could have been complied with by the sellers. The sellers could
4. ALMOCERA v. ONG (townhouse)
go to X, repurchase the property, and sell it to buyer. So, it is still possible. Demand is
When demand is useless
not really useless. What disabled the sellers from fulfilling their obligation is when the
buyers did not demand the fulfillments of the said obligation. Again, according to
In the case of Almocera, there was a townhouse in Cebu which Ong (creditor) tried to
paragraphs 3 of Article 1169 of the Civil Code, there is no need to make a demand:
purchase from Almocera and First Builders (debtors). The contract they entered into
was a contract to sell whereby the developer/seller would transfer ownership to the
3.when demand would be useless, as when the obligor has rendered it beyond his
buyer in exchange with payment of price in accordance to a certain schedule. Prior to
power to perform.
the perfection of the contract, Almocera mortgaged and foreclosed the land to Land
Bank and it was claimed by Ong that it was fraudulently concealed from him. Had he
Beyond the debtor’s power to perform. It is still within the power of the sellers
known that the townhouse was already mortgaged and foreclosed, he would not have
in this case. The sellers could repurchase and sell to the buyer. So in that case,
bought the townhouse in the first place.
demand is not useless. Demand is a useful information towards the sellers to decide
Ong is now asking for reimbursement from the developers and for the resolution of
whether to repurchase. So it should not be an exception.
the contract claiming that they were delayed in the performance of their obligation to
deliver the townhouse more than 6 months after the contract to sell. However, the
5. MEGA WORLD V. TANSECO ( condo building)
Almocera and and First Building denied such liability for Ong also failed to exercise
When demand is useless
his right to demand the delivery of the townhouse.
Eventually, the townhouse was auctioned off and was sold to X.
In the next case, Megaworld v. Tanseco, the issue and the premise were similar.
There's a buyer (Tanseco) and a seller (Megaworld) subject of a contract to sell a
So were the developers/sellers ind fault when they failed to deliver?
condominium unit that should be delivered within a certain period. After the period,
YES. They were in default
including the grace period, the obligation was still not fulfilled.
Was there a need to demand?
NO. There was no need to demand. There was no need to make a demand because
Was demand necessary?
according to paragraph 3 of Art 1169 of the Civil Code, there is no need to make a
NO. Demand was not necessary because demand was useless. Demand would be
demand:
useless because at that time, the condo building was still missing 20 floors. The object
of the obligation is not yet deliverable and it is outside of the seller's power to
3. when demand would be useless, as when the obligor has rendered it
perform.
beyond his power to perform.
What do we mean by demand being useless?

The obligor or the developer could no longer perform their obligation because the
When even if the creditor makes a demand, the debtor cannot comply immediately.
townhouse in question was no longer in their possession. Hence, demand would be
Yes, it can be done, you can still comply, but it will take you a while.
useless. However, the seller can always repurchase the property upon demand of the
28
the project and offered to deliver the unit, buyer would not be obliged to pay the
COMPARING ALMOCERA AND MEGAWORLD price and buyer could never complain that the seller was in default.
MEGAWORLD Was the seller really in default?

ALMOCERA
YES but not now because at that point, the seller would already be rehabilitated
Demand would be useless because even Demand would also be useless. Even if meaning seller would be ready, willing and truthful. On the other hand, buyer would
if buyer made a demand on the due date, demand was made on the due date, be the only one unable to perform the required prestation - to pay the price.
developers/sellers would be in no there is no way for the seller to
position to deliver because they no immediately comply - meaning turnover
Illustration 5: Contract of Sale ( Reciprocal Obligation)
longer hold the property at the time. Yes, and sell and convey the unit.
they could repurchase but that would not
abound to immediately delivery upon the
PROPERTY
receipt of the demand.
SELLER BUYER
GENERAL RULE PRICE

Demand is useless when the creditor cannot IMMEDIATELY perform the required
DAY 1: Seller should convey property and buyer should pay the price
prestation or the obligation upon the receipt of the demand. That is when we say
Seller conveys property but buyer unable to pay price
the demand is useless, it does not mean that there is absolutely no way for the
( Default would incur a penalty of x%)
debtor to perform. Debtor can still perform.
Is buyer in default? YES.
Of course it is a different thing, we will learn later on when let's say, there is no
demand or payment. If there is no payment and you are the buyer, you will be in
default. However, if the buyer does not pay because there is no delivery, there will be WHAT IS A RECPIPROCAL OBLIGATION?
no default. Because what you have here is a reciprocal obligation and in a reciprocal
obligation, they are mutual creditors and debtors of each other. If you have a In a reciprocal obligation, each party has a prestation to be fulfilled in favour
reciprocal obligation and one party defaults or is not ready or is not able to perform, of the other so they are creditors and debtors with respect to this one
the other party will never be in default. transaction. In a contract of sale, seller supplies to convey the property, buyer
supplies to pays the price.
In this example, the seller could not deliver the townhouse. As long as they are in no
position to deliver, the buyer would never be in default. In the same manner, if the
seller cannot complete and convey the unit on the due date, the buyer would not be
in default even if the buyer does not pay because the seller was already in default.
And if for some reason the buyer did not ask and later on seller is able to complete
29
The rule on reciprocal obligations with respect to a party automatically being in

GENERAL RULE default upon the performance by the other of his or her part of the obligation applies
only if you have SIMULTANEOUS PERFORMANCE meaning you have a
In a reciprocal obligation, demand is not necessary because a party defaults “kaliwangan” transaction. I pay you, you sell to me immediately - simultaneous
automatically as soon as the other party is ready, willing, and able to perform exchange of presentation. That is what is crucial.
his or her part of the contract meaning the conveyance of the property or
object of prestation. So the moment one party is ready, willing, and able to The moment you have a tiered performance (you have a performance of a
convey, automatically the other party will be in default. There is no need to prestation on a certain date and then you have another performance on another
made a demand. date), you now apply the demand rule. So if there is performance on day 1, there is
no performance on day 2 by seller, then there is a need for buyer to make a demand
1. If the seller is in no position, not ready, willing, and able, to convey the to place the seller on default. Of course, this is with respect to one party being in
property on due date, buyer will never be in default. default.
2. The moment seller performs, conveys the property, but the buyer fails to
perform meaning not ready, willing or able to pay the price, automatically It is different when you are dealing with a situation where a buyer did not pay the
buyer would be in default. NO NEED TO MAKE A DEMAND. price on day 1, is seller in default on day 2?
NEVER. Whatever happens, seller will never be on default on day 2 if buyer did not
pay on day 1.
So again, that rule in reciprocal obligation whereby one party defaults the moment
6. SOLAR HARVEST VS. DAVAO CORRUGATED (cardboard boxes) the other party performs, applies only if you have simultaneous performance of
the recirprocal obligation or the prestations. If you have successive performance,
In the case of Solar Harvest, Solar Harvest ordered boxes from Davao Corrugated. you still follow the general rule (there must be a demand).
Davao Corrugated eventually made the boxes but Solar Harvest did not pick them up.
In here, you have a sale - a reciprocal obligation.
• Seller and Buyer
• Seller - boxes in exchange for a price
• Buyer - pays price on day 1
• Boxes should be delivered on day 2 - they were not delivered
There's a contract of sale. Buyer should pay the price on day 1 with a check. On day
2, seller should deliver the boxes. Seller did not deliver.
Is the seller in default?

NO. Demand is still necessary.
30
THURSDAY 4 FEBRUARY 2016
REVIEW: WHEN DEMAND NOT NECESSARILY FOR DELAY TO 4. WHEN DEMAND IS USELESS Day 1 – Seller and buyer enter into a Contract
to Sell a certain property.
EXIST Day 1.5 – Seller sold the property to X.
Day 2 – Buyer will pay the price. Seller is now
in default.
WHEN IS DEMAND NOT NECESSARY FOR DELAY TO EXIST? Why? Because demand is useless.
Seller by selling to X now made it impossible
1. BY STIPULATION OF CONTRACT Example: Penalty
to immediately comply with the obligation to
Parties stipulate that failure to pay will
convey the property upon demand by buyer.
automatically yield a 1% penalty per month.
Though it does not mean that seller could
From this you will gather that there should be
never convey the property to buyer, it could
payment on the given due date because the
still happen.
moment there is not payment there will
However, demand is useless because seller
automatically be default because of the
in this case could not immediately perform
stipulation for penalty.
the required obligation upon demand by
buyer.
2. WHEN THE LAW SO PROVIDES Deadlines imposed by law on the performance
Megaworld Case: On due date the
of certain acts by the debtor, e.g. tax payment,
condominium was not yet completed. Even if a
filing of reports with government agencies.
demand was made, there is no way that
Megaworld would be able to deliver the unit.
3. TIME IS OF THE ESSENCE The lender should provide the information
to the borrower that the payment should be Almocera Case: At the time that seller should
exactly made because there is a special convey, Landbank already foreclosed the
consideration and the borrower should townhouse unit. Thus, they were not in the
accept the obligation knowing this position to immediately comply with any
requirement, demand.
e.g. scenario of the wedding gown, birthday Demand being useless means that even if a
cake, Barzaga case (cemetery workers), demand was made on the due day it would be
Lorenzo Shipping Corp. case (cylinders). impossible for the debtor to comply
Example: immediately with the demand.
There is no express stipulation dispensing the
demand, there is just a due date. Creditor says
in the contract “you have to pay on the due
date because I will use the payment to invest
in this business and this is the only time I can KINDS OF DELAY
do so, otherwise I will not be able to invest.”
Time is of the essence because although 1. MORA SOLVENDI ( debtor in default)
creditor will still get the payment, he will lose
2. MORA ACCIPIENDI ( creditor in default)
the opportunity to invest.
3. COMPENSATIO MORAE ( both parties in default)
31
RECIPROCAL OBLIGATIONS done in exchange for the other.

Solar Harvest Case: The rule only applies if you have a simultaneous performance.
Day 1 – Seller conveys the lot.
In a reciprocal obligation, both parties are sellers and buyers, debtors and Day 2 – Borrower fails to pay the price.
creditors at the same time. Is buyer in default?
No. There is no simultaneous performance. This is tiered performance.
To place the buyer in default, seller has to make a demand.
Illustration 1: RECIPROCAL OBLIGATIONS IN A CONTRACT OF SALE
PROPERTY MORA ACCIPIENDI

SELLER BUYER
MORA ACCIPIENDI
PRICE
DEFAULT ON THE PART OF THE CREDITOR
With respect to the conveyance of the property: Mora Accipiendi is the unjustified refusal by the creditor to accept the
seller is the debtor and buyer is the creditor. performance of the obligation by the debtor.
With respect to the payment of the price:
buyer is the debtor and seller is the creditor.
Example: Loan Contract
There is a Loan Contract. Borrower TENDER OF PAYMENT
Each party has a prestation to be performed in exchange for the other. is supposed to pay 1 Million to
lender on February 4, 2016. On Actually show the money.
t h i s d a y b o r ro w e r t e n d e re d If cash payment is required, borrower
Seller and buyer enter into a Contract of Sale. should go to lender and show the cash
payment.
Day 1 – Seller sold the lot. Buyer paid the price. Demand is not necessary and be ready to pay the debt.
If on Day 1 seller does not deliver and buyer in reciprocal obligations
does not pay, buyer will not be in default
only if it requires
because the requirement for buyer to be in
default is that seller should be ready willing simultaneous
1st Scenario: Borrower paid the 1 Million in 1 Peso coins.
and able to perform his part of the performance. If not, Though it is money, the creditor can refuse to accept the payment. Pursuant to BSP
reciprocal obligation. demand will be Circular No. 537, coins are legal tender only up to 1 Thousand Pesos. Beyond that,
But if buyer pays and seller does not deliver, the creditor can legally refuse.
necessary.
seller will automatically be in default even if Mora Accipiendi?
there is no demand because one prestation is
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No, because there is a justification in of refusal where payment is not legal Example: Sale of a Car
tender.
Day 1 – Buyer paid the full amount.
2nd Scenario: Borrower paid only 950 Thousand and promised to pay the 50 Thousand Day 2 – There should be conveyance of the property. Seller was ready, willing, and
the next day. able to convey the property.
Lender can refuse because the payment is incomplete. Buyer refuses to accept the delivery of the property.
As a rule, payment should be complete, that’s what we call integrity of payment. Consequence? Mora Accipiendi, assuming buyer has no legal justification to refuse.
Mora Accipiendi? If seller does not consign, what will be the liability of seller and buyer in case the car is
No, borrower cannot pay in parts unless there is an agreement to that effect or lost or damaged?
an obligation to pay in installments. The rule will depend on the cause.
Without fault or negligence of the seller: Liability of the buyer.
3rd Scenario: Borrower tendered payment; lender’s refusal is unjustified. This is the case especially in a Contract of Sale and there is a Notarized Deed of Sale,
There is Mora Accipiendi. there is a presumed constructive delivery, so even if buyer does not accept delivery, as
Loan earns interest at 1%/mo. and a penalty of 20% of amount due in case of between parties it is as if the buyer is already the owner.
nonpayment or violation of the provisions. There is simple negligence on the part of seller: Liability of the buyer. (e.g.
scratches on the car due to carelessness of the seller in securing it)
Question 1: Will borrower be obliged to pay interest after February 4, 2016?
Yes. There is gross negligence or fraud on the part of seller: Liability of the seller.
As long as borrower has the money interest will continue to accrue because the Underlying reason is the rule on waiver of an action based on future fraud.
borrower presumably uses the money.
To stop the accrual of interest, borrower has to complete the payment by filing Who will shoulder cost of maintenance or preservation (e.g. warehousing)? Buyer,
an action in court for the consignation of payment. even if there is no consignation by seller.
Borrower basically tells the court that he has an obligation, which lender unjustifiably
refuses to accept payment, thus, he is now depositing payment in court.
If court rules on its validity, then it will be deemed as payment and interest will cease RULES IN CASE OF LOSS OF DAMAGE TO OCCUR AFTER DEFAULT OF
to accrue. CREDITOR
Question 2: Will borrower be liable to pay the penalty because there was no payment A. THE DEBTOR WILL ONLY BE LIABLE WHEN HE EMPLOYS GROSS
on February 4, 2016? NEGLIGENCE OR FRAUD.
No. B. THE CREDITOR WILL BE LIABLE IF :
The penalty is premised on default on the part of the debtor (Mora Solvendi).   1.WITHOUT FAULT OR NEGLIGENCE OF DEBTOR
So if the lender is the one in default, the penalty will not be due. Even without 2. WITH SIMPLE NEGLIGENCE OF DEBTOR.
consignation, the penalty will never be due because the one in default is the
lender.
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COMPENSATIO MORAE Ordinarily, a REM is indivisible. If you mortgage a property worth 20 Million and you
owe 10 Million, you cannot ask the lender to only charge half if you’ve paid 5 Million.
You need to pay the entire amount in order to discharge the REM.
However, in this case, because of Compensatio Morae, the Supreme Court held that
COMPENSATIO MORAE the mortgage would only be valid up to 50%, to correspond to the amount of the
BOTH DEBTOR AND CREDITOR ARE IN DEFAULT loan released.
The mortgage was reduced correspondingly in proportion to the amount released by
the bank.
Cortes Case: There is a Contract of Sale. With respect to damages, since both are in default, they cancel each other out.
Seller failed to convey the property (failed to
give Certificate of Title, other documents, and actual turnover of possession of the
property). FORTUITOUS EVENTS
Buyer failed to pay the price.
Who would be in default? Both parties are in
default, Compensatio Morae. Art. 1174. Except in cases expressly specified by the law, or when it is
Assuming their defaults are on equal grounds, the default otherwise declared by stipulation, or when the nature of the obligation
of one can cancel the other. requires the assumption of risk, no person shall be responsible for those
events which, could not be foreseen, or which, though foreseen, were
Example: Loan Contract inevitable.
There is a loan contract. Bank agreed to lend 10 Million. Borrower will pay the
principalplus the stipulated interest on due date.
FORTUITOUS EVENT
Borrower secured the loan with the Real Estate Mortgage (REM), valued at 20 Million.
Bank only released 5 Million due to regulatory impediments (bank was closed). Extraordinary event which cannot be foreseen, or which, though foreseen, is
Borrower then stops payment because of the failure of release; hence, there is failure unavoidable.
to pay.
Who would be in default?
Both the bank and the borrower are in default. REQUISITES OF FORTUITOUS EVENT
The moment the borrower stopped paying, he is in default because the obligation is
to pay the loan. 1. INDEPENDENT OF THE OBLIGORS WILL
The bank is also in default because the bank is a debtor with respect to the 2. UNFORESEEABLE OR UNAVOIDABLE
release of the loan, and by failing to do so the bank defaulted in its obligation. 3. RENDERS OBLIGATION IMPOSSIBLE TO PERFORM
Consequence: 4. OBLIGOR FREE FROM PARTICIPATION
Borrower is still obliged to pay the 5 Million plus interest.
Fortuitous event and force majeure generally applies to natural incidents. In our
law they are identical in so far as they exempt an obligor from liability.
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Is an earthquake automatically a fortuitous event? The earthquake was not a fortuitous event though because the 4th element to
No. Absence of any of the above requisites would disqualify a fortuitous event. qualify an event as fortuitous was lacking (no participation of the debtor to the
loss or damage).
There was contributory negligence on the part of the architect and also of the
If the debtor fails to perform because of a fortuitous event, is the debtor automatically contractor (design and construction defect) Absence of any of the requisites of a
freed from liability? fortuitous event disqualifies the obligor from claiming exemption from liability.
No. Absence of any of the above requisites would prevent the obligor from being They were held to be solidarily liable in this case.
exempt from liability.
3. ACE-AGRO V. CA ( Bottlecaps)
CASES ON FORTUITOUS EVENTS

Ace agro was engaged in the service of cleaning bottles of Cosmos bottling. A fire
burnt down the warehouse. Cosmos unilaterally terminated bottle cleaning contract.
1. TANGUILING V. CA (windmill) Ace agro asked for an extension of the contract because of the burnt warehouse
Missing requisite of fortuitous event where they clean the bottles.
In this case, Ace-agro cannot ask for an extension of the contract.
Tanguilig offered to construct a functioning windmill system for Herce Jr. for The suspension of work was due to a fortuitous event, there was no justification for
P60,000.00. their demand for an extension.
When the windmill failed to work, Herce Jr. stopped paying for the remaining balance. In case of a fortuitous event the term of the contract shall be extended by the period
According to Tanguilig the failure of the windmill to function was due to a fortuitous corresponding to the duration of the force majeure or, an alternative would be as long
event (strong wind). as the fortuitous event subsists then the term of the contract shall be suspended.
The Supreme Court held that when Herce Jr. failed to pay the installment he was not
in default because there was a reciprocal obligation, if the contractor did not However, a fortuitous event does not automatically extend the period.
conform with the obligation to deliver a functioning windmill then owner is not In this case, the interruption would not necessitate or entitle the contractor to
liable to pay the balance. an extension. Its a reiteration of the general rule: it exempts the parties from
liability for failure to perform their respective obligations. Cosmos was
Can the strong wind be considered a fortuitous event? No of course not! Its a exempted from having to provide an extension to Ace Agro.
windmill! Its supposed to be able to endure strong winds!
( Look at the case of Tanguiling, in this case the entire period of the contract was
2. NAKPIL & SONS V. CA ( Building) meant for the construction of the windmill. If a fortuitous event occurred here, then an
Negligence negates fortuitous event defense extension may be granted. But her in Cosmos, it was bottle cleaning! Every time a
bottle was cleaned, a prestation was completed! Extension of the contract was not
An earthquake caused the constructed building to leak, the building might collapse proper.)
anytime thus it was rendered unsafe to utilize.
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You can gather from the two cases how different the presentations are. If there was a The 1997 financial crisis is not a fortuitous event because the event was
period contemplated and mentioned in Tanguiling, an extension should be granted foreseeable. The financial crisis started in 1997, the crisis started even before
because the parties intended that a debtor has the entire usage of the period. they borrowed so it was no longer unforeseeable and they could have avoided it
by not borrowing in dollars.
If you’re going to distinguish or opt out of the Ace-agro case what do you say? You The SC also said that it cant be considered a fortuitous event because there was
say its different because: an assumption of risk. Mondragon will still be held liable notwithstanding the
1. There is only one presentation fortuitous event.
2. The period was given for the completion of that single prestation.
Example: Christmas Rush
Thats how you distinguish and opt out of the Ace-Agro ruling. Christmas season. You are a contractor in NAIA providing inspection services. You
However the best way is to still stipulate it in the contract were not able to expect the amount of passengers because of the Christmas rush
Example: which rendered the performance of the obligation impossible.
“ Any fortuitous event will extend the period of the contract to compensate for the Would it be a fortuitous event?
period or duration of the fortuitous event No.
Or, they may also add that if it lasted for a certain number of days, the contract would The incident was foreseeable because every Christmas, a lot of passengers come in.
be cancelled. You could have prepared or have made arrangements to accommodate the
unexpected amount of passengers.
4. MONDRAGON V. CA (Financial Crisis)
Assumption of Risk GENERAL RULE
If the debtor does not perform, the assumption is that there is breach,
Mondragon loaned from the bank. Its a reciprocal obligation. Lender agreed to
however if the debtor can prove the existence of a fortuitous event, the
extend the loan to Mondragon and Mondragon agreed to pay: interest, principal and
debtor shall be exempted from liabilities due to nonperformance.
other undertakings. Contract concluded around 1997.
Mondragon was a real estate company, a developer. At that time, the interest rate of
US dollars was lower than the peso-denominated loan. So, if you are boring in pesos
the rate would be 2-digits ( P10.00, 12.00) and the dollars were around 5-6% since it
was booming at the time. Now there was this practice that developer companies EXCEPTIONS TO THE GENERAL RULE
would borrow in dollars.
Mondragon borrowed in 1997 and the exchange rate deteriorated. From $1=P25, it
became $1=P46.
What happens now? Art. 1174. Except in cases expressly specified by the law, or when it is
You are now paying a lower interest rate but for you to come up with payment of both otherwise declared by stipulation, or when the nature of the obligation
principal and interest, you would have to raise almost double the amount in pesos. requires the assumption of risk, no person shall be responsible for those
How did the supreme court rule? was this 1997 financial crisis considered a fortuitous events which could not be foreseen, or which, though foreseen, were
event? inevitable.
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1. WHEN THE LAW SO PROVIDES Example: Establishment of a Nuclear Powerplant

There was a meltdown. Let’s assume you took all precautions so there was no
Examples: negligence on your part but nevertheless you would still be liable whether under a
Article 1165 contract or laws not withstanding the existence of a fortuitous event because a
If the obligor delays, or has promised to deliver the same thing to two or more meltdown could not have happened if you did not establish the nuclear power plant.
persons who do not have the same interest, he shall be responsible for any fortuitous
event until he has effected the delivery.
Article 1268
Person in possession of the proceeds of a crime shall still be liable if the proceeds of
the crime are lost due to a fortuitous event
Reason: We do not want to reward a criminal so the criminal should still return the
proceeds of the crime or be liable for the same even if they were lost in a fortuitous
event.
A legal/juridical relation between a debtor and a creditor whereby the creditor can
demand a specific conduct, and the conduct is what you call a prestation - to give, to
do, or not to do
Should there be a default or a failure to fulfill the prestation, there will be consequent
legal remedies
2. WHEN STIPULATED BY PARTIES

When the parties agree by contract that a party or both parties would still be liable
even if the cause of the loss or damage was a fortuitous event.
Example: Insurance Contracts

It is allowed by law to stipulate in a contract that if the “thing” which is the prestation
of the obligation is lost without proof of a fortuitous event, the debtor would still be
liable.
3. ASSUMPTION OF RISK
When an activity creates the risk of loss or damage which would not have existed
without that activity, then the party responsible for the activity is supposed to have
assumed the risk so if something which would qualify as a fortuitous event happens,
the party would not be exempted from liability.
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USURIOUS INTEREST Initially, the lawyers will check the terms and conditions, outside consultants and
accountants as well. These people will go over the counter offer. They will
recommend either approval or rejection.
Art. 1175. Usurious transaction shall be governed by special laws. If the parties approve of the terms of conditions, this proves that the debtor
was aware of the high interest rate, thus there was fully informed consent.
There was no compulsion. Debtor could have looked for other creditors, but
What is usury?
proceeded anyway. Creditor may show the court the context of the loan, and prove
that the high interest was made with full consent of the debtor.
What is the usury law?
USURY
Note: In a contract, always stipulate all the terms and conditions including
It is a law imposing a limit on the allowable
Excessive interest rate imposed payment of interest, surcharges, penalties, etc.
interest rate. The usury law was repealed
on loans
during martial law, thus we currently do
Okay lets move on to presumptions with respect to payment.
not have an active usury law.
Right now, the parties in a contract of loan are free to agree on any rate of
PRESUMPTIONS WITH RESPECT TO PAYMENT
interest. Interest are due only when the parties
agree to it in writing. Agreements on the
In a verbal agreement, there will be no valid
imposition of interests in Art. 1176. The receipt of the principal by the creditor, without reservation
obligation to pay the interest, but the obligation to
loans must be written with respect to the interest, shall I've rise to the presumption that said
pay the loan remains. It must be written. But a
interests has been paid.
party may go to court if the interest in down to be valid. The receipt of a later instalment of a debt without reservation as to prior
unconscionable (note: not unlawful, since the is no
instalments, shall likewise raise the presumption that such instillments have
law against usury. It is technically legal).
been paid.
What can the court do in case it finds the interest rate unconscionable?
The court cannot say “pay only the principal”. It may reduce interest, but may not Now, with respect to payments, the law establishes certain presumptions. Of course,
remove it altogether. these are rebuttal once evidence to the contrary is shown.
1. RECEIPT OF PRINCIPAL GIVES RISE TO PRESUMPTION THAT INTEREST HAS
How is an interest rate unconscionable? BEEN PAID
It depends on the nature of the obligation.
ASSUMPTIONS
VALIDATING AN UNCONSIONABLE INTEREST RATE
On the other hand, if you want to validate a high interest rate, what can you do? 1. The receipt of the principal by the creditor shall give rise to the
High interest rates may be sustained by emphasizing it is a contract. ( Remember presumption that said interest has been paid
Art 1159, contracts have the force of law between parties). 2. The issuance of a receipt of the later instalment shall give the presumption
that prior instillments have been paid
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The default rule when you borrow from someone or take out a loan is that you pay the
interest first before the principal. Thus, if a receipt issued for payment of the principal, ACCION SUBROGATORIA ACCION PAULIANA
there will be a presumption that the interest has been paid as well.
Action by the lender/creditor to collect Also means rescission, a subsidiary
payments by exercising the right of remedy, which means that there is no
the borrower/debtor. other rememdy that can be enforced,
2. ISSUANCE OF RECEIPT OF LATER INSTALLMENT GIVES RISE TO
or the debtor no longer has assets
PRESUMPTION THAT EARLIER INSTALLMENTS HAVE BEEN PAID
from which the liability may be
executed
Example:
Lets assume that the principal os 100M while the interest is 15M. It is a balloon
payment. The lender issued receipt for the principal. Whith that, there will be an
assumption that the interest was paid.
REQUIREMENTS FOR ACCION PAULIANA
1. Creditor, who is the plaintiff should have credit before a resizable contract
2. Debtor executed all his properties in favour of creditor
ADDITIONAL REMEDIES OF A CREDITOR 3. There is no other remedy
Do you still remember the basic remedies of a creditor? 4. The transaction of the debtor to a third person is fraudulent
5. The third person is not a buyer in good faith
Basic Remedies of the Creditor
1. Specific Performance with or without damages
2. Resolution with or without damages
If there is a reciprocal obligation (as in a contract of sale), seller conveyed property
3. Damages only
pursuant to the CoS, buyer defaulted in payment. One remedy is resolution. Another
is Accion Pauliana, also known as rescission.
Article 1177 gives us an idea of some additional remedies of a creditor that we’ll
It is an action for rescission based on fraud causing an economic prejudice to the
discuss later on in more detail.
creditor (Art. 1381). It may only be availed when the creditor has no other remedy or
The two remedies that are discussed briefly in this article are Accion Subrogatoria and
the debtor assets available, thus it is a subsidiary action.
Accion Pauliana
The basis of rescission in not substantial breach, unlike in resolution, but economic
prejudice. Note: not any economic breach can render the contract rescissible. It must
Art. 1177. The creditors, after having pursued the property in possession of be classified as rescissible by law under 1381.
the debtor to satisfy their claims, may exercise all the rights and bring all the Under 1381. Unlike resolution, which may resolve the entire contract, in rescission, it
actions of the latter for the same purpose, to save those which are inherent in is only until the extent necessary to obtain payment of the obligation.
his person; they may also impugn the acts which the debtor may have done to
defraud them.
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Example: His remedy will be accion pauliana. Ordinarily, creditor can only go after all the assets
of the debtor. Howver, under the law the creditor can go after the assets sold to X
A contract to sell jewelry worth 10M. Assuming the debtor has 20M worth of jewelry, when the transaction is fraudulent or with the intention to defraud the creditor.
the debtor is obliged only to give 10M worth of jewelry in case of default.
There is no complete cancellation. In contrast, in resolution, there is mutual
restitution. Seller is obliged to return the thing, plus damages. In resolution, it is as if ILLUSTRATION 2: DIAGRAM OF ACCION PAULIANA APPLIED TO THE LOAN
the contract never happened. CONTRACT
ILLUSTRATION 1: COMPARING RESOLUTION AND RESCISSION DAY 1: CREDITOR CONVEYS LOAN TO DEBTOR
1) CONTRACT OF SALE: LOAN
DEBTOR CREDITOR
Assume that S entered into a Contract of Sale. S sold his property to B for a ASSETS: 20M
price. B incurred default. S can therefore sue B for resolution. hence, there will
be cancellation of the obligation. DAY 2: DEBTOR SELLS ONLY ASSET WORTH 20M to X for 5M
ASSETS ( BAD FAITH)

2. LOAN CONTRACT
DEBTOR X
Day 1: Creditor entered into a loan agreement with Debtor. Debtor was
obliged to pay the principal plus interest on Day 3. 5M ( BAD FAITH)
ASSETS: 20M
Day 2: On day 2, debtor conveyed is only asset to X for a nominal amount. The DAY 3: DEBTOR INSOLVENT AND IN DEFAULT
only asset of D amounted to 20M and he sold it for around 5M.
ASSETS: 0
DEBTOR
( SQUANDERED AWAY 5M )
Let us assume that the transaction between D and X was fraudulent in the
sense that it placed the property beyond the reach of the creditor. It was real,
REMEDY OF CREDITOR?
because there was an exchange of prestation, even though it was only for a
nominal amount. This is opposed to a simulated sale wherein the transaction
between parties is only for show. CREDITOR DEBTOR X
Day 3: Assets now of Debtor is Zero, and debtor has already squandered away
the payment he received from X ( 5M). In short, on Day 3 debtor defaults.
ACCION PAULIANA
For the loan contract, what will now be the remedy of the creditor?
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Rights arising from an obligation are generally transmissible, unless the parties
RESOLUTION
POINTS OF RESCISSION stipulate otherwise or the law provides otherwise.
(1191)
COMPARISON (1381)
Example:
A creditor in a solidary obligation may not transfer his rights to the obligation without
Subsidiary remedy, the the consent of the other solidary creditors; the law also prohibits the transfer of the
Principal or retaliatory
last resort or when rights when it comes to support
remedy; resorted to when
MAIN DISTINCTIONS creditor cannot collect
there is a substantial
from debtor because of
breach of contract
fraudulent schemes
DIFFERENT KINDS OF OBLIGATIONS
Completely cancels the Granted only to the
EFFECT contract, “ as if never extent necessary to ILLUSTRATION 3: PROMISSORY NOTE AS A PURE OBLIGATION This is an example of a pure
happened” obtain payment obligation.
The promissory note is due
Lesion or economic
DEBTOR PROMISSORY NOTE upon demand of the
prejudice; there must be a CREDITOR
BASIS Substantial Breach 1M ( NO DATE)
creditor. Its not subject to any
specific law recognizing
term or condition
such damage
Mutual Restitution for Mutual Restitution as

both parties; buyer should well, however, the PURE OBLIGATION
return the property and creditor will not return
CONSEQUENCE An obligation not subject to any condition or term
compensate for the anything because the
damage caused because creditor did not receive
of non payment anything
Art. 1179. Every obligation whose performance does not depend upon a
future or uncertain event, or upon a past event unknown to the parties, is
demandable at once.
TRANSMISSIBILITY OF RIGHTS
This example ordinarily may be characterised as a pure obligation. So without saying
anything more, it means that the amount will be demandable anytime. Its not subject
Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation to a condition or a term. It is payable upon demand. Ordinarily, in the absence of a
are transmissible, if there has been no stipulation to the contrary
41
payment due date, the court will just state that its a pure obligation, theres no term or 2. REYES V. TUPARAN ( Building Rental)
condition. What is considered a substantial amount/substantial performance?
Reyes was the owner of a residential and commercial lot in Valenzuela. She decided to
CONDITION TERM
build a 3-storey commercial building in the said lot. She operated a drug store and
Future and Uncertain event Future and Certain event cosmetic store in that building. Tuparan was a tenant in the commercial building. The
two developed a friendship. Reyes obtained a loan. Trapan offered to assist her in
CASES ( Art 1179 and 1181) paying the loan. They made a contract stating that if Reyes did not find a buyer ( of
the building) for 6M, Tuparan will assume the obligation and will pay around P4m.
Reyes is alleging that Tuparan made a payment only amounting to 2M and left a
1. DE LEON V. ONG (Contract of Sale or Contract to Sell)
balance of around P805k. Reyes then wanted to resolve the contract
Fulfilment of condition was prevented
Held: There was a a Contract to Sell. The SC said that Reyes’s demand for rescission
In this case, the parties stipulated that De Leon would sell to Ong a property
of the contract could not take place. Tuparan already paid a substantial amount,
for 1M. In the contract of Sale, it was stipulated that there would be a downpayment
leaving only a balance of 805l. It did not constitute a substantial breach of contract.
of 400k. For the rest, Ong willl assume the mortgage of De Leon. Omg was able to
pay the downpayment only to learn later on that De Leon sold the property to a third
party, Viloria. Ong claimed that she’s the rightful owner but De Leon argued that their CONTRACT OF SALE CONTRACT TO SELL
contract was subject to a condition that did not happen: approval of the mortgage
by the bank IMMEDIATE transfer of title upon conveyance occurs only upon FULL
agreement of parties; payment may PAYMENT of price. There is no
The court held that this is a contract of sale. The conveyance of the title was not happen later transfer of ownership until the
subject to any condition. Ownership transferred upon initial payment. In relation happening of the suspensive
to the sad condition the court said that if there is a condition and the seller prevented condition: full payment of the price
its fulfilment, then the condition is deemed fulfilled. Contracts to sell usually precede
contracts of sale
CONTRACT TO SELL
Art. 1186. The condition shall be deemed fulfilled when the obligor In a contract to sell, full payment is the suspensive condition.
voluntarily prevents its fulfilment CONTRACT OF SALE
In a contract of sale, nonpayment is a resolutory condition.
CONSTRUCTIVE FULFILLMENT
When the debtor by his own acts voluntarily prevents the obligation, the
obligation is deemed fulfilled.
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3. GREAT ASIAN V. CA (discounting line)

SUSPENSIVE CONDITION RESOLUTORY CONDITION Suspensive Condition
A suspensive condition is a future and A resolutory condition is a future and This is a case regarding a discounting line. Theres a credit facility. Lender will extend a
uncertain event, the happening of uncertain event, the happening of loan. Borrower will likely collect postdated checks not immediately convertible to
which gives rise to an obligation which, extinguishes the obligation cash. So the borrower will give checks and then the lender will release proceeds less a
OBLIGATION EXISTS AFTER OBLIGATIONS EXISTS BEFORE certain amount, which will then be the discount for the counterpart of payments.
HAPPENING HAPPENING For example, you have 100k worth of check, you will receive less than 100k
depending on the interest rate contemplated.
COMPARING DE LEON AND REYES So here, Great Asia gave certain checks to lender. When lender tried to encase the
checks, only 2 out of 15 were honored.
These two cases illustrate the difference of the two conditions. You can have a In effect, the obligation of the borrower to pay the amount of 1M was not fulfilled.
pure obligation, neither subject to a term nor a condition. Or, you can have an Normally the drawer, the one who missed the check, has the obligation to pay the
obligation subject to a re check when it bounces. So, why was the borrower held liable in this case?
Its because in a stipulation in the contract, it was provided that :
If you compare a Contract of Sale and a Contract to Sell,

“ in case the checks drawn were dishonored, Great Asian will assume the
1) In a contract to sell, there is no obligation yet. This means that full payment of
responsibility”
the price will give rise to the obligation of the seller to convey title.
2) In a contract of sale, the obligation already exists. It is only extinguished when
The court characterized the clause as a suspensive condition.
non payment happens
What does it suspend?
It suspends the obligation of the borrower to assume responsibility to pay the
Art. 1184. If the suspensive condition does not happen within a given amount of the check in case of dishonor.
If for some reason, a check is dishonored, the stipulation gives rise to the obligation
period, as agreed upon by he parties, the obligation will be deemed
on the part of Great Asian to pay for the dishonoured check.
extinguished.
How does an obligation become extinguished in a contract to sell? IMPOSSIBLE CONDITIONS

We turn to article 1184 for an explanation.
In the situation contemplated in 1184, a CTS is extinguished when there is inaction or IMPOSSIBLE CONDITIONS
inability to pay on the part of the debtor. Theres no more CTS. Thats why when you
Impossible conditions are those that are legally and physically impossible
read decisions saying theres no obligation, its because the entire contract is
extinguished.
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Example: Legally Impossible Obligations CONSTRUCTIVE FULFILLMENT

We have a contract: I will pay you 100k if you assassinate the person across you.
Do we have a valid obligation? No. Because the condition is impossible.
There is constructive fulfillment of an obligation when the debtor prevents the
Most likely, both the condition and the obligation are void in this case. fulfilment of the condition.
Example:
Example: Obligation not to do an impossible thing You have a COS with assumption of mortgage. This was the condition. It should be
What if I say: “ I will pay you 100k if you do not assassinate him?” Is there an fulfilled for the transaction to push through.
obligation? THERE IS. The debtor was the seller. The seller is the one obliged to convey the property to the
buyer but the conveyance is conditioned upon the assumption of the mortgage
Whats the difference between the first example and the second? obligation. In order for the buyer to assume the obligation, it should be outstanding.
1. If its a positive impossible condition: something that should be done and its But seller paid the mortgage.
impossible, legally or physically and an obligation depends upon it, then theres no Therefore, theres no more mortgage obligation. So, the buyer will not be in a position
obligation/. ( both the condition and the obligation will be void) to fulfil the condition for this obligation. Thats constructive fulfillment: when the
2. If its a negative impossible condition, like in the second example, there is a valid debtor voluntarily prevents the fulfilment of the condition.
obligation. You just disregard the condition.
Remember, Art 1186 used the word “voluntary.” Voluntary acts do not mean
wilful or malicious. It only means that there is a degree of freedom in doing it.
Negligent acts are voluntary. Therefore negligence constructive fulfilment is
FULFILMENT OF A CONDITION possible. Otherwise, the law soul have used the words “ with intent.”
When do you reckon fulfillment of a condition? WHEN DO YOU RECKON THE FULFILLMENT OF A SUSPENSIVE
If there is a suspensive condition that should occur within a certain period and it does
not happen or if it is clear that it will never happen, the obligation is extinguished. CONDITION?
Thats a typical CTS setting.
What if its a negative suspensive condition? Art. 1187. The effects of a conditional obligation to give, once the condition
has been fulfilled, shall retroact to the day of the constitution of the
Example: obligation. Nevertheless, when the obligation imposes reciprocal presentations
I will pay you 100 if after graduation, you will not work for a law firm for a year. When upon the parties, the fruits and interests during the pendency of the condition
should I pay you? When will i have the obligation to pay you? shall be deemed to have been mutually compensated. If the obligation is
1. After one year ad the creditor did not work for a law firm or unilateral, the debtor shall appropriate the fruits and interests received, unless
2. If it will never happen ( lets say theres no possible way you can work in a law firm) from the nature and circumstances of the obligation, it should be inferred that
the intention of the person constituting the same was different.
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You have to understand how the suspensive condition works. There is this fiction of
law created. If the condition happens later, it retroacts to the date of the constitution
of the obligation. If you have this scenario wherein theres conveyance subject to
payment of the price, and if the price is paid, there is conveyance as of Day 1.
Take note: this rule only applies in an obligation to give a determinate thing
Example:
Lets say you have a mortgage.
You can mortgage property only if you’re the absolute owner, meaning you’re the
beneficial and legal owner. Lets say you have a Sale on Day 1. Seller sells the property
to buyer but the conveyance is subject to a suspensive condition.
Who is the owner as of Day 1?
The seller.
On day 2, Buyer mortgages the property to X to secure another obligation.
Is buyer the owner of the property on day 2?
NO.
This is void as of Day 2 he's not yet the owner.
Lets assume that it was a registered land and on day 3 theres full payment. This
payment retroacts to Day 1.
So as of Day 1, Buyer is the owner by fiction of law. If you follow the fiction of the law,
as of Day 2, B can validly mortgage
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REVIEW: SUSPENSIVE CONDITION time. As you know, a suspensive condition, as in any other condition, happens in the
future. It may or may not happen.
Last time we were discussing the effects of a suspensive condition. In a contract to sell (CTS), payment of the price is the suspensive condition.
I think the example we had was a conditional sale. What does it suspend?
In a conditional sale, seller conveys property, but is subject to a suspensive condition. It suspends the obligation of the seller to convey property. If there is no fulfillment,
Sale is on Day 1; suspensive condition is fulfilled on Day 3. then you don’t have an obligation to convey. The seller will not have an obligation to
convey. If the payment should be made within a certain period, and it’s not done by
According to the law, the effect of this would be as of Day 1 (Art. 1187). the buyer, the CTS itself would be extinguished under Article 1184.
As of Day 1, it’s as if the buyer already owned the property. It’s not on Day 3, because If it happens, then the obligation of the seller to convey the property will arise.
of the retroactive effect of the condition.
However, we explained that that retroactive effect is not applied to proceeds Now, as of Day 1, the buyer does not have any title or right to the property.
and interest. What the buyer has is an interest pursuant to the CTS.
So any interest that has accrued between Day 1 and Day 3, the seller may keep. The Let’s say, that in Day 2, seller offers the property to X.
law does not want an accounting issue between the seller and the buyer. What can buyer do in the mean time?
The law only provides that the fulfillment of the suspensive condition retroacts to Day Buyer does not have the title of the property yet. There’s no conveyance yet.
1, meaning the constitution of the obligation. But buyer based on the CTS, and subject to the fulfillment of the suspensive
In which case, it’s as if conveyance is made as of Day 1 and not Day 3, which we condition, will have that right to acquire the property, or that right to compel the
illustrated last time. seller to convey the property pursuant to the terms of the CTS.
If S offers to X, X cannot say that S convey the property immediately to him because
the suspensive condition is yet to be fulfilled.
RULE ON RETROACTIVITY OF SUSPENSIVE CONDITION But does that mean that B is without any recourse?
B has an inchoate right, an expectancy, based on this CTS.
If the sale is made on day 1, and condition is fulfilled on a latter date,
What is that inchoate right?
ownership retroacts to day one.
The right to acquire the property as soon as the suspensive condition has been
EXCEPTION fulfilled.
So B now has a right to protect. What can he do? He can take judicial and
Though ownership retroacts to the day the sale is made fruits and proceeds extrajudicial actions.
do not.
B can notify X and say that, “I have a contract to sell with S, and under the contract to
sell, S is obliged to convey the property to me, upon the fulfillment of the suspensive
condition or the full payment of the price.” That’s one.
For example, you have multiple sales. If you have conveyance as of Day 1,
theoretically, the buyer will have a better right against other transferees in the mean
Or B can actually file an action against both of them to prevent them from proceeding
with the sale by S to X.
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Just like in the case of Catungal. It’s basically that action taken by Rodriguez. In that
case, B has a right. IF PAYMENT IS MADE BEFORE FULFILMENT OF SUSPENSIVE
But let’s change the example. CONDITION:
Let’s say, S will convey property to B and B will pay the price upon discharge of the 1. IN GOOD FAITH OR ASSUMPTION Debtor may recover payment and
real estate mortgage (REM) constituted on the property. THAT CONDITION HAS BEEN wait till suspensive condition is
So this property is subject of a REM. FULFILLED fulfilled
So, what does that mean?
2. WITH KNOWLEDGE THAT Amounts to a waiver. Debtor cannot
It means that it is provided as a security to somebody else. So in case there is
CONDITION HAS YET TO BE recover early payment
nonpayment, that somebody else can go after the property, sell it and use the
FULFILLED
proceeds to obtain payment.
So, let’s say B is buying the property. B says, “I want it clean.” I’ll buy it only if there’s But as I said, in real life, its difficult to prove good faith.
discharge of the mortgage. So B does not have this obligation. This obligation is This is because what will happen is that this REM will be annotated on the title. The
subject to this suspensive condition. only proof you can say that there is a discharge is if in the deed, there was a
What if B pays prior to the fulfillment of the condition? cancellation of the entry.
There was no discharge of the mortgage yet, but B pays.
What happens? But if the condition is already fulfilled, then there’s no point in discussing this thing
It depends on the context of B’s payment. because now there will be an obligation to pay.
Of course, if the price has been paid but the condition was never fulfilled, then he can
Take note of this provision. recover unless it’s a waiver.
Art. 1188. The creditor may, before the fulfilment of the condition, bring the Let’s go back to the earlier example.
appropriate actions for the preservation of his right. Prior to the fulfilment of the suspensive condition, the conveyance is subject to the
The debtor may recover what during the same time he has paid by mistake in condition. So in between these two periods, something can happen to the property. It
case of a suspensive condition. can be improved, it can deteriorate, or it can be lost.
The law provides that if you have an obligation to give, and that obligation is subject
to a suspensive condition, you follow certain rules in case of loss, deterioration or
1) If B pays knowing full well that there was no discharge of the mortgage yet, then improvement.
that will amount to a waiver.
2) If B paid – let’s assume good faith in his part, although this is hard to prove –
thinking that there was already a discharge of the mortgage, then B has a right to
recover the payment in the meantime. B paid before the fulfillment of the
condition, B can get back the payment because there’s no obligation yet.
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There’s only one rule. If it’s the seller who’s the one at fault, then the seller has to pay.
If the seller has no fault, then it will be bourn by the owner. However, if we’re dealing
Art. 1189. When the conditions have been imposed with the intention of
with an improvement, that benefit will redound to the benefit of B as eventual owner,
suspending the efficacy of an obligation to give the following rules shall be
and in the meantime between period 1 and 3, S can use the improvement made on
observed in case of the improvement, loss, or deterioration of the thing during
the property.
the pendency of the condition:
1) If the thing is lost without the fault of the debtor, the obligation shall be
Again, if there’s a loss or deterioration due to the fault of the debtor (the seller in our
extinguished
example), then seller will be liable. What will be the liability? B can go for damages,
2) If the thing is lost through the fault of the debtor, he shall be obliged to
resolution or any other remedy that may be available to B. S will now shoulder the
pay damages; it is understood that the thing is lost when it perishes, or
cost of that loss or deterioration. If it’s not without the fault of the seller, let’s say it’s
goes out of commerce, or disappears in such a way that its existence is
through a fortuitous event, then B will bear the cost. If it’s done by a third party, then
unknown or it cannot be recovered
B will have a right against that third party, assuming that the seller is without fault.
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
CASES Art. 1182 ( Potestative and Mixed Conditions)
between the rescission of the obligation and its fulfillment, with indemnity
for damages in either case (this was the day we were killed with recits. Explanation of the cases comes after)
5) If the thing is improved by its nature, or by time, the improvement shall
inure to the benefit of the creditor 1. CATUNGAL V. RODRIGUEZ (right of way)
6) If it is improved at the expense of the debtor, he shall have no other right Mixed Condition
than that granted to the usufructuary
Catungal (seller) and Rodriguez (buyer) entered into a conditional deed of sale
wherein it was stipulated that the lot is to be sold for 25 million pesos, provided that a
Actually you can simplify this provision, Article 1189. right of way will be negotiated by Rodriguez. The buyer will pay 500,000 as down
payment, and then issue a check of P4.5 million, and then 4 checks of P5 million each.
GENERAL RULE UNDER 1189

Q: Why was it a deed of conditional sale?
FOR DAMAGES:If the seller is the one at fault, seller has to pay. If seller has A: Because it was dependent upon the condition that Rodriguez should look for a
no fault, it will be bourn by the owner. right of way.
FOR IMPROVEMENTS: Benefit will redound to the eventual owner but in the Q: What was the obligation?
meantime between the period of institution of the contract and the fulfilment A: The obligation subject to the suspensive condition is to pay the installments: 4.5
of the obligation, S can use the improvement made on property million and then the rest of the balance.
JSP: So Rodriguez, the buyer, should deliver a right of way to Catungal because
Catungal needed the right of way.
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Student: Afterwards, since Rodriguez is still negotiating for a right of way, Catungal Q: But here, the contract provided that should there be a failure to pay within the
tried to sell the property to a third person. Rodriguez filed a case to stop it. The RTC given period, the buyer should pay interest. So, as long the buyer is paying interest,
ruled in favor of Rodriguez, stopping the sale of the property to the third party. there would be no need to pay the purchase price.
The CA affirmed the decision. The SC affirmed the decision of the CA and held that Does this mean that interest would just continue to accrue? Perpetually?
Catungal did not have the right to rescind the contract between him and Rodriguez. A: No, sir.
Q: But there was no term?

2. DEL CASTILLO (VDA. DE MISTICA) V. NAGUIAT ( Meycauayan land) A: Yes, sir. But the Court gave a term – 10 years?
Potestative Condition
Q: So would that amount to a purely potestative suspensive condition dependent on
In this case, Mistica was selling a 200 sq. m. lot to Naguiat for a price of P20,000. the sole will of the debtor as buyer?
Naguiat paid P2000 as down payment, and he paid an additional P1,000. After that, A: No, sir, because Mistica had the remedy of specific performance.
he stopped paying. The petitioner demanded from the respondent to pay the rest of
the money. The respondent paid, but he was only paying the interest, and so the Q: Specific performance? But the obligation was to pay the interest without payment
petitioner wanted to rescind the contract because supposedly, the respondent of the purchase price. So as long you are paying interest, or you are continuing to
breached the contract. But then the Court said that there’s no breach because the accrue interest, then there’s no need to pay the purchase price?
respondent is actually following the contract. Therefore, there is no substantial breach. A: What the court said was that Mistica should have asked the court to put a specific
time limit as to when respondent could pay, and that’s what the Court did.
Q: Okay, what was the provision in the contract?
A: The provision on the contract was that should the respondent failed to pay on time, Q: So the moment you have a purely potestative condition, what does it do?
he’s going to accrue 12% of interest per year. The respondent was actually able to pay A: The obligation is void
the interest during the wake of Mistica; he even offered to pay the whole amount but
the petitioner denied the money. JSP: It’s void. So if you have a potestative suspensive condition dependent on
the sole will of the debtor, the obligation would be void. That’s the rule.
Q: What was the claim of the seller?
A: The seller was saying that it was a purely potestative condition because the The contract stated that the buyer should pay the price within 10 years. Should the
contract was solely dependent of the respondent’s will. However, the Court said it buyer fail to pay within that period, interest would be imposed on the balance at the
wasn’t, because there was still a juridical tie. rate of 12% per annum.
There was still compulsion on the part of the respondent to pay. In short, there is no compulsion to pay. Right? Because interest will just pile up.
There’s no deadline. So, it’s payment on the sole will of the debtor.
Q: What is a potestative suspensive condition? Student: That’s why Mistica sued.
A: It’s a condition that solely depends on the will of just one party.
Q: Yes, so why was it not a potestative suspensive condition dependent on the
sole will of the debtor?
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A: Because there was still a juridical tie to pay the interest. Even if the buyer was Conditions are classified based on who determines their fulfillment.
not paying the purchase price, he was still acting within the bounds of the Condition is classified on who determines their fulfillment. If it is just one party
contract by paying the agreed upon interest every year.
Art. 1182. When the fulfilment of the condition depends upon the sole will
Q: What’s the juridical tie here? of the debtor the conditional obligation shall be void. If it depends upon
A: They had an agreement, and he was paying. Because if it were a purely potestative chance or upon the will of a third person, the obligation shall take effect in
condition, it would negate the juridical tie. conformity with the provisions of this code.
Q: Why would it negate the juridical tie?

A: Because there’s no compulsion. PURELY POTESTATIVE CONDITION
Q: Why is there no compulsion? A condition in which the fulfilment is based only on the will of ONE PARTY.
A: Because it’s up to him when he wants to do the prestation.
POTESTATIVE SUSPENSIVE CONDITION
VOID
BASED ON WILL OF DEBTOR
3. RUSTAN PULP V. IAC (supplier of raw materials)
Purely potestative condition POTESTATIVE RESOLUTORY CONDITION
VALID
BASED ON WILL OF DEBTOR
Rustan Pulp will supply raw materials to the paper mill with the stipulation that the
POTESTATIVE SUSPENSIVE CONDITION
paper mill will only get Rustan as the supplier of raw materials. VALID
BASED ON THE WILL OF THE CREDITOR
It was stipulated in their contract that in case there is a sufficient supply of raw
materials, then they have the right to stop the delivery from Rustan Pulp. POTESTATIVE RESOLUTORY CONDITION
The SC held that there was a potestative condition and so such obligation is void. VALID
BASED ON THE WILL OF THE CREDITOR
Q: What’s the potestative condition? MIXED CONDITION

A: That the paper mill has the right to stop the delivery once they have sufficient
supply of raw materials A CONDITION IN WHICH THE FULFILLMENT IS DEPENDENT ON EXTERNAL
FACTORS/THIRD PARTIES AND THE WILL/CONTROL OF THE PARTIES
Q: What’s the rule? If you have a purely potestative condition, what will happen?
A: The status of the obligation is void.
CAUSAL CONDITION
Q: For an obligation to be void, the condition must be a purely potestative condition DEPENDS ON ANYTHING ELSE BUT THE WILL OR CONTROL OF THE
on the part of the debtor. Was Rustan the debtor?
PARTIES
A: Yes, in terms of payment of the price for the raw materials since this is a reciprocal
obligation.
controlling the fulfillment of a condition, then it is a POTESTATIVE CONDITION.
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Potestative condition is a condition dependent on the sole will of a party, that party If you look at it, it is not purely potestative because it can be measured.
controls whether the condition is fulfilled. It is not dependent on the sole will of the owner by showing capacity and inventory
Second is CASUAL CONDITION; it depends on anything else but the will or control you may know when there’s sufficient supply. But in this case the owner still accepted
of a party. delivery.
And then you have a combination of both or a MIXED CONDITION.
Look at Article 1182: When the fulfillment of a condition is dependent on the sole will
of the debtor, the conditional obligation shall be void. If it depends upon chance or
upon the will of a third party, meaning a CASUAL CONDITION, the obligation shall be
DISCUSSION OF CASES fine.
But there’s a nuisance there.

If it is a PURELY POTESTATIVE CONDITION dependent on the sole will of a party,
1. RUSTANS PULP V. IAC
you have to determine who determines the fulfillment? CREDITOR or DEBTOR.
POTESTATIVE CONDITION: Rustan Paper Mill has the right to stop the supply of raw
If it’s the Creditor, will that be a problem?
materials from [Romeo Lluch] when the supply becomes sufficient.
NO. Because the provision covers condition controlled by a debtor.
Why is that so?
This was a reciprocal obligation. Rustans is a creditor with respect to the raw materials
but debtor with respect to the payment of price. The supplier is a debtor in terms of
Example: Loan Contract conditioned on demand of creditor
the raw materials and creditor in terms of
Let’s say you have a burrower and a lender.
payment of the price.
The lender extends one million peso loan on day 1. Borrower has obligation to pay.
The provision that states that Rustans Paper Mill This was a reciprocal
Payment is upon demand by lender.
has the right to stop the supply of raw materials obligation. Rustans Subject of Condition- Payment
should they see that they have sufficient
Pulp was a debtor with Condition- Upon Demand
amounts is a purely potestative suspensive
condition. It is left entirely to the will of Rustans respect to payment of If there’s no demand, there’s no need to pay.
Which means the lender controls when the condition will happen, but the lender is
Paper Mill if the supply contract with Romeo price.
the creditor. That’s why this is valid.
Lluch the supplier will continue.
If you look at it, the lender can demand payment any time.
The obligation was considered void.
If the lender does not demand, there’s no obligation to pay yet. But is there an
obligation? Yes.
(JSP Opinion)
The only thing is the lender now controls when the payment shall be made.
If you look at it, is it really purely potestative suspensive condition?
That’s why the law says that’s fine if you have a Potestative condition dependent
Is this something controlled by the owner?
on the sole will of the creditor.
There’s an objective standard you can measure whether there’s sufficient supply. How
will you measure sufficient supply?
Rate of production, Production capacity of machine.
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However, if it is dependent on the sole will of the debtor, you have to determine
again. There’s 2 kinds of Conditions on how they affect the obligation: SUSPENSIVE Seller will convey the property and buyer will pay the price. Seller is the debtor with
or RESOLUTORY. respect to conveyance of the property and Buyer is the debtor with respect to
payment (RECIPROCAL OBLIGATION).
Lets give instances for both.
Subject to suspensive condition: if the seller feels like selling
RESOLUTORY A purely potestative
Example: Lease Contract So it will be based on the whim of the seller. You now have a PURELY POTESTATIVE
suspensive condition that
Lessor will lease the property in exchange for SUSPENSIVE CONDITION.
rental. This is a contract of lease. You have a depends on the sole will
reciprocal obligation. With respect to leasing the of the debtor is void This is a VOID OBLIGATION.
property, the lessor is the debtor. With respect to because IT NEGATES Why?
payment, the lessee is the debtor. It negates the obligation itself.
THE JURIDICAL TIE
It is as if there’s NO JURIDICAL TIE.
Clause: Lessor says, lessor may terminate the lease The debtor has control over when the obligation will arise.
contract any time by mere notice. Lets say a 30 day Same reason why there’s no waiver on action based on future fraud or gross
prior notice by lessor to lessee. negligence. Because this will allow negation of juridical tie. So the contract will be
In this condition who controls? Lessor. based on the will of the seller it becomes illusory.
In what capacity?
As debtor as the one obliged to lease the property. However, there is an instance when there may be a potestative suspensive condition
Its Purely Potestative Condition however its RESOLUTORY ( extinguishes dependent on the sole will of the debtor that is considered valid.
obligation to lease property).
Is that fine?
Yes. Because if you have this from day 1 lessor has obligation to lease the property to There may be Potestative Suspensive Condition dependent on the sole will of the
lessee. Lessee has to pay the rent. debtor but the obligation will be valid in cases of right of first refusal.
The only power or right of the lessor is to terminate subsequently so it does not
negate the subsistence of the obligation. There is an obligation but the lessor has the
power to terminate the obligation any time. RIGHT OF FIRST REFUSAL
That’s why if its Resolutory its not covered by article 1182. A PROSPECTIVE BUYER HAS THE RIGHT TO BUY THE PROPERTY
BEFORE ANYONE ELSE
SUSPENSIVE
If its suspensive then you now have an issue.
Example: Sale of Property
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If X decides to sell, B has the right to buy the property before anyone else. Was this a Purely Potestative Suspensive condition?
No. S.C. held there’s an obligation, if payment was not done within 10 year period
Lets illustrate: then there should be payment of interest. The buyer who failed to pay the price in 10
Owner will convey the property should the owner decide to sell. years was still acting within the bounds of the contract. He was paying the interest.
This is an example of POTESTATIVE SUSPENSIVE CONDITION.
Why potestative? Because owner decides. He's a debtor with respect to the
conveyance of a property. OBLIGATIONS HINGED ON THE CLAUSE: “ UPON MUTUAL AGREEMENT”
What’s the difference with PURELY POTESTATIVE SUSPENSIVE CONDITION in
the example earlier? In construction contract, if you’re the owner you want a fix price.
In Right of First Refusal, Owner somehow can make the offer to 3rd party, there will However in certain contract you have an adjustment clause and in this case they have
now be a manifestation of this decision to sell. a clause that there would be an adjustment of price if there would be increase cost of
Theres a trigger. materials etc. UPON MUTUAL AGREEMENT.
Before this there’s no obligation to offer to B. There was a request. Contractor requested for adjustment and there was a validation
The moment owner shops for possible buyers, the right of B is triggered. Its just a by representative of the owner which is a senior officer of the corporation. The
question of when it will be trigged. You will know objectively when the decision is request was to increase by 10% let’s assume. Upon validation the owner’s
made. representative said only 5%. So when the recommendation reached the owner. The
owner said no, we don’t want the adjustment.
The contractor sued. Was this a purely potestative suspensive condition?
2. CATUNGAL V. RODRIGUEZ SC said yes.
However take note that m”mutual agreement” is not always Purely Potestative
Seller will convey the property and buyer will pay the price but subject to a condition Suspensive Condition. In fact it is a typical clause that you have when you enter into a
which is the acquisition of the Right of Way. contract.
Purely Potestative? No, you now have a 3rd party in the negotiation of right of way.
The government agency responsible for granting the right of way thus its a mixed
condition and not a purely potestative condition.
Suspensive condition?
Yes. The S.C. held that there was proof that buyer exerted effort to negotiate or
secure the right of way.
3. DEL CASTILLO V. NAGUIAT
Seller sells the property to buyer and buyer will pay the price. Stipulation says
payment of the price within 10 years, if no payment within 10 years there would be
interest.
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( Continuation of Resolution Cases Recitation) The court found the amount required by the penalty unconscionable and thus
adjusted it.
Resolution and Termination. What is the difference?

CASE
Main difference: In resolution the contract is extinguished completely. Contract
1. UY VS. CA (NHA Development) is treated as if it did not exist. There is also mutual restitution.
Resolution Vs. Termination
Termination: The act of pursuing a termination clause though is pretty much
Uy sold a piece of land to NHA who later on discovered that the land did not have following the contract. There is recognition that the contract existed until the
proper utilities like a waterline and stuff. They wanted to use the land to build homes date of the termination. Not necessary to have mutual restitution.
but found it inhabitable and thus they wanted to rescind the agreement that they had.
Proper action should be cancellation of the contract according to the Court. The
motive of NHA was to build a house on the land. The motive of NHA in entering the
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
contract was directly related to the cause in this case. thus in losing this because they
case one of the obligors should not comply with what is incumbent upon him.
should have opted for cancellation instead. NHA believed in good faith that the land
The injured party may choose between fulfilment and the rescission
was in good condition.
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
2. PRYCE VS. PAGCOR (Casino)
become impossible.
Resolution Vs. Termination
The court shall decree the rescission claimed, unless there be just
cause authorising the fixing of a period.
Pryce Corp has a hotel in Cagayan de Oro. They entered into a contract of lease with
This is understood to be without prejudice to the rights of third
PAGCOR wherein they will allow PAGCOR to use the ballroom of the hotel as a
persons who have acquired the thing in accordance with Art. 1385 and 1388
casino. But before the formal opening of the casino, there was an ordinance by the
and the Mortgage Law.
municipal council that prohibited such building but the SC went on to say that it is
unconstitutional. People rallied against the opening of the casino. PAGCOR decided
to stop their operations because of the advice verbally given to them by the Office of Article 1191 applies to reciprocal WHAT IS A RECIPROCAL
the President. obligations. OBLIGATION?
First understand what is meant by a
Problem was that they stopped partway; leaving an unexpired term. Pryce wanted a reciprocal obligation. In a reciprocal An obligation that arises from the
termination of the contract based on the breach of obligation (PAGCOR did not want obligation you have 2 parties in a same cause in which a party is a
to continue and pulled out of the property) contract and they exchange a
debtor and creditor at the same
prestation. Remember the case of
time.
There was a clause in the contract though that allowed Pryce to collect rentals in Solar, when you have a reciprocal
advance in case of breach. Court said it was not rental because there is no longer use obligation the default rule is that the
of the property and thus the future rentals were not just rental but it was a penalty. performance of the obligation is
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simultaneous unless stipulated otherwise. But of course the party might also have obligation you can resolve if there is one party that is ready, willing and able to
successive fulfillment of the prestations in an obligation. Article 1191 is relevant only perform the prestation required of him and the other party is not when it is due. So
when you have a reciprocal obligation. the rule is that it is the injured party that is able to use resolution in case of breach.
Injured party=party who is ready, willing and able to perform when prestation is due in
The law provides that it is implied in a reciprocal reciprocal obligation. Resolution is an alternative remedy (Alternative to specific
There is a distinction
obligation that a party has a right to resolve upon performance and damages. The moment a party invokes a remedy; he cannot invoke
default of the other party. This is what is called between the resolution or opt for the other. Note though that one can opt for Specific Performance then
the Tacit Resolutory Condition of a reciprocal contemplated under Art resort to Resolution (In case the one in default cannot do specific performance)
obligation. Remedy of resolution is built In. 1191 and the rescission
When we speak of remedy under 1191 we use But if it’s the other way around, where the seller already invokes substantial breach.
contemplated under Art.
the term resolution to provide clarity. The seller cannot change his mind and invoke specific performance because he
1381 already sets aside the transaction. Unless the court says that there was no substantial
Resolution and Rescission are totally different breach and they may give buyer a period to pay.
remedies and it is proper to distinguish between
them. How do you resolve the reciprocal obligation?
For implied resolutory condition to exist there must be an actual preexisting Lets discuss the cases.
obligation first.
Example: Resolution not applicable in Contract to Sell
CASE DISCUSSION
In a contract to sell, seller agrees to sell property. Buyer in exchange agrees to pay the
1. UP V. DE LOS ANGELES (Logs)
price. A contract to sell is prepartory to a contract of sale. Meaning full payment of
Default Rule in Reciprocal Obligation
the price is a suspensive condition for the conveyance of property. In a contract to
sell, seller cannot sue for resolution as there is no conveyance or obligation to convey
UP teaches you the defaault rule UP V. DE LOS ANGELES TRANSACTION
yet. What do you do then if resolution is not appropriate for contract to sell? Nothing
in a reciprocal obligation. In UP
actually, nothing needs to be done because the contract will automatically be
and ALUMCO, they had a
extinguished due to the non-payment of the price within the period given under the
contract whereby UP allowed
contract. Remember art 1184, if a suspensive condition be fulfilled within a period and
ALMUCO the right to log in a LO LOG
it not be fulfilled inside the period then the obligation will be extinguished. Do note
property of UP. Eventually,
that in a contract to sell there can also be a termination clause. UP BUYER
though ALUMCO defaulted, bu ROYALTIES
they had another agreement
Who can exercise the remedy of resolution?
called an acknowledgement in
The party who is ready and willing to perform the prestation incumbent upon him to
which they state that if ALUMCO 2. Acknowledgent: Right to Resolve
perform. What happens if both of them are not ready and willing to perform? If they
defaults again, UP would have
are mutually in default? Then neither of them can use resolution. In a reciprocal
the right to resolve. The moment
55
you have a reciprocal obligation, the parties need not stipulate the right to In CO v. CA, we see the importance of knowing when the default rule applies.
resolve. The only difference is the manner of invoking the resolution Seller sold property and there was down payment and installments. It was a contract
of sale.
2. TAN v. CA (Mortgage) On Day 2, Buyer defaulted on payment of installments.

Resolution must be Judicial
On Day 3, seller sent a notice of cancellation. Seller characterized the agreement as
The injured party can resolve but it should be done judicially, that is the default rule. an option but the SC said it was a sale.
This means that you have to file an action in court to resolve. The exemption is when
the parties have an agreement to the contrary (That they can extra judicially resolve On day 4, buyer offered to pay the price in full. Seller refused.
the contract). Take note that what is being altered is the manner and that the
remedy will be there regardless of the stipulation. Note that buyer was already in default from Day 2.
Discharge and Cancellation of mortgage are the same thing. Problem started though when the seller sent a notice of cancellation or even if it was a
notice of resolution it would not matter as it was an EXTRAJUDICIAL ACT. Seller
Singsons were able to clear encumbrance of mortgage but it was a little after the due should have filed a case in court. So at this point there was no proper resolution
date. The supreme court said that there can be no resolution as there was as it was not judicial and in fact wasn't even resolution. This allowed buyer to
substantial performance. In fact, it was tan who was in default as he did not pay rehabilitate himself on day 4 to someone who is ready, willing and able. When
the price. If there is no agreement to resolve the contract extra judicially then seller refused to accept payment he put himself in default and now Buyer may
the party should file an action in court. In practice make sure to remember this, pursue legal action against him.
always put in your termination clause that you can terminate extra judicially (without
need of court action) Normally when you have a judicial resolution, when do you need court assistance? For
instance, when Seller already conveys a property but buyer does not pay the price in
3. CO v. CA (Rehabilitated Party) full so there was default that was considered substantial. If seller resolves and buyer
resists, then he needs court assistance. But there are a lot of cases where it is not
practical to use the default rule of judicial resolution.
CO V. CA TRANSACTION
PROPERTY Example: When Judicial Resolution not ideal ( Real Estate Development)
SELLER BUYER For example, owner of property and real estate developer enter into a contract.
PRICE DAY 4: OFFER FULL PAYMENT Developer will contribute funds, resources and expertise while owner contributes
property. Thus they enter into joint venture agreement. Developer did not fulfill his
DAY 2: INSTALLMENTS * Seller refused part of the agreement. Then under 1191 owner should sue for resolution. Damages
given to you by the court will most likely not cover the cost of litigation. Owner will
DAY 3: NOTICE OF CANCELLATION
have to sue over use of the property to have no legal problems over its use in the
future which means he will have to spend time over the litigation which may take
56
around 10 years. In the meantime, the property cannot be touched without the Be careful when you have this contract of sale. How do you define substantial breach?
assurance that the developer will not go after the owner. Look at what you are comparing, the principal obligation meaning the price and
principal payments. Not the interest.
This is why you always remember to put in termination clause. Otherwise you
will always have to resort to 1191. If it's a breach what will it entail even if it's a slight breach? Damages. Remember
Cathay, as long as there are breach damages will be in order. But if it's a SLIGHT
Breach the court will give them a period wherein they can perform their obligation. If
OPTING OUT OF THE DEFAULT RULE OF JUDICIAL RESOLUTION they still fail to perform within the stipulated period, then it will become a
substantial breach.
The parties may opt out of the default rule. They may do so by
stipulating that they can extrajudicially resolve. You can even stipulate Difference between slight and substantial?
automatic resolution, but the other party needs to be notified so that
the party can challenge it or prepare a defense. You can also create a Let's say you have a default of 5%, which according to Reyes is not substantial it's only
mechanism in the stipulation that makes notice automatic along with a slight breach. Consequently,
Resolution is not available. That does
automatic cancellation at the same time something like “ There is BACKGROUND RULES FROM
not mean though that the buyer is
automatic cancellation after 30 days” the parties should now know free from the 5% liability. The court CASES
when the contract can be cancelled will grant the buyer a period to pay
the 5%. If the buyer fails to pay 1. In RECIPROCAL OBLIGATIONS, the
within the period, then there will be remedy of resolution is already
substantial breach and then the implied
4. CANNU V. GALANG 2. Resolution can only be invoked by
seller can opt for resolution.
Substantial Breach to Warrant Resolution the injured party upon default or
S o f a r Yo u ’ v e l e a r n e d t h e substantial breach
The SC said that if there's nonpayment of 15% of the price in a contract of sale this 3. Resolution must be done judicially
background rules.
will constitute substantial breach. However, this was an obiter. unless stipulated otherwise
6. SURIA v. IAC ( Foreclosure not
5. REYES V. TUPARAN (Building Rental)
Resolution)
Substantial Breach to Warrant Resolution
When Resolution is not the proper remedy
If you do the math, a default of 19% did not constitute substantial breach. So what's
the rule now? This was not an obiter. So what should you do? You should probably
Now in Suria there's a seller who sold a parcel of land. Buyer paid the price in
stipulate “In case of breach by the buyer the seller shall have the right to extra
installments. There was conveyance already as it was contract of sale. To secure
judicially terminate the contract by mere notice to cover default rule and that the
payment of price buyer constituted a mortgage on the same property bought by the
buyer should forfeit all payments in favor of the seller” this will put the burden of
buyer from the seller. What is the purpose of the mortgage? That should the buyer
suing on the buyer. You do this because you cannot invoke resolution as 19% cannot
default on the payment of the installments, the seller may sell the property and use
constitute substantial breach.
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the proceeds to satisfy the installments. In this case, buyer default in installment If lessee defaults in paying the rent, the lessor can resolve as it is a reciprocal
payments. We will assume that this amounts to substantial breach. obligation. How should lessor resolve?
Can seller resolve? If you follow 1191 you should do it through judicial action. However, for lease
contracts this case provides that it is extrajudicial.
Your extinct will be yes. Mortgage take the place
Why?
But judicially NO.
of contracts because
buyer defaulted on loan Because if there's default the action
Resolution will not be an appropriate remedy. extended by seller for of the debtor is ejectment. Lessor
Remedy of seller is to foreclose the mortgage. payment of property. can either sue for specific DEFAULT RULE IN RESOLVING
Why should resolution be pre empted? Because performance or ask them to vacate.
Resolution cannot be the LEASE CONTRACTS
the real estate mortgage took the place of However, before you can file for
cash payment. With the mortgage it is as if the remedy judicially. It must ejectment, a requisite under rules Lease contracts are ter minated
buyer paid the price. Therefore, the recourse be foreclosure of court is extrajudicial EXTRAJUDICIALLY. In compliance with
of the seller is to foreclose the mortgage! termination. This means that the rules of court, extrajudicial
demand presumes an extrajudicial resolution is a prerequisite for the action
To make sense of that you have to understand the resolution including a demand for the of ejectment
transaction as two. Property for the price. To pay the price you have a loan. The loan lessee to vacate the property! Thus if
should be repaid by the buyer within the given period, the period of installment. This you have a lease and you're
is the one being secured by the real estate mortgage. This is what I think the SC dealing with ejectment, then you can resolve extra judicially as a prerequisite for
meant. That when the seller sold the property to buyer, buyer fully paid the price the action of ejectment
when it executed the mortgage. With the mortgage somehow the seller extended a
loan to the buyer to fully pay the price so this was a consummated transaction. So 8. UY v. CA (NHA)
what was left was the repayment of the loan extended by the seller to the buyer and Cancellation instead of Resolution when no substantial breach
this is what was being secured by the real estate mortgage. So if there was default
what the buyer can do is go after loan or foreclose the mortgage. What is the practical use? 
It distinguishes when you pursue cancellation of contract or resolution. If there's no
7. CHUA v. VICTORIO ( Lease Contract) breach you go for cancellation. Let's say this was a contract of sale and the property
Lease Contracts are resolved extrajudicially turned out to be unsuitable for the purposes of the buyer when the seller represented
it was suitable for a housing project. Seller would've breached the contract of sale.
Teaches you that when you're dealing with lease contracts, the default rule is different. Buyer can invoke remedy of resolution, which they can do judicially. However, if you
It's not judicial resolution but extrajudicial resolution. go for Cancellation, it is not resolution and need not be done judicially. This also
means that you do not incur any litigation costs. Cancellation can be done through
sending a notice of cancelling and need not be done judicially.
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CANCELLATION circumstance, the rallies and the opposition by the community, said that, there must
be mitigation of the penalty, so the penalty was not set aside all together but
Need not be judicial. somehow reduce.
It can just be a letter saying, “we now cancel, because of the negation of our
cause, we wanted a property suitable for our purposes, it was made known to That’s the contract part. But in the course of disposing of the case, the court
you, and failed to deliver, therefore our contract shall be deemed canceled” So distinguishes between RESOLUTION and TERMINATION.
who has now the burden of litigation? The other party. And you can have now a
good chance in saying “I did not resolve I cancelled, therefore, there is no need ILLUSTRATION 1: RESOLUTION V. TERMINATION
to file a complaint in court it’s enough that I sent a notice of cancellation.
DAY 1: PROPERTY
9. PRYCE v. PAGCOR ( Casino) SELLER BUYER
Terminatino v. Resolution
DAY 2: BUYER DEFAULTS IN PAYMENT
Clause: Any party may terminate contract
Just remember that one, in Pryce, there is valid contract of lease, SC acknowledge If there is nonpayment, buyer pays a penalty
that the leased between Pryce and PAGCOR. As of day 2, seller could resolve, judicially or extra-judicially. and it would retroact to day 1. If contract is terminated,you still
recognize the contract but at the point of termination, you end the contract.
What’s the difference?
What’s the law between the parties? Let’s say you have forfeiture clause. The buyer is unable to pay. In case of breach, meaning buyer defaulted in paying the price,
the seller could terminate the contract, so by terminating the contract, the seller would be enforcing the contract pursuant
into that provision. At the same time, the seller would be recognizing the effect of the contract prior to termination.
Remember the obligatory force of the contract. The contract governs the parties and
they should comply of the terms thereof in good faith. Now, in the contract, it
guaranteed a specific period. Let say 3 years, so the 3 years, PAGCOR should use the
So the SC said, if it’s RESOLUTION, the contract never existed. That is why each party
property. PAGCOR should not have the option of pre-terminating because the
should return to the other what was received less liability for damages.
contract provided that “should PAGCOR pre-terminate, PAGCOR would still be
However, if its TERMINATION, there is no such obligation. The parties will be
liable to pay the future rentals or PAGCOR violated the contract, Pryce would
governed by their stipulation. The important thing is a termination clause.
pre- terminate and Pryce would collect the future rentals as penalty”. So the SC
said that was a valid stipulation. It’s a contract and that stipulation was not a
Example:
stipulation to pay the rent but rather a penalty in case PAGCOR violates the contract
Party A shall have the right to pre-terminate the contract with or without cause. Why
and there is pre- termination PAGCOR would pay penalty.
with or without clause? So, you can terminate anytime and no have liability. The
purpose is, sometimes you don’t like the party and you want an option out, you don’t
What’s the penalty?
want an issue or litigate. You can just send a short notice saying “pursuant to
provision of the contract we are terminating the contract immediately or effective five
The amount of the unaccrued rentals. SC said that the penalty is fine. The only
years for the days hereof.
problem was the amount. SC said, if you have a penalty, the court can reduce the
penalty if the court finds in unconscionable. So the court considering the
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RESOLUTION TERMINATION The Supreme Court was

JSP: that is WRONG! Because, it destroys the
- CONTRACT NEVER EXISTED - VALID UNTIL TERMINATED wrong in Solid Homes .
rule. The rule is Mutual restitution. You return
- EACH PARTY RETURNS TO THE - governed by the stipulations only the what you received. They ignored the
OTHER WHAT HE OR SHE HAS - better option if there is a penalty requirement of mutual
RECEIVED ( Less liability for clause that a creditor would like to But will it give justice to the buyer? Without restitution. They should
damages) enforce bending the rule, how will you do it? There
have just awarded
should be a return and pay damages. In which
case, you can now have preserved the mutual damages to make up for
restitution rule. You retuned what you the difference in market
MUTUAL RESTIUTION IN RESOLUTION
received plus damages due to the breach. price.
10. SOLIDHOMES V. TAN (LGV PROPERTY)
RESOLUTION (1191) V. RESCISSION
Resolution requires mutual restitution
(1381)
When you have a contract of sale, let’s say, 
DAY 1: property valued at 1M sold to buyer 
that’s the fair market value, in exchange buyer pay the price let assume 1M RESOLUTION (1191) RESCISSION (1381)
in these contract, seller was the developer, seller was supposed to provide facilities,
seller failed to provide the facilities. NATURE OF REMEDY
So there is a breach.
There is nothing to do to the property but it’s the essential consideration of the buyer PRINCIPAL REMEDY SUBSIDIARY REMEDY
in entering to the contract in which the seller committed a substantial breach.
So now, buyer could sue for resolution. In a contract of sale, there is a default A creditor cannot immediately rescind
But because the wheel of justice grants so slowly, after 20 years, there is now by the buyer, immediately the seller the contract; he has to show first that
resolution. The consequence now of the resolution, will be mutual restitution. can resolve the contract based on the he has no other remedy against the
Meaning, seller should return the amount paid and buyer should return the property. breach debtor. If debtor still has assets,
But in the meantime, after 20 years, the fair market value now of the property is 20M. creditor will have to go after those
So if placed in the context of the case, the buyer would have to return the property assets, he cannot rescind the contract.
but Solidhomes will only have to pay the buyer 1M, somewhat unjustly enriching
BASIS
themselves of the extra 19M.
The SC said, we will now require, instead of 1M, you must return the fair market SUBSTANTIAL BREACH LESION/ECONOMIC PREJUDICE
value. So there would be parity of the exchange. So you restore an amount value
equal to the property. Violation of an essential consideration Recognised by law as prejudicial to
another party. No law, no economic
prejudice.
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EFFECT ILLUSTRATION 2: BREACH BY BOTH

PARTIES SUCCESSIVE BREACH IN
COMPLETE SETTING ASIDE CANCELLATION CONTRACT OF SALE ILLUSTRATION 2:
PROPERTY
SELLER BUYER Under 1192, what contemplated is

Completely sets aside the contract. Its Cancellation to the extent necessary. PRICE
as if the contract need existed (Ex. Worth of Property is 10M but successive breach by the parties.
* SUPPOSEDLY A SIMULTANEOUS EXCHANGE
Liability of D to C is 1M. If its possible * DAY 1: Buyer could not pay the price, neither could seller Let’s say the transaction would be
convey property.
to cnacel only to the extent of 1M then Neither of them could be in default. The requirement of
fulfilled on DAY 1 and fulfilled on
only that part can be cancelled) default in a reciprocal obligation is the other party is ready, DAY 2, other conditions on buyers
willing and able to perform. In the same manner if you have
simultaneous performance on day 1, the seller conveys the
side and sellers side. Let’s say this
CONSEQUENCE property but buyer could not pay the price. THERE IS NO was done. Buyer paid the price
NEED FOR DEMAND. Automatically, there would be default
partially then default on the rest and
MUTUAL RESTITUTION MUTUAL RESTITUTION since its a reciprocal obligation.
then seller defaulted on the
ART. 1190 ART. 1385, ONLY FOR RESCISSIBLE fulfillment of other conditions. In this
CONTRACTS case, neither of them will be considered in breach of the obligation. Because you
know the sequence.
As of DAY 2, buyer has already defaulted, because buyer did not pay half of the price.
Just like in suspensive conditions, prior to the happening of a resolutely condition, a But, as of DAY 3, seller is also in default because seller did not fulfill certain condition
relevant party can take actions to protect his interest. So in case there would be a the same way buyer is also in default because buyer did not fulfill some of the
resolution, to protect an interest of a party, necessary legal actions may be taken conditions. So they are both in default.
If this is the case, the liability of one will be offset by the liability of the other. Let’s
assume the court can determine. Let’s say, the liability of S will be 1M and B will be
Art. 1192 Breach by both parties 5M. in the end B will pay 4M.
That is the importance of Art. 1192.
But the court presupposed who committed the breach first and there is a subsequent
Art. 1192. In case both parties have committed a breach of the obligation, the breach by the other. If the court cannot determine, who is the first infractor? What will
liability of the first infractor shall equitably be tempered by courts. If it cannot be happen to the obligation? The obligation will be extinguishing. Take note of that rule.
determined which of the parties first violated the contract, the same shall be
deemed extinguished and each shall bear his own damages.
So this article contemplates a situation where in both parties committed a breach

of the obligation.
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THURSDAY18 FEBRUARY 2016
Art. 1193 Obligations with a Period SUSPENSIVE TERM RESOLUTORY TERM
A suspensive term will always A resolutory term will suspend the

Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall suspends the demandability of an extinction of the obligation.
be demandable only when that day comes. obligation, it does not deal with the For example, you have a contract of
Obligations with a resolutory period take effect at once, but terminate upon existence of an obligation. lease ending on December 31, 2016.
arrival of the day certain. That will be a resolutory term. It’s
A day certain is understood to be that which must necessarily come, although it certain to happen.
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.
Remember, a feature of a terms is that it is in the 1) FUTURE and 2) CERTAIN TO
HAPPEN.
In an obligation with a period, just like an obligation subject to a condition, you It doesn’t matter whether you’re not sure when will it happen, as long as it will
always have an obligation subject to a condition. It’s just a question of when the happen. Like death, death will certainly happen. It’s a term. If it’s uncertain, most likely
obligation will be demandable or extinguished. Because just like a condition, you it’s a condition.
have 2 kinds of terms – a suspensive or resolutory term.
CASES (1193-1197)
TERM
1. RADIOWEALTH FINANCE COMPANY V. DELROSARIO (Promissory Note)
A PERIOD OR TIME. Either it will determine when the obligation may be demandable
When a period is intended by the parties
( SUSPENSIVE TERM) or when the obligation will be extinguished ( RESOLUTELY TERM).
Radiowealth Finance had a loan agreement with spouses del Rosario. The spouses
Example: SUSPENSIVE TERM VERSUS SUSPENSIVE CONDITION promised to pay the sum of P139,000.
There were 3 promissory notes, which promised to pay X amount when?
The agreement didn’t specify the dates of payment but it said in the contract that
SUSPENSIVE TERM SUSPENSIVE CONDITION the payment should be on a monthly basis and that it was payable for 12
consecutive months.
I owe X 10,000. I will pay X on June 15, 2016.  I will pay 100,000 to X if Bong Bong Marcos wins as
That’s a suspensive term. Before June 15, the Vice President.  The spouses del Rosario said that since there were blanks in place of dates in the
obligation will NOT be demandable but there’s [And that will be the day – a ridiculous day if he wins. agreement, the obligation was not yet due and demandable. So what did the court
already an obligation. Prior to that period, there’s So if any one of you thinks of voting Bong Bong say? The court held that even though the agreement did not indicate a specific date,
already an obligation. I have an obligation to pay X, Marcos, you should be ashamed. That’s a double it does not mean the obligation was not yet due and demandable.
the only question is WHEN – that will be on June whammy for me. I pay 100,000 and Bong Bong Wins] 
15. That’s why on June 15, I will be in default if there’s In this example, there’s no obligation yet – it may
a demand. or may not exist. Lets go back to the definition of a term.
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ART 1195: BENEFIT OF THE PERIOD IS FOR BOTH PARTIES GENERAL RULE
IF THERE IS A TERM, THE TERM IS FOR THE BENEFIT OF BOTH PARTIES.
Art. 1195. Anything paid or delivered before the arrival of the period, the
obligor being unaware of the period or believing that the obligation has become Can you make the period for the benefit of the debtor in illustration 1?
due and demandable, may be recovered with the fruits and interests. Answer: Payment may be made on or before June 15, 2016
Now make it for the benefit of the creditor.
Answer: The debtor shall make the payment on June 15, 2016 or upon the demand of
ILLUSTRATION 3 : PERIOD BENEFITS BOTH PARTIES the lender.
If you cannot figure it out, you can assume that the period will be for the benefit of
both parties. You just look at the language of the contract. Normally you’ll find there
LOAN CONTRACT
who has the benefit of the term. For example, if you see that the creditor can call
LENDER 1 MILLION BORROWER payment at any time, then the creditor has the benefit of the term.
Pay 1M On June 15, 2016 ( There is a suspensive term)
IF: Borrower pays TODAY. ( Before June 15) Can the borrowed recover payment?
Let’s analyse first.
ART 1198. WHEN THE DEBTOR LOSES THE BENEFIT OF THE PERIOD
Whats the first thing you have to determine if borrower can recover?
Who has the benefit of the period?
The Borrower or the lender? Art. 1198. The debtor shall lose every right to make sue of the period:
Whats the default rule? Both of them? Why?
1) When after the obligation has been contracted, he becomes insolvent, unless
If there’s a term imposed on the demandability of an obligation, that term or period is presumed to be
for the benefit of both parties. So borrower has the benefit of the term in this example. Lender cannot
he gives a guaranty or security for the debt
demand payment yet, neither can borrower force lender to accept payment. But borrower paid and 2) What he does not furnish to the creditor the guaranties or securities which
lender accepted. Can borrower recover payment? he has promised
3) When by his own acts he has impaired said guaranties or securities after their
Just like in an obligation subject to a suspensive condition, in this case the obligation is not yet establishment and when through a fortuitous event they disappear, unless he
demandable. We’ve determined that Borrower has the benefit of the period. So borrower, technically,
immediately gives new ones equally satisfactory
can ask to suspend payment until June 15. But borrower paid. The next question should be, did borrower
pay by mistake? Why will that be relevant? If B paid knowing full well that the due date will only be on
4) When the debtor violates any undertaking in consideration of which the
June 15, that will amount to a waiver. creditor agreed to the period
5) When the debtor attempts to abscond
There must be payment by mistake – meaning payment thinking that today was the due date. In that
case, Borrower can recover. But if you’re the lender and you accepted, maybe for good measure, you
should say that the due date is still June 15 but I am accepting payment. Because there’s such a provision So as we learned in 1195, the benefit of the period is presumed to be for
under the law that if a payment is made before the due date and the debtor has the benefit of the term, both parties. However, there are five instances when a debtor may lose the benefit of
the debtor may recover the payment. Of course that rule assumes that the recovery will be done before
the period. Meaning, the creditor can disregard the period agreed upon and demand
June 15. If the term arrives and there’s no attempt at recovery, recovery cannot be made.
performance from the debtor immediately.
63
ILLUSTRATION 4 : INSOLVENCY OF DEBTOR Why should the lender be allowed to collect now due to the practical insolvency of
the borrower?
Take note I say practical – because that
1.PROMISSORY NOTEL BORROWER TO PAY 1M JUNE 15, 2016
insolvency does not require judicial declaration. Insolvency need not be
1M on JUNE 15 2. SUES
THIRD PARTY In other words, the court does not need to
LENDER BORROWER declared by the courts. As
FOR 10M adjudge the debtor as insolvent. As long as
you can establish that assets are less than long as a party can
ASSETS of B: LOT WORTH 5M 3. THIRD PARTY GETS FAVOURABLE
JUDGEMENT WORTH 10M liabilities, you can make use of the law. establish insolvency, they
4. TOTAL LIABILITY of B: 11M (before JUNE 15) can make use of the law.
So why does the law deny the borrower the
You have this promissory note. Borrower has to pay P1.0 million to lender on June 15, 2016. benefit of the period in case of insolvency?
So lender cannot compel borrower to pay before June 15.
Why?
Let’s say you have multiple creditors going after
Because both of them have the benefit of the period. But let’s say a third party, X, sues borrower for
P10.0 million, and lender now asks borrower to pay P1.0 million. Can he do that? No. Because the the debtor. Borrower only has assets of P5.0 million. If the lender cannot demand
borrower will still have the benefit of the period. payment now, creditor X can have to himself the entire asset. Unlike if Lender is
So let’s say X got a favorable judgment for P10.0 million. But B only has 1 property, a house and lot allowed to collect by filing an action, this asset will be taken by the court and
worth P5.0 million. distributed to all creditors of Borrower. That’s the reason.
Can lender now demand payment? Yes? Why?
Because when you have an insolvent debtor, all creditors will be scrambling for assets.
Borrower still has the benefit of the period, so why? As of today, Borrower has a judgment against him
of P10 million, he has assets worth P5.0 million and the question is – can lender demand payment now, So if you have an obligation owed to you declared by court, you are in a
considering that B still has benefit of the period? preferred position. To equalize that one, if you have an insolvent debtor, the law
In this case, the judgment against B of P10.0 million is already a liability. So now you have a debtor allows the lender to immediately collect notwithstanding the existence of the term for
with a total liability of P11.0 million (P10.0 million owed to X and P1.0 million owed to lender). Asset is the benefit of the debtor. The law sets aside this term.
only P5.0 million. So you have here a practically insolvent debtor.
Unless the debtor gives a guaranty or security – let’s say Y, friend of B, will mortgage
property to secure payment of the loan. In that case, the period for the benefit of B
INSOLVENCY will be preserved. Because if you have that security, there is an alternative for the
lender to get payment notwithstanding the insolvency of the debtor.
ASSETS ARE LESS THAN LIABILITIES In contrast, you have this normally:
ACCELERATION
Example: Loan Contract
The assets will not be sufficient to cover liabilities. The law provides that if there is CLAUSE
Let’s say you have a loan contract. You default in one
insolvency, what will happen? installment or two installments. You’re considered in Stipulation in contract
The borrower will lose the benefit of the term. Lender can now collect. d e f a u l t a n d t h e e n t i re o b l i g a t i o n b e c o m e s that the moment you
Why? demandable. This is what you call in a loan contract an default, the entire
From now until June 15, the borrower can win the lottery, work for money, do crowd acceleration clause. The moment you default, the obligation becomes
funding. entire obligation becomes demandable. demandable
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Q: Sir, if it becomes due and demandable upon insolvency, what’s the remedy of the 2. MACASAET v. MACASAET (Family Lot)
creditor? I’m thinking it’s kind of impractical to collect from the debtor if he’s insolvent. When period is not intended by parties
SP: No, it’s not impractical. Because let’s say a debtor has limited assets. Let’s say you The old Macasaet spouses owned the land. The young Macasaets were occupying the
have 20 creditors with a total claim against a debtor of 100 million. Now, the debtor land, and so the old Macasaets allowed use of their property. There was rent of P500.
has an asset of only 50 million. As much as possible, if you’re a creditor who’s How are they related?
entitlement is subject to a term, you want a proceeding where all assets of the debtor The young Macasaets, the husband, was the son of the old Macasaets. Then, the old
will be gathered and the court will decide how the assets will be distributed among Macasaets filed an ejectment suit against the young Macasaets because they failed to
the creditors. Because in that scenario, it’s still possible for you to get something. pay the rental. The young Macasaets claimed that it was given to them by the Old
Unlike if you allow those with demandable obligations to be paid now, certainly, you – Macasaets. First they said that it was for their family to become closer and to employ
the creditor subject to a period – will not get anything. So at least in this set-up, you the sister of Ismael. They also added that the first land was given to them as an
may get something. It may be insufficient but it’s better than nothing. advance grant of inheritance and that the second land was given to them to repay the
construction of the house of the old Macasaets. The issue is here is whether or not we
To simplify: can use the provision in Article 1197.
What’s Article 1197?
That in case the parties intended period, the court can fix the term of the obligation.
DEBTOR LOSES THE BENEFIT OF THE PERIOD THE MOMENT THE DEBTOR: Under what circumstance? If the parties intended a period – then there’s already a
period so there’s nothing to fix! The parties intended a period but they forgot to
1. DEFAULTS indicate it in their agreement.
2. BECOMES INSOLVENT The second circumstance is if it’s in the sole will
3. ATTEMPTS TO ABSCOND of the debtor.
A potestative term on the
What kind of term is that? What’s the technical part of the debtor is
The other items, they’re basically a breach of the obligation.
term? different from a
It’s a purely potestative term. potestative condition
When there’s a violation by the debtor, there’s an acceleration of the obligation.
If the debtor gets to decide the term, why is it
Except for loss of the guaranties or securities given. because it suspends only
different from a purely potestative condition
Let’s say a guaranty or mortgage was given and the mortgage was somehow lost
dependent on the sole will of the debtor? Why the demandability of the
through no fault of the parties, the obligation will be immediately demandable.
And then take note of the last item. When the debtor attempts to abscond.
not just void the obligation just like in a purely obligation not the
potestative condition dependent on the sole will juridical tie. There is still
What do you mean by abscond?
of the debtor? Why is there no nullification of the
That the debtor attempts to run away from the obligation. Take note, it’s an an obligation.
obligation?
attempt. It’s enough that the debtor is at the airport with a one way ticket to
Because a suspensive term suspends only the
nowhere, that’s enough to show an attempt to abscond. Of course you have to
demandability of the obligation. So if you have
show that there’s no intention to return.
a suspensive term, you have an obligation or you have a juridical tie. Unlike in a
purely potestative condition, there is no juridical tie.
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[Digression] Loss of love and affection. Isn’t that certain to happen? It its’ certain to
Art. 1197. If the obligation does not fix a period, but from its nature and the happen, then the court can fix a period. There’s science in that. When you fall in love,
circumstances it can be inferred that a period was intended, the courts may fix it fades. Automatically. After one year, the love is not the same. Your feelings after one
the duration thereof. year will be different. The chemicals in your body will be different. But it doesn’t mean
The courts shall also fix the duration of the period when it depends upon the will your love will end. Because your brain will establish new connections. That’s the
of the debtor. solution of your body so you can stay with whoever your significant other is. But
In every case, the courts shall determine such period as may under the definitely it will fade.
circumstances have been probably contemplated by the parties. Once fixed by
the courts, the period cannot be changed by them.
COMPARING RADIOWEALTH AND MACASAET
WHEN MAY THE COURTS FIX A PERIOD? But anyway, the SC said it was a condition so the court cannot fix a term.
How about in Radiowealth?
1. When from the nature and circumstances it can be inferred that a period was Did the court fix a period in Radiowealth?
intended You said in Radiowealth, although there was a blank in the payment date, the parties
2. When it is a purely potestative term ON THE PART OF THE DEBTOR
intended a period. Therefore, it’s an ideal case for the court to fix a period right?
So what was the decision of the court in Radiowealth?
So let’s go back to the case. Did the WHAT IS A POTESTATIVE TERM? The parties did not forget to fix a term because there was an acceleration clause and
court fix a period? No? Why not? late penalty clause in the agreement.
A potestative term is a term that
So the use by the young Macasaet depends purely on the will of the debtor.
spouses was not subject to a term. It FIXING A TERM
It suspends the DEMANDABILITY of the
was subject to a condition. obligation. There is an obligation that
What was the condition? exists, what is suspended is WHEN it Let’s go back to Macasaet. The spouses used this property as what?
The love and solidarity of the family. may be demanded. For residence and their construction business.
Who broke the love and solidarity of I want you to reach a different conclusion, that the parties intended a term.
the family? How will you argue that the parties intended a term? How will you convince the court
The young Macasaets. that there was a term intended? That there was a business? If there’s a business, it can
[Who between the spouses do you think? Most likely, there was trouble in the family, go on and on. How will you argue? Based on the facts in the case, what could have
the wife could not get along with the in-laws so they had a problem.] been shown?
So the court said, there was what? We want to establish that the parties contemplated a term for the use of the young
A condition. What kind of condition? Macasaets of the property but they just failed to place it in the contract. After how
A resolutory condition. The resolutory condition was loss of love and affection. many years or months did the old Macasaet spouses terminate the contract? Do you
Can that be a term? What’s a term? When is it a term? know?
Will that be relevant? Yes? What can you show? What can you make of the fact that
there was a construction of a brand new house of the young spouses on the property?
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Let’s say – if you’re going to build a house on somebody else’s property. What will be If you bought equipment, we could assume that he intended it for a certain business and then there
your consideration? Let’s say you’re building a P5.0 million house on somebody else’s would be a period for that business to grow first before the borrower could pay back the loan.
lot. What will be your consideration knowing for a fact that you cannot take the house
So once you have established a purpose, you have a shot of convincing the court that a term was
with you? You have to be able to use the house for a period commensurate with your
contemplated. In fact, if you have a huge amount, it’s easy to convince the court that a term was
investment. Let’s say if you rent, you’ll be spending P5.0 million for 5 or 10 years. Your contemplated. Otherwise, it’s not possible for the lender to demand payment.
main consideration is – will you be able to recoup your investment by use of the
property for a certain period.
How about for the business? What can you say about the business? HOW THE COURT FIXES A PERIOD
I think the background of this case is that the spouses just got married so they were
So when the parties contemplated a term but failed to stipulate it in the agreement,
starting a business so they were given use of property.
or if the term is dependent on the will of the debtor, the court can fix a period.
This is how you approach this case.
Take note that to do this, a case must be filed. One party must go to court and ask
Let’s say you want to support the idea that a period was intended. They’re a young
the court to fix the period.
couple starting their period. Somehow, the couple intended that this business should
How will the court fix the period?
fly for a while and the spouses should develop it in the meantime.
Of course the court will fix the period based on the contemplation of the parties. If
That’s how you approach it.
the parties do not agree, the court will just base its decision on the facts. That term
You say, this part of the deal shows that there was a term contemplated by the
will now be the term for the performance of the
parties. Otherwise, they would not have done these things were it not for a
obligation.
contemplated term for the use of the property. In that case, you can convince
In the provision in Article 1197, it says there
the court that there was an intended term that the parties failed to stipulate. So When a court fixes a
that once the court fixes the term, the term
you will not negate that claim of loss of love and affection. period under 1197, this
cannot be changed by them.
Does that mean that once the court fixes the can only be done once.
ILLUSTRATION 5 : SHOWING A PERIOD WAS INTENDED BY THE PARTIES term, the parties cannot change the term The court cannot change
anymore?
the period after that.
LENDER BORROWER The parties can still change the term. That
100M LOAN
provision refers only to the courts. In other However, the parties may
PROMISORY NOTE PROMISING TO PAY LENDER ON _________ words, the word “them” refers only to the do so by entering into
courts. So it is just a one-time decision for the another contract.
The general rule is that it’s upon demand right? If you’re the borrower, how will you show that there
court. However, if the court fixes a term, the
was a term intended in this case? What will you have to establish to determine that a term was
contemplated by the parties?
parties can still enter into a new agreement to fix
You borrowed P100 million. Why will you borrow P100 million? a new term.
You can invest it in a business like...Mang Inasal. [You know that company, that’s a good deal. Jollibee
bought it not because it was a good business but because it was a competitor. So it was a good
investment.] Lets move on to the kinds of obligations classified according to the number of
So in this case, let’s say borrower bought equipment – machinery worth P100 million – to be used for a
obligations involved.
business. So lender can no longer demand payment at any time?
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ALTERNATIVE OBLIGATIONS ( 1199-1206)

Obligations are also classified depending on the number of prestations involved. So if Example: Alternative Obligations
you have multiple prestations, you can have a conjunctive, alternative, or facultative. Now, an alternative obligation, you have let's say the same thing. The car or the 1
In a conjunctive obligation, you have at least two prestations. million or a ring.
In an alternative obligation, the debtor is to perform only 1 among the multiple
prestations or between two prestations.
KINDS OF OBLIGATIONS ACC. TO NUMBER OF PRESTATIONS
Let's say in this example, in exchange for the condo unit, the debtor can convey a
1. CONJUNCTIVE: DEBTOR SHOULD PERFORM ALL PRESTATIONS specific car, pay 1 million, or give a specific ring. Take note we encounter these
2. ALTERNATIVE: DEBTOR IS TO PERFORM ONLY 1 AMONG THE MULTIPLE alternative obligations in the case of Mondragon.
PRESTATIONS In Mondragon, there is a consequential default. On default of the borrower, the lender
3. FACULTATIVE: DEBTOR CHOOSES A PRINCIPAL PRESTATION TO PERFORM, AND will have remedies. The remedies will have a counterpart obligation on the side of the
SUBSTITUTE PRESTATIONS ARE AVAILABLE borrower, so that will be an alternative obligation. In an alternative obligation,
default means the debtor will choose what prestation to be performed but the
Example: Conjunctive Obligation parties can agree otherwise just like in the case of Mondragon the lender will
decide what prestation should be performed by the borrower.
Let's say a car plus 1 million cash. In this example, you have an obligation where the
debtor should perform two prestations. Both conveyance of the car and the
ALTERNATIVE FACULTATIVE
payment of 1 million. Let's say there is a contract...an ex-deal in exchange for a condo
unit. The buyer of the condo unit to the seller and owner of the condo unit a certain ALL prestations are principal prestations. In lieu of the principal presentations you may have
car plus 1 million. So the prestations to be performed by one party will be a The debtor will choose which prestation to substitute presentations.
perform. The debtor chooses what presentation to be
conjunctive obligation requiring performance of both prestations...that's why - if one prestation is illegal or against public performed, always and there is a principal
conjunctive so both prestations must be done. It's not one or the other. policy, debtor has to choose legal presentations presentation and substitute prestaions.
-if principal obligation is illegal, entire obligation is
void
Art. 1199. A person alternatively bound by different presentations shall

completely perform one of them. Now, from that distinction, you have let's say if the principal is void in a facultative
The creditor cannot be compelled to receive part of one and part obligation, what happens to the obligation? The obligation will be void even the
of the other undertaking. substitute presentations are valid. If the principal obligation is cannabis, the delivering
Art. 1200. The right of choice belongs to the debtor, unless it has been of 1 sack of cannabis mixed with chocolate and pudding. Now, you have a void
expressly granted to the creditor. principal prestation therefore the substitute being accessories only will now be void
The debtor shall have no right to choose those presentations which also. There will be no obligation at all. Unlike in an alternative obligation, let's say you
are impossible, unlawful or which could not have been the object of the have four. A sack of marijuana as an additional prestation. There will be a valid
obligations obligation but this prestation, the delivery of the marijuana, will be void being an
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illegal prestation. As I said, just take note of that distinction. If it's facultative, only the
debtor will choose the prestation will be performed always. If it's alternative, the
Art. 1201. The choice shall produce no effect except from the time it has
creditor may be given the right to choose the prestation.
been communicated.
in a facultative obligation, the only way you can make it clear is through this: What is
the principal obligation and what are the substitute prestations? Of course, if the debtor makes a choice, the debtor has to communicate it to the
Otherwise it may be confused as an alternative obligation. Facultative, you rarely see creditor. It can be done expressly, the debtor will write, or you just go there and
that. Normally, you see conjunctive and alternative obligations. deliver either of the 3 prestations.
The tricky part is if the debtor brought the ring to Mordor and something happened
Now let's go to alternative obligations. Now, who has the right to choose, as I said, to the ring there. So there is only the car. Will the debtor be liable to the creditor for
the debtor by default has the right to choose. We are dealing here with alternative destroying the ring? No, because the debtor has the right to choose and by
obligations so let's say alternative, car, ring, and 1 million. destroying the debtor chose the car. The issue
We're assuming they're all principal prestations. is, after destroying the ring, the car is lost
Who can choose? through a fortuitous event. The answer is that
Once a debtor makes a
By default, the debtor can choose. there will be no liability because there was a
choice made and the car was lost though a choice in an alternative
So if you have this obligation, the debtor on due date can just say I'll just deliver the
car, the ring, or the 1 million because the debtor has the right to choose. fortuitous event so there will be no liability for obligation (expressly or
Of course, by agreement, the creditor can be given the right to choose the prestation. the loss. Just follow the general rule that if it is implied) the obligation
There's only a limitation. The debtor or even the creditor, if given the choice, lost through a fortuitous event there will be no
becomes a simple
cannot choose an impossible or unlawful prestation. liability. As I said, if the debtor already
communicated the choice, then you now have obligation.
So let's say today is the due date the debtor does not pay. What should the creditor
do? a simple obligation. It is no longer an
The creditor has to make a demand to put the creditor in default. alternative obligation
What should the demand be?
For the debtor to perform any of the valid prestations. That's the same prayer if there What if the creditor has the right to choose?
would be a case filed in court for the court to offer the debtor to perform any of the
prestations. The problem will be what if the debtor does not choose anything? Same rule, the creditor will have to communicate the decision.
Then, that will be a wavier and the court may make the choice for the debtor. What if the creditor does not communicate and you are the debtor, what will you do?
So, in this case, as I said, the debtor cannot choose an unlawful or impossible You do nothing because you do not perform as long as there is no notification. You
prestation. take the case of Mondragon there is default by the borrower. The lender is not doing
anything so you do not ask what you should do. You go on your merry way and wait
The debtor cannot also say I'll pay half and half. Because early on you learn in Cathay, for the creditor to make his move.
the rule on integrity of payment. So when you are the debtor and you're going to
pay an obligation, you have to pay in full. You cannot pay one part and then another Lets move on to joint and solidary obligations.
part.
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JOINT AND SOLIDARY OBLIGATIONS creditor 2 because they're presumed to be joint creditors meaning they're entitled to
one-half of what might be paid by each. Each payment by debtor 1 will be equally
divided between the 2. In a joint obligation, if creditor 1 will get 250 and
These are obligations classified by liability. creditor 2 will get 250.
Art. 1207. The concurrence of two or more creditors or of two or more

However, if Illustration 6 is a solitary obligation
debtors in one and the same obligation does not imply that each one of the
Let's assume now these are solidary debtors and solidary creditors.
former has a right to demand, or that each one of the latter is bound to render,
You can have solidarity on both sides. On due date, creditor 1 demands payment
entire compliance with the prestations. There is a solitary liability only when the
from debtor 1, how much should debtor 1 pay?
obligation expressly so states or when the law or the nature of the obligation
Debtor 1 should pay the whole amount because that is the nature of solidarity. They
requires solidarity.
are solidary creditors meaning each one can collect the entire debt and because
Art. 1208. If from the law, or the nature or the wording of the obligations to they are solidary debtors meaning each are liable for the entire debt. That is why
which the preceding article refers the contrary does not appear, the credit or in this example creditor 1 can collect from debtor 1 the entire amount on due date.
debt shall be presumed to be divided into as many equal shares as there are What you have to remember always is the default rule. In the absence of any
creditor or debtors, the credits or debts being considered distinct from one peculiar fact or circumstance, remember it is always joint. You have to find the
another subject to the Rules of Court governing the multiplicity of suits. indicators of Solidarity.
DEFAULT RULE JOINT SOLIDARY
AN OBLIGATION IS PRESUMED JOINT UNLESS 1) STATED OTHERWISE BY PARTIES 2) IT - default rule regarding obligations containing - must be stipulated by parties, by law or by the
IS SOLIDARY BY NATURE OR AS REQUIRED BY LAW multiple debtors or creditors nature of the obligation
- debtors are only liable for the amount - any creditor may demand fulfillment of ENTIRE
ILLUSTRATION 6: OBLIGATION proportionate to their share obligation
- - upon demand on a debtor, debtor MUST
WITH MULTIPLE DEBTORS AND If Illustration 6 is a joint obligation, debtor creditors may collect only amount
proportionate to their share FULFILL ENTIRE OBLIGATION
CREDITORS 1 will pay, how much will debtor 1 pay?
Debtor 1 will pay 500,000.
How much will creditor 1 collect from
C1 B1
debtor 1? CASES
1 BILLION If it is join we assume they're equally liable 1. MARSMAN V. GEOANALYTICS (Soil Test)
in the absence to proof to the contrary. In Application of default rule on joint liability
C2 B2
this case, if we have this example, you
assume each will be liable for one-half
When you build a condominium, you just don't hire an architect. The first thing you do
How much can each creditor collect? therefore debtor 1 is liable to pay only
is a soil test. That is purpose of engaging the services of PGI. You will determine if you
How much will each debtor be liable? 500,000 on due date. In that 500,000
DEPENDS IF ITS SOLIDARY OR JOINT. can build a condominium on that property. In fact, you do that even before buying the
should be paid not to creditor 1 alone or
property. If you are Gotesco you do that before entering a joint venture because it
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may turn out that the land will not be suitable. The contract was entered by Marsman Examples of Joint Obligations
and Gotesco so you have 2 debtors for this service contract. PGI rendered service to
the joint venture project, but the signators to that contract were Marsman and Example 1: Loan Obligation
Gotesco. Example this is a contract of loan. There is an obligation to pay on due date. This is
Day 1 and this is Day 2.
ILLUSTRATION However, the proceeds were released 50% to B and the other 50% to C.
Do you have joint debtors here? No.
It does not necessarily mean if you received you are a debtor. You have to be party to
MARSMAN the contract. So, if they are parties to the contract and somehow C signed the
PRICE contract as borrower.
JOINT In the absence of a special stipulation they are joint debtors. The fact that
PGI
VENTURE DRILLING AND SOIL TEST someone received the payment does not mean that party is a debtor unless you
can show proof. We assume now that you have B1 and B2 (Borrower 1 and Borrower
STIPULATION: Marsman to provide land, and GOTESCO to 2). If you have a joint obligation, you have to remember 1 rule. The act of one party
GOTESCO shoulder all expenses of development of condominium will affect only the party or parties privy to such act.
Example 2: Obligation based on contract

Today is the due date and Lender 2 makes a demand on Borrower 2. Is Borrower 2 in
The issue now is who should pay the fees of PGI? default? Yes. Is Borrower 1 in default? No. Why?
The Court ruled both of them should pay and the nature of liability is joint. You This act of making a demand only affects B2 and only benefits L2. As of day 2,
follow the general rule because there was no special agreement or circumstance. B2 will be in default with respect to L2.
But there was an issue thrown by Marsman that Gotesco was to pay for expenses and How about L1? No. As L1 is concerned B2 is not in default. If you have this situation,
reimbursements as said in the Joint Venture Agreement. there are also joint creditors or lenders, Lender 1 has to make a separate demand
The Court ruled that PGI should be able to collect from both because PGI is not to place B1 or B2 in default.
part of the Joint Venture Agreement hence it does not apply to PGI. Marsman
cannot get reimbursement from Gotesco not withstanding that this should be the Example 3: Insolvency of a Borrower
arrangement.
2 parties entered into a contract with PGI and PGI rendered services pursuant to that Another example, let's say this is an obligation based on contract. Later on, you will
contract and both parties should be liable in the absence of a special fact then their learn that an obligation based on contract the prescriptive period is 10 years from
liability will be joint. breach. Let's say today is the last day of the period in which to collect and tomorrow
the obligation will already prescribe. What can be done? L2 made a demand on B2.
Lets go to a joint obligation. You have to determine if a party is a join obligor or The obligation cannot prescribe with respect to B2 and with respect to the claim of
lender. L2. By tomorrow, if no demand was made by L1 on B1. B1 will have no liability
because there is already prescription.
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Example: Indivisible obligations Solidary because the law requires solidarity with the accommodation party
What if you have an indivisible obligation or an obligation that cannot be performed according to the negotiable instruments law. You receive nothing but you will be
in parts? liability to pay. This is based on the law.
Let's say you have Seller 1, Seller 2, and Buyer 1. They are supposed to sell a specific On the other hand, the case also presents express stipulation because of the term
car to B and there is payment of the price. jointly and severally being used. That indicates solidarity. What is the safe word to
Are they joint debtors with respect to the conveyance of the car? use? Solidary because it is the safe word for law. Another example of this is a
Yes, because there is no special circumstance. Let's assume they were to get this car promissory note saying, "I promise to pay" and signed by other parties. "Each agrees
somewhere through their joint efforts and expense. On due date, buyer was ready to to pay the entire obligation" or "Each of the parties agree to pay the entire
pay 1M and they could not. To place them in default what should B do? obligation,” indicate solidarity. You can even stipulate, "the liability of the parties
The fact that it is an indivisible obligation does not make it a solidary obligation. It will herein is solidary." You can indicate anything to say that any of the parties can be
still be joint by default. To place both on default, a demand should be made on both liable to pay the entire obligation
of them. If a demand was made on both of them, S2 was ready to what was
incumbent of him but S1 was not ready, willing, and able.
This will now be converted into a monetary liability. Let's say the car is worth 1.2M
how much will each pay? 600K each.
But S1 caused the default, then S1 would be the only one liable for damages. If
it is a joint obligation, only the party or parties privy to the act will be liable.
2. GONZALEZ V. PCIB ( accomodation party)

Accommodation party solidarily liable, solidarily liable as stipulated by parties
When do you have solidarity?

Upon agreement, the law requires, or the nature of the obligation requires.
The Gonzalez case is an illustration of the two.
In Gonzalez, a promissory note was issued. It
said we jointly and severally pay. Two parties As provided by the
signed X and Y. Y is the real borrower and X negotiable instruments
signed as the accommodation party. The law, accommodation
borrowers loaned 1M from the lender and the
parties are solidarily
entire 1M went to X but to ensure payment
another signed as a co-maker to the note as an liable in obligations they
accommodation party. This person does not agree to co-sign to.
receive any of the proceeds but signs as a co-
maker. What is the nature of the liability?
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Reviewing Joint and Solidary Obligations That’s different if you have solidary obligations. I explain last time that you can have,
Let us now assume it’s solidary, D1, D2 and C1, C2 (Again we’re reffering to illustration
We are discussing Joint Obligations, let me recap. 1) 1M Payable by D.
When you have a Joint Obligation, let me simplify, you have one creditor and then 2 This one, we will assume passive solidarity. When we say passive solidarity, there will
debtors or you have 2 creditors and 1 debtor. You have 1M. So the default rule is be solidarity between the debtors so in this case, if you have solidarity, each debtor or
that if you have multiple debtors or creditors, the default rule is that their all of them may be held liable for the entire obligation, C makes a demand on D1, this
relationship is joint (remember Art 1207). demand binds also D2.
The rule is as between the solidary debtors you have what you call Mutual
ILLUSTRATION 1 Agency, each one will be acting for the other. So
They are joint debtors or joint creditors. if C1 makes a demand on D1 that’s as if he made
500k
C1 D1 So in this example the debtors, they are by a demand on D2, how much should D1 pay? D1 Rule on Mutual Agency:
default presumed to be joint, they will be
1M should pay the entire obligation because the when each party will be
liable only to the extent of their share. We creditor can hold a solidary debtor liable for
C2 D2 will assume equally. So Let’s say for the due acting for the other. The
500k the complete amount or C can opt to collect
date, how much will they pay? half from D1 and half from D2 or whatever
act of one binds all
combination may be in practice.
They pay one-half each only. If the creditor
demands payment from D1, that demand will only affect D1, so if that demand will Active Solidarity
place D1 in default, only D1 will be in default because we explained last time if you
have joint debtors or in case of joint obligations, only the parties privy to the act Now, on the other hand, you have active solidarity.
shall be affected by that act so if a demand was made to D1, that demand will have
a consequence only on D1 so if D1 will be in default by virtue of that demand only D1
will be in default not D2, okay? Because D2 was never privy to that demand.
Art. 1214. The debtor may pay anyone of the solitary creditors; but if any
demand, judicial or extrajudicial, has been made by one of them, payment
The same manner you have joint creditors, on due date, D1 should pay 1M and C1 should be made to him.
makes a demand on D1. How much should D1 pay? Just half to C1 because the
demand of C1 does not benefit C2, C2 was not privy to that demand. Therefore, that
demand is only for C1. C2 as far as D1 is concerned has not yet made any demand, In active solidarity, you have
again, only the parties privy to the act will be affected by that act. That’s how you PASSIVE SOLIDARITY ACITVE SOLIDARITY
solidarity, between creditors, in
understand a Joint Obligation. There will be separation of the liability of debtors in which case, if C makes a demand on SOLIDARITY BETWEEN SOLIDARITY BETWEEN
case of joint debtors or the entitlement in case of joint creditors. D, that demand by virtue of the DEBTORS CREDITORS
rule on mutual agency is a -each debtor MUST pay the - each creditor can
entire obligation demand the entire
demand for and on behalf of the
obligation
two of them,C1 and C2 so if C1
73
makes a demand on D, D will also be deemed in default with respect to the entire
obligation not just with respect to the share of C1 and the demand in this case, D Last time we discussed the case of PCIB, in PCIB, you have solidary liability in respect
should pay the entire amount. If you have active solidarity, D can pay anyone if to the promissory note, in that promissory note, ordinarily, if you have a promissory, I
there’s no demand yet, you can pay the entire amount to anyone. If there’s already promise to pay x amount on y date, just a typical promissory note, there is an amount
a demand, as a rule, you have to pay the one who made the demand. and its payable.
Difference Between Joint and Solidary Obligations Now, ordinarily, this will be signed by? Promise to pay X is the name, X amount on Y
Difference between Joint Obligation and Solidarity Obligation date, signed by name, that’s the typical promisorry note. This will be one liable to pay
So that’s a distinction, generally, between Joint Obligations and Solidarity the obligation, normally if you borrow, let’s say from a bank, you required to issue a
Obligations. As I said, you have to know what part is Joint because you can have Joint promissory note, promising to pay the loan amount plus interest on a given due date.
relationship with respect to the creditors and solidary relationship with respect to the Now, in that case of PCIB, you learned there was one other party who signed, that
debtors or vice versa. other party is called the accommodation party.
This is an example of a solidary

DEFAULT RULE obligation pursuant to law, at the ACCOMODATION PARTY
same time, this promissory note which
WHEN THE OBLIGATION IS JOINT, FOR THERE TO BE A SOLIDARY OBLIGATION, THERE A party that did not receive the
MUST BE AN AGREEMENT OF THE PARTIES TO MAKE THE OBLIGATION SOLIDARY. was actually worded, we, used the
proceeds of the loan and yet signed the
THERE IS ONLY SOLIDARY LIABILITY WHEN: 1) THE PARTIES STIPULATE 2) THE LAW words jointly and severally or solidarily
promissory note undertaking to pay the
REQUIRES SOLIDARITY 3) BY THE NATURE OF THE OBLIGATION, SOLIDARITY IS promise to pay, so in that case, there
whole amount. The accommodation
REQUIRED is also a stipulation by the parties.
party is considered solidarily liable
In this promissory note, you have
under the law.
two basis of solidary liability, the
legal mandate of solidary liability
with respect to an accommodation
INDICATES JOINT LIABILITY INDICATES SOLIDARY LIABILITY party and the joint solidary
undertaking of the parties, clear?
MANCUM SEVERALLY
MANCOMUNADA JOINTLY AND/OR SEVERALLY
MANCOMUNADAMENTE SOLIDARIA Example: Solidary Liability in Corporation Law
PRO RATA INSOLIDUM In the corporation law, for example, sec 31, ordinarily, you have a creditor and you
PROPORTIONATELY SOLIDARILY
have a debtor.
PRO RATA TOETHER/ANDOR SEPARETELY
JOINTLY INDIVIDUALLY AND/OR COLLECTIVELY
CONJOINT  JUNTOS O SUPARADAMENTE Your debtor is a corporation and the debtor owes 1M, there’s a loan contract, who
“WE PROMISE TO PAY” I PROMISE TO PAY would be liable? Only the corporation. The liability does not extend to the directors,
INDIVIDUALLY AND JOINTLY
74
officers or stockholders, with respect to the stockholders, it can be only to the extend
of their paid subscription.
What’s a paid subscription? LIM
LAFARGE files civil case against
It’s the amount you pay to get
ILLUSTRATION 2: SOLIDARY LIABILITY IN CCC, LIM and Mariano Are CCC, Lim and Mariano
shares in the corporation.
CORPORATION LAW Solidarily Liable?
the general rule is, only the LAFARGE CCC
corporation will be liable.
1M In sec 31 if there is an act of bad
CREDITOR DEBTOR
(CORP) faith, gross negligence or fraud, MARIANO
t h e n t h e d i re c t o r s b e c o m e
solidarily liable to pay the creditor.
It is the rule recognizing the
CCC entered into a Sale and Purchase Agreement with La Farge. La Farge agreed to purchase
separate juridical personality of a corporation. That’s based on law, and also based on the cement business of CCC. During the pendency of the transaction, there was an ongoing case
fraud because of the nature of the liability that sec 31 of the corporation code states. that CCC was a party to against APT. La Farge had knowledge of this case. It was alleged that La
Farge and CCC agreed that as part of the agreement, there would be retention of the purchase
price for the cement business by La Farge in anticipation of any liability CCC may have if they
Cases lost the case against APT. CCC lost. They told La Farge to apply the retained amount to their
liability against APT. La Farge refused CCC filed a civil case in two separate courts for preliminary
attachment against La Farge. La Farge as a counter claim, filed a civil case for specific
1. LAFARGE CASE performance and tort against CCC, LIM ( President of CCC) and Mariano ( Corporate
Solidary Liability in tort obligations Secretary of CCC).
So this was a case for specific performance and tort?
Yes sir.
ILLUSTRATION 3: LA FARGE CASE What’s tort?
A quasi-delict sir.
1. LETTER OF INTENT AND SALE AND PURCHASE AGREEMENT Specifically what was the basis of tort?
PRICE Bad faith
LAFARGE CCC So what was the issue here?
Whether Lim and Mariano could be solidarily liable.
BUSINESS
So are they solidarily liable?
Yes sir. When there is bad faith, there is solidary liability.
STIPULATION: In anticipation of possible liability in a previous case against CCC
Let’s simplify this one.
(APT v. CCC) , parties agreed to retain portion of purchase price (117k)
Let’s say you have 3, so Lafarge two, Continental, Lim and Mariano. If I were not
mistaken, actually the owner here was Lim, Mariano was only an officer so most likely,
- CCC loses case against APT. Tells APT to apply retained sum of 117k to their
if you were going to practice, and he is your client, you will be solidary liable for being
liability to APT. La Farge refuses.Claims that CC and its president: LIM and
a lawyer. Why? They’re all guilty of bad faith and filing a complaint against Lafarge
corporate sec: MARIANO acted in bad faith
75
based on Jurisprudence liability for that is solidary and considered all as principals be terminated and the claim should be submitted to the proceedings to settle the
and why? estate of the deceased, meaning, in short, the assets will be subject of a settlement
Can you measure bad faith? Can you determine the percentage of accountability of proceedings, let’s say judicial proceedings, so the rules of court, provide that in that
each one if there’s a commission of bad faith? case the plaintiff should go in the settlement of estate proceedings and submit its
No. So it’s very difficult to apportion, the authorship of each tortfeasor. Therefore? claim in that proceeding.
Of course, there should be an accounting of liability but that accounting should So the issue was should C follow the rules of court?
happen among themselves but not between the debtor and the creditor. It’s difficult The answer, NO. Because the entitlement of creditor to go after any or all or
to apportion accountability in tort cases. It would be a burden on the creditor. combination of solidary debtors based on substantive law, that is the credior has
So if tortfeasors ( parties guilty of tort) were only jointly liable, before you could the prerogative who to collect from so whether its D1, D2 or D3, whatever
claim against the joint tortfeasors as solidary debtors you have to prove their combination, it’s up to the creditor.
respective accountability, what would be the consequence if you have that rule?
Its as if you’re penalizing the creditor.
It defeats the very nature of the liability so Jurisprudence said if it's a tort liability, the Art. 1216. The creditor may proceed against any oone of the solitary debtors
creditor only has to prove the tort liability and the moment it’s proven, whoever or some or all of them simultaneously. The demand made against one of them
participated in creating that tort liability, shall not be an obstacle to those which may subsequently be directed against
then they will be solidary liable and their the others, so long as the debt has not been fully collected.
respective shares will be a matter for the By its very nature,It is
joint tortfeasors to litigate among difficult to measure or make The procedural rule cannot negate that substantive right of the creditor. So in this
themselves but that’s not the concern of
the creditor.
an accounting of bad faith. case, if D2 died, the option will be on the part of the Creditor, Creditor can choose to
The moment tort is proven proceed with the litigation against D1 and D3 or can opt to pursue its claim in the
I think when we say, it’s the nature which in
settlement of the estate proceedings of D2. So its an illustration of the entitlement or
this case, because it’s a tort liability, it is very by the creditor, the
right of the creditor to go after any or all of the debtors. It cannot be limited by
difficult to apportion among the obligation becomes procedural rules.
perpetrators of the tort so the rule is there
should be solidary liability and there is no
solidary.
need for the creditor to prove the Art. 1211. Solidarity may exist although the creditors and the debtors may
accountability or obligation of each
not be bound in the same manner and by the same periods and conditions.
tortfeasor.
(1140)
2. Boston v. CA (dead creditor)

Creditor not obliged to collect from estate of a solidary debtor Take Note: If you have solidary liability, its possible that certain parties will be
solidary liable but they are bound separately. They are subject to different terms
So in this case, C1 sued all, however during litigation, let’s say, D2 died. There is this and conditions so solidary may exist even if the debtors and creditors are
peculiar rule in the rules of court, that if the defendant dies, the proceedings should subject to different terms and conditions.
76
Example: LaFarge Case, Solidary debtors differently bound The company could go and collect from A or B or both of them but if you look at this,
the beneficiary of the conveyance for the candy business is only B and the biscuit
In the LaFarge case, the creditor here, the principal creditor, based on the contract business is only A, meaning, with respect to the conveyance of the business, A
was Continental Cement. However, under the contract, only Continental Cement will and B, they are separately bound but they are subject to different terms and
be liable as contracted party, Lim and Mariano, they’re liable based on tort, Even if conditions, Nevertheless, that will not stop them from being solidary liable
Continental Cement will be liable based on the contract as well on tort and Lim bacause based on agreement, just take note of that, it is possible.
and Mariano will be liable only based on tort, they will still be solidary liable, it’s
an illustration of the debtors, subject to different terms but would still be solidary Next example. This one is an old case, a classic example of the provision.
liable.
Ill give you another example. ILLUSTRATION 5: SOLIDARY DEBTORS DIFFERENTLY BOUND How much can C demand
from B?
A.800k
ILLUSTRATION 4: SOLIDARY DEBTORS DIFFERENTLY BOUND 1 MILLION
C LOAN A B. 500k
C.400k
SOLIDARY
SOLIDARY
TO PAY: 12/31/16 D.None of the above
BISCUITS
D B Lets analyze.
AGREED TO BE
A
PRICE.( Either part should pay SOLIDARILY BOUND
TO PAY: ON DEMAND
Let’s analyze.
COMPANY entire amount)
TO PAY PRICE TO
COMPANY D CONDONED 200k IN FAVOR OF A If you look at this, there is
B condonation. It reduces the
C BEFORE DUE DATE DEMANDS FULFILLMENT FROM B
obligation. Who may get
CANDIES t h a t b e n e fi t i s o f n o
consequence as far as the
creditors and debtors are concerned, the obligation will be reduced to 800k, it’s
a matter for A and B to duke it out later that the benefit should only be for A.
There is a company with 2 businesses, biscuit and candies. There was a sale of the
businesses to A and B – under the sale, biscuit would go to A, the candies business Take note, if there is remission, there could be no reimbursement for the favor gotten
will go to B. by the debtor.
However, they have to pay a price, right? So you’ve established the obligation: 800k. But its a solidary obligation. C made a
Ordinarily, the price will be paid jointly, meaning, if there is no stipulation, equally, but demand on B, B is obliged to pay on demand so you’d say 800k but then what
they agreed to pay the price solidarily. So the question was, from whom the company happened to the provision giving A a term until 12/31/16?
should collect?
77
There is no sense to to this provision. You have to make sense of all provisions, you First rule: A debtor may pay any creditor, of course the payment should be complete
have to harmonize all the provisions so remember that rule, they maybe solidary and subject to the other rules of payment. However, if C1 demands, meaning a
debtors but they could be subject of different terms. creditor demands, D should pay whoever makes the demand.
You need to operationalise both due dates: on demand and on 12/31/16. How do What if you have multiple demands? Then you pay the first one you received. That’s
you operationalize? the sequence, so if the first one who made a demand is C1 then, C1 should be paid
Assume they are of equal share so 1⁄2 each. first and that demand may be judicial or extra-judicial. What’s an extra-judicial
Only half of the obligation is due bacause the Half of the obligation is demand? Sending a demand letter. Judicial? Via complaint in court.
other half is subject to a term. That’s a subject to a term. Only
Supreme Court decision, that’s only one case, 400k is demandable from B 2. Any creditor may extinguish an obligation
an old case cited in I think Tolentino.
prior to due date. After the
So the answer would be 400k and the The creditor can do anything to extinguish the obligation, whether by compensation,
reasoning again is they’re solidary debtors due date, the entire 800k is Will that bind the other creditors?
but they are bound differently by different demandable. Yes, because of rule on mutual agency or representation.
terms. The creditor who extinguished the obligations will be deemed a representative of the
Who gets the benefit of 200k? It’s a matter other creditors.
between A and B to settle, its not an issue Take note, that is between creditors and debtor – the accounting of that will be a
when D makes a demand on B for payment. matter later on between the creditors.
Art. 1212. Each one of the solitary creditors may do whatever may be useful
Rules on Active Solidarity to the others, but not anything which may be prejudicial to the latter.
Between Creditors and Debtor

Remember Article 1212 saying a solidary creditor can do what can be useful to the
others but then that creditor, can it do something prejudicial to the others?
1. A debtor may pay any creditor except if any of the creditors demand
The answer is Yes. However, that creditor will be liable for that prejudicial act
payment. Payment must be made to demanding creditor.
when the solidary creditors do an accounting of the liability of each solidary
creditors. Any creditor may extinguish the obligation by whatever mode, but
there will be accounting later on between the creditors.
Art. 1214. The debtor may pay anyone of the solitary creditors; but if any
demand, judicial or extrajudicial, has been made by one of them, payment
should be made to him. Example:
D sued C1, only C1 to nullify the loan liability. Lets say D was a minor, borrowed, the
money, but did not benefit from it, maybe used it for useless things.
78
Now D sued and won, there is now a judgment in favor of D voiding the liability of D. assign it to X without the consent of C2. On the other hand, C1 can, let’s say they’re 3:
That judgment binds C1 and C2, meaning a judgment or any defense that D has C1, C2 and C3. C1 can assign it to another solidary creditor and this rule will not
against any creditor can be used against the other. apply. It has to be an assignment to a stranger.
So D can say I obtained a judgment against C1 nullifying this obligation, it’s the
obligation itself, that would be binding on C2.
ILLUSTRATION 6: ASSIGNMENT OF RIGHTS WITHOUT CONSENT OF OTHER CREDITORS
Any creditor may extinguish the obligation by whatever mode.
Let’s say C2 says forget the entire loan, we’re waiving or remitting the entire loan. Will 450k
X C1 C3
that be valid? Rights to Rights to
500k loan 500k loan
Answer: Yes, because of the rule on mutual representation. C2 can do anything on

behalf of C1, but because it’s prejudicial to C2, there will be an accounting later on. CONSENT C2 CONSENT NOT
NECESSARY NECESSARY
Rules between Solidary Creditors
1. Mutual representation or agency It’s a dated rule because the underlying reason is when you have solidary creditors,
the relationship is supposed to be based on some kind of trust or personal relation
We’ve already explained this in the recent example. Any act of one of the creditors but it’s not really the thing.
will bind the others whether they be beneficial or prejudicial, it doesn’t matter. Its up When you have an obligation, it’s really a transaction about money. So it doesn’t
to the creditors to make an accounting amongst themselves when an act of one matter who you’re dealing with as long as you get the money, you’re fine. But it’s a
creditor is prejudicial or beneficial. dated rule, so you have to remember it.
Most likely if you’re a solidary creditor, you want to opt out of this rule, so you
2. A solidariy creditor cannot assign his rights without consent of others stipulate otherwise. It’s possible. Meaning, once you’ve stipulated it in your contract, a
solidary creditor can assign its entitlement to anyone without the need of consent of
Art. 1213. A solidary creditor cannot assign his rights without the consent of the other solidary creditors. Just remember this old rule. It’s still there.
the others
3. Accountability between creditors
Example:
Art. 1215. Novation, compensation, confusion or remission of the debt, made
Let’s say it’s a loan. You don’t have money, you cannot wait, what can you do with the
by any of the solidary creditors or with any of the solidary debtors, shall
loan? You can sell it or discount it.
extinguish the obligation, without prejudice to the provisions of Article 1219.
Say, I’m entitled to 500,000. I need the money now give me 450,000. I’m good to go
you can have the money. So you discount it, you get cash now. But for you to do that,
C1, let’s say, has to assign it to the successor. Let’s say, X, X is a stranger. So C1 cannot
79
Example:
Example: Let’s say C made the demand on D1. That will also place D2 in default. And let’s say C
wants to interrupt the prescription, by making or filing a case, that case even if only
ILLUSTRATION 7: ACCOUNTABILITY TO OTHER CREDITORS filed against D1, will affect also D2 because they are solidary debtors.
C1 has a payable to D in a separate
transaction worth 1M. This was already
C1 to
D C1 due. They’re both due. So C1 said, let’s
2. Defenses
ITY OF
LIABIL just offset with this liability. This can be
D 500k
done because of 1215.
1M Loan from C1 and C2 Now, between C1 and C2 there will be Art. 1222. A solidary debtor may, in actions filed by the creditor, avail
an accounting. Who will be liable for the himself of all defences which are derived from theatre of the obligation and of
C2 1M? C1 will be liable now for the
those which are personal to him, or pertain to his own share. With respect to
prejudicial act but considering that C1 is
* C1 decides to offset his liability to those which personally belong to the others, he may avail himself thereof only
D with D’s loan to C1 and C2 entitled to 1/2, C1 has to pay or
reimburse the share of C2, the other as regards that part of the debt for which the latter are responsible.
* C1 must pay C2 500k
500,000.
Each debtor can use a defense direct to the obligation that may be claimed by one
debtor or that may be claimed by the other debtor. Meaning those personal to D2,
but only to the extent of the share of D2.
Art. 1216. The creditor may proceed against any one of the solidary debtors
Example:
or some or all of them simultaneously. The demand made against one of them
Let’s say, a creditor sues a debtor to collect 1M. The debtor can raise defenses
shall not be an obstacle to those, which may subsequently be directed against
personal to him. the debtor can say you owe me in a separate transaction 500,000. So
the others, so long as the debt has not been fully collected.
you can collect only 1M by offsetting.
For solidary obligations, the share of one debtor (when there are 2) is 1⁄2. The second
debtor was a minor. He did not get to use it reasonably. That would create a defense
that could be raised by the first debtor to mitigate this liability.
Rules on Passive Solidarity So in short, if there is solidary relationship between the debtors, the first debtor
can use a defense relating to the obligation to itself, personal to the debtor, or
PASSIVE SOLIDARITY personal to the second but only with respect to the share of the second debtor.
SOLIDARITY BETWEEN OR AMONG CREDITORS
1. Mutual Agency
You’re familiar with this concept already. Here’s an example.
80
Rules between Debtors in Passive Solidarity That’s no longer a civil obligation. Therefore, D1 cannot get reimbursement.
Reimbursement will be in order only before D2 if D1 paid an obligation paid an
1. The paying debtor is entitled to reimbursement obligation that is still due and demandable.
2. The debtor getting a remission

Art. 1217. Payment made by one of the solitary debtors extinguishes the
obligation. If two or more solitary debtors offer to pay, the creditor may
Art. 1219. The remission made by the creditor of the share which affects
choose which offer to accept.
one of the solitary debtors does not release the latter from his responsibility
He who made the payment may claim from his co-debtors only the
towards the co-debtors, in case the debt had been totally paid by anyone of
share which corresponds to each, with the interest for the payment already
them before the remission was effected.
made. If the payment is made before the debt is due, no interest for the
intervening period may be demanded.
When one of the solitary debtors cannot, because of his insolvency, What is a remission?
reimburse his share to the debtor paying the obligation, such share shall be This is a condonation. This is not when you have cancer. No. This is remission of a
borne by all his co-debtors, in proportion to the debt of each. debt. Debtor getting remission is not entitled to reimbursement. Take note, the
provision says remission of the obligation so we’re not sure if this applies to partial
remission, but you can assume that it does.
Art. 1218. Payment by a solidary debtor shall not entitle him to
reimbursement from his codebtors if such payment is made after the Example: ( Refer to illustration 8)
obligation has prescribed or become illegal. Now, if D1 convinces C: Please remit the entire the obligation. C says yes, fine I’m
remitting it in your favor.
Can D1 and now goes to D2 to collect the 500,000?
Example: No. So D2 will not be obliged.
ILLUSTRATION 8: REIMBURSEMENT If D1 paid, we assume equal sharing, Remember that rule.
D1 can collect how much? If D1 wants the benefit of getting reimbursement, it should not be done by way of
500,000 from D2. remission or condonation.
RE
E F O ON
I
D2 should reimburse D1 for D2’s Let’s say D1 can say just assign the
B PT
1 M ESC
RI share. obligation to me. So, C will assign the
R D1 If the creditor only wants one
P Of course, that reimbursement obligation to D1, that’s not a remission, it’s
cannot be halved by D1. debtor to benefit from the
C 500k an assignment of credit but because D1 is
1M Let’s say D1 paid an obligation that’s liable for half, there will be an extinction to remission, he should perform an
D2 no longer due and demandable, say the extent of 1⁄2 but the other half will be on assignment of credit to the
it’s already prescribed. standing and should be reimburse by D2. debtor he favours.
Lets say the obligation was due 20 Therefore, if the intention is to benefit
years ago, nothing was done and D1 only one debtor, the remission should be
paid.
81
ILLUSTRATION 9: ACCOUNTING BETWEEN DEBTORS

done some other way. Not remission but should be structured like an assignment
of credit or D1 will be considered as a collecting agent. Any arrangement short of
a remission. D,
USE D1
REF D
D1
D ED, CCRUE
AN YA
3. Insolvency of a debtor DEM ENALT
P D1 MUST REIMBURSE D2
( recall par. 3 of Art 1217) HALF OF ENTIRE
OBLIGATION PLUS 100K
C 1M LOAN PENALTY
What’s the consequence? There will be sharing pro rata. What does that mean?
DEMA
NDED
, D2 P
Example: AID O
BLIGA D2
PENA TION
LTY PLU
Let’s say you have 3: D1, D2 and D3. They’re all liable. D2 is insolvent. D1 paid. S
Ordinarily, each one will pay 1/3 of 1M. but now D2 could not pay his share because
he is insolvent. No asset to pay. IF DEBTORS DEFAULT, 100k PENALTY
D3 will now pay 1/3 plus 1/6. Technically, 1⁄2. But because D3 will also shoulder 1⁄2 of
the share of D2. So D1 paid the entire amount, D3 will pay his share and will share half
of the share of D2 together with D1. 1.1M because you have solidary debtors.
Follow up: So the act of D1 causing the default and triggering the penalty would still bind
Assuming D2 recovers, has the assets, liability has not yet extinguished, yes D2 will D2.
still be liable for his share. But it is not automatic. D1 and D3 still has to file an Remember the rule on mutual agency. So D2 would be liable to pay 1.1M. That’s
action, unless D2 is a good Christian. between creditor and debtor.
But that’s it, if this guy is insolvent, they have to wait it out until he has the money or How will you now share the 1.1M? 1⁄2,
asset to pay but it assumes that the obligation is still subsisting. the 1M, the principal, 1⁄2 would be D1, An act of a solitary debtor or
1⁄2 would be D2 because that’s the a solitary creditor will bind
4. Accountability of the debtor principal liability, but whoever triggered the other solitary debtors or
the or caused the penalty will be the one
creditors. However, if its
What does that mean? Similar to our discussion of the prejudicial act of the creditor. liable to pay when there’s an accounting
Example: or reimbursement between D1 and D2. prejudicial or whatever
Let’s say, you have D1, D2 they’re solidary. They’re supposed to pay 1M to creditor.If In this case, it’s D1. So D1 has to adverse affect it may have, it
they default, assume there will be a penalty of a 100,000. reimburse D2 600,000. 500,000 which is will be accounted for when
C made a demand on D1. D1 refused to pay for some unknown reason. Did not even one half of the obligation plus 100,000
they are setltling respective
bother to go to D2 to ask for the sharing. which is the penalty that accrued
So there’s default, the consequence will be, default + 100,000. because of his refusal to pay the creditor. liabilities.
So the liability now is 1.1M because of the default. So now creditor sues both of them.
Gets a judgment and executes against D2.
How much should be collected from D2?
82
Divisible and Indivisible Obligations

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages
What do you mean by the divisibility of an obligation? from the time anyone of the debtors does not comply with his undertaking.
It depends on whether the obligation is capable of performance in whole or in parts. the debtors who may have been ready to fulfil their promises shall not
A divisible obligation is susceptible of partial performance. 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
DIVISIBLE OBLIGATIONS INDIVISIBLE OBLIGATIONS
Example:
- capable of partial performance -must be performed in its entirety Let’s say you have a debtor: D1 and D2. They’re supposed to sell property. It’s
indivisible. Creditor is supposed to pay the price of 1M. The creditor paid the price
What’s the default rule when it comes to the divisibility of obligations? Is it but because of D2’s fault, debtors were unable to deliver the property.
performance in parts, meaning divisible or indivisible? C now sues both of them. C will be entitled to the value of the property, which is 1M
and then for the default, damages.
GENERAL RULE From whom can C collect 1M? It’s invisible but still joint so C can collect half from D1
and from half from D2. C cannot collect the entire thing from D1 or D2 because it’s
An obligation is indivisible joint. Remember it’s invisible but converted to a monetary liability, 1M. therefore, C
can collect 1⁄2 500,000 from D1, the other 500,000 from D2.
But there’s a liability for damages arising from the fault of D2. Who will be liable?
How do we know?
C can collect only from D2, the one who is at fault because it’s a joint liability.
Because in the rule of payment, the default rule is payment should be made complete
Remember when you have joint liability or joint obligation, there will be separation.
or the rule on integrity of payment. It cannot be payment in parts.
There’s no mutual agency, an act will affect the party privy to that act considering that
So the exception will be if partial performance is allowed. Let’s say by agreement by
D2 committed the default, then D2 will be the only liable to pay the damages.
the parties.
Of course, there are certain obligations that you cannot perform in parts. Like the
Note: Its possible that they’re jointly liable with respect to the principal obligation;
delivery of a vehicle, unless you’re restoring something so you delivery one part. But
accessory obligations like penalties can be solidary liabilities as long as the parties
generally, you have to deliver it as a whole.
stipulate it.
What is the consequence of the obligation is divisible? Does it destroy the default rule
of joint liability?
It remains joint. The indivisibility of the obligation does not create a solidary
obligation.
Obligations with a Penal Clause
For example, you have solidary debtors obliged to deliver a car, but that doesn’t
mean they’re solidary liable. In which case, you still follow the rules with respect to When you have an obligation with a penal clause, you have an obligation whereby
joint obligation. If you want to put the debtors in default, you make a demand on the debtor in case of default is obliged to perform an additional prestation or
both if you’re the creditor. obligation or undertaking.
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You as borrower, you have this investment opportunity, where you can either get 0 or
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
thrice your investment. The problem is you only have 10M. So you’re choice will be
indemnity for damages and the payment of interests in case of noncompliance,
you invest or you pay.
if there is no stipulation to the contrary. Nevertheless, damages shall be paid if
But let’s say the interest rate right now is 10% per annum, will you pay or will you
the obligor refuses to pay the penalty or is guilty of fraud in the fulfilment of
invest? In order for you to invest you have to borrow from a bank, interest is 10% per
the obligation.
annum.
The penalty may be enforced only when it is demandable in
When you fix your penalty, it depends on your purpose, if it’s to liquidate damages,
accordance with the provisions of this Code.
then that’s fine, meaning you will be happy with getting that amount in case of
breach. But let’s say you want to insure compliance, in this situation; you think the
Example: penalty will work?
The only obligation was to convey the property but converted to a monetary No. In fact in this case, the penalty will be an incentive to default. Why? There will
obligation 1M. There’s a penalty triggered by the default. Let’s say there’s a fixed be a difference of 4% but there may be other liabilities. Will that be a concern? No,
penalty 100,000 and that 100,000 will be a penalty. because the general rule is when there is a penalty it takes the place of liquidated
A penalty therefore is an extra obligation paid or performed by the debtor in damages.You will compare immediately that there is a difference of 4%.
case of breach or default. Rather than borrowing from another bank, you just default then you just pay 8%.
Why would that be an incentive if default entails liability for damages? Because if
Why do you have a penalty? What’s the use of having a penalty? there is a stipulation of a penalty, the penalty covers everything, unless the
parties agree otherwise or there is some exception entitling the creditor to
extract, but the general rule is the penalty will be the limit of recovery. So this
PURPOSE OF THE PENALTY will be the cap.
LIQUIDATED DAMAGES: INSURING PERFORMANCE/COMPLIANCE:
Whatever happens, the additional liability will be 8% as against 12%. So in this
the parties establish beforehand what should be Because the penalty may be considerable, the scenario, I’d rather default now because if I’m going to borrow I incur an additional
paid in case of default or breach. Theres already debtor will think twice whether to default cause here I will already fix the costs at 8%. So you have to factor in first the
a fixed amount. There is no need for the creditor because it will hurt your pockets. It’s a means of difference. So there is an incentive to default. Second you have to remember the
to establish what should be the entitlement of ensuring performance of the obligation.
background rule, if there’s a penalty, that penalty will be the limit of recovery
the creditor in case of breach. Its enough that
theres a breach. Automatically, the amount fixed
unless there is an agreement to the contrary or there is an exception allowing
by the parties will be the amount payable or the recovery of extra.
liquidated damages.
Art. 1227. The debtor cannot exempt himself from the performance of the
Example obligation by paying the penalty, save in the case where this right has been expressly
Borrower owes, under a loan contract, 10M. reserved for hi. Neither can the creditor demand the fulfilment of the obligation and the
Interest 5% per annum, penalty in case of breach additional 3% per annum of the satisfaction of the penalty at the same time, unless this right has been clearly granted
entire amount. him. However, if after the creditor has decided to require the fulfilment of the
You’re the borrower, today is the due date. obligation, the performance thereof should become impossible without his fault, the
penalty may be enforced.
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Example:
You have a seller, you have a buyer. Sale of a property. Buyer ready, willing and able So lets recall.
but the property not so. So there’s a penalty. In case of breach, X amount shall be due Based on the purpose of the penalty: reparation (which serves as liquidated
from either side. There’s a penalty embedded in the contract. There’s a breach by damages )or punitive (it enforces or it insures compliance).
either party, X amount must be paid as penalty. Can seller say I will just pay the
penalty and not convey the property? No. It’s only a subsidiary penalty. In case of non- GENERAL RULE ON REPARATIVE PENALTIES
conveyance, the consequence will be seller may be required to pay the penalty. That’s
the consequence of breach. The option will be at the buyer’s side. The buyer can say there can be no recovery beyond the penalty. Nothing over and above the
specific performance or convey the property or I will collect penalty. The penalty substitutes as indemnity for damages and payment of
the penalty because it’s a subsidiary liability or an alternative liability. The seller cannot interest incase of breach.
just opt to perform the penalty.
The exceptions are if the parties agree otherwise.

Art. 1230. The nullity of the penal clause does not carry with it that of the principal
How do you agree otherwise in this case?
obligation. The nullity of the principal obligation carries with it that of the penal clause.
This one you have to remember when you do contracts.

It’s an accessory undertaking, so if you have a void penalty, it does not affect the Let’s say you’re the creditor, when you see a penalty, automatically you add:
obligation, unless you have a void obligation, then it affects the penalty.
The penalty may be subsidiary or alternative. What does that mean? “this penalty shall be in addition to other rights and remedies of the creditor
If it’s subsidiary or alternative, the penalty replaces the obligation in case of non- under this contract”
performance. In case of breach, there’s a penalty that will substitute the prestation. Or
it can be joint or cumulative, meaning non-payment of the price, you just don’t pay This clause is to clarify that the penalty is on top of other things that the creditor may
the penalty, it will be price + penalty. So let’s say additional 20%. The penalty is in get. Otherwise, if you forget that clause, you will be limited to the penalty and that
addition to the principal obligation. will be a problem especially if the penalty is not adequate to cover the consequence
of the breach.
SUBSIDIARY/ALTERNATIVE JOINT/CUMULATIVE
This will be the limit of liability.
In case of default/breach the penalty replaces the Non-payment of the price would obligate the
Principal, Interest and Penalty. INSTANCES WHEN CREDITOR CAN
obligation. It substitutes the prestation. debtor to pay the price PLUS the penalty.
However, if D refuses to pay the COLLECT MORE THAN PENALTY
penalty, L can get damages. Not STIPULATED
because there is a stipulation but
DEFAULT RULE because the default by D on the 1. When the parties stipulate
PENALTY, UNLESS THE CONTEXT REQUIRES OTHERWISE, IS ONLY ALTERNATIVE OR SUBSIDIARY payment of the penalty itself. 2. When the debtor defaults in payment of
So that’s the other exception. When penalty
the debtor refuses to pay the penalty.
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There is a separate basis to claim damages aside from the penalty. An act of fraud,
then you can collect damages.
If the parties stipulate a penalty, it will be in their contract, it will be the law that will
govern the parties. You cannot do away with the penalty stipulated but you can go to
court but the court cannot set aside the penalty. What the court can do is only reduce
the penalty.
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable
WHEN THE COURT CAN REDUCE THE PENALTY
IRREGULAR PERFORMANCE PENALTY IS UNCONSCIONABLE OR

INIQUITOUS
When there is performance but slight delay. It will The court can reduce but cannot set aside
only apply if the penalty is meant to be a the penalty. Its a penalty paid regardless of
reparation ( liquidated damages) the extent of the damage. Its purely
punitive.
The court may decide what the correct level
of penalty is.
DEFAULT RULE
THE COURT CANNOT REMOVE PENALTY. THEY MAY ONLY REDUCE IT.
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TUESDAY 1 MARCH 2016
RECAP ON OBLIGATIONS WITH A PENAL CLAUSE

That’s what we mean by liquidated damages, the parties fixing beforehand the cost of
the breach. And the other one is to ensure or compel performance. There will be an
accompanying disincentive for a breach.
We were discussing obligations with a penal clause. So somehow it will ensure that the debtor will perform.
We discussed last time an example of a situation where you can have a penalty that
can be an incentive for a breach rather than for compliance.
PENAL CLAUSE So you have to, if you're doing a contract, make sure the penalty must be severe
enough that it will force performance. But not so severe that it will be rendered
Penal clause is an accessory undertaking by the debtor to assume a greater
unconscionable by the court and it will be reduced.
liability in case of breach
 
Take note, the penalty is triggered by the breach; carrying with it an additional What will be unconscionable would depend largely on the transactional context.
prestation to be performed by the debtor. As you can gather from the case I assigned,
The penal clause has a twin purpose: In Filinvest, he engaged a contractor. There was a penalty imposed; 15,000 for every
1) serve as liquidated damages or day of delay. And the total amount involved; you have to see there how the court
2) ensures or compels performance compared the total penalty to the total contract value and then compared to the
actual accomplishment.
In case there is a breach, the party agrees beforehand that this would be the Can you measure accomplishment of a contractor?
cost of the breach by the aggrieved party. Yes. Because there will be deliverables. Somehow these professionals will have a
measure, or a way for each deliverable. The Court came up with a determination that
Example: there's performance of up to 94% and there's a penalty that is not reflective of the
So there is an amount paid for the purpose of let’s say, a contract of sale worth P10 default.
Million. In case of breach, the parties agreed that the penalty will be P1 Million. So the court said, it's unconscionable. This case shows how its ordinarily done.
In case of liqiuidation, there’s no need to prove the damage caused to the When can the court reduce the penalty depending on the purpose of the
aggrieved party; there would be a fixed penalty to be paid by the party who penalty?
breached.
1) Liquidated damages. It's for preparation. It's to compensate the aggrieved party
for the damage caused by the breach. Therefore, the court can reduce the penalty If
its for reparation and there is partial or irregular performance. Because the damage in
LIQUIDATED DAMAGES COMPEL PERFORMANCE
case of an irregular or partial performance is slight, the penalty should have been
Parties fix beforehand the cost of the lessened.
An accompanying disincentive for a
breach. No need to prove actual
breach
damage.
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2) Punitive: In these cases there's no point in discussing the extent of the damage or You have to identify also if the penalty is subsidiary or alternative - the penalty
performance. But again in that case, the Court will decide whether the penalty is replaces the obligation in case of non performance.
unconscionable. Let's say for example, if a party cannot deliver certain properties, the object of a
It's considered unconscionable if the court can reduce the penalty. contract of sale, that party shall pay x amount. Then that is a subsidiary or alternative
penalty.
Again, just reduce the penalty, NOT removing altogether.
In the end, the court may waive that unconscionable magic wand and reduce and However, it could be a joint or cumulative if the other party does not deliver. Then the
it doesn't matter whether if it's compensatory or punitive. As long as the court other party will be liable on top of specific performance for the payment of x amount.
finds it's unconscionable the Court will just reduce. That is joint or cumulative penalty.
Unless the context or there is a clear stipulation showing otherwise, the penalty
Of course your best bet here is if you're the one who sustains the validity of the is deemed to be subsidiary or alternative.
penalty. You go back to our discussion with respect to a contract being the law Of course, even if it's subsidiary or alternative, the debtor cannot just choose to
between the parties. You show the process by which the parties entered into a perform the penalty. It's the always the option of the creditor, unless there is an
contract: that they negotiated, they were express grant in the obligation or contract itself.
fully informed, they willing consented to the  
If you want to sustain the
terms and conditions, they discounted all
the risks involved, then somehow, it's penalty, you have to show the
possible for you to convince the court. circumstance under which the THINGS TO LOOK AT WHEN DEALING WITH PENALTIES:
Because if the court will just see numbers, parties entered into the
let's say you have a P10 Million contract and 1. Is it a punitive penalty or penalty that takes the place of liquidated
contract and agreed to the damages?
then the penalty already ballooned to 5
million. Immediately the Court will say that penalty. 2. Is there an applicable standard to follow to ensure the penalty wont be
it is unconscionable. It's a 50% penalty.  considered unconscionable by the courts?
3. Is it a subsidiary/alternative or joint/cumulative? ( Default rule: Subsidiary
Another thing is that you have to identify the applicable standard. unless stated otherwise)
Let's say a penalty in a construction contract. There's an agreed standard for that.
There's a standard which says 1/10 of 1% for everyday in delay.
Some things I want to emphasize when you’re dealing with penalties:
That's an industry standards so it's very difficult to regard it as unconscionable
because it's acceptable.
1) If you're on the debtor's side and there's a penalty involved: If its acceptable
If you're doing government contracts, you need to have cap of a maximum of 10% of
to you: be quiet
the total contract price. But if you are on the side of the one who's debt benefits the
The moment that the penalty is fixed, that would be the limitation of liability. There
penalty is created, it will form the cap and there's no problem with that.
will be no additional liability on top of the penalty. That's the cap.
So you could just say 1/10 of 1% in every day of delay.
If the debtor will be sued, and there's a penalty clause, the penalty will be the cap
 
unless there is a stipulation to the contrary or there is a separate basis to claim
additional damages.
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2) If you're on the creditor's side, and it's acceptable to you: add something else. Take note, there are other modes of extinguishing and obligation other than
those mentioned in Article 1231.
What do you add? The last paragraph provides additional modes of extinguishing an obligation like
"The penalty is in addition to any full rights or remedies that the creditor may have prescription.
under this contract or relevant laws.” What is prescription?
This provision makes sure you’re not limited to recovering only the penalty in case of After the lapse of a certain period of time, the obligation is to be extinguished.
breach. Let's say there's a breach of contract. A party to a contract violates the contract.
If there's a violation then the other party will have a cause of action. If it's based on a
written contract, the right of action will be prescribed in ten years counted from the
time of the breach.
EXTINGUISHMENT OF OBLIGATIONS If nothing is done within that 10 year period, then the right of the creditor will
prescribe or the obligation of the debtor will prescribe.
Another example of another mode of extinguishing an obligation not here is waiver.
You can have a waiver, it will also extinguish the obligation. The creditor waiving his or
Art. 1231. Obligations are extinguished: her entitlement under the obligation would extinguish it.
1) By payment or performance
2) By the loss of the thing due Let's start with payment.
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 PAYMENT
Other uses of extinguishment of obligations such as annulment, rescission,
fulfilment of a resolutely condition, and prescription, are governed elsewhere
in this Code. Art. 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation.
We'll start with Article 1231. These are the modes of extinguishment of an obligation.
We start with
1) payment
2) loss of the thing due CASE
3) condonation 1. GO CINCO V. CA (SPA)
4) confusion Tender of Payment
5) compensation
6) novation. In the case of Cinco v CA, Manuel Cinco had a loan with a MTLC.
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But Cinco to make sure that there would be payment to MTLC, he issued a special
ILLUSTRATION 1: GO CINCO TRANSACTION
power of attorney authorizing Ester to claim the loan proceeds.
However, there was a clause with the discharge of the REM, because it is the same
1M LOAN
GO CINCO MTLC REM that Cinco used.
Ester went to the bank with her SPA to claim her proceeds. But the bank said that
SECURED WITH REM before she can get the proceeds, she has to sign the discharge of mortgage to cause
the cancellation of the REM in favor of MTLC so that the discharge which is one of the
stipulations of PNB, and not of MTLC.
1M LOAN
You have property given to MTLC as security. Property was mortgaged to MTLC for
GO CINCO PNB
let's say P2,000,000. That same property was also mortgaged to PNB after this
SECURED WITH REM mortgage.
So PNB now asks that this mortgage be cancelled first before PNB releases the
proceeds so that the property has no other liens aside from that of PNB.
But technically if you look at it, if PNB pays the principal obligation and there is
MTLC granted the loan and Cinco has to pay P700,000. There's an obligation to pay an acknowledgment of full payment, this one should automatically be
and this would be the simplified due date may be on day 2. With the penalties, the discharged.
total amount for the payment of principal, interest and penalty is now P1,000,000. Of course it is a formality that you would have to get the discharge of mortgage.
This was secured by a real estate mortgage. Actually, this is how the bank works: if you're going to a bank, you have a loan take
In case there is no payment on due date, MTLC could foreclose the mortgage and out. Before you could get the proceeds of the loan take out, you must discharge of
use the proceeds to pay the obligation due. the first mortgage.
Because Cinco didn't have enough money to pay MTLC, he went to a bank (PNB) to So when Ester found out the mortgage, she refused to sign the discharge. And
apply for a loan and pay MTLC. technically Ester was to foreclose the mortgage.
This is what you call a loan take out. According to the Court, payment is not only by money.
Basically PNB will be assuming the loan and getting the entire arrangement. When the law speaks of payment it doesn't mean only payment of money but it
Let's say you don't want your bank, you go to another bank and the other bank will means the performance of the prestation due under the obligation ( Art. 1232).
take out your loan from that other bank. So it could be the performance of the service required mandated by the obligation or
There was a catch stated in the loan contract between PNB and Cinco- there must be some other object or prestation due under the obligation.
a discharge of the mortgage
Ester should discharge the Real Estate Mortgage.
But before Ester discharges the Real estate mortgage, Cinco gave a special power of
attorney (SPA) to claim the proceeds.
You'll learn later on that when you have this, that PNB is a debtor with respect to the
release of the loan proceeds to Cinco. Now later on you'll learn that when you have a
contract and the debtor should pay the right creditor. It should be Cinco that should
get the loan proceeds.
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TENDER OF PAYMENT If I accept it, then we have a completed payment; the obligation would be
extinguished. If I refuse and it's unjustified, then we have mora accipiendi. There's an
unjustified refusal to complete payment, there must be a remedy.
TENDER OF PAYMENT  
You do this by consignation.
“Showing the money”
or when debtor manifests his readiness, willingness and ability to pay the
obligation on due date.
EFFECTS OF VALID TENDER OF PAYMENT
What is Tender? ACCEPTED BY CREDITOR OBLIGATION EXTINGUISHED
For there to be Tender of payment the debtor must show the money. MORA ACCIPIENDI
REFUSED BY CREDITOR
In this case the court cited the case of Far east bank. REMEDY? CONSIGNATION
In that case, the court defined when we have tender of payment. When the debtor
manifests his readiness, willingness and ability to pay the obligation on the due
date. And that means in case of a loan, the debtor must be ready to hand over the
If you analyze this case, was there tender of payment? No because there was only an
cash needed to pay the obligation. That readiness is shown only by actually showing
SPA given and in fact Ester went to the bank, and the bank didn't even say we're
the money to the creditor. Short of that, it will not be tender of payment.
ready to pay. We'll pay if you give the discharge of mortgage.
So in this case, there was tender of payment. The activity of Cinco was considered
The court ruled that Ester was acting in bad faith since she wants to keep the property
by the Court to be tender of payment.
instead of discharging the mortgage.
This is the definition of tender of payment: it is not payment. When you tender
payment, you show payment to the creditor. The debtor manifests the readiness,
willingness, and ability to pay the obligation by actually showing the payment to the
creditor.
You having a notarized letter saying I strongly manifest my readiness willingness and
ability to pay is not tender of payment.
When you say tender of payment it's done only by showing the payment whether it's
cash or if agreed upon, by check. You have to show it.
You cannot just give a letter as that would not be enough. Now tender of payment is
preparatory to payment. It ripens into payment if accepted by the creditors.
So let's say you tender payment and you show me the money, and say this is my
payment.
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PAYMENT Go Cinco obtained a loan from MTLC. IT was evident in the PN and was secured by a
mortgage with one of the properties of Go Cinco in leyte. It was provided in the PN
that is with x interest.
Art. 1232. Payment means not only the delivery of money but also the To pay the loan, Go Cinco secured another loan from a bank and then paid the
performance, in nay other manner, of an obligation. mortgage with the same property subject to the mortgage of MTLC.
PNB required that before they release the loan, MTLC must release the mortgage.
Why would PNB want to cancel the mortgage in the previous transaction?
PAYMENT
The performance of the prestation of the obligation. If mortgage 1 was still in effect, what will that be? It says in mortgages, you can have
Payment is not confined to the payment of money. It is comprehensive to cover as many mortgages as possible. Its possible as long as the debtor will accept.
the performance of any obligation or prestation. Lender was given an SPA by the Go Cincos to collect the proceeds. Lender however,
refused to accept the SPA to collect the payment from PNB. Instead they opted to
foreclose said property.
TENDER OF PAYMENT Because the lender refused to sign the deed of cancellation of mortgage and collect
the loan from PNB by virtue of the SPA, lender was in mora accipiendi.
"Tender of payment is not payment. Tender of payment is just showing the He unjustly refused to accept the proceeds of the loan.
payment. And that doesn't ripen into a payment until it is accepted by the
creditor." Was there a tender of payment?
No. The court ruled that there was something akin to a tender of payment. They
ordered lender to collect loan from PNB.
If the creditor refuses without justification the payment then you have a situation
of mora accipiendi or default on the part of the creditor in which case there will be no IF you look at the case, there really was no tender of payment. Because if you’re
payment. the debtor, you have to hand over actual payment for it to constitute a tender of
So if there is no acceptance or if the creditor rejects the tender of payment, the payment. Short of that is not a tender of payment. So the SPA here cannot
remedy of the debtor is to consign the payment in court. And only in that case will legally be considered tender of
there be a completion of the payment. payment.
However, its peculiar in this case Because of the peculiar
because cash will readily be available situation, the court considered
CASES ON PAYMENT if only the lender signs the document
what the Go Cinco’s did AKIN
1. GO CINCO V. CA ( Mortgage) but lender unjustifiably refused
( maybe he was interested in the to a tender of payment.
What constitutes a valid tender of payment?
property) Though generally, an SPA is NOT
So in this case, the court said, this is tender of payment
equal to tender of payment. 
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5) where payment should be paid, and

The court said that since the creditor refused to accept payment, the court recognized 6) other particulars.
that there is no payment and that there was no follow through of the complete
payment through consignation. These matters may be agreed upon by the parties. If the parties do not agree on
But nevertheless, the court stopped the accrual of interest subsequent to the refusal these matters then you have the default rules. You follow the mandate of the
of the creditor to get the payment from the bank-- the loan proceeds of the debtor law on these particulars of payment.
from the bank-- which i said is a peculiar conclusion.
Because as I said, if there is no payment then interest should continue to run.
IMPORTANT RULES ON PRINCIPLES OF PAYMENT
What should have been done would have been an award of damages to offset the
accrual of interest.
1. IDENTITY the presentation mandated by the
obligation should be the one
performed by the debtor.
GENERAL RULE
2. INTEGRITY payment must be complete.
if there is no payment and the obligation earns interest, interest would
continue to accrue.
However, if there is mora accipiendi then a penalty, if due under the contract will Art. 1232. Payment means not only the delivery of money but also the
never accrue for there is no default -- only the creditor is in default. performance, in nay other manner, of an obligation.
But as I said Go Cinco is more relevant in illustration to you what the meaning of
payment is and the concept of tender of payment and the consignation.
WHAT DOES AN OFFER CONSTITUTE? 1. IDENTITY OF PAYMENT
If it is a monetary obligation, it is the showing of the payment, whether cash or if In relation with the case of Cathay:
agreed upon, a check. The obligation mandated a business class ticket for the couple. It cannot be
more, it cannot be less.
For there to be a valid payment there are certain legal requirements with Even if it is more, the creditor can refuse to accept the payment of greater value.
respect with T h e c re d i t o r c a n d e m a n d t h a t t h e re m u s t b e p e r f o r m a n c e o f t h e
1) who should pay, exact prestation required by the obligation.
2) who should be paid,
3) when payment should be made, Other examples and illustrations:
4) how payment should be made,
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Example: Wagyu
So let's say if the debtor under the contract is obliged to deliver a pound of Remember the default rule when it comes to the divisibility of obligations?
fresh wagyu, it cannot be rib-eye. It has to be same thing. It also cannot An obligation is presumed indivisible.
be angus beef. It must be the one stipulated as per contract whether the payment is
more valuable, the creditor can refuse. Why?
Because of the rule on integrity of payment — that payment should be complete
Example: Rings unless the parties agree on staggered performance.
Example:
Art. 1244. The debtor of a thing cannot compel the creditor to receive a Let's say for example in ring case, only one ring was sold so the obligation should be
different one, although the latte may be of the same value, as or more proceeds plus unsold ring.
valuable tan that which is due. Right?
Obligations to do or not to do, an act or forbearance cannot be substituted by In my discussion earlier, I said that what was returned instead was a different ring
another act o forbearance against the obligees will. which violated the rule on identity of payment.
There was a case before, there's a contract. There's a principal and a selling agent.
The principal had two (2) rings. The agreement was the agent would sell. If there's a Now, there was also an offer to pay the proceeds in installments. Could that be
sale, there should be remittance of proceeds. If there's no sale, return of the ring. done by the debtor over the objection of the creditor?
What happened was the agent sold one (1) ring to a stranger, X. Therefore The answer is no because of the rule on integrity of payment.
pursuant to the contract, the obligation is to return one ring and to remit the
proceeds. Payment should be complete unless there is an agreement to the contrary or
Let's just go to that identity of payment. In this case, the agent offered to return a ring somehow the creditor accepts.
different to the unsold one. And the ring offered to be returned was in fact more Of course, in reality, if somebody pays you, you just accept — always —whether it is
valuable than the unsold one. partial and then you say "received partial payment".
It is better to have something than nothing but if you're the legal type, you can say
The SC said it is the option of the creditor to refuse the delivery or the performance of "i refuse because it is incomplete"
a different prestation even if the offered prestation is more valuable than the That is the right of the creditor.
original prestation agreed upon by the parties because of the rule on identity of
payment — the exact same prestation should be performed y the debtor. However there are certain exceptions to the integrity of payment rule.
2. INTEGRITY OF PAYMENT
Art. 1233. A debt shall not be understood to have been paid unless the Art. 1234. If the obligation has been substantially performed in good faith,
thing or service in which the obligation consists has been completely delivered the obligor may recover as though there ha been a strict and complete
or rendered as the case may be. fulfilment, less damages suffered by the obligee.
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What will happen in that case?

The Court will fix a period within which the debtor should perform that
Art. 1235. When the obligee accepts the performance, knowing its incomplete part of the prestation and of course there will be liability for
incompleteness or irregularity, and without expressing any protest or damages on that part of the breach.
objection, the obligation is deemed fully complied with.
Remember if there's a breach, regardless of the extent of the breach there will always
be liability for damages. You have to relate that to this one -- the exception to the rule
on integrity of payment.
EXCEPTIONS TO THE INTEGRITY OF PAYMENT RULE
If the debtor performs the obligation substantially in good faith, then that can be
In case of substantial performance by the debtor in good faith of the considered as an exception the rule on integrity of payment. However, that does not
mean that the debtor will be freed from liability.
obligation.
There will liability for the slight breach.
In case of waiver of the creditor of an incomplete or irregular performance.
2. In case of waiver of the creditor of an incomplete or irregular performance.
( Art. 1235)
Take note, this is what you call a waiver.

1. In case of substantial performance by the debtor in good faith of the If it is a waiver, what is required?
obligation. ( Art. 1234) There must be awareness that there is irregular or incomplete performance -- that's
the premise of the waiver.
In this regard you have to remember our discussion before with respect to resolution. So if the creditor should know the incomplete or the irregular performance and yet
When can a creditor ask for a resolution? accepted the performance, then there will be a waiver.
When there is substantial breach.
Take note of the word used by the law. The creditor accepts an irregular or
If there is only a casual or slight breach, incomplete performance.
If there is a slight breach, the
there can be no resolution. Acceptance is different from mere receipt.
Meaning, in that case there is substantial court will fix a period within
performance. If there is no substantial which the debtor should perform So, what's the difference?
breach, there is substantial performance. the incomplete part. Here is an example of a waiver.
However that doesn't mean that the Example: Lease Contract

debtor is freed from the obligation of You have a creditor and you have a debtor.
performing the balance -- meaning that part subject to the slight breach. First Scenario:
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Let's say pursuant to a lease contract, the debtor should pay an annual rent of CASES ON INTEGRITY OF PAYMENT
P100,000 for the lease of a property.
However, debtor only paid P95,000 upon demand of the creditor.
If the creditor accepted the payment and issued an official recepit saying "full 1. INTERNATIONAL HOTEL CORP. V. JOAQUIN ( Foreign Loan)
payment as per contract”. This is acceptance. Substantial Performance
Joaquin entered into a contract with IHC to provide consultancy services consisting
Second Scenario: primarily of procuring a foreign loan for the construction of the hotel, to be
"received payment of P95,000." This one, is mere receipt. guaranteed by DBP.
It may be disputable whether there is waiver because this document only states The proposal encompassed nine (9) phases but the IHC Board of Directors approved
"received". only of phase one to phase six.
Here there is awareness of incompleteness because if the creditor knows that the In exchange for his services and for those which he would provide outside the scope
amount is due and yet placed in the official receipt, "full payment as per contract", of the technical proposal, he requested P500,000 but is also amenable to receive
that will amount to a waiver. shares of stock instead in consideration of IHC's financial condition.
The Court in one case said you must distinguish. The arrangement was like this, IHC would get financing from a third party.
Receipt is not acceptance amounting to a waiver. It can just be a statement of a To secure payment, there will be a guarantee by DBP that should there be no
fact that payment was indeed received. payment, DBP would assume the obligation to pay -- that's the role of DBP, in order
So if you are the creditor and you received an incomplete or irregular performance? to strengthen the likelihood of payment to convince the lender to finance this
You get the money but at the back of your mind, project.
"if I take this money, I may be waiving the P5,000" because of that rule
on acceptance of incomplete performance is a waiver. So first, the SC discussed somehow-- as a review--the issue of constructive fulfillment
So, you should issue a receipt stating that "received P95,000 in partial payment of the of a condition.
P100,000 loan." What is that issue all about?
You are in effect asserting that you still have a claim to the balance of the That the debtor prevented the fulfillment of the obligation.
P5,000. Was there constructive fulfillment of the obligation?
Did IHC prevent the fulfilment of the obligation?
No.
ACCEPTANCE RECEIPT
The obligation of IHC is subject to a suspensive condition.
it implies awareness of incomplete or it is just a matter of fact statement The fulfillment of the obligation would trigger the obligation of IHC to pay the fees.
irregular performance that an amount is received without So, if IHC prevented the fulfillment of the obligation to funding then IHC will be
any conclusion on whether it's an obliged to pay not withstanding the non-fulfillment of the condition in reality.
acceptance of an irregular Because the rule to be followed would be the constructive fulfillment of the condition.
or incomplete performance. The condition is that the obligation shall be deemed fulfilled when the obligor
voluntary prevents its fulfilment ( Art. 1186).
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What did the SC say? This is how you do it.

The law uses the term "voluntarily prevents"-- it means that there need not be Whatever contract you make and you are the one to receive payment, you should
malice or a deliberate intent to prevent. have certain milestones or accomplishment.
A debtor can voluntarily prevent the happening of the condition by a negligent act, Let's say I accomplish a phase, it would equal to a certain percentage until you
let's say an accident, and that would still qualify as constructive fulfillment. complete the 100%.
But in this case, the SC said IHC did not intend to undermine the efforts of Joaquin. This problem could have been addressed if the parties just stipulated that for
What does that mean? each deliverable, there would be a corresponding rate and a corresponding
Well, if you go through the discussion, the SC basically said that in fact IHC followed payment until you complete the total fee.
the recommendation of J&F Consultants.
So, in that case, it is not even relevant anymore to discuss if there has been This way you will have a schedule of payment which was lacking here in this case.
prevention in the fulfilment of the obligation because what IHC did was to follow the There is a fee but there was obscurity in the performance of the major deliverable,
advice of J&F. getting financing.
So when the financing was not procured, the SC easily said that there was no
What about the substantial performance? substantial performance but if there is a breakdown or a schedule of payment and
Has there been substantial performance or QUANTUM MERUIT milestones for the accomplishments, the substantial performance would not even
completion? The SC ruled that there is no matter but what we just have to determine was the milestone achieved and getting
Payment be proportioned
substantial compliance because the whole paid the corresponding value.
with the services rendered.
exercise was for the purpose of getting
financing for the project. 2. MIAA V. DING VELAYO ( Sports Complex)
When there is no financing, we cannot speak of Waiver of irregular performance
substantial completion for there is nothing-- there is no completion at all and yet there
needs to be a payment made based on the measure on quantum meruit -- based on Under the contract, Velayo had certain undertakings that must be fulfilled such as
the services done, what the services would have merited. further development of the property. These undertakings are never fulfilled. So there
must be a breach, right?
But Velayo continued to pay rentals and MIAA received such and did not terminate
So, in this case, the SC just explained to you what substantial performance is: the lease contract.
performance of the prestation mandated by the obligation. In fact, MIAA wanted to raise the
The obligation simply demanded financing. It was never procured by the consultants. amount of the lease. MIAA continuously accepting rentals
Therefore, the SC said that these for the property without asserting
Let us now analyze this, J&F had six phases to complete. acts of the the lessor, MIAA, the need for the agreed upon
amounted to waiver of irregular
No breakdown? What about the breakdown? So if there is breakdown, would it have performance of the mandated
improvements amounted to a
helped the consultants? prestation. Irregular in the sense waiver of the irregular
performance
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that there is no development but there was payment of the rental. In that case,
the SC considered that as a waiver.
Take note, in this case, the SC enumerated the facts showing that MIAA knew fully
Art. 1251. Payment shall be made in the place designated in the obligation.
well the deviation of Velayo from the mandate of the contract and that actions taken There being no express stipulation and if the undertaking is to deliver a
by MIAA to show that it was accepting the performance by Velayo even though determinate thing, the payment shall be made wherever the thing might be at
complete in respect to those undertakings we mentioned earlier. the moment the obligation was constituted.
Now, what about the option? In any other case the place of payment shall be the domicile of the debtor.
What's the objection of MIAA in that option? If the debtor changes his domicile in bad faith or after he has incurred in delay,
There was a clause in the contract that upon expiration of the lease, the lesee has the the additional expenses shall be borne by him.
right to renew the lease at its option. And the objection was that it violated the
mutuality of contracts-- basically, one party deciding the contract similar to our notion Where should the debtor pay?
of a purely potestative suspensive condition dependent on the sole will o the debtor. You have to distinguish the prestation, whether it is an obligation to give, to do, or
So it's only one party deciding whether the obligation shall continue. not to do. If it is an obligation to give, you must also classify.
So you have to understand this one, if you have that option, it is like having an If it is an obligation to deliver a determinate thing: in the absence of any
outstanding offer. So one party is making an offer. stipulation under the contract, it must be delivered at the place where the thing
In this case, it's as if the lessor is saying that at any time within a certain period might be at the perfection of the contract.
prior to the expiration of the lease, the lessee can automatically extend the
contract. If it is a payment of money, the default rule is that it should be at the domicile--
So it is an outstanding offer. basically the habitual residence of the debtor.
Anytime it may be accepted by the lessee by just saying "ok, i'm now extending That's why when you borrow from the bank, normally you will see the contract of loan
pursuant to that provision." And then what will be the terms? a stipulation to the contrary that you will have to remit to the bank at its designated
Same terms and conditions. office or branch the payment accruing or there will be a debiting from your account or
That's why you have to be careful. some other arrangement but not payment at your domicile or residence.
The moment you place, "at the option of one party," if you're on the cautious side,
you always add, "upon the terms and conditions to be agreed upon." Who pays the expenses?
So that it will negate the unilateral right of one party to extend the contract. In absence of a stipulation, the debtor shoulders the expenses of extra-judicial
Otherwise, you will be tied down to the same contract under the same terms and payment.
conditions at the instance of just one party.
WHERE SHOULD PAYMENT BE MADE?
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What about payment from an incapacitated/heavily medicated person? Should you

WHERE SHOULD PAYMENT BE MADE?
accept?
No.
GENERAL RULE DOMICILE OF DEBTOR
Why?
Payment can only be considered valid if its made to a person with legal capacity. An
DETERMINATE THING IF NO EXPRESS STIPULATION,
insane person does not have legal capacity. If its made for example, by a minor that
WHEREVER THE THING MIGHT BE AT
payment can still be recovered.
THE MOMENT THE OBLIGATION
WAS CONSTITUTED
3. CARANDANG V. DEGUZMAN
SUM OF MONEY DOMICILE OF DEBTOR Payment by third party
So Carandang spouses and the De Guzman started a broadcasting company. The
share was 54% to Carandang spouses and 46% to De Guzman. So they started out
However, that does not include the setting of collectors by the creditor in case with 500k capital. As the capital stock increased, Carandang would pay for the
of collection in the domicile of the debtor. shares of De Guzman to keep the partition the same. The case said that C and
DGs allegedly had an informal agreement that DG would offer his expertise in
exchange for C paying the stock.
WHO SHOULD PAY? Somehow, things went sour and C demanded back payment for DG’s share in the
stock.
GENERAL RULE
ILLUSTRATION 1: THIRD PARTY PAYMENT
The debtor should pay the creditor. A creditor can refuse, technically, payment
by a third party.
OBLIGATION TO
DE GUZMAN PAY CAPITAL
STOCK
So, the rule is the debtor should be the one paying the creditor.
Let’s say I owe you 1 million pesos. Today’s the due date, I did not pay. CARANDANG ACTUAL PAYMENT
So, you follow the rule, it should be I should pay, right? Let’s say Acuyong offered to (THIRD PARTY)
pay 1 million.
Can you legally refuse to accept payment? Yes.
Why would you refuse?

So here you can see, C as 46% owner of the company had an obligation to pay his
A creditor has the right to refuse payment from the third party. What if the
share every time the stock increased but it was DG who paid pursuant to their
proceeds are a product of a criminal undertaking such us money laundering? You
informal agreement.
wouldn't want to get entangled in that.
How would you charactererize this?
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Third party payment. Example: 1M Loan

Should Carandang repay De Guzmans?
Yes.
To what extent? What is the rule? If the third party pays an obligation of a debtor to ILLUSTRATION 2: 1 MILLION LOAN
the creditor, what is the rule?
The debtor should reimburse first. 1M DEBT
The only issue is, to what extent? What will the third party pay to the extent of DEBTOR CREDITOR
reimbursement?
Art. 1236. The creditor is not bound to accept payment or performance by a

third person who has no interest in the fulfilment of the obligation, unless there PAYMENT 1.1 M
THIRD PARTY
is a stipulation to the contrary.
Whoever pays fora other may demand form 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
Let’s say, debtor a debtor owes a creditor 1 M. Third party offers to pay, debtor did
not consent but third party still paid anyway. He paid 1.1M How much should be the
Art. 1237. Whoever pays on behalf of the debtor without the knowledge or indemnity of the debtor
against the will of the latter, cannot compel the creditor to subrogate him in his 1 million only
rights, such as those arising from a mortgage guaranty or penalty. So what if third party told the debtor, “I am paying 1.1 million for your debt.”
Debtor did nothing. Third party paid 1.1 million. It turned out the obligation was
GENERAL RULE ON THIRD PARTY PAYMENT only one million.
Third party is entitled to 1.1. When debtor did nothing, that was tantamount to
When a third party pays for the debt of another, the debtor is obligated to reimburse third implied consent. He is liable to pay the third party the entire amount.
party
If you have a third party paying, always the debtor should reimburse.
TO WHAT EXTENT SHOULD DEBTOR REIMBURSE? The first question is, what should be the extent of reimbursement?
WITHOUT KNOWLEDGE NO SUBROGATION AND ONLYT TO THE The first thing you have to answer is,
BENEFIT THAT DEBTOR BENEFITED Did the debtor consent or has knowledge of the payment by the third party?
If it is without the knowledge or consent of the debtor, then the reimbursement will be
KNOWLEDGE BUT DID NOT CONSENT NO SUBROGATION AND ONLYT TO THE to the extent that there is a benefit.
BENEFIT THAT DEBTOR BENEFITED So let’s say, third party paid 1.1 million without the knowledge of the debtor, or
without the consent of the debtor and the obligation is actually only one million, then
CONSENT/ KNOWLEDGE BUT NOT SUBROGATION ALLOWED AND ENTIRE
the benefit is only one million.
REACTION ( IMPLIED CONSENT) AMOUNT THIRD PARTY PAID
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Therefore, reimbursement shall only be to that extent, the extent of the benefit. Theres another benefit that a third party gets if he pays with the consent of the
Clear? debtor. What is it?
Subrogation.
Next, my example was debtor notified B. I am going to pay your liability to creditor. I
am going to say 1.1 m, debtor did nothing. So, third party paid as per notice.
There will be the liability of the debtor. SUBROGATION
To the extent of benefit or 1.1?
Acquisition by another party of the rights of the creditor
Answer now is 1.1.
We are no longer dealing with the benefit because debtor impliedly consented
to the payment by the third party. Will that be relevant in the case of Carandang?
So if there is overpayment, it is now the debtor that should go after the creditor, No. Ill give you an illustration.
not the debtor. That is the
difference.
So in the earlier example, third party If debtor does nothing after being ILLUSTRATION 2: 1 MILLION LOAN
paid 1.1 m without the knowledge or informed by the third party of
consent of the debtor.
payment, that is tantamount to
1M DEBT
The reimbursement will only be to implied consent. He must pay third DEBTOR CREDITOR
the extent of the benefit. This case, party the entire amount. If there is REM
only up to 1m. If third party overpayment, debtor must go after
n o t i fi e d d e b t o r, d e b t o r d i d
the creditor and not third party. PAYMENT WITH
nothing, notwithstanding the CONSENT SUBROGATION OF
notice and third party paid RIGHTS TO REM
pursuant to the notice, debtor will
be obliged to pay the entire amount regardless of the benefit because debtor, THIRD PARTY
by doing nothing, it deemed to have consented to the payment by the third
party.
That is why I want you to see the provision, the provision says, payment without the
knowledge or consent, if there is notice by the third party to the debtor, let’s say third
party says I am going to pay 1.1 m to creditor on this day. Let’s say, debtor owed 1m to the creditor.
Debtor should reply and say, “do not pay” or object to the payment because in To secure payment of the loan, there is a real estate mortgage.
that case there will now be reimbursement only to the extent of the benefit. Third party pays, payment
We will assume with consent of debtor.
What is the effect?
101
So let’s say, there is payment of 1m. If it is based on a document, the obligation is you have to pay whoever holds the
There will now be an entitlement to reimbursement to the extent of the payment of document If it is a bearer instrument, you pay whoever holds the instrument on
1m. maturity date.
Aside from that entitlement to reimbursement, the third party, by getting the Or if it is an order instrument, meaning, it is payable to a certain person or that person
consent of the debtor to the payment, will also be subrogated in the rights of to order, you have to check if the one receiving the payment is pursuant to that order
the creditor. of the person named in the instrument.
Meaning, the third party will be deemed the creditor.
So, should the debtor fail to pay the 1m to the third party, the third party not On due date, D pays X ( third party). This will be an invalid payment. So even if it is
only can collect, the third party also has an option to foreclose the mortgage the general rule, if D pays 1m to X, then there is no payment at all, the obligation to
pursuant to the subrogation. pay will remain outstanding.
That is the added benefit of getting the consent of the debtor. So the requirement of the law, the debtor should pay the creditor. Just like in
the rule in payment by a debtor.
TO WHOM SHOULD PAYMENT BE MADE?

Art. 1241. Payment to a person who is incapacitated to administer his
property shall be valid if he has kept the thing delivered or insofar as the
Art. 1240. Payment shall be made to the person in whose favor the obligation payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded to
has been constituted, or his successor in interest, or any person authority to
the benefit of the creditor. Such benefit to the creditor need not be proved in
receive it.
the following cases:
1) If after the payment, the third person acquires the creditors rights
The valid payment requires the debtor to pay to the creditor or the creditor’s 2) If the creditor ratifies the payment to the third person
authorized representative or agent or in the proper case, a successor-in-interest of the 3) If by the creditor’s conduct, the debtor has been led to believe that the third
creditor like an assignee of a credit. person had authority to receive the payment
So, if you have, an amount owing the creditor, lets say 1M, Debtor should only pay
the creditor or somebody authorized by the creditor to accept the payment on behalf The debtor should only pay to a creditor who is capacitated.
of the creditor, like an attorney-in-fact with the special power of attorney for the So, let’s say, we have a situation.
purpose. Debtor on due date pays one million to C on due date.
Now, so debtor can pay X. He is insane on due date.
How can that ever happened debtor paying a third party? So, C is insane, so D paid C. Is the payment valid?
The answer is it is invalid, however, you have to make a determination what C
did with the payment.
Art. 1242. Payment made in good faith to any person in possession of the If C retains the payment, then C, the payment will be valid to that extent.
credit shall release the debtor. If C uses the money, you have to determine how C used the money.
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You have to know if whether C used the money judiciously or reasonably. De Guzman can say there was an invalid payment made since it was made to the
It doesn’t mean that a purchase of any necessity, it will be to the benefit of C because wrong party.
C could have bought food, let’s say, 1m, 10 thousand Big Mac in a day. Who else can De Guzman go after?
That’s not judicious use of money. Or C bought medicine, 1 million of Dulcolax. Landbank.
That would not be judicious use of money. Why?
In that case, D would be required to pay again because D paid an incapacitated Landbank cleared the check for payment in favor of a party not named in the check.
person. Right?
So the payment is invalid because the payment will be valid in that case if there The check was issued in the name of the creditor. ( De Guzman).
is a reasonable or judicious use of the payment. Let’s say, he used it for medical So, if Landbank allowed the encashment of the check by someone else, it is actually a
treatment. In that extent that will be valid. wrong payment at the level of Landbank and the creditor as payee.
What could be a cheaper alternative or option for De Guzman to claim his fee without
having to file court proceedings?
PAYMENT TO AN INCAPACITATED PERSON Filed a Complaint with the Ombudsman and you make a story that actually the
PNP, in connivance with Cruz, allowed the payment of Cruz and the encashment
WHEN WILL IT BE VALID of check.
INCAPACITATED PERSON VALID

Why will that be the cheapest?
RETAINS PAYMENT
Because that only involves a lot of money, you don’t have to pay filing fee and most
YES. ( For payment of likely that would achieve a quick result.
medical treatment for It would pressure PNP to come up with the money so you can get the payment.
example) THEREFORE So before you do the filing of a civil complaint, you do go to the Ombudsman first,
WAS THE PAYMENT USED
INCAPACITATED PERSON PAYMENT VALID because it may be quicker.
JUDICIALLY OR
USES PAYMENT The pressure will be on PNP to force a payment by Cruz.
REASONABLY? NO. THEREFORE PAYMENT
NOT VALID ( like buying
But in this case, what happened was, creditor sued PNP.
1000 hamburgers)
What is the claim of PNP?
PNP claimed that Cruz is responsible for reimbursing the payment to De Guzman.
4. REPUBLIC V. DE GUZMAN SC said that PNP is responsible and should be held liable to reimburse De Guzman.
Payment to the wrong person
But actually thats not an accurate statement.
De Guzman owned a company that supplies construction material to PNP. De Guzman Creditor, as we explained earlier, should have sued Cruz, but it is the option of
demanded for payment, PNP paid. But there was a problem, PNP paid to the wrong the creditor whether to sue PNP, the debtor, or Cruz who was the one who
person. They issued a check another contractor, Cruz. received the money supposedly payable to the creditor.
Who can the creditor ( De Guzman ) go after? Cruz? No.
PNP. Why?
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As you know, if you have to look for an option, you look for the one with the deeper Yes, sir, if there is a stipulation.
pocket and so, you go after PNP. Loan in dollars payable in dollars?
In fact, as I said, this could have been an easier one. It should not have been paid to Yes.
Cruz by the Landbank. We can do that, any combination as long as the parties agreed.
There is no restriction on the currency that will be used as payment as long as it is
agreed upon and stipulated.
On due date, debtor pays by personal check.
LEGAL TENDER Is this allowed?
No. Thats what the cases on checks will show. But we’ll discuss that later.
Art. 1249. The payment of debts in money shall be made in the currency In monetary obligations, the first requirement is there must be payment in the agreed
stipulated, and if it is not possible to deliver such currency, then in the currency upon currency. If there is no stipulation of the currency, it should be Philippine
which is the legal tender in the Philippines. currency. Now, on Philippine currency, what kind of Philippine currency - legal tender.
The delivery of promissory notes payable to order, or bills of But take note of the statutory prohibitions
exchange or other mercantile documents shall produce the effects of payment
only when they have been cashed, or when through the fault of the creditor There is a BSP circular that explains that coins can only be considered legal tender up
they have been impaired. to a certain amount
Let’s say, creditor and debtor loan contract. Debtor pays 1m. The question is, how WHEN WILL COINS BE CONSIDERED LEGAL TENDER?
should debtor pay?
On due date, debtor tenders US dollars worth a little over 1m pesos based on the DENOMINATIONS LESS THAN ONLY UP TO PHP 100
prevailing exchange rate. PHP1.00
Can the creditor refuse? (25 centavos, 10 centavos, 5 centavos,
Yes. 1 centavo)
P 1.00, P5.00, P10.00 ONLY UP TO PHP1000

GENERAL RULE DENOMINATIONS
Payment should be made in Philippine Currency or in currency stipulated in

contract.
Anything over 1000, that is not legal tender. Therefore, if it is not legal tender, the
creditor can refuse payment.
So, let’s say, the parties agreed, loan in pesos will be paid in dollars? Why is there a prohibition to pay coins?
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If you want to harass a creditor, you go to my house, collect the payment, because
that is the rule, from my domicile and then I pay you all dump truck of coins. In the law I assigned ( RA 7653 Sec 60) it is clear in that provision that checks, whatever kind,
That is one way of harassing, so it’s very impractical. personal or issued by a bank, a check is not a legal tender.
So, it must be legal tender. Remember, pursuant to the BSP circular, not all The provision states:
Philippine currency is legal tender.
“checks representing demand deposits do not have a legal tender power and their
When you pay in coins, the legal tender is only up to 1000.
acceptance by the debtor is at the option of the creditor. “
Over 1000, a creditor can refuse to accept payment.
So, it emphasizes the nature of a check as not a legal tender.
What about checks? are they legal tender? But then I assigned also the case of New Pacific. That case of New Pacific says the manager’s
check, by practice, is deemed cash and therefore good as cash payment, yet implying that a
It depends on the case you read. There are two (2) cases I assigned just to illustrate that there is tender of manager’s check is a valid tender of payment. If it’s a valid tender of payment, it has to
one school of thought saying that a manager’s or cashier’s check is deemed cash and therefore be a legal tender. And then I assigned to you the other case of Tibajia. The Tibajia case says, a
considered legal tender. There is another set of jurisprudence saying that manager’s or cashier’s cashier or manager’s check is not legal tender.
check is not legal tender. It is very categorical.
Also there are cases or instances when the Supreme Court recognized a manager’s check as
good as cash and considered legal tender, but if you go by the law and the other half of the
jurisprudence, the check really is not legal tender.
NEW PACIFIC V. SENERIS TIBAJIA V.CA
Legal tender is the one issued by the Philippine government to the extent limited by that
circular. Clear?
Manager’s checks are as good as cash.
Plainly applies the provision. CHECKS
Therefore, checks can be considered
ARE NOT LEGAL TENDER.
legal tender.
For new pacific v. seneris, the explanation is, if it is issued by a bank, according to one case, it is
as good as cash. That is not true. When you receive a manager’s check, it is just like a liability of
the bank, it is not the bank setting up an account in your name and placing funds to the credit of
that account, like you automatically have some kind of deposit account with the bank.
It is nothing.
It is just a book inquiry, that is the liability of the bank, because the manager’s check will actually
purchase from the bank who should see that manager’s check.
So New Pacific v. Seneris says it is considered legal tender or considered cash.
Tibajia says its not.

That later decision will prevail over the earlier decision.
105
RECAP ON PAYMENT bank issued a cashier's check, the bank earmarks funds for the payment of that
cashier's check.
On the other hand, there's also the other side saying that its not legal tender, whether
How should payment be made? its a manager/cashier/personal check, a check is not legal tender - Because the law
says check is not legal tender.
Art. 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency
WHAT MAY BE CONSIDERED LEGAL TENDER?
which is the legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of LEGAL TENDER NOT LEGAL TENDER
exchange or other mercantile documents shall produce the effects of payment
1. CASH IN PHILIPPINE CURRENCY 1. PERSONAL CHECKS
only when they have been cashed, or when through the fault of the creditor 2. COINS ONLY UP TO 1,000 PESOS 2. CASHIERS OR MANAGERS CHECKS
they have been impaired. 3. CURRENCY STIIPULATED IN THE CONTRACT 3. PROMISSORY NOTES
4. CASH IN OTHER CURRENCIES UNLESS
STIPULATED
The requirement is, in the absence of any stipulation, payment shall be made in
Philippine currency.
Of course, no one can stop the parties in agreeing for the payment in another INFLATION
currency.
If payment will be made in Philippine currency, it has to be made in legal tender.
Legal tender, generally, is the currency issued by the Bangko Sentral ng Pilipinas. Art. 1250. In case an extraordinary inflation or deflation of the currency
However, with respect to coins, legal tender is only up to P1,000. stipulated should supervene, the value of the currency at the time of the
If somebody will pay in coins, its possible for a creditor to reject the payment because establishment of the obligation shall be the basis of payment, unless there is an
it's not legal tender. agreement to the contrary
We also discussed the payment by checks. Personal checks are not legal tender.
The creditor may or may not accept the payment by personal check.
What’s a personal check? Whats inflation?
Personal checks are checks drawn by a person against that person's account in the
bank. On the other hand, there's an issue with respect to payment by manager's/ S: Sir when there's a decrease in the purchasing power of the specific currency
cashier's check. Manager's/Cashier's check is a check issued by the bank against itself. SP: How do you measure inflation?
Its a liability or an obligation of the bank. S: By consumer price index
Now, the problem would be, payment by manager's/cashier's check, we have contrary SP: What's consumer price index?
jurisprudence. S: Its the amount of purchase of a currency at a given time
There's one school of thought saying that as a matter of practice, manager's check SP:You will know inflation by?
can be considered legal tender, its deemed as cash. The theory being that when the S: Calculating the purchasing power from-
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SP: So when you speak of inflation, you're referring to the purchasing power of the 3. She also has money market placement in Citibank Geneva.
currency.
How do you measure it? Use consumer price index. Sebeniano defaulted at her loan before Citibank manila, in order to compensate,
Citibank wanted to offset the loan that Sabeniano defaulted in Manila with the time
Its a basket of goods against which the purchasing power of peso is measured. So lets deposits in Citibank Geneva.
say your consumer price index contains large hands bananas. These are the bananas
we export. Lets say you have 10 hands in JSP: What's legal compensation?
that basket, lets say your 100pesos will be INFLATION S: They should be debtors and creditors. Citibank wanted to offset, meaning to
able to purchase 1 large hand of bananas, use the proceeds in the deposit and placements to pay the obligation.
and then a year after, if your P100 and you Decrease in the purchasing power of JSP: So they did that. Then what happened?
can already buy 2 hands of bananas. Do you the currency. It is measured using the Sabeniano moved to recover the time deposits used to offset her defaulted loan in
still have inflation? consumer price index Citibank Manila.
S:No sir, deflation. What's deflation? Its an One requirement of compensation is that, parties should be the same.
DEFLATION
increase in purchasing power of the JSP: Is Citibank Manila and Citibank Geneva the same?
currency. Increase in the purchasing power of JSP: In reality, YES, they are just the same. But under Philippine law, the manila
the currency. branch is separate from Geneva.
branch.
JSP: So, long story short, SC said that Citibank Geneva and Citibank Manila are
Cases on Inflation different. Sabeniano and Citibank should be mutual creditors and debtors to each
other, and the parties should be the same. Theoretically Citibank Manila and Geneva
are just the same juridical entity, however, under Philippine Law, they are not the same
1. CITIBANK V. SABENIANO ( Geneva and Manila Branch)
entity.
Fluctuating CPI does not indicate extraordinary inflation
Citibank also claimed for adjustment because there's extraordinary inflation.

In the case of Citibank, Sabeniano has deposits and money market placement in
In this case the Court said that there's no extraordinary inflation because there was no
Citibank Geneva and she has a loan in Citibank Manila.
pronouncement from the BSP that there is an extraordinary inflation.
JSP: Whats the standard to claim extraordinary inflation?
Whats a money market placement?
S: The German experience. So severe that it changes every minute
Its an investment, different from time deposit, in money market placement, interest
JSP: What was the example given by the court?
may vary.
S: When the employees received their salary and give it to their wife to purchase
In this case there are 3 transactions:
goods and commodities.
1.The first one is the time deposits and placements for Citibank Geneva - Sabeniano
JSP: So extraordinary inflation was not present in this case. What was the context?
is creditor here and Citibank is the debtor because when you have placement in the
What year did this case happen?
bank, you are actually lending the bank. In this transaction, the bank will be the
S: 1970s? What happened during the 1970s? The value of peso fluctuated.
debtor.
2. She has a loan with Citibank Manila.
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In this case, the SC said that the fluctuation of the purchasing power of peso is extreme. The currency purchasing power would change so often that once you
just normal compared to other currency so you can’t characterize it as receive your salary, you need to use it already since you’re not sure how long the
extraordinary inflation. prices will stay the same.
2. EQUITABLE V. NG It’s pretty much a dead law.

Requirements for extraordinary inflation You will not be able to invoke it and there's a practical reason for that, we already
discussed financial crisis as fortuitous event. If you look at it, its possible for you to
S: The Ngs have a loan from Equitable and there was a promissory note that they argue that it meets the requirements or elements of fortuitous event, exempting a
would pay equitable. However, They did not know that Equitable can change the debtor from liability. It won’t happen, because to apply that, you will only shift the
interest rate, so the Ngs moved to cancel the contract. burden from one party to the other. From the debtor, it will now be the burden of the
JSP: What’s the use of this case? creditor, if you have a default by the borrower of the banks, the banks will now
shoulder the losses.
The SC provided the requirements for extraordinary inflation
First there must be a valid pronouncement from the BSP. If you have art 1250 situation, you will just shift the burden from one party to the other
party. Instead of the creditor bearing the loss, it will be shifted to the debtor
depending if its inflation or deflation.
EXTRAORDINARY INFLATION EXISTS ONLY WHEN: Its very difficult to claim art 1250, so its a useless law?
NO.
1. There is an official BSP pronouncement that there is extraordinary inflation
How can you operationalize it? If you're the creditor you want to have an adjustment.
2. There is a valid contract
Stipulate.
3. Both parties acknowledge the effects of extraordinary inflation
Stipulate in the contract that if there is for example, an inflation of 10% for the year, it
Second, it must be contractual, take note that Art. 1250 will not apply to will be extraordinary inflation. You will have a formula. Inflation of X percent shall
obligations arising from law. constitute Extraordinary inflation and there should be corresponding adjustment.
Third, the parties should agree to the effects of You will not rely on 1250 but you will use the underlying principle in 1250 but
1250 does not apply to you will have a formula to measure Extraordinary Inflation.
extraordinary inflation.
obligations arising from Art. 1250 is useless, that’s why banks are very careful. If you make a placement in the
Have we ever had an instance of extraordinary law. Only contractual bank, there's a provision there that you waive your right under Art. 1250, so there's
inflation? obligations nowhere you can invoke it. So there's no instance that you can demand a higher
None. amount from the bank.
Even after the assassination of Aquino, there's no
extraordinary inflation.
THE JURISPRUDENCE USES A VERY HIGH STANDARD. The standards were so high,
so its difficult to meet, the Court used the German experience to explain how difficult
it is to invoke extraordinary inflation. The fluctuation in the German experience was
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APPLICATION OF PAYMENT ILLUSTRATION 1: APPLICATION OF PAYMENTS They are all due.

Its only in these kinds of
The civil code provides certain rules on application of payment. It will be relevant only situations that the rules on
DEBTOR CREDITOR
if you have a debtor with multiply obligations. application of payments
applies.
Art. 1252. He who has various debts of the same kind in favour of one and OBLIGATIONS OF DEBTOR TO CREDITOR:  What does that mean?
1. Promissory Note for 10M no interest
the same creditor, may declare at the time of making the payment, to which of Because lets say the debtor
2. Promissory note for 10M with interest 1%
them the same must be applied. Unless the parties so stipulate, or when the per month tenders payment, X amount,
application of payment is made by the party for whose benefit the term has 3. Promissory Note for 5M with interest of these obligations are all due,
been constituted, application shall not be made as to debts which are not yet 1/2 % per month now the rules on application of
due. payment will now govern.
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot complain of the same, Debtor tenders payment of 10M, how should application of payment be made?
unless there is a cause for invading the contract. First is, the debtor have the right to choose which obligation will he pay.
The debtor can choose the most onerous i will pay, because that will counter interest.
Art. 1253. If the debt produces interest, payment of the principal shall not be BUT THE RIGHT OF THE DEBTOR IS SUBJECT TO THE RIGHT OF THE
CREDITOR.
deemed to have been made until the interests have been covered
What are the rules on payment?
Integrity and Identity. If debtor tenders 10M, what can debtor pay in full?
Art. 1254. When the payment cannot be applied in accordance with the So debtor can’t pay number 2, because 10M earned interest, that cannot be full
payment.
preceding rules, or if application cannot be inferred from the other
Debtor can pay number 3, but there will be residual amount. That residual amount,
circumstances, the debt which is most onerous to the debtor, among those due,
may or may not be accepted by the creditor because its not full payment.
shall be deemed to have been satisfied.
So the debtor has the right to choose, but the right of the debtor in choosing which
If the debts due are of the same nature and burden, the payment
obligation to pay is subordinate to the rights of the creditor in relation to the
shall be applied to all of them proportionately.
payment.
What if debtor did not choose?

Lets say you have this situation.
The creditor can make the decision for the debtor.
The creditor can apply the payment, with the consent of the debtor.
Creditor now, can make the application with the consent of the debtor. Creditor can
issue a receipt, and then if debtor does not object, then that's consent in the
application of payment ( par 2 of 1252).
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If there's no application by the debtor, the debtor does not choose, the creditor 3. LUZON DEVELOPMENT V. ENRIQUEZ ( DACION EN PAGO)
does not apply the payment with the consent of the debtor, it will be applied in Dacion en Pago must be respected because of statutory provision
a the court by operation of law. The rules are, in interest bearing obligation, interest
first before principal. And then, if that rule is not applicable, then you pay the most The bank gave a loan to the property developer. The loan was P8M. So there's a loan
onerous obligation. So if you have operation of law, how will application be made? contract, there was an obligation to pay. Payment of principal and interest. To secure
Higher interest rate first. payment, they secured it with a real estate mortgage over certain properties - the
saleable lots. Because, they are developers. They need money. They had the property,
they have the inventory. They can use the inventory to secure the obligation.
SUMMARY OF RULES ON APPLICATION OF PAYMENT

What happened then is that the developer, will have to make money in the mean time
1. THE DEBTOR ALWAYS HAS THE even prior to the completion of the project, they can sell. So this developer, entered
( BUT ALWAYS SUBJECT TO THE
RIGHT TO CHOOSE WHICH DEBT into a contract to sell with Enriquez. So before the conveyance of the property, in
RIGHTS OF THE CREDITOR)
TO APPLY THE PAYMENT TO. exchange, there will be payment of the price. And then the developer failed to pay
the loan. The 8 million loan to the bank. Developer defaulted, so instead of the bank
2. IF DEBTOR DOES NOT ( He may choose which obligation foreclosing the property, the developer offered dacion en pago. So the same
CHOOSE, CREDITOR HAS THE to apply payment to, issue debtor properties were covered by dacion en pago.
RIGHT TO CHOOSE WHICH a receipt and if debtor does not
What's the english term for Dacion En Pago?
O B L I G AT I O N T O A P P LY object, that is Dation in Payment.
PAYMENT TO
Among those covered by the real estate mortgage was the property bough by
3. IF NEITHER CREDITOR NOR ( What is considered the most Enriquez.
DEBTOR CHOOSES, COURTS/ BY onerous obligation? The one that Developer owed the bank a certain amount. To pay the amount, developer conveyed
OPERATION OF LAW WILL APPLY bears interests. ) by way of dacion certain lots, the same lots secured by real estate mortgage. Among
TO THE MOST ONEROUS the lots was the one sold to Enriquez pursuant to a Contract to Sell.
OBLIGATION Now, there's a law. PD 957.
Under that law, the moment the buyer pays a lot, there should be a delivery of the
title to the buyer.
DACION EN PAGO In short, there would be a deficiency of the payment because there will be no
corresponding compensation for the release title.
Normally what would happen is, lets say, its the bank, the transaction will go like this:
Art. 1245. Dation in payment, whereby property is alienated to the creditor Developer would mortgage to the bank and for that mortgage to be valid under P.D
in satisfaction of a debt in money, shall be governed by the law of sales. 957, there must be approval by the HLURB, without that approval, the mortgage
would be void.
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So, if there's such an arrangement, the bank will normally require payments be Its actually a sale, so the rules on sales will apply to dacion en pago. What kind of
remitted to the bank. If the developer wants to release certain lot, developer should rules according to this case? Implied warranties. You enter into a contract of sale,
pay the corresponding portion of the loan before the release of the mortgage. automatically, there will be warranties, even if you didn't stipulate it in the contract.
So that was the problem, they entered into a dacion, was there a qualification in
dacion? Isn't it that you're actually penalizing the bank? Example of implied warranties are warranties against legal defense and warranties
The bank basically received less property for the payment of the loan obligation, against eviction. Where did this amount to a violation of the warranty against
What should the bank do? eviction? Meaning, upon full payment of the buyer, the bank will be disposed of the
The bank should have been aware. property covered by the dacion.
They were required to exercise extraordinary diligence. S: Sir, so the buyer can actually be able to ...
Ordinarily, what’s your standard of care? JSP: Yes! But that will be the logical consequence the moment the buyer fully pays,
Due diligence or ordinary diligence unless the law requires or the parties stipulated. the bank would have to release.
This is an instance wherein a law requires extraordinary diligence, it is S: Wouldn't that be incident sir?
established by jurisprudence. JSP: What did the court say?
Ordinarily, if you're accepting a S: If the bank would have release sir, the bank would still be compensated because of
mortgage, its okay to just rely on the agreements as well as the decision of the bank of taking the mortgage.
a certificate of title, you have the . By virtue of the PD the bank is So a Dacion en Pago is basically a sale. For the sale to be valid, the parties should
right to rely on that by law. required to honour the sale to Enriquez agree on the price. If they don't agree there will be no sale since agreement on the
If its a bank, the law requires even if they claim they did not know price is an important element of a contract
that the bank must conduct Now in this case, was there an agreement of the price?
about the transaction. A bank is
additional due diligence. They Yes, when they accepted properties being sold by the developer and stated that it
should conduct ocular required by law to exercise was an act of total fulfillment of the obligation so.
inspection, possibly check the extraordinary diligence when it In effect they agree because dacion would completely extinguish the obligation.
dated contracts to verify comes to property transactions What if they do have the stipulation? What will happen to the dacion en pago? Will
information relevant to the dacion en pago be valid?
transaction.
S: No.
In this case, the SC said the bank should have known the Contract to Sell JSP: Why not?
between Developer and Enriquez because they are dealing with a developer to S: Because it did not state the amount of the properties to be satisfied or how much is
pay off the loan. the actual value of the properties in question.
In fact, in exercising due diligence, they would have known. JSP: According to this case, how does a dacion en pago extinguish an obligation?
So, the Court inferred that the bank accepted the mortgage knowing full well S: By conveying the property
that some of them may be covered by a Contract to Sell. JSP: Yes, to what extent? How do you know the extent of the extinction?
S: It must be stipulated.
JSP: If there is no stipulation, there must be a proceeding unless they can guess if
Now, how could you characterize dacion en pago? from the contract if it was expressly made it.
111
possible for the developer to offer and say I'll just give you property, then, you just
Jurisprudence says that a dacion en pago shall extinguish the obligation. give me a discount. That will be the leverage of the debtor.
In our example, the loan obligation to the extent as may be agreed upon by the The debtor can ask for concession in exchange the debtor will be in dacion en pago.
parties or in the absence of an agreement, to the extent that the value of the property It's done more in the past by the real estate developers and financial business. They
may be proved. So if we go by jurisprudence, a relevant party can just go to court will be under proceedings involving an insolvent debtor and they will bargain with the
and say I can establish the value by competent evidence so in that case, you will have various creditors by enticing them to accept a dacion instead of pursuing a case
a valid dacion en pago. against the debtor.
Dacion en pago is a form of novation. The object of the contract changes.

Instead of money, it will now be conveyance of property. Dacion en pago is a Cession v. Dacion en Pago
usual resort of a debtor in case of a financial instrument.
Art. 1255. The debtor may cede or assign his property to his
DACION EN PAGO creditors in payment of his debts. This cession, unless there is
stipulation to the contrary, shall only release the debtor from
A dacion en pago is a form of sale. It extinguishes the obligation to the extent
that the parties stipulate. If the parties are unable to stipulate, they must responsibility for the net proceeds of the thing assigned. The
show in a court proceeding that a price was actually considered and agreed agreement which on the effect of the cession, are made
upon by the parties to be valid dacion en pago. between the debtor and his creditors shall be governed by
A dacion en pago changes the object of the obligation. To some extent, it can
special laws.
be considered a form of novation
What is cession?
Example: Reverting to Dacion en Pago to satisfy an obligation It's similar to dacion but in the case of cession, it is a surrendering property.
Let's say you owed the bank a lot. You want to haggle with the bank. How is it different to dacion?
You just say, I'll just give you property rather than you get nothing, you can get In dacion you convey your properties however in cession you turn it over to the other
property. party so that it is disposable. And then they use the proceeds as payment to the
Sometimes that will work. The bank will accept payment in kind rather than getting obligation.
nothing.
Let's say you don't have a mortgage, there is just a liability by the developer to the Example: Cession vs. Dacion for 1M obligation
bank, how will you collect if you are the bank? 1. 1 Million Extinguished through Dacion en Pago
You demand. And also likely if I'm the developer, I will ignore you. Let's say debtor owes one million.
So what do you do? You will sue. Instead of paying one million, debtor will convey property with a fair market value of
When you sue, you have to get a judgment first, ordinarily, before you can go after one million and the creditor will accept. It's a sale.
the assets of the developer and litigation take a long time and during the litigation it's So if it's a sale, what happens to the property?
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Ownership of the property is transferred from the debtor to the creditor.

So there is conveyance of ownership. So creditor now becomes the owner after the Normally cession will be in favor of multiple creditors but you can have a cession in
dacion en pago. The obligation is extinguished. favor of just one, when you are authorizing one creditor to liquidate all assets and
apply the proceeds in payment of the obligations to the creditor. Now if you are the
2. If Cession is applied: debtor, will you do cession in this example?
If it is cession, the debtor cedes the assets to several creditors, well it can also be one. S: If I have no choice sir.
Normally, the law contemplates a lot. JSP: You will not make sense if you will do cession. What instance can you consider
What will happen? that a debtor does not have a choice?
Who will own the property in the mean time? This is practically insolvency. Assets are less than liabilities.
The debtor will continue to own the property. Will you do cession? You won't because it doesn't make sense. Why?
What is the purpose of cession under the law?
In cession as contemplated by the law, the debtor cedes all assets to the Let's assume you have three creditors with a claim total of one hundred ten million.
creditors so that the creditors may liquidate them and apply the proceeds in Creditor 1: 30 million ;Creditor 2: 40 million; Creditor 3: 40 million
payment of the obligation. Debtors available assets: 100M
Even if you have do cession, you still have an obligation. Well that's the downside.
Example: Cession applied to 100M Assets, 110M liability But will you do it? Do you have an incentive of doing it aside from not getting an
Let's you have assets worth one hundred million, the creditors have a total claim of extinction of your obligation? What is the immediate consequence if you do cession?
one hundred ten million. You lose assets over your properties instead of being able to use them. You cede
In this scenario, debtor cedes all assets to the creditors so the creditors can liquidate them all to the creditors and you don't get anything in exchange. There is no benefit
the assets. because the extinction of the obligation will only be up to the extent of the
SCENARIOS: proceeds.
1.If creditors realize one hundred million the creditors will now apply the one hundred
million in payment of the obligation.
2. If it is less then there will be an extinction of the obligation. Financial Rehabilitation Insolvency Act
3. If this obligation will be more than the proceeds then there will be a deficiency.
There is a counter-part proceeding here under the financial rehabilitation and
Meaning, the debtor will still have a liability to the creditors for the deficiency)
insolvency act.
In short if you have cession, the debtor retains ownership.
An individual debtor for example can file a petition to be discharge from his or her
The debtor only grants authority to the creditors, for the creditors to monetize
obligation. Let's say the debtor here is an individual. The debtor can say I will now
the assets and apply the proceeds in payment of the obligations.
cede all my assets but I will ask for a discharge from my obligation.
If you look at dacion, it is possible that a property of lower value may extinguish
So there will be a benefit in that case because the obligation will be extinguished. But
an obligation by agreement of the parties.
even in that instance, it doesn't make sense. Why? Because if you're the debtor and
In cession, it won't happen because they are always tied up to the proceeds.
you have one hundred million, what do you do?
Whatever proceeds will be realized will be to the extent of the extinction of the
S: You use your assets to make a profit.
obligations to the creditors.
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JSP: Oh yes but let's say the debtor is stupid he cannot make a profit. He may enter
into litigation and use the one hundred million. DACION EN PAGO CESSION
What can you do with hundred million?
You can buy a lot. You can get a good lawyer to fend off his creditors so in the DEBTOR SURRENDERS OWNERSHIP DEBTOR RETAINS OWNERSHIP
meantime he can use his property. If he's good then maybe he can buy time and OF PROPERTY TO CREDITOR, A O F P R O P E R T Y, W H A T I S
after a while his property may double and his obligation will be the same and he FORM OF SALE
SURRENDERED IS
will be able to pay them.
ADMINISTRATION TO DISPOSE
So in this scenario, I don't see any debtor doing cession because in cession, you're OF PROPERTY
giving up all your assets without any concession in exchange unless for example if the
OBLIGATION IS EXTINGUISHED TO OBLIGATION IS EXTINGUISHED
creditors will agree to a complete extinction then that is fine.
THE EXTENT THAT THE PARTIES ONLY TO THE POINT OF WHAT
Litigation will work only if there is no criminal case against you. If there is a criminal
AGREE ON. MAY EXTINGUISH
case then that is a problem but even in those instances when the debtor is sued THE PROCEEDS OF
ENTIRE OBLIGATION
criminally, the debtor even refuses to part with the assets. ADMINISTRATION PROVIDES.
So if you want to do cession, you do it under the framework of the financial It is possible that after the
rehabilitation and insolvency act, if you're an individual, because in the end you disposition of property, the
can get a discharge from all your obligations.
obligation still stands.
FINANCIAL REHABILITAITON INSOLVENCY ACT

Tender of Payment and Consignation
It is possible for a debtor to be released from an obligation after he has ceded all his
What is tender of payment? What is consignation
assets. He may file a petition in the court to be discharged from the obligation after
ceding all assets. It does not matter that the proceeds are not enough to satisfy the
obligation. If the petition is granted, the normal rules of cession do not apply. He will be
discharged from his obligation TENDERY OF PAYMENT CONSIGNATION
-Tender of payment is the offer of When a debtor deposits to the court

payment by the debtor to the creditor. the payments which he had offered to
-there is a readiness to perform the creditor but the creditor unlawfully
immediately the prestation and there refused to accept.
should be manifest that you could
perform.
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JSP: What did the bank tell Diaz? So initially there was a deposit and then?
Art. 1258. Consignation shall be made by depositing the things
S: Long story short, Diaz filed a complaint that FEB invalidly accept the check.
due at the disposal of judicial authority, before whom the tender The issue was WON the check was a valid tender of payment.
of payment shall be proved, in a proper case, and the JSP: A check ordinarily is not a valid tender of payment because it was not legal
announcement of the consignation in other cases. tender. But in this case, it was considered a valid tender of payment because?
S: Technically the creditor was accepted the payment.
The consignation having been made, the interested
JSP: Accepted how?
parties shall also be notified thereof. S: Through the deposit of the check.
JSP: By instructing Diaz to a lot of things - deposit it in the bank and then later making
into another placement. In short, the
bank controlled how the funds or the
checks will be disposed. So how did the In directing Diaz to deposit
Cases on Consignation the check, the bank expressly
court defined a valid tender of payment?
1. FAR EAST BANK V. REALTY ( CHECK, TENDER OF PAYMENT) What should be there? recognised the check as legal
Acceptance of check recognises check as legal tender S: There should be acts that
tender. They controlled how the
demonstrate intent, ability and
In the case of Far Eastern Bank, Diaz had a loan agreement with Pacific which capability to fully settle the payment would be disposed of .
amounts to 720k. Diaz secured the loan through a Real Estate Mortgage (REM). That obligation. There was a valid tender of
property security was being leased by Diaz to Allied. Per agreement, the rentals of JSP: When there will be a valid tender of payment.
Allied would be paid directly to Pacific to discharge the loan obligation. payment? There will be a valid tender
What was the mortgage? of payment when the debtor is ready,
Two parcels of land. After Pacific was closed down, it was held as a receiver. Far willing and able to perform the
Eastern Bank purchased from receiver the obligation of Diaz. Far Eastern Bank prestation.
contacted Diaz that they have purchased his obligation but Diaz learned of the
outstanding obligation held by Far East Bank. The original loan stipulated that the 2. STATE INVESTMENT HOUSE V. CA
interest rates would increase from 12% because of this the original loan of 720K No consignation, penalty still accrues
became one million four hundred thousand. Because of this outstanding obligation,
Diaz tendered check payment. You have here debtor 1 (D1) and debtor 2(D2). Debtor 1 has an obligation to creditor.
JSP: Is that a valid tender of payment? Let's say x amount, payable to creditor. This x amount earns interest of y percent. This
S: That would not be legal tender. The creditor has the right to refuse is secured by a pledge. In another transaction, debtor 2 owes another amount to the
JSP: It is not legal tender. It will be valid only if the creditor accepts. So was it creditor. However, there is no security for this payment. Rather, D1 was solidarily liable
accepted by the bank? with D2. Now what happened was of course payment.
S: It was expressly accepted by the bank but Diaz has to deposit the check in the Full payment by D1.
branch of Far East Bank (FEB). After deposit, FEB refused to take this as tender of D1 paid the creditor but the creditor did not want to release the security because
payment. according to the creditor the pledge also secured the obligation of D2. Therefore, for
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there to be release of pledge shares, D1 should also pay for D2's obligation, in TENDER OF PAYEMNT V. PAYMENT
respect of which D1 had a solidary undertaking.
In this contract if there is default, there will also be a penalty for default. Default Tender of payment is not payment. Payment happens only if tender of payment
equals to penalty. is accepted by the creditor, just like in the case of Far East Bank. If there is
So the question here was: Is D1 in default? acceptance then there is payment. If it is not accepted, to complete the
If you look at the facts, you would understand that D1 was not in default with payment you have to do consignation. Otherwise, there is no payment and as
respect to the obligation. If there was default, it's the default by the creditor, we said, interest will accrue. Take note that in certain instances, mere tender of
mora accipiendi. payment will produce certain legal consequences ( Go Cinco Case).
The creditor refuses to accept payment.
So in this case, what's the recourse of the debtor in case of refusal is to sue the
creditor for consignation. Prior to consignation, interest would continue to run 3. LEGASPI V. CA ( Right to repurchase)
because the debtor, D1, would still have possession of the money. Right to repurchase is preserved after tender of payment
As long as D1 had possession and control of the money, D1 should be liable to
pay interest because interest is compensation for the use of the money. Even if Legaspi sold two parcels of land to Salcedo but he is allowed to repurchase within five
D1 does not use the money, it's in his possession and it was good enough. years. The day before the expiration of the period, Legaspi rendered tender of
However, with respect to the penalty, there will be no penalty because there was no payment. However, this was refused by the Salcedo. It was an unjustified refusal.
default. The one in default is the creditor. That is why D1 is justified in filing an action Legaspi filed an action for consignation.
for consignation.
Of course what was that case wherein we had encountered the peculiar situation As we said, tender of payment is not payment. It does not produce the effect of
wherein the court said, notwithstanding the non-consignation, the interest should not payment until the creditor accepts.
run. That case wherein a SPA was given to the creditor so the creditor could collect However in this situation, we are dealing not with the fact of payment. We are
the loan proceeds? Go Cinco. dealing with a preservation of a right.
So the SC said, with respect to the preservation of the right to repurchase as per
contract, it is enough that the seller tendered payment on the last day, meaning prior
to the expiration of the repurchase period.
GENERAL RULE In fact, the SC said that it was not even necessary to file an action for
If there is consignation, then the interest would stop. Prior to consignation, interest consignation that could have been done after the tender of payment or even
would continue to run/accrue. Tender of payment only prevents the accrual of penalty if after the expiration of the period.
there is any. What is important to preserve the
A valid tender of payment is
right to repurchase is there is a tender
of payment prior to the expiration of enough to preserve the right
the period. That's the case of Legaspi. to repurchase. Consignation is
So Legaspi tells you that in case of a a surplus age and thus
situation wherein a creditor, the one who
unnecessary.
has the right to repurchase within a
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certain period, if that person wants to preserve that right, it is enough that valid JSP: What was shown then instead?
tender of payment be made within the period. There is no need to make payment S: A certification by the bank that lessee obtained a loan to pay for the lot.
within the period. There is no need to make consignation within the period. The JSP: Would that be tender of payment?
tender of payment is sufficient. In fact, the court said that consignation within the S: It is not a tender of payment because it is not cash.
period would be a mere surplusage. JSP: It is not payment. It is just a certification. That would have been undertaking by
the debtor which is not a tender of payment. But?
Tender of payment will produce a legal effect or consequence. Specifically, S: In this case, tender of payment was not necessary.
tender of payment will be sufficient to preserve a legal right. JSP: So like Hulganza and Legaspi, there is no tender of payment. Neither was there
an action to compel the exercise of the option. So?
4. HULGANZA V. CA ( option to buy) S: The lessee only needed to give advice.
Filing a case is sufficient to preserve a right JSP: No notice to preserve his right?
S: Yes notice that he was ready to pay.
Hulganza is just like Legaspi. Instead of tender of payment, what was done was to file JSP: So there was notice and readiness to pay?
a case within the period. The SC said that you don't even have to make tender of S: Yes sir but actual payment was not made.
payment. It is enough to file a case. Filing a case is tantamount to tender of payment
and is enough to preserve the right to repurchase. What should the option contain?
Why will it be like tender of payment? Of course there must be the object and the price and the option period. Sometimes,
When you go to court, you are presumed that you will comply with the order of you will also have the option money.
the court. If the court tells you, you now deposit the payment, you will because Option money is a consideration distinct from the price.
you are the complainant. Distinct from the price means it is just an advice.
Let's say for this example, was there a consideration of the price? Yes there is. There is
5. BACCUS V. CA a contract. There are several provisions in the contract to supporting the grant of the
option. If there is option money or a consideration distinct from the price, the
There is a contract of lease. The lease was for six years and there was a provision. The lessor cannot withdraw option within the option period which in this case was 6
lessor granted the lessee the right/option. But there was no price for the option. years.
JSP: There must be a price because it is an option. If there is no price, it may be So if you look at the option, it is like the lessor making an outstanding offer. It's like
something else like a right to first refusal. If the lessor decides to sell, the lessor the lessor saying I'm going to sell you my property for this price within this period and
should first offer the property to the lessee. So there's an option to buy. What's the in exchange for that option, you will pay me x amount option money. So there was
option period? only an offer which the lessee at any time may accept. If any of the lessees accept
S: 6 years within the term of contract of lease. One of the lessors died. Before the then there is now a contract.
death of the lessor, the lessee said that they wanted to buy the property. However, the It's like there will now be a sale so in this case, the issue was there was an option to
heirs stated something different. buy within a 6 year term. Prior to the 6 year period, there was a notice given by the
JSP: So the lessee manifested that he want to buy. What did the lessee do? Did the lessee. Lessee told the lessor, I will exercise my option under the contract of lease. So
lessee tender payment? unlike Legaspi, there was no tender of payment. In fact, there would never be a
S: There was no tender of payment. tender of payment in this case because what was given was just a certificate. Unlike
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Hulganza, there was no action to enforce the option. There was only notice. Was this
notice sufficient to preserve the right? As a rule, before a party can file an action for consignation there must be tender of
S: Yes, sir. payment. However, there are instances when the debtor can go straight to
JSP: Why? Why was tender not needed? consignation.
S: Because there was no obligation?
JSP: When will that obligation arise in an option?
S: In the contract of sale. Art. 1256. If the creditor to whom the tender of payment has been made
JSP: So if this is your scenario, there is an option, what can the lessee do? The lessee
refuses without just cause to accept it, the debtor shall be released from the
can exercise the option. In which case, there will be just notice. Lessee will say I am
responsibility by the consignation of the thing or sum due.
exercising my option.
Consignation alone shall produce the sae effect in the following cases:
What's the next step?
1) When the creditor is absent or unknown, or does not appear at the place of
The next step is the contract of sale or the deed of absolute sale. This will be the only
payment;
time that payment will be needed. Why?
2) When he is incapacitated to receive the payment at the time it is due;
Because upon conveyance there will be an obligation to pay the price. It will be a
3) When, without just cause, he refuses to give a receipt;
simultaneous exchange of prestations. Reciprocal obligations were present. There is
4) When two or more persons claim the same right to collect
no need to tender or consign payment until other party executes the deed of sale. As
5) When the title of the obligation has been lost
we’ve learned, no party is in delay in reciprocal obligations until other party is
able to execute deed of sale.
1. When the creditor is unknown or creditor does not appear in the place of
INSTANCES WHEN A RIGHT MAY BE PRESERVED payment.
NOTWITHSTANDING NO TENDER OF PAYMENT OR CONSIGNATION Let's say it's an instrument payable to a bearer but you don't know who the bearer is.
Or the creditor does not appear in the place of payment.
LEGASPI HULGANZA BACCUS Where is the place of payment found?
It could be stipulated in the contract. If it is an obligation to give a determinate thing,
Tender of payment within Filing of an action to To preserve an option to the place is where the determinate thing is upon consignation of the obligation. If is is
the repurchase period will enforce the right to buy, it is enough that you an obligation to pay, it should be in the domicile of the creditor.
be sufficient to preserve repurchase will be sufficient give a notice within the
the right to repurchase even without tender of option period. Tender of
payment payment may be done
when there is already a 2. When the creditor is incapacitated.
formal execution of the Why can you not pay an incapacitated creditor?
contract of sale since this is A debtor cannot pay an incapacitated creditor because it will be valid only to the
a RECIPROCAL extent that the payment is retained by the creditor or the creditor judiciously or
OBLIGATION reasonably uses the payment. There will be a problem if the incapacitated creditor
accepts the payment but he did not use it judiciously or reasonably.
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3. When the creditor refuses to give receipts. terminate the lease. Dalton consigned the rental payments to the court. However,
This is not an exception because it assumes there was tender of payment and there the court said that the consignation is invalid because they did not give notice
was refusal. It can only be an exception when way ahead of the due date, the creditor before and after the action of the consignation. Debtor has to give notice before
says "I will not give a receipt. I want it off books." If you look at this, it's not really an and after consignation.
exception because it assumes tender of payment and refusal.
4. When there are conflicting claims. JSP: Let's give an example. Upon due rental, the rental will accrue every end of the
When two or more persons can make a claim for a credit. month. Before end of the month, if there is a case of consignation, the lessee will have
This is like an action for an intervenor, you ask the parties with conflicting claims to to notify the lessor that the lessee will consign the rental to accrue at the end of the
establish their entitlement to the obligation in court. month. Then he will consign it in court and after that he will give another notice. This
5. When the title of the obligation is lost will be repeated every time monthly rental accrues. Why do you need to repeat the
When is a title to an obligation lost? When you speak of a title to an obligation being notice every time the rental accrues when there is already substantial compliance?
lost, it's the document that serves as the basis of the obligation like a bearer
instrument. If the bearer instrument is gone then you can consign in court and then (to be continued on Thursday)
the relevant parties will present documents to establish entitlement. This is not the
certificate of title.
REQUISITES OF A VALID CONSIGNATION (ART 1256-1261)
1. There must be a debt due.

2. Consignation, either because:
a. Creditor unjustly refuses tender of payment or;
b. For some reason, payment can’t be made (1256)
3. There must be a first or prior notice.
4. The action/complaint for consignation together with deposit of payment in
court.
5. After deposit, there must be second or subsequent notice.
6. Court decision (just an extra)
6. DALTON V. FGR REALTY ( Rent payments)

Requisites of a valid consignation are absolutely necessary
Dayrit owns property which was leased to Dalton. Such property was sold to FGR.
Dayrit and FGR refused to accept the rental payments of Dalton because they want to
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THURSDAY 10 MARCH 2016
Consignation continued But in his contract of sale, seller has the right to cancel the contract by paying X
amount, and of course returning what has been paid by the buyer. Let’s say the buyer
refuses this X amount.
Debtor tenders payment of 1m, but the creditor refused.
The debtor can’t just leave the payment with the creditor, so debtor has to sue for
Is this grounds for consignation, should seller consign the payment in court?
consignation.
The answer is no, this is not a debt; this is a condition for the exercise of a right.
So if the creditor refuses to accept the performance of the obligation, let’s say the
In this case consignation would not be relevant or applicable.
payment of 1m in our example, the debtor has the right to file the action for
consignation.
Action of consignation is a legal remedy of a debtor to complete payment. 2. Tender of payment is refused or excused
As explained last time tender of payment is not payment unless or until the
creditor accepts it. Of course when we say excused we’re talking about the five instances the debtor can
So if the creditor refuses to accept, the debtor can complete it by consignation. proceed immediately to consignation. The process would be like this: debtor tenders
Now, as a rule, before a debtor can proceed to consign a payment in court, they must payment: accepted, its fine, obligation is extinguished.
file an action to consign the payment in court. The debtor has to tender payment. If it was refused then proceed to file action for consignation, how do they do it, so
Now you must know what constitutes a valid tender of payment, you know the rule. there is a tender of payment, first notice, what is the first notice?
Monetary obligation, default rule, including currency and it should be legal tender
meaning below the thresholds of the currency. 3. Information by the debtor to the creditor that the debtor intends to consign
Of course there are instances where the debtor can immediately proceed to consign, in court ( first notice)
example creditor is unknown or cannot be found or the title of the obligation has
been lost or the proof or basis has been lost, the debt instrument payable to bearer. So if there is first notice what could happen?
In those instances the debtor can immediately proceed to consignation The creditor can accept or can refuse, in either case debtor can now proceed with
consignation, meaning the deposit.
Lets explain the requisites of a valid consignation.
4. Action for consignation
1. There must be a valid debt due. When I say consignation I don’t mean the action but the act of depositing the
money in court.
The debtor owed creditor 1m, its payable now, debtor tendered payment, it is an Now, the consignation is not just filing an action or petition in court,it has to be
example of debt due. accompanied by the deposit of payment.
If there is a period in favor of the creditor, its payment is a loan obligation earning
interest, and the due date is December 31, the debtor can’t consign the payment now 5. Second notice
because the creditor now has the benefit of the period, it’s a debt but it’s not yet due.
Example: After the consignation, we have the second notice this will be information to the
Let’s say there is a contract of sale, seller agrees to sell property to buyer, in exchange creditor that the amount has been consigned. It can be made by the debtor or it
buyer will pay the price.
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can be made through the court because there is already a proceeding notifying that Why? I asked if there could be substantial compliance with requisites,
the payment has been deposited in the court. Based on jurisprudence there must be strict compliance with the requisites, they
What can happen? Again the creditor can accept or creditor can refuse, which now are mandatory and the debtor cannot omit any of the requisites otherwise the
you have to await the decision, where judgment can now be a valid or invalid consignation would be invalidated.
consignation.
Why is that? Why does the law require strict compliance with the requisites of
The first requirements are therefore, you have the actual deposit or consignment of consignation?
the payment, and then you have the second notice, those are the requisites, which
will also show you the process: the debtor owes the creditor a certain amount, debtor Art. 1259. The expenses of consignation, when properly made, shall be
tenders payment, creditor refuses to accept, debtor sends notice to creditor that charged against the creditor.
creditor will be consigning, thus filing action in court, filing action of consignation and
depositing in court, then sends the notice to the creditor and again you just wait for
the judgment of the court, whether consignation if valid. This is not explained in Dalton but the underlying reason is because the creditor
incase of a valid consignation shoulders the cost of the consignation, therefore
Last time we discussed these requisites, can there be substantial compliance? In the the law requires that every turn of the proceedings, the creditor is given a
example, with one million, what should the debtor do? Debtor should tender chance to accept the payment and stop the further accrual of cost because as we
payment, said there is a judgment validating the consignation the creditor will be paying.
So to compensate that liability the creditor is afforded an opportunity to accept
If refused debtor should notify creditor that debtor will consign, if creditor does not the payment and stop the accrual of expenses.
accept or continues to refuse payment, debtor will go to court and consign payment
in court, of course in the notice you have to somehow give a period, you don’t just
say “this is the notice and I will file” you have to give the creditor the chance to ILLUSTRATION 2: PROCESS OF CONSIGNATION
accept.
Creditor either
Most likely it will be a letter informing the creditor that the debtor is ready to pay, not 1.VALID DEBT 2. TENDER OF refuses or accepts. 3. FIRST
withstanding refusal. The debtor will give creditor x number of days, and if there is DUE PAYMENT Refuses, proceed NOTICE
continued refusal debtor will proceed with action for consignation. with 3.
Take note, what is the actual deposit?
Court decides whether
The payment should be placed under the control of the court. After the deposit a Notice that amount
D gives C notice and
consignation is valid or provides D with
second notice informing the creditor the fact of consignation. This is fine with a simple invalid. To be valid all consigned to courts.
period to accept or
obligation. requisites must be Creditor again may
refuse consignation.
refuse or accept
What if you have rentals or payments accruing periodically? present.
Based on the case of Dalton for every accruing payment, you have to repeat this 6. COURT 5. SECOND 4. ACTION
process, 1st notice, consign, 2nd notice. If you look at jurisprudence, you see that you DECISION NOTICE
have to do it over again, until the amount matures or the obligation does, otherwise
that will render the consignation invalid.
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If there is an acceptance, it does not mean a waiver for the deficiency, but for good
Q: For the second notice does the court also give notice to the debtor? measure you always have to qualify the acceptance.
You have to state the reservation or additional claim against the debtor.
Eventually if there is no acceptance or if there is reservation, ultimately the court
A: For the first notice there will be summons, maybe that will in the second notice that decides if the consignation is valid.
there will be a payment in the court, but for subsequent payment, that will not be Let’s say there is a judgment that the consignation if valid, this judgment retroacts to
covered. the day when the consignation was made.
When you consign, there must be a pleading filed, and because it’s a pleading it will So from this date, whatever could have accrued like interest will stop from this day,
be furnished to the creditor, this will cover the matter of notice. So long as there will because it’s a valid consignation and debtor has lost control over this payment,
be information to the creditor that consignation has been made. therefore debtor should not be charged with interest.
The same way, if not consigned, debtor has the capacity to use the money and thus
Now of course if we are the creditor we are most likely you have an objection to the should pay interest if accruing on that obligation.
payment, you may have certain issues, maybe the payment is incomplete in your
mind, amounts should be added, penalties to pay. Q: If there is a penalty for failure to pay on a date, are you liable to pay the penalty
The creditor can during consignation accept the payment without waving those along with consigned payment?
objections to pay. A: It’s in State investment of funds, creditor mora accipiendi but debtor is ready willing
and able therefore the penalty will never be triggered.
Example:
Let’s say debtor consigns payment in court, creditor opposes consignation because Q: And interest?
payment is incomplete, there are other charges that should be paid by the debtor, so A: It will continue to accrue till consigned as debtor can use the money until then.
that’s a counter claim, basically saying “yes, that is true, but on top of that you have to
pay extra as for contract”. Let’s say debtor owes 10 million to creditor, this amount earns interest at 1% per
In that situation if you’re the creditor your incentive will be to get the money month.
and qualify your acceptance that you are reserving your right to collecting It’s now due but creditor refuses to accept payment. Creditor is mora accipiendi.
whatever the deficiency. Debtor files for consignation, follows the process.
Why will you do that? A creditor may accept a After placing the payment in court and giving all the notices required under the law,
Because you want to lock this money in, consignation while at the same however the debtor needs the amount for a business venture - the same amount of
take it now, and at the same time use the time reserving his right to any money, let’s assume.
proceedings to claim from the debtor any After filing action for consignation, to avoid loaning from a bank and paying interest,
deficiency. Accepting a
deficiency. debtor can withdraw the amount consigned, interest from debt may continue to run
The creditor can claim payment with consignation does not but if the interest in a bank is higher, that’s fine.
reservation or qualification. automatically mean the creditor The debtor can do this. Until the creditor accepts the payment or until the court
If you are a creditor the best thing to do to waives any deficiency in the validates the consignation the debtor can withdraw, that’s why you have to tie this up
the consigned amount is to accept it but with what should a creditor do in case of consignation, a creditor should accept but
obligation
with qualification if you’re claiming extra.
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with reservations, preventing the debtor from withdrawing the money in the mean It’s different if you were selling ecstasy, clearly you don’t have an obligation in light of
time but preserving the right to claim extra against them. the illegal prestation.
This rarely happens, normally consignation is made when two parties have opposing
claims, where debtor not wanting to pay the wrong party will file an action in court So when you say extinction due to loss, we’re referring to a valid obligation,
and opposing claimants establish entitlement. otherwise there is no need to extinguish.
How will loss happen?
Q: can the withdrawal of consignation be partial?

A: No, it is not valid. Then you’d always lose because it would have to be a valid
Art. 1263. In an obligation to deliver a generic thing, the loss or destruction
consignation to complete payment, partial payment in the end the court will just say of anything of the same kind does not extinguish the obligation.
your consignation is invalid.
Q: If the creditor demands payment after a withdrawal is debtor in default? 
Normally it’s pointless with an obligation to give a none specific object. You need
A: Yes, now debtor is in default as creditor demands payment, but if the creditor does
something like “sale of car with license plate abc 1234” the car is hit by lightning or
nothing after withdrawal, then nothing happens.
lost, then it is a loss, obligation is extinguished by loss through the fault of either
party. If its lost by a third party, it’s still extinguished, though you can go after the third
party.
LOSS OF THING DUE (1262-1269)
Loss of the thing due could be a mode of extinguishing an obligation. When we
speak of loss, it refers to an impossibility of performing a prestation because the Example: Loss of Generic Thing
thing is lost or made impossible to perform you do not have an obligation. What if its sale of 100 sacks of wagwag rice?
It’s difficult to claim loss because its generic unless sacks are earmarked and stored in
If impossible this is because as a prestation it has to be legally or physically possible. a warehouse, then there is no loss, unless, suddenly all the wagwag rice becomes
As a mode of extinguishing an obligation it assumes that there was an obligation to extinct and all is left is the healthy brown rice and now it’s possible to claim loss as
begin with. the entire class of the prestation is loss.
Example: Subsequent statutory prohibtion Art. 1266. The debtor in oblgations to do shall also be released when the
A contract of sale on meldonium (performance enhancement drug found in Maria presentation becomes legally or physically impossible without the fault of the
Sharapova), let’s say it’s a valid transaction. obligor.
If you have the contract, its valid, but let’s say after the contract there is a law that is
enacted that bans meldonium, considering it an illegal drug.
Now you have a legal impossibility, but from the get go you had a valid So when you claim loss whether physical or impossibility of performance it also
obligation but subsequently a law was passed outlawing the prestation. In that happens in obligations to do, let’s say somehow the performance is outlawed such as
case there is a loss on the thing due. if its subjective, like if the debtor is prevented from performing by law for example.
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1. NAGA TELEPHONE V. CA ( TELEPHONE POSTS) 

Example Applicability of 1267
Foreign artist asked to perform, complete with schedule, but congress was very
efficient and prohibited all acts by foreign artist, you now have a law in that case that
in particular the foreign artist isprohibited to perform. ILLUSTRATION 3
Laws will extinguish the obligation if neither party contributed in causing the
loss.
FREE TELEPHONES
If one party is the cause then it’s no longer the object to be delivered that must be NAGA TEL CO NA-SURECO
given to the creditor, but a substitution like the payment of damages. ELECTRIC POSTS
Art. 1262. An obligation which consists in the delivery of a determinate

thing shall be extinguished if it should be lost or destroyed without the fault of
In the case of Naga, Natelco a telephone company in Camarines Sur entered into an
the debtor, and before he has incurred in delay.
agreement with Na-Sureco the electrical company in Camarines Sur. The contract
When by law or stipulation, the obligor is liable even for fortuitous events, the
states that the telephone company can attach their telephone lines to the electric
loss of the thing does not extinguish the obligation, and he shall be responsible
company within Naga city.
for damages. The same rule applies when the nature of the obligation requires
So the electric company is granting the phone company the use of property. In
the assumption of risk.
exchange of that the telephone company granted the electric company 10 free
telephone units as an ex-deal. The contract subsisted for several years, but the phone
In your textbook you may read that some circumstances don’t extinguish the company expanded, attaching more wires and going beyond naga city (outside the
obligation even with a fortuitous event, remember there are 3 exceptions: (1) Law; (2) contract). Despite this difference they did not compensate the electric company
Stipulation; and, (3) Assumption of risk (refer to discussion on fortuitous events). with more phones. These wires also started damaging the electric poles
Remember the element of participation or contribution of the damages, where it will (overcapacity).
not qualify as a fortuitous event and the obligation will subsist.
What’s the slogan down stairs? “pledge for parity”
So the electric company filed for a petition
for reformation. REFORMATION
In this case the court upheld not to reform
W H E N PA RT I E S E N T E R I N T O A
the contract because clearly the document
CASES ON LOSS OF THING DUE reflected the agreement of the parties,
CONTRACT AND THE WRITTEN
DOCUMENT DOES NOT CAPTURE THE
there was no ambiguity in the contract, the
ACTUAL AGREEMENT OF THE
exchange was clear. You suppose in PA R T I E S T H R O U G H W O R D O F
exchange of telephone lines for units. CONTRACT OR BY ACCIDENT
But in this case evidence was presented
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and they decided to release both parties from their present obligation because the This is the only case that uses art. 1267.
electric company invoked article 1267. As I said it should not be used as it undermines the obligatory force of a contract.
When parties enter into a contract theY do so with circumstances, in this provision Thus a party is given the ability to just withdraw from a contract due to difficulty of the
when they enter into a contract they always discount factors or make contingencies obligation due to a change of circumstance.
and in article 1267 if circumstances arise that are not contemplated by the If you look at article 1267, “When the service has become so difficult as to be
parties when they entered into the contract, there is a change of circumstance manifestly beyond the contemplation of the parties, the obligor may also be released
(emphasis not a fortuitous event; but never foreseen by the parties) that render there from, in whole or in part.”
the performance of the obligation extremely difficult but not impossible, obligor And in this case the service is the usage
may ask or a release from that obligation by the court. of the post, it is basically a lease. And a The term “service” under Art
That provision should only be invoked judicially by filing an action in court. In this case contract of lease is a prestation to give, 1267. is contemplated to mean
the action was reformation, but the court a service is suppose to be a prestation
both obligations to do and to
held that the requisites of article 1267 to do. But the court said that the term
were established and so there could be an REBUS SIC STANTIBUS service here represents any give.
application of rebus sic stantibus. prestation to be done by the debtor.
International law concept that is often
applied to treaties that explains that
This is an international law subject
when there is a fundamental change in
somehow applied to contracts, but note the circumstances contemplated before 2. PNCC v. CA ( stone crushing plant)
this is an exception because a contract is a entering into an obligation, parties may Applicability of Article 1266
law between parties, entering full well that be released from said obligation
the contract will govern the relationship. PNCC wanted to set up a stone crushing plant. They entered into a lease contract
with the owner of a lot in Rizal for this purpose.
Thus this article allows parties to opt out of a contract thus somehow
undermining the use of a obligatory nature of a contract. The terms of the contract were:
1. The lease would be P20,000/month for the first year, P21,000/month for the second
With a drastic change of circumstance that both parties did not contemplate. year and so on;
In the end the court said the phone company can no longer use the electric poles free 2. The payments will be made 1 year in advance; and
of charge and the electric company had to pay the phone company for the phones. 3. The property would be used for rock crushing.
So in the end the court exercised their equity jurisdiction and laid down the rules that
governed the parties not completely using Article 1267. Later, PNCC was issued a temporary permit to proceed with the stone crushing.
Considering that PNCC already got their permit, the lessor demanded that PNCC pay
the 1-year advanced rental. One month later, PNCC did not pay the rent, and
expressed that they wanted to terminate the contract. So, the lessor filed for specific
Art. 1267. When the service has become so difficult as to be manifestly performance with damages, demanding that he be paid rental.
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part. Lessor invoked Art. 1266:
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SP: PNCC was claiming that there was

Art. 1266. The debtor in obligations to do shall also be released when the extreme difficulty of perfor ming the 1267 could not be invoked
presentations becomes legally or physically impossible without the fault of the obligation due to the drastic change of because the EDSA revolution
obligor circumstance. and the changing political and
Art. 1267 provides that there will be a
economic atmosphere was not
SP: You have to remember that Art. 1266 states “obligation to do”. So, it release from the obligation, but SC said
contemplates what kind of extinction of an obligation? there could be no release because Art. 1267 beyond the contemplation of
S: Loss of a thing due. could not apply because the event was not the parties
SP: Yes, but only in an obligation to do. So, SC held? beyond the contemplation of the parties.
S: SC held that this case deals with an obligation to give, not an obligation to do. This is an important element, because it is
Therefore, Art. 1266 does not apply. what makes it an unforeseen event.
SP: But you have 1267, which we explained based on Naga, covers all types of
prestations. The court held that 1266 does not apply because it refers to obligations ARTICLE 1267 vs. FORTUITOUS EVENTS
to do, and it contemplates loss, meaning legal or physical impossibility. On the other
hand, 1267 covers extreme difficulty in performance due to a change in circumstance. You have to remember if it is impossibility, you apply the rule on fortuitous event. In
Art. 1267, the doctrine of unforeseen events or rebus sic stantibus as applied in
obligations refers to extreme difficulty in performing the obligation. Difficulty is not
ART. 1266 ART. 1267 impossibility.
- covers only obligations TO DO. - “services” contemplates both obligations
- can only be invoked when TO DO AND TO GIVE This doctrine proceeds from the premise that the parties entered into an
presentation becomes legally or - invoked in instances of EXTREME obligation or contract based on a set of conditions. Now if there is a change in
physically impossible DIFFICULTY beyond contemplation of condition, which they never contemplated/ considered the law provides for a
parties release if that change makes fulfillment extremely difficult.
So 1267 requires a drastic change in circumstance which makes the performance of
the obligation extremely difficult. And neither party caused the change. Of course,
S: In this case, PNCC said that it could not fulfill the obligation because of the change there is still an obligation to perform.
in political climate in the country due to EDSA revolution.
SP: Why? When was this contract executed? This is similar to Mondragon Leisure v. CA, which involved a claim of fortuitous event.
S: in 1985.
SP: when did EDSA happen? One requisite of fortuitous event is that it must be unforeseeable.
S: The EDSA Revolution happened in 1986, but Ninoy Aquino was assassinated in And the SC in that case the event was not unforeseen. Because at the time
1983. The SC held that PNCC should have been able to adapt or foresee the change Mondragon entered into the contract it was already the onset of the financial crisis.
in political climate. SC said that after the assassination of Aquino, mass Both Mondragon and PNCC required the element that the event is unforeseen.
demonstrations were common, so it should not have been a surprised or beyond In this case, it could have already been foreseen by PNCC because there was already
contemplation of parties political and economic turmoil, at that time. At that time, I think we had no dollars. In
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fact at one point, the central bank governor pretended to have a dollar reserve of 4 difference is that it is possible to constrain Art. 1267 only to a specific
billion dollars or something, when actually it was never there. transaction. Meaning such case would not be a precedent to future decisions.
ART. 1267 vs. ART 1250 (INFLATION) AND FINANCIAL CRISIS AS FORTUITOUS Art. 1267 contemplates a change in circumstance beyond the contemplation of the
EVENT parties. Each transaction and circumstances of a transaction is unique, thus, even if the
decision reaches the SC and the SC affirms, it will not become precedent. Other
Art. 1250 speaks of Extraordinary Inflation. As I said before, Art. 1250 is pretty much a parties could not possibly claim it because it is only peculiar to the situation of the
dead law, just like a claim of financial crisis as a fortuitous event. And my take is that it contracting parties.
could not be applied because if applied, the application would just magnify the
problem. Unlike in Art. 1250, is the SC says there is extraordinary inflation, it is a Precedent. Any
one similarly situated could invoke and benefit from that decision. In the same
As I explained, in the case of 1250, or in financial crisis as fortuitous event, there is no manner, if there is a declaration of the financial crisis as a fortuitous event. That will
loss allocation. It is just shifting the burden from one party to the other. The loss also be claimed by similarly situated parties.
is still there. It is just a question of who should bear the loss. And if you apply
1250, you will create problems because you would be shifting the burden to, let’s say That consequence will not likely happen in the application of 1267. But as I said,
the lenders. 1267 is rarely applied or it should not be applied because it undermines the strength
of a contract. It undermines contract law.
Just like in our example on a financial crisis as a fortuitous event. The lenders will be
the one bearing the loss. And that will not be good for the economy. So they are Contracts are unlike litigation. In litigation, you argue based on what happened, in
basically dead law. contracts, you anticipate what may happen in the future, and then you provide, rules
that may govern. That’s why you have a provisions.
SP: How about this one, Art. 1267, it is the same right? If you do it, you will just create And you cannot contemplate or predict everything that will happen.
the same problem. So, it is a dead law? So sometimes, a lot of things, they are simply beyond the contemplation of the
S: But they were able to apply it in Naga Tel. parties. And this article provides for an escape clause and that is is possible to
SP: They applied it one time, but undermined it immediately by saying that now, we successfully invoke Art. 1267.
are invoking our equity jurisdiction, so here are the terms by which you should
transact. So the debtor was not really released from the liability. That’s why the SC Q: So for 1267 to apply, there must an unforeseen event. Is there criteria for an event
said that, we are invoking our equity jurisdiction. That was the only instance they ever to be unforeseeable?
applied it.
So? 1267 is pretty much a dead law just like 1250 and financial crisis as fortuitous SP: No. you just show that it is a matter of proof. That at the time we entered into the
event? contract, these are the only things we considered. And at that time, the event that
SP: No. There is a chance to win using Art. 1267. happened subsequently, could not have been predicted by the parties.
Although they have the same effect, as Art. 1250 and financial crisis as fortuitous So you have the same element, in fortuitous event, in art. 1250.
event, in that they will just shift the burden from one party to the other. The
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But its transaction specific for art. 1267. So there is no standard it is matter of proof
that the parties could not foresee the event. Art. 1271. The delivery of a private document evidencing a credit, made
voluntarily by the creditor to the debtor, implies the renunciation of the action
which the former had against the latter.
CONDONATION OR REMISSION OF DEBT (ART 1270-1274) [Condonation is basically, the Creditor returning the Promissory Note and saying,
“Forget about it,” or “I’m giving that to you.”]
CONDONATION Implied Condonation

Creditor does not collect until it prescribes. So, in this case, it starts out as
Condonation or Remission is another mode of extinguishing the obligation condonation but eventually will be barred by prescription.
It Is the gratuitous foregoing of an obligation by the creditor
Express Condonation
Express Condonation is needed when, for example, the Creditor wants to give the
Art. 1270. Condonation or remission is essentially gratuitous, and requires benefit of the obligation to the debtor, and the debtor wants some assurance that the
obligation is already extinguished. It takes 10 years for the action to prescribe, within
the acceptance by the obligor. It may be made expressly or impliedly.
that time, the Creditor may change his mind and, all of a sudden, decide to collect.
One and the other kinds shall be subject to the rules which govern in officious
donations. Express condonation shall, furthermore, comply with the forms of
Express Condonation is, in effect, Donation. It is the Creditor donating to the
donation.
debtor the proceeds of the obligation. And this entails formal requirements.
FORMS OF CONDONATION REQUIREMENTS FOR EXPRESS CONDONATION
1.EXPRESS CONDONATION 1. Donation must be in writing ( Creditor must express consent)

2.IMPLIED CONDONATION 2. The debtor must accept the donation in deed of donation
3. WAIVER
Waiver
How will condonation happen? But what if, you don’t want any formality in the donation, but the debtor still wants
Example: assurance that the obligation is extinguished?
Debtor owes Creditor X amount. The debt is covered by a Promissory Note
and is not yet due. Example, the Debtor does not want to sign any acceptance, but the Creditor really
wants to give. Without signing any acceptance, the donation will not be valid. And,
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for some reason, the Creditor and Debtor don’t want to just let the action prescribed
because this does not provide any assurance. Example:
A issues a Promissory Note, payable to Bearer.
The Alternative is not to make a Donation, but to make a Waiver. It is issued to B,
Waiver is not a donation. It is just saying that I waive my claim based on this negotiated to C,
promissory note. It is the same effect. But because it’s a waiver there is no need and eventually negotiated with D.
for acceptance. D then negotiates it back to A.
Assuming its not yet passed due, this example shows confusion or merger.
Restrictions on Condonation (Inofficious Donation):
This means that the debtor who issued a promissory note, being the bearer, is
also the creditor. This really happens in real life. Sometimes, you purchase from
Example:
the market your own debt instruments. That will be confusion and merger.
C loans D P 20M. C condoned. C has a compulsory heir, X. C died. Therefore, X has a
legitime (A Legitime is something that will not be denied X except for certain
Example: 2 Corporations
exceptional circumstances).
Corporation A is the debtor; Corporation B is the creditor. They merge. This means
That P 20M is the only assets owned by C when he died.
they become one juridical personality. After the merger, the obligation between
them will be extinguished as a result of the merger between their corporation.
What will happen?
The condonation may be invalidated to the extent that it reduced the legitime
entitlement of X. This is what you call an inofficious donation.
COMPENSATION (1278-1290)
CONFUSION OR MERGER OF RIGHTS (ART 1275-1277)
COMPENSATION
The offsetting of obligations between two parties

CONFUSION OR MERGER
TYPES OF COMPENSATION
Another mode of extinguishing an obligation wherein the debtor and creditor
become ONE. LEGAL CONVENTIONAL FACULTATIVE JUDICIAL
By operation of Compensation by Compensation Compensation

Art. 1275. The obligation is extinguished from the time the characters of law but a relevant agreement affected by one pursuant to a
creditor and debtor are merged in the same person. party must invoke party, who has court order or
it the right to affect decision
it
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Art. 1279. In order that compensation may be proper, it is necessary: ILLUSTRATION 4: MUTUAL DEBTORS AND CREDITORS
1. That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other 1. TRANSACTION 1
2. That both debts concept 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 PROPERTY
SELLER BUYER
latter has been stated PRICE
3. That the two debts be due
4. That they be liquidated and demandable 2. TRANSACTION 2
5. That over neither of them there are any retention or controversy,
commenced by third persons and communicated in due time to the debtor PROMISSORY NOTE
SELLER BUYER
So article 1279 gives us the requisites for a valid compensation. Lets discuss each.
1. Each party must be principally bound as debtor and creditor of the other
Now, we have 2 transactions/ obligations/ contracts.
Note, being mutual debtors and creditors to each other is not the same as
In Obligation 1, the seller is the creditor with respect to the payment of price. In
having reciprocal obligations.
Obligation 2, buyer is the creditor.
Therefore, as long as all the other requisites are present, we can have legal
Example (Reciprocal Obligation):
compensation.
Transaction: Seller and Buyer executed a contract to sell.
There must be 2 separate transactions because that will be the basis for offsetting.
Seller will convey property and buyer must pay the price. In this transaction, the Seller
is a creditor in terms of conveying property, and is a debtor in the payment. One the
“PRINCIPALLY BOUND”
other hand, the Buyer is a creditor in terms of the payment, and is a debtor in the
conveying of the property.
Example: Not Principally Bound
In this case, can there be compensation?
B acts as attorney-in-fact of C. B executed a CTS with A as AIF.
Can there be offsetting in this situation?
There can be NO COMPENSATION.
What is contemplated in the 1st requirement is that they be mutual debtors and
There cannot be offsetting in this case. In this case, the principals are A and C (say,
creditor to each other. This means that there must be 2 separate transactions.
for example, A is the creditor and C is the debtor). B, the Buyer, is not a Debtor, the
Ill give you an example that fulfils the requirement. debtor is C. B is only acting as an Agent. Therefore, B is not principally liable.
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FACULTATIVE COMPENSATION In short, in terms of support legal compensation which requires all the elements
of compensation to be present cannot be done. However, facultative
Example of a Facultative Compensation: compensation initiated by the part who is entitled to support may be done.
Obligation is not yet due (3rd requisite of legal compensation).
Thus, legal Compensation is not proper. The party who has the benefit of the But remember legal compensation is permitted in cases of arrears of support. Support
period can say let’s just have compensation. in Arears is Support that has already accrued. In this case, it can already be assumed
that the one entitled to support does not need the amount. He can already live by the
In this case, there will be facultative compensation rather than legal compensation. support accruing in the future.
COMPENSATION IN SUPPORT Thus, when someone asks when compensation is allowed in cases of support, it
is not automatically Yes or No.
Example: Compensation in Support
IN CASES OF COMPENSATION ON SUPPORT

ILLUSTRATION 5: COMPENSATION IN In this case, A is the debtor for the
SUPPORT loan of P 1M, and the creditor for the We must look at who has the benefit of the provision of law, or who is entitled to
obligation of Support. block offsetting. If that’s the case, that person can possibly claim offsetting
1. TRANSACTION 1
Can there be compensation?? through facultative compensation, meaning at the option of the one who has
It depends. benefit of law.
LOANS 1M from
A B
COMPENSATION IN CRIMINAL CASES
Case 1: B tells A, “I will no longer give
2. TRANSACTION 2 you support, we will just offset. I will
invoke Legal Compensation.”
A is entitled to
A support of 1M B Art. 1275. The obligation is extinguished from the time the characters of
This cannot be done. creditor and debtor are merged in the same person.
Legal compensation cannot be done

to offset accruing support ( Art 1287)
Example:
B was convicted of a crime, and was ordered to pay damages of P 1M to X today. In a
Case 2: A tells B, “Forget about the support, just apply it in the payment of
separate transaction, A owes B P 1M.
the loan.”
This is valid. But it will be Facultative Compensation, rather than Legal
Can Compensation take place?
Compensation. A, as the one entitled to support, has the benefit of the provision
of the law.
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Case 1: B tells A, “I want to invoke Compensation.”

SP: But let’s say there is no undertaking? Could Mondragon go after Sola?
This is invalid. Offsetting will not be allowed here, because somehow, it will be S: Depends on the property regime.
rewarding B and emasculating the penalty. SP: Alright, so it happened now, what would be the property regime?
S: Absolute Community,
Case 2: A tells B, “Forget about the damages in the Criminal case, let’s just apply it in SP: So? What do we need to look at?
offsetting in payment of the P 1M loan.“ S: if it redounded to the benefit of the family
SP: yes, you need to make that effort.
This is valid. Facultative compensation is available at the option of A. First, you must determine whether it is a liability to the conjugal partnership.
If it is not, like in this case it is a liability of the wife, then you go to that level.
You must determine whether it redounded to the benefit of the family. If there
was then it would be enforced to that extent against the absolute community
CASES ON COMPENSATION property.
2. INSULAR INVESTMENT and TRUST CORPORATION v. CAPITAL ONE EQUITIES

1. MONDRAGON V. SOLA ( warehouse)
CORP. (T-Bills)
Both must be principally bound
Conduit or Principally Bound
Mondragon engages in the sale of consumer products. They had a contract with Sola:
Transaction 1: Insular purchased Treasury Bills (T-bills) worth P260M from Capital One.
Mondragon would use Sola’s bodega/ warehouse, and, in exchange, Mondragon
But what was actually delivered was only P 121M. So there was a balance of P 140M.
would pay Sola service fee/ rent.
Transaction 2: Insular sold T-bills to Capital One worth P 186M.
Transaction 3: Insular purchased from Planter’s Bank T-bills worth P 186 M.
Sola’s wife had a separate agreement with Mondragon. They had a Franchise
The claim of Insular is that: they had an agreement that Planter’s would just give
Distributorship Agreement. Sola’s wife owes Mondragon payables. In the same
Capital One the 186M, and Insular would get a fee (a very minimal amount around
manner, Mondragon owed Sola and amount
20,000).
SP: Will there be compensation?
There were 2 transactions between Insular and Capital One
S: Yes, because Sola wrote a letter to Mondragon saying that he would pay his wife’s
In the first, Capital One, as seller, sold T-Bills to Insular worth 121M.
obligation through post-dated checks. The court held that this was a showing that he
In the second, its Capital One buying from Insular T-Bills worth 186M.
wanted to be held liable with his wife.
SP: so, we are dealing here with the issue, on whether the parties are principally
bound as debtors and creditors to each other.
Principally Bound
In the first transaction, Sola, was a creditor.
Capital One wanted offsetting of these two transactions. However, Insular said there
In the second transaction, the wife was the debtor.
can be no offsetting because they are not principally bound as debtors and
In between these transactions, Sola issued an undertaking (the letter) to be held liable
together with his wife.
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creditors. Insular said that he was only an agent, specifically, a conduit. In short, This is an example that in court, it is not what really happened, its about what you can
an agent for planters only. prove. Because the real transaction was that IITC was only a conduit here. For some
reason, Planter’s could not sell directly to Capital One. Because I think there were
SC held that Compensation was Proper. They principally bound as debtors and certain limitations. So planters could not have transaction with Capital One. So they
creditors. The basis of the SC was they have documents: Confirmation of Purchase told Insular, we have this transaction. You will just facilitate. And then we will give you
and Confirmation of Sale, which show that Insular was a principal in the transactions. a small fee.
These confirmations stated something like, “we as principals…confirm the purchase.”
In fact, evidence was presented by Insular showing a receipt that they were paid a
Confirmation of sale and of purchase are issued when T-bills are sold between facilitation fee. They also presented check payments which were directly between
investment houses. The seller would issue a Confirmation of Sale. And the Buyer (ex. Planter’s and Capital One, without involving Insular. But the courts disregarded these
Capital One) would issue Confirmation of Purchase. because of the evidence of confirmation of sale and purchase. So the court believed
that it was not a conduit. Even if that was the reality.
There is no mention at all of a conduit arrangement. Therefore, SC held that based on How did I know that? I handled the case!
the documentation they are principally liable.
In these 2 transactions, But in the end, Insular won. Insular was able to collect around 186M. Litigation lasted
In T1: Insular = creditor for 10 years. In fact, Insular already wrote off the entire thing as loss. So it was pure
In T2: Capital One = Creditor. gravy when they received the interest.
And during litigation, planter’s earned the money to pay Insular.
Same Kind & Quality Because if litigation ended earlier, and planters was forced to pay, it may have had a
The second requisite is that the debts need to be of the same kind or quality. bank run and collapsed. So, sometimes, litigation not really for winning but for
However, T-bills may differ in amounts or interest rates. waiting.
T-bills are auctioned periodically (I think every 2 weeks) by the government. So the Upon investigation, we found that during that time, there was an investment house
Bureau of Treasury will offer for sale T-bills and then at the auction, certain rates will that oversold securities. It was selling securities left and right. And it never had
be established. So, there could be different rates. securities in the first place. They were receiving money but they didn’t have securities.
So, when the creditors would ask for the securities. They would appease the creditors
The SC held that, these T-bills are basically, government indebtedness. They have a by giving them jewelry. And these were not the real creditors, they were the traders.
face value which could be used. In fact, in a separate transaction Insular recognized
that this instrument could be exchanged. And somehow that was the reasoning of the Because this is what happens, say, you are a group of traders (from different
court. investment houses), so what you would do is just call each other, and say, “Hey I have
this T-bill or X amount. I want to sell; this is the rate.”
But the main issue here is whether the parties principally bound as debtors and
creditor to each other. Based on documentation they were. Therefore, there can But in reality, it is just like lending. At that time, how it worked was, I want to lend P
be legal compensation. 100M, but I can’t, because I do not have the license to lend. But we would document
it as a sale of T-bills. So I would lend you P 100M, then I would repurchase it through
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T-bills. So you will get the money. And then you were supposed to deliver the T-bills
to me. That was the scam.
So, they traded and called everyone saying, “We want to borrow.” So they lent to this
entity, who supposedly sold T-bills. So when the entity defaulted there were no T-bills
to be delivered. In fact Capital one closed. There were several investment houses that
were closed because of that.
TREASURY BILLS:
- T-bills is an indebtedness of the government
- Trading T-bills is basically trading government securities or short term
government indebtedness.
- BILLS VS. BONDS
- Bonds: when the indebtedness lasts for over a year.
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Art. 1279. In order that compensation may be propert, it is necessary: 1. Mondragon was charged a fee in the use of a certain warehouse. In this case,
Mondragon was the debtor and the creditor. He transacted with Sola
1) That each one of the obligors be bound principally, and that he be at the
2. On a separate transaction, the wife of Sola sold goods ( presumably of
same time a principal creditor of the other;
Mondragon) and needed to pay X amount. Again, the creditor would be
2) That both debts consist in a sum of money, or if the things due are
Mondragon and the wife of Sola would be the debtor
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 * the husband made an undertaking to be bound with his wife in her obligation to sell
goods to Mondragon
4) That they be liquidated and demandable
5) That over neither of them there be any retention or controversy,
If you take a close look at this case, legal compensation would not have taken place
commenced by third persons and communicated in due time to the debtor
because you do not have the same debtor and creditor in the same transaction.
However, the husband here made an undertaking to be liable for the obligations of
the wife. In the case, the husband became a debtor here. That’s the reason why
legal compensation was possible under Mondragon. Without that undertaking,
there would not be compensation because the husband would not be a debtor in
Review of Cases the second transaction.
I. The first requirement of legal compensation is that each one of the obligors
3. CITIBANK v. SABENIANO ( Geneva and PH Bank)
1. INSULAR V. CAPITAL Exception to the corporate rule on bank entities
Both parties must be principal creditors and debtors
Let’s say you have a corporation. The corporation has a Metro Manila office and a
Insular and Capital One acted both as a principal. Insular here is the debtor and Cebu office. Let’s say that the Cebu office transacted with X. The Cebu office has a
creditor while Insular, in the second transaction is the creditor. In the second payable to X. In a separate transaction, X has a payable to the Metro Manila office.
transaction, Capital One is the debtor. The Supreme Court said that based on the Can there be compensation in this case? Answer is yes. These offices form one
documents of the transaction, both parties were acting as principals. Therefore, juridical person. The corporation has several offices. These offices represent the same
there is compliance with the fulfillment of the first requirement of a legal juridical entity so compensation would be possible in this case.
compensation that each party should be principally bound as debtor and creditor
of each other.
The case of Citibank was peculiar because in Citibank, there was a Manila branch and
But remember, a conduit is not a principal debtor/creditor. However being a conduit
there was a Geneva branch.
must be proved for legal compensation not to occur.
Entirely, if you follow corporate rules, these entities should be considered as on
juridical entity or personality. However in this case, the Supreme Court prevented
2. MONDRAGON V. SOLA
the application of legal compensation because under our law, the branches are
When a party is considered a principal creditor
treated as separate from the head office or from other branches for purposes of
preserving the assets of the Manila branch. This is in favor of the creditors of the
There were two transactions:
Manila branch. But to arrive at the conclusion that the Geneva branch was
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separate from the Manila branch, the Court resorted to American jurisprudence money when there’s a withdrawal by the depositor, and the depositor is the
saying that these should be treated as separate. The case of Citibank is peculiar. creditor. This is transaction 1.
It is an exception. Let’s say in a separate transaction, depositor borrowed from the bank and obtained a
letter of credit.
Generally, if you have a corporation, it does not matter if you deal with an office or What’s a letter of credit?
branch of that corporation. That branch would be regarded as part of the corporation It’s like a standby loan, that after complying with certain documents, the bank would
- unless you find a law or you find jurisprudence in this case saying that there release the loan proceeds pursuant to the terms of the contract.
would be separate treatment of the branch from the other. So, if let’s say this letter of credit is payable to X – meaning somebody whom the
depositor transacted (let’s say depositor wants a purchase from X) – X does not want
the check or some undertaking by the depositor. But once a bank guarantees, the
bank will issue a letter of credit or guarantee letter, so here whatever will be drawn
ILLUSTRATION 1: CAN A CREDIT LINE TO THIRD PARTY OFFSET DEPOSIT? from this letter of credit will be a liability of a depositor.
So, if there’s a release of the proceeds of the letter of credit to X, the depositor
TRANSACTION 1: will be the debtor and the creditor would be the bank.
DEPOSIT DEBTOR
Let’s assume you have these two transactions, but there’s no release of the proceeds.
DEPOSITOR RETURN DEPOSIT BANK Can there be offsetting?
No, because in the first transaction the bank is actually a debtor.
CREDITOR
In the second transaction, there’s no release yet of the proceeds of the loan
TRANSACTION 2 under his letter of credit. The depositor is actually not yet a debtor. You will
CREDITOR have compensation only when there is a release of loan proceeds with X
pursuant to the terms of the letter of credit.
DEPOSITOR BANK
OBLIGATION TO PAY LOAN
DEBTOR II. The second requirement is that both debts consist in a sum of money or if not
are of the same kind or quality.
CREDIT LINE TO
THIRD PARTY
(Provided Debtor fulfills
4. UNITED AIRLINES V. CIR
X Taxes cannot be offset
certain requirements)
THIRD PARTY
The Court held that when you speak of debt, the terms do not include taxes. Taxes do
not constitute a debt. Taxes are obligation to the state as a sovereign entity;
Ill give you another example. therefore there would be no compensation.
In a case of a bank and a depositor – 
The depositor committed a deposit in the bank (savings account or time deposit). Example:
A deposit by depositor in the bank is actually a loan transaction. The depositor is X paid income tax to the National Government. This is the first transaction.
claiming money so the bank is the debtor or the borrower, obliged to return the
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X has to pay income tax to the National Government for income returns during a In a case (Francia v. IAC), X owes the local government, real property tax.
certain year. It is the tax you pay for your real estate.
In a separate transaction, X has a receivable from the National Government. This can In a separate transaction, X was entitled to get from the national government, a
be anything not necessarily related to tax – it can be a tax refund, just compensation certain amount as compensation for the next appropriated property. So the claim was
for the exercise of eminent domain of the Nat’l Govt. or anything in lieu of the Nat’l X wanted to offset this receivable from his tax payable to local government. Supreme
Govt. Court held that there could be no offsetting because this is an obligation to the state
If you have this, X cannot legally insists that the receivable from the government can in its sovereign capacity not as a debt.
offset against X’s liability to pay the tax because the tax is not a debt, and is not On the other hand, there’s also another objection. The local government is
subject to legal compensation. different from the National Government
A requisite of legal compensation is that there must be a debt. Offsetting is now out
of the question since taxes are not debts. III. The third requirement is that both debts should be due
In United Airlines, SC held that you could not have offsetting of taxes against some It should not be subject to a term or condition, meaning it is a pure obligation. There
other obligation. is an obligation to be paid immediately. Parties in separate transactions are debtors
But in the course of the decision, the Supreme Court validated the actual and creditors of each other. For example we have this situation:
offsetting done wherein there would Y is the creditor in Transaction 1 and X the debtor. In transaction 2 X is the creditor
be a claim for refund and in reality, it and Y is the debtor. So that fulfills the first requirement. However transaction 1 is
turned out that there was a deficiency Taxes cannot be offset against payable upon demand. Transaction 2 is due on December 31, 2016. Y demands from
tax. So that Court said that the refund other obligations since they are X, X cannot say, “we can just offset” because transaction 2 is not due. So, there can
was out of the question because in fact, be no legal compensation.
not debts. However, United
t h e re i s a d e f i c i e n c y. S o m e h o w,
Airlines can be characterized as What will happen here is either conventional compensation (both parties agree that
practically, there was an offsetting.
Although, the SC, before recognizing a form of facultative obligation, there would be an offsetting) or there would be facultative compensation. It will be at
that offsetting said that the taxes would at the discretion or option of the option of Y – the one who has the benefit of the period. Or, both debts should be
not be the subject of compensation. demandable.
the state
It could have been validated not as legal What do you mean by demandable?
compensation but as facultative When you say demandable, it’s not subject to any legal defense.
compensation. It is the option of the Let’s say this obligation already prescribed or is unenforceable or it’s part of a void
state. The Court explains offsetting was proper to avoid a multiplicity of suits or obligation. In these instances, there could
proceedings. That proceeding was the appropriate venue for the proper computation be no legal compensation, because it is not
demandable. It may be due but it already DEMANDABLE
of the refund and the deficiency.
prescribed. Let’s say it is based on a written AN OBLIGATION THAT IS NOT
Heres another example. contract after the non-payment or default SUBJECT TO ANY LEGAL DEFENSE 
without anything done by the creditor and (Ex. Void Obligation, Prescribed
the obligation will prescribe then you could Obligation, Unenforceable obligation)
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not have compensation. Let’s say that this is an obligation based on a promissory note Let’s say the parties already agreed. The rental is easy to fix because it’s in the
enforceable within 10 years. From then, there was a default and if it weren’t paid contract.
within the 10-year period, then there would be no offsetting because the obligation is If the lessor agrees to the amount of repair cost, then you can have an offsetting.
no longer demandable. However, in the case of it is only a claim for repair cost. There are issues. First, are
these repair costs contemplated by the contract to be payable by the lessor. Second,
IV. Fourth, both debts should be liquidated is there proof of the repair cost? (In which case, it is only a claim, there is no proof, it is
still not liquidated) It is only liquidated rom the moment that there is a validation of
5. FIRST UNITED V. BAYANIHAN ( Dump Trucks) the repair cost – either by acceptance by the lessor or a decision by a relevant court.
A claim is not a liquidated amount After, you’ll have a liquidated debt in
which case offsetting can be proper. That is basically the case of Lao.
LIQUIDATED
V. The last requirement is that there be no retention or controversy on either
The amount of the obligation is FIXED or DETERMINED. debts
Example: Offsetting rentals with monthly amortisations

Example: Unliquidated claim
X owes Y one million. X sues Y for 1M but it is only a claim. ILLUSTRATION 2: OFFSETING MONTHLY RENTALS WITH AMORTISATIONS
If you have this situation, you cannot have offsetting. Why?
Because there is no debt. A claim is not a debt. It is not enforceable for X to get a TRANSACTION 1:
judgement. On the other hand, if this were already an obligation, there could have PROPERTY
been offsetting
LESSOR LESSEE
6. LAO V. SPECIAL PLANS ( Restaurant repair claim) MONTHLY RENTAL
CAN BE OFFSET
Repair claims are not liquidated AGAINST EACH
TRANSACTION 2 OTHER UNTIL
Now let’s assume that X won in this case. It is no longer a claim, there’s already a MONTHLY AMORTISATION MONTH 6
judgment but the judgment still has to be fixed. There should be a computation
of the award. LESSOR LESSEE
Let’s say it’s a labor claim. There’s already a judgment but there should be a LOAN
computation of the award, so it’s still not yet liquidated.
We’ve seen this in the case of Lao. MONTH 6:
Let’s say we have a lessor and a lessee. Lessee will have to pay rentals. Let’s say under
the contract, the lessor has to pay for repairs cost if these were already determined.
If they’re due, demandable and liquidated, then you can have an offsetting. LESSOR LESSEE
INSOLVENCY PETITION:
GRANTED BY COURT
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Let’s say lessor in transaction 1 has a receivable from the lessee. On a separate Art. 1290. When all the requisites mentioned in Article 1279 are present,
transaction, lessor owes lessee in a loan transaction. Lessor has payable to lessee and compensation takes effect by operation of law and extinguishes both debts to
a monthly amortization. They’re of equal amounts. Can there be compensation? Yes, the concurrent amount, even though the creditors and debtors are not aware of
because they’re both debtors and creditors, and all other requisites are present. the compensation.
They’re both due and demandable and liquidated. Therefore, as they accrue, there
can be offsetting. However, let’s say if a creditor filed an action against lessor
(insolvency petition) under the Financial Rehabilitation Law, we will assume the court As long as the requisites occur, there will be legal compensation. That doesn’t mean it
ordered that the lessor should not dispose of any property without court approval. happens automatically. Somehow a party must invoke it.
There should be no disposal of properties without court approval, and that took effect Situation: All requisite are present, legal compensation will take place as a matter of
– let’s say, the order happens month 6. Can there be offsetting? law. But lessor or lessee continued paying rentals. They accrue. Lessor must therefore
Prior to the order, there can be offsetting because all the requisites of legal pay loan amortization that accrued.
compensation are present. Upon issuance of the order, there is already a That’s the benefit of Legal Compensation. Even if Legal Compensation occurs, the
controversy or retention with respect to transaction 2. The two transactions no relevant parties must invoke it.
longer comply with the last
requirement: that there should be no S: Can you refuse Legal Compensation? 
other controversy or retention with A court decision ordering that none JSP: It’s not for you to refuse. If all requisites are present, you cannot refuse.
respect to either debt. of the properties of the lessor be If any of the requisites of legal compensation does not exist, a party can invoke the
disposed of without the consent of conventional compensation, facultative compensation or conditional compensation.
In this case, there would be retention the court. Rental paid to the Lessor is
with respect to the rental. The rental is a Example:
a property. He cannot compensate
property of the lessor. If the court says You have two contracts. One is a COS where the seller needs to convey the property
that the property of the lessor would not his obligation to pay amortizations
and the other needs to pay a certain amount of money. The question is – is this legal
be disposed of without the consent of with the rental payment he receives.
compensation?
the court, the rental could not be offset The answer is no.
against the accruing amortization. Why?
Otherwise, there would be a preference given to the lessee as creditor as to prejudice Because there are different objects of the prestation: one is property, one is money.
of other creditors of the debtors But they can have conventional compensation, or it can be stipulated in the contract.
It can be stated that the property be substituted by the payment of the sum of money.
Art. 1286. Compensation takes place by operation of law, even though the Apart from legal compensation, there are other forms. Thats what we’ll take up next.
debts may be payable at different places, but there shall be an indemnity for
expenses of exchange or transportation to the place of payment
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KINDS OF COMPENSATIONS Art. 1285. The debtor who has consent to the assignment of rights made by a
LEGAL JUDICIAL FACULTATIVE CONVENTIONAL creditor in favour of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
5 requisites must A court decision A unilateral By mutual/ assignor was notified by the debtor at the time he gave his consent, that he
be present, issued ordering option by one bilateral reserved his right to the compensation.
occurs by for party agreement of If the creditor communicated the cession to him but the debtor did
OPERATION OF compensation the parties for not consent thereto, the latter may set up the compensation of debts previous
LAW between parties offseting 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
Lets explain facultative compensation
until he had knowledge of the assignment.
Let’s say we have two loan transactions, and we have A and B. In one transaction, B is
the debtor owing 1M. In the other transaction, A is the debtor owing 1M to B. This is
subject to a term. Let’s say the first transaction is already due. No legal compensation
because the second is not yet due. However, A can have an option. A can say – RULES UNDER 1285
“Don’t pay 1M, we’ll just forget and offset two liabilities”.
DEBTOR CONSENTED TO Debtor cannot invoke compensation
ASSIGNMENT OF CREDIT( par 1) against assigned credit UNLESS he
Art. 1287. Compensation shall not be proper when one of the debts arises notified the assignor ( original
from a depositum or from the obligations of a depositary or of a bailee in creditor) at the time he gave consent
commodatum. that he reserved his right to
Neither can compensation be set up against a creditor who has a claim for compensation
support due by gratuitous title, without prejudice to the provisions of
DEBTOR DID NOT CONSENT TO Debtor may set up compensation of
paragraph 2 o Article 301. (1200a).
ASSIGNMENT OF CREDIT debts previous to assignment of credit
but not subsequent
Art. 1288. Neither shall there be compensation if one of the debts consists in
civil liability arising form a penal offense. DEBTOR HAS NO KNOWLEDGE OF Debtor may set up compensation of all
ASSIGNMENT OF CREDIT debts previous to assignment and
after until he has knowledge of said
LEGAL COMPENSATION IMPROPER WHEN assignment
1.Obligation arising from a penal offense CONSENT OF A DEBTOR IS NOT NECESSARY IN ASSIGNMENT OF CREDIT. It
2.DEPOSITUM is only material when it comes to whether or not compensation may be invoked.
3.COMMODATUM
4.CLAIMS FOR SUPPORT
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KINDS OF NOVATION
7. PEREZ V. CA
OBJECTIVE SUBJECTIVE
Exception to Art. 1285.
CHANGE IN PRESTATION CHANGE IN DEBTOR OR CREDITOR
What should be your takeaway in the case of Perez? (ex. dacion en pago)
All the requisites of legal compensation were present. A and C are both debtors and
creditors, under the law. So they are of the same kind, due and demandable and OR BOTH: CHANGE OF PARTY AND
liquidated. There is an offsetting. PRESTATION
But in the case of Perez, the SC said that if you are dealing with debt instruments, you
ought to know that the debt instruments you issue would transfer from one
party to another. This would mean they would be negotiated in due course. So for there to be novation, there
REQUISITES OF NOVATION
Therefore, you are supposed to have should be an old valid obligation
consented to the subsequent because if it’s not valid, there is nothing
assignment or negotiation of the These were money market to be extinguished. Second, there 1. Old valid obligation
2. New and valid obligation extinguishes
debt instrument. transactions. By the nature of the should be a new and valid obligation.
or modifies the old obligation either in
In that case, C could not claim legal obligation, the SC said that there was That new and valid obligation
terms of the object or subject or both
compensation because there was no extinguishes or modifies the old
pre-consent to the assigning of the
consent from the start on the further obligation either in terms of object or
obligation. No subsequent consent
negotiation of the debt instruments. subject or both.
was necessary.
What should be applied is the provision
on the consent of the party – to ILLUSTRATION 3:NOVATION
subsequent assignments of an
o b l i g a t i o n . T h e re w o u l d b e n o TRANSACTION 1: CONTRACT OF SALE
compensation in those instances.
PROPERTY ( property not identifiable in CoS,
A B
PARTIES DECIDED TO NOVATE)
Novation (1291-1304) 1M
What is novation? TRANSACTION 2: NOVATION OF CoS
NOVATION A B
1M
It is the extinguishment of the obligation by the substitution or change of the obligation,
which immediately extinguishes the old obligation or modifies it. Is the novation to extinguish the Contract of Sale valid?
141
There’s a contract of sale. A selling a property to B, but the property cannot be entitlement of the creditor against the original debtor – simply because there is
identified based on the COS. If you cannot identify the object of a contract, then already extinction. There is no qualification. If you want to go after the original debtor
you have a void obligation. Let’s say the parties entered into a new obligation. A and you’re the creditor, you have to reserve in that case. What is peculiar is the
would pay B a sum of money (1M) then it would extinguish the obligation. There’s no exception – except when said insolvency already existed and of public knowledge or
point here. Old obligation is void obligation. So it cannot extinguish it. There’s known to the debtor when he delegated his debt. Why is it peculiar?
nothing to convey.
S: Bad faith? 
However, the case would be different if the first contract is a valid contract. If there’s a JSP: No, not bad faith.
valid first contract and invalid subsequent contract, is the novation valid? Generally,
no but it can be agreed upon by the parties that not withstanding the invalidity of the Take note the exception is: the old debtor will be responsible for the insolvency
second obligation, the first obligation may remain valid. of the new debtor if said insolvency of the new debtor was already existing and
of public knowledge or known to the debtor when he designated the debt. Is
there a problem with it?
Art. 1295.The insolvency of the new debtor, who's been proposed by the
original debtor and accepted by the creditor, shall not revive the action of the Let’s illustrate: 
latter against the original obligor except when said insolvency was already So you have the old debtor and new debtor. You have delegacion. Old debtor owes
existing an of public knowledge, or known to the debtor when he delegated his 1M to creditor. Old debtor transferred the obligation. Of course all of them consented
debt. to this delegacion, that’s required.
On day 1, new debtor was insolvent. Assets are less than liabilities. This is known to
the old debtor only.
GENERAL RULE UNDER ART 1295
In that case, you were right that it would be bad faith because the old debtor knew
Insolvency of the new debtor that is accepted by the creditor does not revive the action the case and he was proposing somebody who is insolvent.
of the creditor against the old debtor What you have to be careful about is the insolvency information – not accessible to
creditor. Creditor could not have known even by exercise of due diligence. If creditor
EXCEPTION
had known, that would be inexcusable. In which case, the creditor should not allow for
1. Insolvency was already existing and of 2. Known to the original debtor at the this thing to happen and it would be the fault of the creditor.
public knowledge at the time of the time of delegation But that is some trick issue. What is more problematic is the first qualification –
delegation except if it’s of public knowledge.
What’s the problem with that?
If it’s of public knowledge, then the creditor knows. Then if the creditor knows, and he
accepted the debtor then that should amount to a waiver. But if you look at the law, it
Article 1295 is peculiar.
says the old debtor shall be liable.
So you have here what kind? Delegacion. So the old debtor proposed to the new
My say is the old debtor should be liable if the old debtor has the information and did
debtor with the consent of the creditor. The new debtor turns out to be insolvent,
not disclose it to the creditor who is in no position to know the information. But the
unable to pay the debt. The insolvency of the new debtor shall not revive the
142
moment the creditor has access to the information, and yet accepted the new debtor, ILLUSTRATION 4 CREDITOR PAYING A PREFERRED CREDITOR
that should be a waiver. But, you have that provision.
1. TRANSACTIONS 1M
Now if you have a change of creditor, what do you call that? C1 PREFERRED
DEBTOR REM
SUBROGATION
1M
Subrogation is novation when there is a change of creditor. In subrogation, another (UNSECURED) C2
person acquires the rights or the entitlements of the creditor
2. PAYMENT TO PREFERRED CREDITOR

C2 Pays C1 the preferred creditor.
By operation of law, the loan he
Art. 1300. Subrogation of a third person in the rights of the creditor is either 1M
C1 extends to the debtor is now
C2
legal or conventional. The former is not presumed, except in cases express secured by the REM that initially
mentioned i this Code; the lattermost be clearly establishes in order that it may REM THROUGH LEGAL SUBROGATION secured the loan to C1.
take effect.
3. RESULT
1. Legal Subrogation: when it takes place KINDS OF SUBROGATION

1M
without any agreement between the parties C2
1. Legal Subrogation DEBTOR
to that effect but by operation of law SECURED W/
2. Conventional Subrogation REM
You have a debtor, two transactions. Debtor owes creditor 1 and 2. First transaction
Art. 1302. It is presumed that there is legal subrogation
secured by REM, second is unsecured.
(1) When a creditor pays another creditor who is preferred, even without the
What do you mean by unsecured?
debtor’s knowledge;
In case of default by the debtor, the creditor has to sue. The creditor cannot go
(2) When a third person, not interested in the obligation, pays with the
directly to property of debtor.
express or tacit approval of the debtor
Unlike when there is mortgage, you can go after it and foreclose it, and apply
(3) When, even without the knowledge of the debtor, a person interested in
proceeds or the payment of the loan.
the fulfilment of the obligation pays, without prejudice to the effects of
Now, if debtor defaults, creditor 2 pays the obligation of D to creditor 1. D objects.
confusion as to the latter’s share
For C to pay without knowledge of D, there will be legal subrogation, meaning C2 will
acquire the rights of C1 under his contract. Now, C2 can go after the mortgage.
If you’re C2, why will you do this? Why will you pay 1M when you cannot even collect
1.“When a creditor pays a preferred creditor even without a debtor’s knowledge
your own million?
for consent”— What does that mean?
143
The answer is the value of the mortgage. This property might be worth more Now, let’s say debtor defaults. X paid. This will not be a third party payment. This is an
than 1M so in case you acquire the rights under the mortgage, you can foreclose example of the legal subrogation
this and C2 can give 1M for offsetting and the other 1M for the debt. That’s an resulting from a payment by a party
example of legal subrogation. interested in the fulfillment of the A surety is a party interested in
obligation.
the fulfilment of the obligation.
2. When a third person, not interested in the obligation, pays with the express Why would a surety be interested?
or tacit approval of the debtor. Because if there’s nonpayment, surety He becomes liable upon default
will be liable. Now if the surety pays, of the debtor.
You have a debtor (D) who owes 1M to creditor (C). even without the consent or
You have X who paid. You learned that this is a third party payment. knowledge of D, X the surety, will
Do you need the consent of the debtor? now acquire the rights of C. Now X
The answer is no. This can be done over the objection of D, and it will be valid even if can go after the mortgage.
it’s meant to be a donation. There is no need to comply with the formalities of
donation for this payment to be valid. Now, what is interesting is if you have this situation:
However, if D consents for X’s knowledge but does not object, X paid with the
consent or with the knowledge of D. What will be the consequence? There will Let’s say you have two solidary debtors. They owe 1M to creditor. To secure the
be subrogation, aside from the right of the reimbursement. obligation, D2 mortgaged his property to creditor. On due date, D1 paid 1M. Will
there be subrogation?
In our example, subrogation will be useless because it’s really the same for the One school of thought is that D1 should be subrogated in the rights of C. Another
reimbursement of the entitlement. Subrogation will be relevant if secured by a real view is that this is a solidary obligation – you have to go to the rules of accounting
estate mortgage. With the payment of X of the obligation to C, with the consent of D and settlement between or among solidary debtors. And what’s the rule?
or with the knowledge of D, X now becomes the creditor. So X is now subrogated in Reimbursement. There’s no right to subrogate.
the rights of the creditor. X can collect the 1M and can foreclose the mortgage in case My say is that there should not be subrogation in this case. It’s like D2 volunteered to
of default. secure loan without any additional consideration and D1 takes advantage of it by
paying. And to be insured that there is reimbursement, D1 will use property as
3. When, even without the knowledge of the debtor a person interested in the collateral. Again, there is no jurisprudence on the matter.
fulfilment of the obligation pays, without prejudice to the effects of confusion as
to the latter’s share. Next question: How do you do novation? There are two ways and only two ways.
Debtor owes 1M to creditor. This is secured by REM, and a surety undertaking by X.

What is a surety undertaking?
Art. 1292. In order that an obligation may be extinguished by
It is an undertaking by a party who paid upon default by the debtor. The only another which substitutes the same, it is imperative that it be so
condition for the obligation is for the debtor to default. declare din unequivocal terms.
144
2. SALAZAR v. JY BROTHERS
KINDS OF NOVATION Issuance of new check does not novate
EXPRESS IMPLIED
In this case, you see there the difficulty of claiming novation. What happened in
Parties should agree on the extinction of happens if there is utter Salazar? There was a debtor who had a payable to creditor. There was a check. It
the old obligation incompatibility between the old and bounced. A new check was issued. Question was – did the new check novate the first
new obligation check? SC said there’s no incompatibility here. There’s no express agreement. This
check actually was in confirmation of this obligation, they refer to same obligation.
Jurisprudence frowns upon implied novation. It is disfavored as a rule because it is 3. PNB V. SORIANO
very difficult to show utter incompatibility. Restructured loan does not novate
So if you’re doing novation as a mode of extinguishing an obligation, what should you
do? This situation will better illustrate the case of Soriano: let’s say debtor has a loan. This
You have to do it expressly. is loan 1. Loan payable, secured by a REM.
In the novating contract, you have to expressly stipulate that the novating contract In a separate transaction, you have loan 2, unsecured. When the debtor defaulted,
extinguishes the old obligation. Otherwise, in case of litigation, you may have they entered into a consolidated loan.
difficulty in claiming the extinction of old obligation. This is what you call restructuring: a fancy way of saying the debtor was not able
to pay so let us capitalize on all his liabilities. We’ll call it a new loan – a
restructured loan and this will earn interest.
CASES ON NOVATION So if you have restructuring or consolidation, will that amount to novation? It would
be critical in this example because if there’s novation, what’s the consequence? It will
1. KWONG V. GARGANTOS (lots) extinguish the two. The mortgage will also be released because they did not agree on
Implied novation in absolute sale vs. conditional sale the mortgage being a security of this consolidated loan.
If you have this situation, SC will say that there is no novation. There is no utter
Kwong is an example of implied novation because the two contracts would not stand incompatibility between the restructured loan and the other two. This one will
together. There was a conditional sale, and there was a deed of absolute sale. In the just be a confirmation of the first two loans. So the mortgage will subsist. There is
conditional sale, there were 15 lots involved. There was a requirement of payment of no extinction of the liability under the two. This is another example of how difficult it is
a certain amount and there was a balance. So, there was a reservation of the title. to claim implied novation.
However, in the deed of absolute sale involving some of the lots but not all, the
parties agreed on an absolute conveyance and on full payment. Ill give you more examples of how hard it is to prove implied novation
So the court said, there is utter incompatibility. They may be both sales contracts
and both on similar properties, but the terms and conditions are different. The second
contract had an absolute conveyance and it involved only specific lots.
145
Example: Chattel and Real Estate Mortgage there was an assignment of the liability by selling the car to C. C was now paying with
consent of S.
Lets say you have a debtor. The debtor owes 10M to a bank. This debtor is engaged
in trading of goods. This is secured by chattel mortgage. What does the chattel Was there novation? Again, SC said there’s no novation, just an addition of debtor.
mortgage cover? Inventory, the goods traded by D. So, S had the benefit of going after D and C. Not withstanding the fact that C paid
Let’s say debtor defaults and you have litigation. The parties entered into with knowledge of S and there was in fact information to S that there was an
compromise. Compromise was debtor should give REM. assignment (sale of the car to c), S accepted payment from C.
So now, there’s double security - the chattel and the real estate. But when default time came, S went after both of them. SC said that there was just
The question, this Real Estate Mortgage – did it novate the contract? Meaning did it an additional debtor.
cost the release of the chattel mortgage? So in this situation, if you’re D, you ask for a discharge.
Take note, in this case, the debtor would have an interest in releasing the chattel What can you do? You can have sale with assumption of mortgage with the consent of
mortgage. Why? Because debtor is engaged in trading of goods and the interest of S, and stipulate there that d would no longer be liable under the relevant contract.
the debtor is to free the inventory.
So debtor will have incentive to throw in REM just to free up the inventory for sale by
the debtor. Novation with Criminal Offenses
What do you think is decision of SC?
There is no novation. They’re both security arrangements, they both secure the
In obligation involving criminal offense, novation does not automatically extinguish
10M loan. There is no incompatibility.
the criminal offense
Normally that’s what you encounter if you claim novation.
That’s why if you have this situation, short of an express agreement, you have to
Example: Bouncing Check
establish the unwritten or implied understanding of the party.
You issue a bouncing check and give new ones, the fact that there is acceptance there
Like in this example, the debtor could have shown that, the debtor would not have
is novation, but that does not mean that the criminal liability with automatically
thrown in this REM if the chattel mortgage would not be released. Otherwise, it would
be wiped out. That’s why when you issue new checks in place of the bounce
not make sense throwing additional property for the security of the same obligation.
checked, you ask for the old ones (bounced checks), because that will prevent the
We assume that this chattel mortgage covers the principal obligation. So there was no
filing of the case then.
point in throwing in the REM. In fact in this example, this REM was given by the
shareholders of the debtor, the third party.
In jurisprudence what you’ll find out is that if it’s possible to reconcile the two
obligations, the new and the old. The Supreme Court will just say there is no
Another example. incompatibility and that there is no novation. It doesn’t matter if it is a lease contract
There’s a seller. Seller or the car dealer sold a car to buyer. Ordinarily, buyer should or a sale, the Supreme Court will say that they can stand together not withstanding
pay the price and this would be paid in installments. To secure the arrangement, there that there’s a lease or a sale. Of course you have to be careful with the context.
would be a chattel mortgage. Of what? The car.
Now let’s say, subsequently, D sold car to C. C paid subsequent payments to S. C Lets give two examples.
eventually defaulted. Now, S sued both. D now claims there was a novation because
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ILLUSTRATION 5: LEASE CONTRACT TO CONDITIONAL SALE

RENT TO OWN CONTRACTS 
CONTRACT 1: Is there a novation in rent to own contracts? There is no novation in rent to own
contracts. What you have is just one contract.
LEASE
A B You lease the property now and let’s say after 2 years assuming you’re a good lessee,
there can be conveyance. That is a rent to own. It’s not a novation. You start as a
DOES TRANSACTION 2
NOVATE TRANSACTION 1?
lessee and then there is conveyance.
CONTRACT 2:
CONDITIONAL SALE Who should consent to novation?

A B Both parties: creditor and debtor.
Except when you have expromission, then the old debtor need not consent. Of
course if you have subrogation not all parties need to consent.
A leased to B a property for rentals. This is one contract.
They now enter into another contract, the same property will be sold but this is a NOVATION VS. ASSIGNMENT OF CREDIT
conditional sale. Title will only transfer after full payment; therefore there is obligation You have to distinguish novation for assignment of credit. Assignment of credit is not
to pay price, we will assume in installments. In another transaction, A sold property in novation.
a sale to the buyer for a price. This is the first transaction, second transaction because
B could not pay they agreed verbally that there will just be a lease for rentals. Example: ASSIGNMENT OF CREDIT
So B defaulted, is there novation in this first example? A owes B 1 million, B assigns it to C. This assignment does not need the consent of A
So in this first example A leased property to B, B was obliged to pay rentals, they because as you know all rights are transmissible and this is a credit there is no
subsequently entered into a conditional sale, A would convey the same property obligation from B to A, it’s only A to B, so B can assign this without the participation
subject to the leased and B would pay the price. of A.
Could A still go after B under the original contract of lease? Yes because there is That’s valid so if you don’t want the debtor to participate you have to do an
no incompatibility between the two contracts because its a conditional sale. A is assignment of credit, because if you do novation you need the consent of the debtor.
still the owner and there is still lease therefore.
In illustration 5 if the sale was absolute instead of conditional, the lease contract
Example: SALE TO LEASE
would terminate because the lessee would now be the owner of the property. Should
A sold property to B, B could not pay the price. So they just agreed verbally that A
B default in payment of the property, he may not offer to pay rent because there is
would lease the property to B. Is there novation?
already conveyance of the property for A to B.
Yes, this is a case of express novation agreed upon verbally because there is a
change of the prestation instead of a sale there is now rentals.
Note: Normally when there is a lease and a sale you’d say there is incompatibility but
you have to look at the details of each case.
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4. LICAROS V. GATMAITAN
Assignment of Credit v. Subrogation
NOVATION OF DEBTOR
Licaros had a deal with Anglo, a foreign bank. Licaros made a placement in exchange
EXPROMISSION DELEGACION
for principal plus a handsome return. There was default because Anglo was nowhere
to be found so what Licaros did was look for Gatmaitan a fixer. Substituting a new debtor in place of Creditor accepts a third person to
They had an agreement where Gatmaitan would collect and Licaros would transfer the original made without knowledge or take place of the debtor with
entitlement to Gatmaitan, and Gatmaitan would be entitled to whatever may be due against the will of the latter consent of debtor.
from Anglo. -
If you look at this it could have been an assignment of credit, if it were an assignment
of credit whether or not Anglo pays wouldn’t be a concern of Licaros and Gatmaitan CONSENT OF NEW DEBTOR AND OLD DEBTOR, NEW DEBTOR AND
would have to pay Licaros whatever Gatmaitan promised to pay for the assignment CREDITOR ONLY CREDITOR MUST AGREE
credit.
That is assignment of credit, the only parties that need to consent is Licaros and DOES NOT GIVE RISE TO GIVES RISE TO SUBROGATION
Gatmaitan, but if you look at the transaction the intent was Gatmaitan was SUBROGATION. ONLY
suppose to be a fixer. Gatmaitan would look for Anglo, try to get the payment REIMBURSEMENT
and in exchange try to get something from the deal.
NOVATION OF CREDITOR
Fortunately they properly documented the transaction by making it an example
of a conventional subrogation a form of novation. ASSIGNMENT OF CREDIT CONVENTIONAL SUBROGATION
If it’s a novation all parties should agree even the debtor should agree if it were an ( NOT A FORM OF NOVATION)
assignment of credit A as debtor need not consent only the assignor and the assignee
need to agree. But Gatmaitan was somehow able to show that what they wanted was Transferring right of assignor to CREDIT IS EXTINGUISHED AND
a conventional subrogation. asignee: DOES NOT EXTINGUISH NOVATED BY ANOTHER
How did that happen? OBLIGATION, ONLY CHANGE OF
In the recital or the whereas clause of the agreement, there was a mention that the CREDITOR
parties needed to get the consent of the Anglo at the same time there was a
space provided for the approval of Anglo. So the Supreme Court easily says this is CONSENT OF DEBTOR NOT REQUIRED CONSENT OF DEBTOR, OLD
not an assignment of credit this was a conventional subrogation therefore all ONLY NOTICE CREDITOR AND NEW CREDITOR
concerned parties including the debtor need to consent. ARE REQUIRED
EFFECTS WITH RESPECT TO THE EFFECTS BEGIN FROM THE TIME

DEBTOR BEGIN FROM THE DATE OF ALL PARTIES HAVE GIVEN
NOTIFICATION CONSENT
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plus interest. This happened on day one. On day 2 is the release of the loan. When
CONTRACTS
will there be perfection of the loan contract? The perfection will happen only on day
two, because by law, a loan contract is only perfected upon delivery of the object,
Art. 1305. A contract is a meeting of minds between two persons wehreby meaning the proceeds of the loan.
one binds himself, with respect to the other, to give something or to render But be careful, does that mean there is no contract as of day 1? There is. There is a
some service. contract to lend, because the parties agreed to the object and the cost. So there is a
contract but there is not a perfected contract. That’s why you need to know which
contracts are perfected upon delivery (Ex. deposit or pledge).
CONTRACT 3. Consummation
Consummation is the completion of the contract. If you have a loan how do you
A contract is a source of an obligation whereby two or more parties agree for consummate it? Release of the loan proceeds and then payment. If you have a sale,
one party to perform a specific prestation in exchange for another prestation. conveying the property and payment of the price. So consummation means
completion of the obligations of the parties under the contract.
So a contract would involve at least two parties and the performance of one In reality, how do you start a contract?
prestation, which we may consider the object in exchange for another prestation,
which we will consider the cost, and you have the elements of a contract. Letter of Intent
If you want to be formal about it, you send a letter of intent. A letter of intent is a
letter stating this is to express my intent to buy or lease a property with the following
ELEMENTS OF A CONTRACT STAGES OF A CONTRACT terms and conditions, my price and payment schedule and other relevant terms. Of
course, you need to be careful depending on the objective.
1.CONSENT 1. NEGOTIATION
2.OBJECT 2. PERFECTION Example: Open Discussion
3.CAUSE 3. CONSUMATION If my objective is only to open discussion, what I will write in the letter is terms and
conditions that I propose, and then I will have there an escape hatch saying,
“and other terms and conditions to be agreed upon by the parties”
STAGES OF A CONTRACT
or something like execution of the contract with mutually acceptable terms and
1. Negotiation
condition. Meaning for the contract to happen there must be an acceptable contract !
Negotiation deals with the parties discussing the possible terms and conditions of the
executed by the parties.
contract.
2. Perfection
Example: Binding a Party
As a rule, perfection is when they agree on the 2 other elements of the contract, the
If I want to be bound immediately by the offer I will make my letter of intent a
object and the cause. There is perfection when the parties reach an agreement.
complete offer. I will say, “I offer to buy your property for X amount and I will identify
However there is what we call “real contract”. They are not perfected upon
the property (your property located in X address under TCT title 123abc). If this is
agreement of the parties of the object and the cost, but upon delivery. An example of
acceptable, please sign.
which is a contract of loan. Lender agreed to lend in exchange, borrower pays price
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If you are the one offering, be careful because if there is a definitive offer, it’s
complete. What does that mean? You now have the object and the cause. The
moment you sign in the space below, you now have a contract.
As I explained, the moment the parties agree on the object and the cost, you will
have a contract. So when you start negotiation you need to be aware of your
desired objective.
If your objective is to start negotiation you always have that clause saying that we still
have to agree on the other terms and conditions and if we don’t agree there will be
no contract. The purpose of that is that you have wiggle room when and before you
proceed. If you want to be bound and you want to bind the other party, you make you
offer definite.
If you’re on the other side, do not sign. If you want to think it over, just say, “let’s
meet and discuss”. Never sign.
In fact if the offer isn’t complete the person you’re dealing with might be a litigious
person and the moment you sign there will now be a document that may be a basis
for litigation. I’ve seen people send contracts saying, “I wish to buy your property”
without giving all the details, and the other party signs. Later on the seller changes his
mind, the offeror now goes to court claiming they have a contract.
Now we know they don’t have a valid contract because there is no agreement as to
price and object but now we need a court to say that. Until then the property is
entangled in litigation.
Let’s go to elements –
Consent of the parties on the object and the cause. It’s not accurate if you just say
consent. Whose consent? The contracting parties. Object. Maybe object is self-
explanatory.
( to be continued next meeting)
150
Continuation of Contracts JSP: Before going to arbitration, what was the requirement of the contract? In
case of a dispute, the dispute should be resolved by arbitration but before going
to arbitration there is an intermediate step that should be taken by the relevant
parties. Which was what? (They must go first to the DOH Secretary). And what
Cases on Contracts
happened in this case? Did HTMC go to DOH?
S: Yes, they went to DOH but the DOH Secretary did not mind them so they went to
Art. 1306. The contracting parties may establish such stipulations, clauses, the CIAC
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy. By the way, CIAC is the arbitration court for resolution of all disputes related to
construction contract. It is a legally mandated dispute resolution scheme for
construction contracts. It is only industry with that mandate for arbitration.
1. DOH V. HTMC ( hospital plans)
Contracting parties must agree on the stipulations JSP: So was it premature for HTMC to go to CIAC? DOH was correct it was
premature. There was no action yet of the Secretary, they should have waited for the
DOH entered into an Owner-Consultant Agreements with HTMC involving various action of the Secretary before HTMC should have gone to the CIAC.
infrastructures of 4 hospitals: East Avenue Medical Center, Tondo Medical Center, The stipulation of the contract is the matter that the dispute should be submitted to
Amang Rodriguez Medical Center and Rizal Medical Center. Contract intended were the Secretary for resolution.
intended for the preparation of the A&E design plans, and the construction There was no resolution. There was no action yet.
supervision. HTMC was able to complete the A&E plans and submitted the to DOH So how could HTMC go to CIAC?
pursuant to the agreement. After a few months, DOH wanted to amend the contract I already told you the principle involved here, the obligatory force of a contract. A
based on the guidelines issued by NEDA. contract is the law between the parties and complied with in good faith.
S: In this case, there was bad faith
JSP: So, DOH wanted to amend the contract pursuant to the NEDA regulation. Can JSP: So who's in bad faith?
DOH do that? S: DOH was in bad faith because they refused since HTMC did not agree to the
S: No, because when DOH proposed to HTMC the amendments, HTMC only further amendments.
submitted a position paper therefore they did not agree to the amendments. So there
was no agreement between the parties. 2. GF EQUITY V. VALENZONA (Coaching Staff)
JSP: What's the principle of the obligatory force of contracts? Applicability of 1308
S: The obligatory force between contracts is the law between the two parties, and the
parties may stipulate.
JSP: The parties should comply with the contract in good faith. How does that figure
in this case? Art. 1308. The contracts must bind both contracting parties; its validity or
S: They stipulated in the contract that whenever disputes arise they would go to, first compliance cannot be left to the will of one of them
with the Secretary then to the CIAC
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RECAP OF LAST MEETING

Valenzona was hired by GF Equity to coach the basketball team of Alaska for PBA. So,
in this case, a contract was entered for his stint as the coach.
So last meeting, we discussed the essential elements of a contract.
There was a particular provision in the contract that "in the sole opinion of GF Equity,
The essential elements of a contract are: consent of the parties, object, as well as the
if Valenzona fails to exhibit the competence and the skill required, he will be
cause.
terminated". Alaska placed 3rd in 2 conferences in PBA so GF Equity terminated
In a COS, you have here the parties agreeing on the property subject of the sale and
Valenzona for this.
conveyance for a price. So that's the minimum. That's why we explained that, as a
JSP: Terminated as in kill him?
rule, contracts are by nature consensual. The moment the parties agree on the
S: No, I mean, terminated the contract between them. So, Valenzona contested the
object and the cause, you have a contract.
termination of the contract.
It doesn’t matter if its the bare minimum, the law will supply the additional rules.
JSP: Look, I understand you. All lawyers talk like that. "You terminate the employee".
No! You don't’ terminate the employee, you terminate the employment or the
services of the employee.
S: So Valenzona questioned the onesidedness of the paragraph of the service contract
between him and GF Equity. RTC ruled in favor or GF Equity saying that Valenzona
CAR
freely and voluntarily entered into the contract. X Y
The issue here is whether or not the provision violated the principle of mutuality of PRICE
contracts.
For example, parties enter into a COS. X and Y. X sold a brand new car to Y, X is a
The Supreme Court ruled that it was MUTUALITY PRINCIPLE dealer and Y paid the price as per agreement. The contract is simple, X shall convey a
v e r y a r b i t r a r y. I t l e a v e s t h e specific car to Y in exchange, Y shall pay a certain price and nothing more.
determination of the performance of Refers to the inherent equality between
the parties. The determination or the So we have there the essential elements of a contract. There will be in that case, a valid
the contract to the sole opinion of the
performance of the obligation should not and enforceable contract. But then you will ask, how about other terms and conditions?
corporation.Supreme Court said that
be left to the will of only one party. I think we explained in this case, you now have the default rules kicking in.
it violated the principle of mutuality
of contracts
As i said, for example, how should performance be done?
JSP: What is the mutuality of contracts? What does that mean? You will have simultaneous performance. What will be the warranties that will be
S: Mutuality springs from the inherent equality between the parties implied in this case? Warranties against hidden defects, X would be liable for that
JSP: What do you mean when its mutual? (Shouldnt be one-sided) warranty. As well as warranty against eviction, if it turns out X is not really the owner of
S: The determination of the performance of the obligation should not be left solely to the property.
one party. So in this case, SC said that certain provision, that leaves the determination  
of whether or not Valenzona exhibits the required competency or skill to be the coach So in a contract, you will better appreciate a law being a set of background rules
of Alaska was left solely to the will of the Corporation. There was no safeguard. against which you can stipulate.
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So, here, the moment you enter into a contract, you can now, just by agreeing on the For example, there may be a mandatory provision of law but you can still work around
object and the cause, have a set of rules applying to your contract. Lets say, the rules that mandatory provision of law. Its not illegal, its just avoiding the consequence of a
on sales in this example. mandatory provision of law.
Of course, the parties can stipulate other matters in the contract, anything. There can
be representations and warranties. My typical example here is, let's say, can the foreigner own land?
No. Can the foreigner have the economic benefit of the ownership of land? Yes.
Let's say X will represent that the car have this kind of performance, that will be an How can you do it?
express representation. You just do layer of corporations and you can have a foreigner practically having the
In case of breach, then that will entitle Y a right against X, as will be provided by law. benefit of direct ownership.
Against the provision of the contract, what will be the remedies?
You go by the default rules.
What are the default remedies? PRINCIPLES OF A CONTRACT
Specific performance, resolution and/or damages.
1. OBLIGATORY FORCE OF CONTRACTS
Now, of course, you can only stipulate so much in a contract. The difficulty in having a
contract is finding out the outer limits of possible stipulations. What can you stipulate
Now, let's go to certain rules. The obligatory force of a contract. This one you
in a contract?
encountered earlier on under Art. 1159.
For example, there are mandatory provisions of law against which you could not opt
out. Give me a mandatory provision of law that they could not opt out in this case, in
a COS. Art. 1159. Obligations arising from contracts have the force of law between
Answer: There could be no waiver of an action based on future fraud so they could the contracting parties and should be complied with in good faith.
not stipulate in the contract that X will not be liable even if X destroys the car or sells
something that does not meet the requirements of the contract.
Remember our discussion on this? The obligatory force of a contract means that when the parties enter into a
X can opt to destroy the car in a race. That will render nugatory the juridical tie. There contract, the contract will govern their relations. They have to comply with their
is not more compelling factor for X. obligations under the contract in good faith.
Let's say, for example, this is a sale of land. Can the parties stipulate that the buyer We see this in the case of DOH.
can own the land even if the buyer is a foreigner? In DOH, there was a contract between DOH and HTMC, its a construction consultancy
Of course not because there's a Constitutional prohibition or there are other agreement basically dealing with a construction.
provisions of law wherein you cannot stipulate. In the contract, there was a provision on dispute resolution. How should dispute be
But it is possible for you to still opt out. That's what you have to learn in practice. resolved? The process was, the dispute should be submitted to the DOH Secretary for
appropriate action and upon decision by the Secretary, the relevant party could go to
CIAC, the arbitration board/panel to resolve all the construction disputes between the
parties.
153
Now, so there was that provision that's being questioned. Why could HTMC directly Yes, because based on the principle of the autonomy of contracts, meaning the
go to CIAC? parties can stipulate anything as long as it is not contrary to law, the parties can have
dispute resolution mechanism in the contract.
That was the provision of the contract, its the law between the parties. They Is that contrary to law?
established a procedure by which a contractual dispute should be resolved. Of course not, in fact, it is encouraged by law.
Go first to the Secretary the after the Secretary, they should go to arbitration under There’s a law on ADR but before, let's assume, there is no such law, it still wont
the CIAC. contravene the law.
So the question was, but there was no action yet of the Secretary. 2. MUTUALITY OF CONTRACTS
Why could HTMC go directly to CIAC?
Because the Secretary refused to act. Somehow, the Secretary was acting in bad Next principle is mutuality of contracts.
faith. There's a dispute that should be acted upon, the Secretary was not acting This mutuality of contracts, it should remind you of purely potestative suspensive
on it. condition dependent on the sole will of the debtor.
In that situation, we explained that the condition renders the obligation void because
You could also look at it from the perspective of mutuality. It's really the Secretary the condition basically negates the juridical tie, the debtor will determine whether an
determining whether a proceeding will go through. obligation will exist, so that cannot be allowed otherwise, its as if there's no
But the SC ruled it more as a obligatory force of a contract. obligation.
At the same time, there was an issue with respect to an amendment. The DOH
wanted to amend the contract pursuant to a certain government regulation. Supreme In mutuality of contracts, the determination of the performance of the contract is left
Court ruled that could not be done, it could not be unilaterally imposed on HTMC. on one party, lets say in this case (GF Equity), when the contract should be
The moment the parties entered into a contract, that would be the law between the terminated.
parties. Why is this case peculiar?
But take note, there is a nuance here. What do you think swayed the SC to decide in favor of Valenzona?
When you entered into a contract all laws apply to your contract. Here, what the S: It was peculiar because of the phrasing "sole will of the corporation"
government wanted to do was to amend the contract pursuant to a regulation. Its JSP: Yes. Would that have been valid otherwise? Is it possible to save that clause and
subsequent to the contract. That cannot be done otherwise that would violate the it will be a valid provision?
mutuality of contracts. One party would determine an essential term of the contract. S: Yes, sir. I think GF Equity can remedy that by adding "with prior notice".
So, SC said that's not legally allowable in the context of a contract. JSP: No, there was notice here, right. It was told "You're a loser, you're not winning
games. We want to terminate"
I'll give an example of a contract. S: It should provide notice to Valenzona for him to be able to at least contest the
termination
Example: Arbitration Stipulations JSP: Oh contest? In fact he contested after 6 years. So maybe he word from a lawyer
In this case, we have arbitration. As an alternative, parties stipulate on modes of "You have a good case, lets file something" and it appeared to be good, he won. So,
dispute resolution, one of which is arbitration. you are saying, you could not have that clause in a contract?
Would that be a valid stipulation?
154
There is no way you can have a valid clause allowing one party to to terminate the It could be an abuse of right by making a baseless opinion. That was the problem
contract. here, its a lawyer problem. There was an insertion of that clause "at the sole opinion
of the corporation" but you are dealing with performance. It could have been phrased
S: You cant have that specific phrase "on the sole will" without other safeguard or better. How?
safety nets
JSP: What safety nets? Are you in a circus? There's something wrong with this clause. S: There must be a standard, like Alaska places 1st or 2nd in PBA or a win-loss record
GF Equity, in it's sole opinion, can terminate the services of the coach. that the coach should attain.
S: The termination violates inherent equality but because GF Equity is the only person
who can terminate the contract, in its opinion, which is very arbitrary with respect to JSP: Let's say, im Alaska, i dont want that standard. If you are the one engaging the
both of them. There must be a mechanism to put them in equal footing. services of somebody, you want that discretion to terminate at anytime the services/
JSP: He entered into the contract knowing full well that it was a one-sided contract. contract. Party may terminate the contract upon breach of a provision thereof by the
He had information and yet he decided to agree. So what's wrong with that? other party” and then you place there the process.
S: Despite the contract being perfected, they are still not in equal footing, it violates
the inherent equality between them Let's say, by giving a written notice. In the same manner, this clause could have been
phrased better. How? You just state
JSP: Inherent equality means that neither parties should determine how the "GF Equity can terminate this contract, with or without cause, at anytime by
contract, whether the contract should be performed. Its a akin to a purely giving Valenzona a written notice at least X number of days before the intended
potestative suspensive condition dependent on the sole will of the debtor, it date of termination".
some how negates the juridical tie in a contract. Will that be valid? Yes.
That is why there a requirement of mutuality. It is also related to the element of Will that violate the mutuality of contracts? No, because the parties agreed.
consent, the parties should consent to the terms and conditions of the contract.
You could not leave one party to decide what terms should be inserted in the Its like an engagement of the services at will, so the moment you no longer want that
contract. Basically here, the Supreme Court was saying, one party was deciding person, you let go and then you have a valid termination clause. The problem here
whether there should be a contract. was that phrase "an the sole opinion of the corporation" and the attendant
circumstances.
So let's assume that clause is inherently defective, that termination clause saying that
on the sole discretion of the corporation, the corporation can terminate the services Like for example, Valenzona. Who was he?
of the coach. He was just a player, had no other profession, just basketball and then coaching.
How will you phrase it to be valid? With same effect, meaning it will be a unilateral Somehow, i think that tipped the balance in his favor. But if you look at this, it is a
decision of one party. drafting problem. If it were crafted in that way, that the corporation could terminated
at anytime, with or without cause or without giving any cause, by mere written notice,
The problem here was you have that clause and there were no objective standards by it would have been fine.
which the corporation would decide what constituted non-performance by the coach, So the SC was able to use this provision to state that somehow its just the corporation
it was just an opinion. making a unilateral and baseless decision because its opinion.
155
The question now is: If you have a termination, it that termination clause i gave you JSP: What's an escalation clause?
valid? S: It states that PNB can increase the rates according to the prevailing interest
Yes, of course i gave that to you! rates.
What will be your statutory basis?
Can you recall a case? JSP: Aside from that, what was stated? In the escalation clause. So PNB could
One is that would amount to a potestative resolutory condition dependent on the unilaterally adjust the interest rates without need of notice. So was the escalation
sole will of one party. The other is the case of Pryce. clause valid? No.
That case recognized the validity of a termination clause.
In fact, a lot of contracts, you have a termination clause. Otherwise you have to go by An escalation clause allows the increase of the interest rate on a loan. But for it
the default and the only way to terminate is by resolution under Art 1191 only upon to be valid, the law requires that it should be coupled with a de-escalation
substantial breach. clause.
3. PNB V. ROCAMORA ( Escalation Clause) A de-escalation clause means that the lender For an escalation clause
Validity of Escalation Clause could unilaterally increase the rates pursuant to be valid, there must be
to the escalation clause but the lender should
an accompanying
Spouses Rocamora obtained a loan from PNB, payable for 5 years. also decrease the rates based on the same
In addition to the principal, spouses Rocamora agreed to pay an interest of 12% per standards provided in the escalation clause. deescalation clause.
annum, as well as, a 5% penalty per annum for delay. To secure a loan, they executed
2 mortgages: That's the first requirement for validity of an
1. real estate mortgage of Php 10k on the property, escalation clause. That is why i used adjust, that will save you.
2. a chattel mortgage of Php 25k over various machineries and a guarantee of Php If you say the bank can adjust the interest rates, it means it can go up or down
65K. depending on the factors provided. So, the escalation clause here was valid
Both PN and REM contained an escalation clause that allowed PNB to increase JSP: The escalation clause here was valid because there is a corresponding
the interest rate of 12% at anytime without notice. requirement of decrease. What was the problem?
Rocamora was able to pay up to Php 107k then after sometime, it defaulted with the S: It was so high... There was no proper accounting
balance of 75k. PNB could have foreclosed the mortgage pursuant to PD 385 because JSP: If there was a proper accounting, would that be valid?
it mandated that mortgages can be foreclosed once the arrearages amount to at least S: Yes, sir, because it was required that proof of deficiency was necessary so that the
20% of the total obligation. deficiency claim could be awarded. However when the ledgers of PNB were
examined, there was no proper accounting.
JSP: How was the interest rate adjusted? Who adjusted the rate? On what basis? JSP: Could PNB unilaterally increase the interest rates pursuant to the escalation
(PNB). How was the loan documented ? (It was through a PN). clause, and the PN and mortgage?
So based on the PNs, what gave PNB the authority to adjust the interest rate? S: No, PNB could not unilaterally increase.
(It was the escalation clause)
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4. SOLID BANK v. PERMANENT HOMES ( Option to prepay)

Validity of Escalation Clause PNB SOLIDBANK
NOT VALID. It violates the principle of VALID. There is a stipulation in the contract:
S: Permanent Homes loaned from Solid Bank PHP 60M to pay for their town house
mutuality of contracts since one party (PNB “ Should the borrower refuse to accept the
project, there were 3 loans, and all of these loans had a clause that SB can increase or
is left to decide an essential term of the adjustment rate, the borrower shall have
decrease the interest according to the market, and then SB must notify them of any
contract: the interest rate. the right to prepay the penalty.
increase or decrease in interest. - NO STANDARD TO ADJUST INTEREST In effect, there was a mechanism for the
RATE. The only standard is that they do not borrower to agree so there is consent to
SJP: Let’s cut to the chase it’s the same thing with PNB, the basic issue was there was exceed the maximum ceiling imposed by the adjustment and not just a unilateral
an adjustment of the interest rate. What was the clause involved here? law ( but there is none!). imposition.
S: That the interest rate will be according to the global market
SJP: And who would determine the interest rate?
S: Solid Bank, Sir.
3. AUTONOMY OF CONTRACTS
SJP: The bank determines the escalation clause. We’re assuming that there’s a valid
escalation clause coupled with a de-escalation clause, it could be an increase or What is Autonomy of Contracts of the freedom to contract?
decrease. And then? The parties can stipulate anything as long as it’s not contrary to law.
S: They will send notice and then they will bill them for the month.
SJP: When you borrow, let’s say long term, 5-10 years, your contract will normally The contract is from a practical viewpoint the best source of an obligation because it
provide, of course its possible for a 5 year loan with a fix interest rate, but sometimes can fix it in a way that the contract will suit the needs of the parties.
you have, a 10 year contract, you will have an interest rate adjustment clause. You can provide the rules governing your relationship, how disputes will be resolved,
Which means that there’s a re-pricing. and how payments will be made in case of breach, when contracts will be terminated,
What’s a re-pricing? as long as you do not violate the law.
A fancier way of saying adjusting of the interest rate.
So periodically, the bank will be re-pricing the loan. Meaning the rates will be Lets give some examples.
adjusted… could be quarterly or annually, but in this case, it’s monthly.
S: After PH has received the bill and is notified of the increase or decrease of the Example: Prenuptial Agreement
interest, that’s the only time they can apply the interest rate. When should you have a pre-nup?
SJP: Was the act of the bank valid? Before the marriage.
S: Yes, sir. Let’s say a pre-nup can have any stipulation.
SJP: But, why? That’s the same as PNB? There’s a unilateral adjustment. What’s the Like:
difference? “For every year of togetherness, the husband should pay the wife x amount...”
S: There was a notice here, and the increase was not dependent on the sole will Would that be valid? In certain jurisdictions it would be valid.
of SB. In our jurisdiction, is this valid?
No. Why not?
Whats the difference between the two cases?
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Its against the sanctity of marriage! SJP: What’s a non-involvement clause?

I will tell you, otherwise, the spin is… it actually promotes togetherness, because for
every year of togetherness, the wife earns something… x amount! S: Within 2 years, Tiu must not apply or transfer to another company because it
Does that give an incentive to preserve the marriage? may trade secrets of the company.
Of course, there’s no jurisprudence on the matter. SJP: So the non-involvement clause mandates what?
I’m just saying, it depends on how you look at it. You cannot immediately say it’s S: Sir, it mandates that Tiu cannot apply to another company. From the termination of
contrary to public policy. employment, Sir, after two years, she cannot apply to another company who has the
same line of business, which is (sic) pre-need industry.
Of course, you cannot stipulate in the prenup, like, “We will just renew our marriage
contract ever 5 years.” SJP: What did the Court say? The Court made a discussion on the factors that you
should consider whether non-involvement or a similar provision in a contract is valid.
Example: Building Restrictions
Is it possible to stipulate, “In a certain area, a building should not reach a certain S: Yes there are three, Sir.
height”? Yes? It depends on the context.
If you’re in a residential subdivision, it’s a valid stipulation since subdivisions may First, is the time of the non-involvement FACTORS TO CONSIDER IN NON-
sometimes require height limits. clause. INVOLVEMENT CLAUSES
(What do you mean by time?)
Example: Buy back agreement Sir, the time means when the employee 1.TIME
Can you put in a contract that let’s say… I sold property to Acuyong, and I tell can apply after the termination of the 2.TRADE
3.PLACE
Acuyong in the contract that. “Acuyong cannot sell the property to anyone but me.” contract. In this case it’s 2 years from
Valid? termination of employment.
According to a case, it’s not valid because it impairs the property rights of an owner Second is the trade, Sir. In this case Sir,
because there’s a limitation. Platinum Plans is a pre-need industry.
How do you validate it? She cannot apply to a similar industry. (SJP: There’s a restriction on the trade as
You can make a right to first refusal. covered by the clause.)
Should you decide to sell, you need to offer it first back to me, or a right to Last was place sir. (This one covers the entire period?) Yes, sir. (Was it valid?) It was
repurchase within a certain period. valid because it complies with the three requisites.
5. TIU V. PLATINUM PLANS (non-involvement clause) SJP: What would be an objection to the non-involvement clause? What public policy
would undermine the non-involvement clause? It is actually - what you call - a non-
Daisy Tiu was hired by Platinum Plans, as the director of marketing department. After compete clause. It’s a standard in an employment or service contract.
a few years, she was re-hired as VP. After 2 years, she applied to another company S: If it restraints a person to practice his profession.
who had a same like a (sic) line of business, which is in the pre-need industry. She was SJP: Yes, so? What’s wrong with that? If you have a blanket prohibition on any practice
hired in the other company as the VP of the Marketing Department. So, Platinum of profession.
Plans contends that Tiu violated the non-involvement clause.
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Btw, going back to an earlier example, a 5 year

period will still be valid. A perpetual non-
complete clause will be invalid. Objection to the non-
What else? involvement clause:
What’s a problem on a blanket prohibition? impairment of profession
S: It will limit the rights on opportunities.
SJP: What’s the consequence?

Because if you’re prohibited from working, the blanket prohibition will deny the
employee as towards his means of his livelihood. Basically, that’s the objection of the
non-compete clause.
What about non confidentiality clauses?

In a non-confidentiality clause you can insert anything, you can say:
“the recipient of the confidential information should not disclose any confidential or
personal information.”
Of course, confidential information should not include public information. Let’s say the
client is taking drugs. Valid non confidentiality clause?
S: Sir no, because illegal drugs is contrary to the law. So if you hold information to…
SJP: Remember you’re not being compelled by the Court. If you’re compelled, you
need to disclose. You’re not obstructing justice.
If you see the client taking drugs, you’re not supposed to disclose. Valid?
Let’s just say your client goes out of their way and says, “My client is an addict.” Can
he be sued? Can he be liable under the confidentiality agreement?
Yes, because it’s a contract. It’s not contrary to public policy.
The only time you have to disclose is when you are compelled by the court.
Otherwise if you disclose, you can be held liable under the confidentiality
agreement.
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TUESDAY 12 APRIL 2016
RECAP ON ELEMENTS AND PERFECTION OF CONTRACT 1. AUTONOMY OF CONTRACTS
The parties can agree on other terms; the parties can stipulate anything in a contract.
ESSENTIAL ELEMENTS OF A A few meetings back I told you that if you have The only limitation is the general limitation imposed by law that it must not be
CONTRACT a contract the minimum agreement for the contrary to law, morals, and public policy (e.g. waiver of an action based on future
parties should be on the object and the cause. fraud, sale of a property to a foreigner).
1. OBJECT The moment the parties agree on the object We saw this principle applied in the case of Tiu v. Platinum plans.
2. CAUSE and the cause, you will have a valid contract, as In Tiu, there is a non-compete clause.
3. CONSENT ( on the object and a rule. A non-compete clause will be valid when there is a limit with respect to time, place,
the cause)
and trade/industry. So, it depends on the reasonableness of the non-compete clause.
GENERAL RULE Also an example is when there is a limitation on the use or ownership of property. In
certain cases it may be valid, in some not.
THE MOMENT THE PARTIES AGREE ON THE OBJECT AND THE CAUSE, YOU WILL
HAVE A VALID CONTRACT. Say for example, in one case, a perpetual restriction on the disposition of the
property, is VOID. Because there is undue burden on ownership.
How do you validate it?
Art. 1315. Contracts are perfected by mere consent, and from that moment Put a time-frame.
the parties are bound not only to the fulfilment of what has been expressly
stipulated but also to all the consequences which according to their nature, If the parties do not agree on other terms, then the law will provide for the default
may be in keeping with good faith and usage and law rules. Even if they agree only on the object and the cause, the terms will be fine.
Say, payment, when should it be made? Simultaneously.
Should it be full payment? Yes. As a rule, payment is full, indivisible, it should be
A contract has to be consensual (Art 1315). complete.
2. OBLIGATORY FORCE OF CONTRACTS

PRINCIPLES
Obligations arising from contracts have the force of law between the contracting
1. AUTONOMY OF CONTRACTS parties.
2. OBLIGATORY FORCE OF A CONTRACT
Why is it obligatory?
3. PRINCIPLE OF MUTUALITY OF CONTRACTS 
Because they agreed. So the moment the parties agree on the terms, they had to
RELATIVITY OF CONTRACTS
abide by the terms. For it to be obligatory, there must be mutuality.
Lets review the principles we discussed when it comes to contracts.
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3. PRINCIPLE OF MUTUALITY OF CONTRACTS (Art 1308):

GENERAL RULE
One party cannot dictate an essential term of the contract.
We learned that in the case of GF Equity.
ONLY THE CONTRACTING PARTIES ARE BOUND BY THE CONTRACT
In GF Equity, the team owner was given the right to terminate the contract if the team
owner, based on its discretion, assessed the performance of the coach as below par.
The court said that it violated the mutuality of contracts because only one party will Example: Contract of sale
determine when there would be a contract. Say you have a contract of sale where seller sells property (subdivision lot) to buyer in
I explained last time, it’s more a fault of contract drafting because if it were crafted as exchange for the price, and you have the terms such as restrictions of use: you can
“the team owner shall have the right to terminate the contract, with or w/o cause, by only use it as residence, there is a building height limitation, you cannot subdivide it,
mere written notice to the coach” that would have been valid even in the perspective you cannot have multiple buildings in one lot, etc. which are all valid restrictions.
of a purely potestative condition. There are also certain mandates like you have to build within a certain period, if you
Why? don’t, you shall be penalized. So let’s assume you have those terms here.
Because in that case, that would be a resolutory condition. What does Relativity mean? It means that this contract will bind both or operate
As we’ve learned, a potestative resolutory condition dependent on the sole will against both parties.
of the debtor is valid. Reason: in this case there’s an obligation, it does not
negate the juridical tie. What is determined only is when the obligation cease. Example: Debt collection against inheritance
The general rule is that the seller could enforce the contract with respect to the
We also learned the rule of mutuality in the two cases, the bad cases. payment of the price against the buyer. Let’s say, the buyer has a son. Buyer
defaulted.
In PNB, you see there the court saying that one party cannot decide an essential term Can seller go after the son?
of a loan contract. No! Because only the contracting parties, the buyer and the seller, are bound by the
What is that essential term? contract. But let’s say, buyer died leaving a balance yet to be paid. And there’s an
Fixing the interest rate of the contract. It’s an important term of a loan contract where inheritance. Should the son be liable? Yes!
one party should not be left with unbridled discretion to determine the interest rate. But only to the extent of the amount inherited because the estate, the
So, in this case, what was the problem with the clause? properties of the deceased, should be used first to pay the seller.
There is a wide discretion on the part of the bank. There is no control. How could you
have controlled it? The parties could have had a formula for interest adjustment.
In which case, the adjustment of the rates would not be discretionary on the part of CASES
the bank only. Another is when the borrower has the option to prepay should he
reject the adjustment rate. It’s an illusory opt-out because generally, borrowers are not
in the position to pre-pay especially in the early part of your loan contract. 1. NPC v. PROVINCE OF QUEZON ( Energy Conversion Agreement)
Only the contracting parties are bound by the contract
4. RELATIVITY OF CONTRACTS
NPC entered into an ECA-Energy Conversion Agreement with Mirant on November 9,
This is where the contracts binds only the parties and their assigns. 1991. The ECA provided for a build-operate-transfer agreement between Mirant and
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the NPC. Mirant will build and finance a coal-fired thermal power plant on the lots As far as the LGU is concerned, Mirant is the owner of the power plant in the
owned by the NPC in Pagbilao, Quezon for the purpose of converting fuel into meantime, hence, the tax payer and proper party to file the action.
electricity, and thereafter, operate and maintain the power plant for a period of 25 The said provision could not bind the LGU because this provision only binds NPC and
years. The NPC, in turn, will supply the necessary fuel to be converted by Mirant into Mirant.
electric power, take the power generated, and use it to supply the electric power The undertaking by NPC to pay the property taxes stipulated in the contract between
needs of the country.   NPC and Mirant could not force the LGU to recognize NPC as the taxpayer. As far as
the LGU is concerned, the LGU can go after Mirant.
This case is an example of the applicability of the principle of relativity of contracts.
ILLUSTRATION 1: NPC v. PROVINCE OF QUEZON TRANSACTION But there are exceptions to the rule.
GENERAL RULE ON RELATIVITY OF CONTRACTS

ECA ASESSMENT
ONLY THE CONTRACTING PARTIES ARE BOUND BY THE CONTRACT
NPC MIRANT LGU
EXCEPTIONS
NPC TO PAY TAXES VS 1. CONTRACTS CREATING REAL RIGHTS THAT BIND THIRD PERSONS (1312)
2. PROTECTION TO CREDITORS FROM DEBTORS INTENDING TO DEFRAUD THEM

(1313)
At the end of the 25-year term, Mirant will transfer the power plant to the NPC 3. TORTIOUS INTERFERENCE (1314)
without compensation.  
4. STIPULATIONS IN FAVOR OF A THIRD PARTY
Under the contract, there is a provision that NPC will pay all the taxes, specifically
property taxes. So there’s an assessment
by the LGU. The NPC, being the one
obliged to pay, contested such Because the contract between Mirant 1. CONTRACTS CREATING REAL RIGHTS THAT BIND THIRD PERSONS
assessment. and NPC only binds the two of them ,
So the issue in this case was the NPC the LGU is not obligated to recognize Art. 1312. In contracts creating real rights, third persons who come into
the correct party to do this action? NPCs contention that they are the possession of the object of the contract are bound thereby, subject to the
For that purpose, NPC showed the actual property tax payers of ECA. provisions of the Mortgage Law and the Land Registration act
ECA, specifically the provision obliging
NPC to pay the taxes.
The Supreme Court said that this
contract binds only the parties, NPC There are certain contracts that create real rights that bind third persons, provided it
and Mirant. complies with specific legal requirements.
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2. PROTECTION TO CREDITORS FROM DEBTORS WHO INTEND TO DEFRAUD

Example: Mortgages bind third parties THEM
Let’s say you have a Lender and a Borrower. L extended a loan to B. B has the
obligation to pay the principal plus interest. B mortgaged property as security for Art. 1313. Creditors are protected in cases of contracts intended to defraud
payment of the loan obligation (REM). So now there’s a loan contract and a mortgage them.
contract. Following the rule on relativity of contracts, only the lender and borrower
would be bound by this contract; this contract would not work in favor of or against a
A creditor may have a right in relation to the contract defrauding him. Remember
third party.
when we discussed resolution as against rescission? I will remind you.
However under the law, if this REM is registered with the relevant registration
deeds, the mortgage will bind even third parties.
ILLUSTRATION 2: RESCISSION
So lets say there was registration of the mortgage and B sold the property to X.
Will the sale be valid?
Yes.
DAY 1: 10M DAY 2: ONLY PROP
But the property in the hands of X will still be subject to the mortgage because the
mortgage is registered.
CREDITOR DEBTOR X
The mortgage, if registered, will follow the property and will bind anyone who will
possess the property.
Example: Pledge DAY 3: PAY NOMINAL SUM (FRAUDULENT)

Same principle.
If the pledge is in a private document (not notarized), it will only bind the
parties.
However, the moment you have a notarized pledge agreement, that will bind third For example on Day 1, creditor extended a 10M loan to debtor. The loan will be
parties dealing with the pledged property. payable with interest on Day 3.
Clear? But on Day 2, debtor has already conveyed his only asset to X in exchange for a
TWO KINDS OF small or nominal sum which is not commensurate to the value of the property.
So that’s the first exception, contracts binding Let’s assume that this is a fraudulent scheme for the debtor to have 0 assets on Day
NOTARIZATION
third parties after following certain formalities 3.
of law. 1. Acknowledgement: used for What will be the creditor’s recourse?
By the way, there are two kinds of notarization: contracts Creditor has no other recourse but to rescind the contract.
Acknowledgement and Jurat. If you have a 2. Jurat: used for affidavits Remember that rescission under Art. 1383 is a subsidiary remedy as opposed to
contract, you use acknowledgement. If you have resolution under Art. 1191, which is a retaliatory remedy.
an affidavit you use jurat.
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Under the law, by virtue of accion pauliana, the creditor in this example can assail But how about X?
the said transaction, despite being a stranger to the contract, up to the extent X is a stranger to the contract.
necessary to obtain payment of the obligation. So will X be held liable?
Yes, as a Tortious interferer!
So why is this an exception? In this case, what’s the decision of the Supreme Court?
The creditor here is a third party but has the right to rescind the contract to the Was malice part of the equation?
extent necessary to obtain payment.
There are 2 schools of thought that take differing views when it comes to the
importance of malice in determining a tortious interferer
3. TORTIOUS INTERFERENCE (1) Malice is required for tortious interference.
(2) Malice is not required for tortious interference.
Art. 1314. Any third person who induces another to violate his contract shall The SC adopted the 2nd school of thought and said that malice is not required.
be liable for damages to the other contracting party So it does not matter if X here is malicious.
Then the only issue here is, if there is no malice, then there may be possible
limitations as to the entitlement to damages.
There is a third party inducing a contracting party to violate his undertaking in the
But clearly, there was tortious interference here because tort does not require malice.
contract. The inducing party may be held liable.
(Most people misinterpret the decision of this case that there was no tortious
We call that inducing party a tortious interferer.
interference. There was.)
3. SO PING BUN V. CA (WAREHOUSE)

CASES ON TORTIOUS INTERFERENCE
Requirements of Tortious Interference
2. GILCHRIST V. CUDDY (ZIGOMAR) Tek Hua Trading Co. entered into a lease contract with DCCSI, in which the former will
Tortious Interference use the warehouse of the latter to store textiles for a period of 4 years.
Under the contract, if at the end of the term the lessee, Tek Hua stays in the leased
Cuddy, owner of the film ‘Zigomar’ or whatever that is, had a contract with Gilchrist warehouse, the lease will be on a monthly basis.
wherein the latter would rent the film for 6 weeks for a price of P150/week. Tek Hua Trading Co. was dissolved and one of its founding members, So Pek Giok
died.
Here comes another party, X, who induced Cuddy by offering a higher price, say However, the other founding members, headed by Manuel Tiong, formed Tek Hua
P450/week. Enterprises Co.
In this case, X blew the contract. X knew that there was an existing contract between After So Pek Giok’s death, his grandson, So Ping Bun occupied the warehouse for the
Cuddy and Gilchrist and yet X made an offer and he induced Cuddy to breach such textiles manufactured by his company, Trendsetter Marketing.
contract.
Obviously, Cuddy will be liable based on breach of contract.
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Aggrieved, Manuel Tiong and the rest of Tek Hua Enterprises, wrote a letter to So 3. LAGON v. CA ( intestate sale of land)
Ping Bun, demanding the latter to vacate the warehouse for 14 days since there is a Missing requisite of tortious interference
subsisting contract of lease between Tek Hua and DCCSI.
However, So Ping Bun asked DCCSI to execute a lease agreement between his Lagon, through an intestate court, bought two parcels of land from the estate of Bain
company (Trendsetter) and DCCSI. The latter acceded to the request of So Ping Bun, Tonina Sepi.
thus the complaint of Tek Hua Enterprises that So Ping Bun was a tort interferer.  A few months after the sale, Lapuz filed a complaint for damages against Lagon
because Lapuz allegedly had 4 lease contracts with Bai Tonina Sepi over the lands
In this case, the SC laid down the requirements for tortious interference. Remember bought by Lagon. Under the lease contracts between Sepi and Lapuz, the latter may
them. put up commercial buildings to be leased to new tenants.
However when the contract ended, the buildings were yet to be completed. Hence,
as Lapuz claimed, the lease contracts were renewed. According to Lapuz, the
REQUISITES OF TORT INTERFERENCE administrator of the property advised him to stop collecting rentals from the tenants
1. EXISTENCE OF A VALID CONTRACT of the building because Lagon already owned the property. Lapuz accused Lagon of
2. THIRD PARTY HAS KNOWLEDGE OF THE EXISTING CONTRACT inducing the heirs of Sepi to sell the property to the latter, thus violating the renewed
3. UNJUSTIFIED INTERFERENCE BY THE THIRD PARTY contracts of lease between Sepi and Lapuz.
On the other hand, Lagon argued that he verified the existence of the lease contracts
to Atty. Fajardo who showed him 4 copies of unsigned lease renewal contracts.
So in Gilchrist, if you interfere in a contract, even with a purpose to advance your Lagon’s personal investigation and inquiry also did not reveal any claim or
economic/financial interest, it would not make you liable for damages. encumbrance on the subject lands, and so he purchased them.
Which is totally wrong! So was there tortious interference in this case?
Because financial/economic interest, for me, is always the reason why you enter into The courts said no.
any contract!
Only the first element of tortious interference was present ( existence of a valid
That’s why if you look at the development of the cases. contract).
In Gilchrist, it is clearly stated that malice is not an element of tortious
interference. Lagon was not aware of the existence of the lease contract between Lapuz and Sepi
As long as you are aware of an existing contract and despite his exercise of due diligence (verifying the
you induced another party to violate his contract, you existence of a lease contract).
Lack of malice cannot
will be liable, unless you find a valid justification.   When there is due
discount tortious
In Gilchrist, advancement of one’s financial interest is The exercise of due diligence is the proof/ diligence on the part of the
interference. It only
not a justification. justification of the third party’s lack of knowledge third party to inquire into
mitigates damages that
But you see that in the case of So Ping Bun, the SC of an existing contract. the status of a land, it
may be awarded
focused on the absence of malice by considering cannot be said there was
financial gain as a justification/excuse and did not The third party cannot just say that he has no tortious interference
award damages. knowledge of the contract; he has to prove that he
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exercised the necessary diligence which led him to believe that there are no contracts There is no tortious interference on the part of the Lacsons (3rd party) because it
concerning the prestation. merely follows the CARP since the contract between the tenants and Tayag
If one party is not aware of the existence of the contract after exercising due violates the said law.
diligence, the party will not be a tortious interferer.
That’s the ruling here. The landowner was saying, “if you proceed with this, it will be illegal.”
In effect, the third party merely prevents another from consummating an
However, the court went beyond what’s needed to make that decision. It could just unlawful contract.
have said that there was no awareness of the contract that could have been interfered So that’s a justification that is not an advancement of financial interest.
with.
But the SC proceeded to the next element and said: in fact there was a justification 4. STIPULATION IN FAVOR OF A THIRD PARTY
because it was in furtherance of an economic interest, therefore there is a legal
justification.
Art. 1314. (par 2) If a contract should contain some stipulation in favor of a
third person, he may demand its fulfilment provided he communicated his
Like I said before, for me, that shouldn’t be the justification because if that’s the case
acceptance to the obligor before its revocation. A mere incidental benefit or
then we will never have a tortious interferer because somebody always gets some
interest of a person is not sufficient. The contracting parties must have clearly
money out of something, so you will not have a tortious interference at all.
and deliberately conferred a favour upon a third person
So what will be a legal justification? You will find that in the next case, Tayag v. Lacson.
4. TAYAG v. LACSON (CARP Beneficiaries) REQUISITES OF A STIPULATION IN FAVOR OF A THIRD PARTY

Lega Justification for Interference 1.STIPULATION IN FAVOR OF A THIRD PERSON SHOULD ONLY BE A PART NOT THE
WHOLE OF THE CONTRACT
There was a beneficiary of a land reform program. There was a landowner (Lacsons)
and they have tenants (Tiamson et. al). Under the Comprehensive Agrarian Reform
Law, the tenants will be getting the lands. However, the tenants should keep the land 2.THE CONTRACTING PARTIES UST HAVE CLEARLY AND DELIBERATELY CONFERRED A
within a certain period. Then here comes Tayag, he promised to pay P50 per square FAVOR UPON A THIRD PERSON, NOT A MERE INCIDENTAL BENEFIT OR INTEREST
meter in exchange for the conveyance of the land. Tayag wanted to get the rights of
3.THE FAVORABLE STIPULATIONS SHOULD NOT BE CONDITIONED OR
the tenants even before the tenants could get the land. There was a directive by the COMPENSATED BY ANY KIND OF OBLIGATION WHATSOEVER
landowner (Lacsons), that they will cause the disqualification of the tenants to benefit
under the CARP if the tenants will proceed with the contract with Tayag. It was like a
threat from a third party. 4.THE THIRD PERSON MUST HAVE COMMUNICATED HSI ACCEPTANCE TO THE
OBLIGOR BEFORE ITS REVOCATION
So Is there tortious interference? 5.NEITHER OF THE CONTRACTING PARTIE BEAR THE LEGAL REPRESENTATION OR
AUTHORIZATION OF THE THIRD PARTY
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The parties are not representatives of the lessor, otherwise the church would not be a
5. LIMITLESS V. QUILALA ( advertising sub lease) third party in this contract. The lessor also willingly accepted the benefits by getting
Stipulation in favour of third party the money.
All the requirements were present.
There was a contract of lease between lessor (Church) and lessee (Limitless) for
advertising purposes in the lessor’s property in Guadalupe (San Carlos Seminary and The issue was, this may be a donation. And in donation, there must be a certain form.
Our Lady of Guadalupe Church) in exchange of rentals. It must be in writing. The acceptance must also be in writing.
Astro, another advertising company, applied to the lessor to lease a part of its However, there was no compliance with the formalities of a donation. The SC said no,
property. there’s no need for compliance to this formality. There must only be compliance to the
The lessor referred the application to lessee, and the lessee executed a Sublease requisites of stipulation in favor of a third party.
Agreement with Astro (sub-lessee), which contains a stipulation that the Limitless claims that the rentals paid by Astro to the Church should be credited to the
payments of Astro will go directly to the lessor to augment the rentals received obligation of Limitless by virtue of the Sublease Agreement.
by the Church. The Church argued that the stipulation directing the payments of Astro to the Church
Lessor signed the Sublease Agreement as a witness. Lessee defaulted rental is a stipulation pour autrui in its favor.  
payments due to the lessor.  
The counter-argument of Limitless was, if the said provision is in the nature of a
stipulation pour autrui, then the Church should have accepted it in writing
ILLUSTRATION 3: TRANSACTION IN LIMITLESS V. QUILALA because the benefit is actually a donation, and by law, the acceptance of a
donation must be in writing.
LEASE SUBLEASE Remember our discussion on

the payment by a third party STIPULATION POUR ATRUI
CHURCH LIMITLESS ASTRO without any intention of being
reimbursed? It’s the same thing. Stipulation in a contract clearly and deliberately
conferring a favour upon a third person who has a
It’s a donation but the payment
right to demand its fulfillment, provided he
RENT RENTS DIRECTLY TO CHURCH would still be valid
communicates his acceptance to the obligor before
notwithstanding the non-
its revocation by the obligee or the original parties
compliance to the requirements
of the formalities of donation.
How should you characterize this transaction whereby the church will get all the
payment due for the lease?
As long as you comply with the requisites of a stipulation in favor of third
parties, there’s no need to comply with the formalities required in donation for it
This is an example of a stipulation in favor of a third party.
to be valid. 
The lessor got a benefit which was only incidental to the contract deliberately
conferred to them.
Lets now go the essential elements of a contract.
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ESSENTIAL ELEMENTS OF A CONTRACT 1. The consent should be given by a party with legal capacity.
What is legal capacity?
For natural persons, it will be 18 years of age. For corporations or juridical persons, it
will be the necessary approvals of the board of directors.
Art. 1318. There is no contract unless the following requisites concur:
1) Consent of the contracting parties 2. Consent should be informed.
2) Object certain which is the subject matter of the contract A party should consent to the contract knowing the relevant or material facts.
3) Cause of the obligation which is established Otherwise, there may be a vice of consent. Let’s say, there can be a possible fraud or
there can be mistake.
CONSENT
3. Consent should be given freely.
Again, if it’s not freely given, then it may be vitiated.
For example, by intimidation or violence.
Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.
How do you give consent to a contract?
The offer must be certain and the acceptance absolute. A qualified acceptance
It can be expressed or implied.
constitutes a counter offer.
Acceptance made by letter or telegram does not bind the offerer
Express consent? How do you consent?
except from the time it came to his knowledge. The contract, in such case, is
Through a signature?
presumed to have been entered into in the pace where the offer was made.
Yes, you sign. When you sign a contract, that’s the usual. That’s the express consent.
Or it can be implied?
Art. 1320. An acceptance may be express or implied. Through silence.
Through silence? You’re a potential rapist. No.
Silence does not mean consent.
When we speak of consent of a party to a contract, the minimum requirement is it
It has to be a yes. In certain cases, it can be; we have a case like that.
should be a consent on the object as well as to the cause of a contract.
That gives you the fulfillment of all the elements of a contract.
Example Implied consent through silence:
I’m selling my phone to Acuyong for P5,000. You get the phone and you hand me the
REQUISITES FOR CONSENT TO BE VALID P5,000. That’s implied consent. You have a contract. We have that implied consent in
the case of Velayo.
1.CONSENT SHOULD BE GIVEN BY A PARTY WITH LEGAL CAPACITY
2. CONSENT SHOULD BE INFORMED
3.CONSENT SHOULD BE GIVEN FREELY
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This one you have to remember: Should you ever get married, and you’re going to Then you say husband, then signature, and then below you say, with my marital
enter into a contract, forget about your spouse. consent, and then wife’s signature.
Don’t remember that you are married. Why? To show power? That was not done in this case.
No! To show independence? Instead, the wife signed in the witnesses’ section.
No! Would that be enough?
Yes, the wife had knowledge of the contract and she consented to it. This would
If you enter into a contract requiring spousal consent but without it, what’s the be implied consent.
status of the contract? It’s void!
Remember that one.
It’s a void contract if there is no spousal consent, if necessary. OFFER
The contract will be void as against the conjugal properties; it cannot be
COMPLETE OFFER
enforced against the conjugal assets. An offer can result automatically into a
The contract is void, but it is a special kind of void. contract upon acceptance by the AN OFFER IS COMPLETE WHEN IT
If it is void, nothing can be done about it, offeree if the offer is complete. CONTAINS THE OBJECT AS WELL AS THE
right? What is a complete offer?] CAUSE
In contracts that dispose of
You cannot ratify a void contract, as a general
conjugal properties, spousal
rule.
consent is necessary. No
But in the case of a void contract due to So if you have an offer and it sets forth the object and the cause, the moment it is
consent- void contract. However,
lack of spousal consent, it is a continuing accepted, you will have a valid contract, assuming it is a consensual contract where
the spouse may ratify the void
offer since it can be accepted anytime, and there is no required formality.
contract by consenting. Its
therefore, validated by the relevant
considered a continuing offer.
spouse. Let’s say, I sell to Acuyong my phone and he accepted it.
Do we have a contract?
None, there’s no price. It is an incomplete offer and it will not ripen into a
CASES ON CONSENT contract.
You still have to negotiate or agree on the other terms, specifically the price. But if I
say: I’m selling to you my phone for P5,000, the moment you accept, we have a
contract.
1. PELAYO V. PEREZ ( wife’s sigature)
That’s why you have to be careful.
Implied Consent
When you make an ad for example.
Technically, when you place an ad, you say:
It was a sale, and on the signature page, the wife did not sign.
For sale: Toyota Altis with License Plate No. ABC 1234 for P500,000 and there’s a
If you draft a contract, it would look like this: let’s say you have a deed of absolute
picture.
sale, then at the end, you say:
Technically if it is accepted, there is a contract because you have the object and you
“In witness thereof, the parties executed this contract on the date written below”.
have the price.
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Some people will just indicate there a ridiculously high price so there can be Student: Sir, if there’s already a valid contract if there’s already the object and the
negotiation. cause, can you still stipulate the specific details afterwards?
When an offer is a unilateral action by one party proposing to enter into a contract,
the offer will result in a contract if it contains at least the object and the cause. JSP: No more. Because the moment you accept an offer, and you do not agree on the
other terms, you follow the default rule. If you want certain special stipulations, then
For an offer to be valid, it must be complete and a serious one. you have to agree on those things before you sign the contract. If you do not want to
Let’s say I’m selling you my phone for P1,000. You accepted, we have a contract. be bound by mere acceptance, you need to place there the clause:
No, I’m not selling my phone for P1,000 and if you accept, I will flunk you! “Subject to an agreement on some other stipulation/s.”
Meaning, it is not a serious offer, it is just an example in class.
ACCEPTANCE
You have to see the context that it is an offer made in class, therefore it is not a real Now, so let’s say you have an offer on a car with License Plate No. ABC1234 for
offer. But let’s say that I will give you an apprenticeship if you get 90% in OBLICON P500,000. This is a complete offer. If offeree accepts, you have a contract. But when
and I will pay you Pxxx amount. should acceptance happen?
Of course, it is a definite amount but we cannot disclose. Requisites of acceptance:
It may be a real offer, right? It may be a joke because you can never get a 90% here.
REQUISITES OF ACCEPTANCE
So the point is, this is funny to you, but I’ve seen a number of cases wherein it was not
really a serious offer and it started litigation. At the time the offeree must have the
Not serious as in it is a joke, but it’s like they’re just exploring a possible transaction capacity to enter into a contract. If an
and because somebody threw a number and there was a property identified, the acceptance is made by an insane person,
the contract will be voidable. If the offeree
other party accepted and then sued. 1.MADE BY A PERSON WITH LEGAL
is placed under guardianship or
There’s litigation for 10 years just because of that offer. The whole point is that the CAPACITY
receivership, the contract will be void
offer should be complete.
because it needs court approval in that
There’s this classic example. case. That’s the case of Villanueva.
If I sell to you my phone for P5,000, and you accepted but for P4,500.
Do we have a contract?
You did not consent to my offer, so there was no agreement as to the price. If it is revoked, there is nothing to accept.
What if I sell it for P5,000 and you said “No, I’ll buy it for P6,000.” If if the offeror becomes insane before the
Do we have a contract? Do you know subset in Math? acceptance of the offeree, it will be void
2. MADE PRIOR TO THE REVOCATION because there will be no consent on that
Your offer engulfs my offer?
AND BEFORE THE OFFERER LOSES THE point. It is different if it is the offeree who
Theoretically, there’s a contract because I can just say I won’t get your P1,000.
CAPACITY TO ACCEPT THE ACCEPTANCE is incapacitated. The incapacity of the
Basically, you accepted my P5,000 because you’re offering P6,000.
offeror renders the offer invalid, so there’s
Who am I to refuse if you are paying an additional 20%? Of course, that will not nothing more to accept.
happen in real life.
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2. VILLANUEVA v. CA
Art. 1323. An offer becomes ineffective upon the death, civi l interdiction,
insanity, or insolvency of either party before acceptance is conveyed.
ILLUSTRATION 2: RESCISSION
DAY 1: OFFER TO BUY PROP FOR PXXX You can see this in Art. 1323
DAY 2: ACCEPTED WITH QUALIFICATION Acceptance must be made before the offeror has withdrawn the offer or before
OFFEROR BANK placed under receivership or before he becomes insolvent or incapacitated. What are
DAY 3:BANK PLACED UNDER RECEIVERSHIP the other instances? Loss of legal capacity, death, civil interdiction.
DAY 3: ACCEPTANCE: (TOO LATE)
IF ANY OF THESE OCCUR BEFORE ACCEPTANCE OF OFFER, OFFER IS

INEFFECTIVE
1. DEATH
Onn Day 1: The bank accepted but made a qualification on Day 2. 2. CIVIL INTERDICTION
Do you have a contract? 3. INSANITY
No, because acceptance is qualified. It was actually another offer. 4. INSOLVENCY OF EITHER PARTY
On Day 3, bank was placed under receivership.
Day 4, acceptance by offeror. When the offeror made a valid offer to an incapacitated offeree, but then when the
Do you have a contract? offeree accepted, he was already capacitated.
None. If you look at this, it started with an offer from the offeror, then the bank made What’s the status of the contract?
a counter-offer.
The offeror could have accepted it, but before the offeror could accept, the bank was Then you have a valid contract.
placed under receivership because it was in financial distress. What’s important is the capacity of both parties at the time of acceptance.
Being under receivership, it lost the capacity to S: Sir, is verbal acceptance an express consent?
Banks under receivership
transact. If a bank or corporation is placed JSP: Well, verbal can be express, there is just a question of proof. It can also be
must get court approval to
under receivership, court approval must be implied like a nod, thumbs up, thumbs down.
dispose of property. They do
asked before disposition of assets could be
not have the legal capacity to
done. Let’s now use this offer and acceptance. Ill give you some scenarios
freely enter into obligations or
In this case, the offer was deemed nullified by the
accept offers.
receivership. When the offeror accepted, there is
nothing more to accept. Offer was withdrawn in
light of the receivership.
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3. PNB v. ROCAMORA ( Bank Loan)

Escalation Clause: Silence not consent
SCENARIOS OF REVOCATION AND ACCPETANCE
The bank extended a loan. Borrower is obliged to pay principal and interest. There’s
Day 1:complete offer was an escalation clause which provides that the bank may adjust the interest rates after
SCENARIO A made. VALID CONTRACT
considering certain factors and within the limits allowed by law.
DAY 2: ACCEPTANCE
Pursuant to the escalation clause, the bank periodically adjusted the interest rate
Day 1: complete offer NO CONTRACT ( theres reaching as high as 40%+.
Day 2: legal incapacity of withdrawal of the offer by Will the escalation clause be valid?
SCENARIO B
offereror the law due to the legal No, because it violated the mutuality of contracts because only the bank would be
Day 3: acceptance incapacity of the offeror fixing the interest rate, an essential term of the contract.
But that is not the lesson, we’ve done with that.
DAY 3: Both acceptance and VALID CONTRACT ( at the
In this case, the lender periodically gave notice to the borrower about the
revocation ( but acceptance time of the acceptance,
SCENARIO C was first) there is already a valid adjustment of the interest rate. The borrower did nothing; he was silent. The
contract) lender claims that the silence was deemed consent.
Held: The court held that if there is no obligation to reply, silence does not mean
consent.
GENERAL RULE: If you have revocation and acceptance, the rule is whichever comes first Remember the case of Pelayo? In the case of Pelayo, Pelayo did not want to consent,
so the wife was duty bound to say that she was not consenting. By her inaction or by
Day 1 complete offer. VALID CONTRACT
Day 2:offeror sent revocation (Revocation was received fully silence, that was considered as giving of consent.
notice through snail mail. on day 4, so as of day 3, But in this case, the Court said that when the lender sends a notice of
Day 3: acceptance by offer there’s still something to adjustment of the interest rate, the borrower has no obligation to reply.
SCENARIO D Day 4 receipt of snail mail. accept. As far as the offeree is Therefore, the inaction of the borrower could never be considered consent.
concerned, this revocation is
not yet valid because it has OFFER: OPTION CONTRACTS
not yet reached him. )
Art. 1324. When the offerer has allowed the offeree a certain period to
VALID CONTRACT. In due accept, the offer may be withdrawn at any time before acceptance by
The tricky question is what if course, the offeree should
communicating such withdrawal, except when the option is founded upon a
revocation was received on have read the mail and the
SCENARIO E consideration as something paid or promised
day 2 but the offeree did revocation should prevail.
not open the mail, then day The date of receipt will
3 there was acceptance. prevail. What is an option?
For example, an option to buy and an option to sell, or it can be a combination.
An option is akin to a complete offer.
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Example: OPTION MONEY AND EARNEST MONEY

X, the owner, grants grantee an option to buy a certain property at a fixed price.
This is an option contract, but you don’t have a sale yet. An option, if it is not supported by a consideration distinct from the purchase price,
This option to buy is strictly speaking a complete offer that at anytime the may be withdrawn anytime prior to the acceptance or exercise of the grantee ( Art
grantee could accept by exercising the option within the given period. 1324).
Meaning, even if the grantee has 30 days, but without payment of an option
For example, a house and lot worth 20M is the subject of a 30-day option. money, the owner can withdraw the option at anytime, generally without any
The grantee, within the 30-day period, could inform owner that he is exercising the liability, unless the grantee has already exercised the option and communicated
option, meaning, buying the property upon the terms. it with the owner.
Does he need to pay?
No. Remember Baccus, if it’s an option, it’s enough that notice of the exercise of So, in the example, to make sure that the owner of the shares would not withdraw the
the option is given within the term during the effectivity of the option. option, I paid option money let’s say P1M.
The sale will happen after, and during the sale, then there is a need to make the What does a P1M option money give me?
payment. If the price goes up to P2,500 within 90 days, I can exercise the option and I gain half
a billion.
An option is actually an outstanding offer during the effectivity period. If the shares go down to P1B, I just won’t exercise the option and I just lose the P1M.
What’s the purpose of an option? Why not go directly into the sale? An option here somehow manages your risk.
Well, it has a legal and economic purpose. If your plan does not work out, just leave the option money. This will be relevant when
you discuss the jurisprudence on options.
Example: Legal and Economic Purpose of Option Contract On the other hand, an earnest money is like a downpayment, it’s part of the
I want to buy 1M shares of stock of PLDT worth P2,000 each. purchase price. I
Let’s say I want to buy the shares because I believe that in a short period of time, the f there’s payment of earnest money, that will indicate not an option, but a sale.
price will spike to P2,500 per share.
I also want to minimize the risk because it could happen that the P2B could go as high S: Is an option the same as a hedge contract?
as P2.5B or as low as P1B. JSP: Yes, this will be one of those derivatives. You want to be protected. Let’s say your
If I’m going with a Deed of Absolute Sale and I will purchase, I’ll need P2B. So what plan is you want to be protected for possible loss. You can have this contract with you.
can I do? And I face the possibility of losing P1B. It’s more of your foreign exchange, when you buy a forward contract. When you buy
So, what do I do? foreign exchange now at a given price.
I can do an option contract. So even if it fluctuates, you may lose, but you may lose only some, not the entire
I will ask somebody with 1M shares to grant me an option to buy at a certain price amount. You just pay a sort of a premium and you are protected somehow. Well I
within a period of 90 days. think, in that sense, it could be used as a hedge against a certain risk.
This is my horizon whereby I think there will be a spike on the share price, and I will
have an option. By the way, this thing, option and the more esoteric contracts, like derivatives, are not
for lawyers. So you really need to be a math guy. Who do they hire to do these
things? Math guys. Lawyers, we just draft.
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Let’s go back to this option. It is crucial to determine whether the obligor is supported to be sold.
by the consideration distinct from the price. If the purchase price is P20M, your option So the Court said: If that were a consideration distinct from the price, this
money will be on top of this, say an additional P500k. forfeiture of the improvements in case of failure to exercise the option would
If you have paid an option money, you have protection, theoretically. be, with more reason, a separate consideration.
The Court allowed the exercise of the option.
OPTION MONEY EARNEST MONEY
CONSIDERATION DISTINCT FROM PRICE; PART OF THE ACTUAL PURCHASE PRICE And then you have the two en banc cases, Ang Yu and Equatorial. They were decided
ON TOP OF ACTUAL PURCHASE PRICE; only months apart.
USED TO PRESERVE A RIGHT AND
PROTECTION TO USE THE PERIOD 5. Ang Yu v. CA
Right of First Refusal
In Ang Yu, what was involved was a right of first refusal. What is a right of first refusal?
Should consideration distinct from the price be paid in money or can consideration How do you distinguish it from option money?
take other forms?
When you have a right to first refusal in a contract, the only right given to the grantee
is the grantee would have the right to retract the grantor despite the disposal of the
4. SERRA v. CA ( Lease Contract, Improvements) property subject to the right of first refusal.
Consideration distinct from price not necessarily money
Example:
There was a lease contract between lessor and lessee. I own a house and lot and gave Acuyong the
There was an option to buy the leased property granted to the lessee but he did not right to first refusal.
exercise the option. Then, the lessee forfeited the improvements it made on the Then Acuyong said I am now buying your Rights of first refusal are not
property. property; sell it to me. options. You identify the object
Was there a consideration distinct from the price? Can Acuyong now force me to sell? but you do not fix the cause or
The Supreme Court said that there was The courts considered the No, because it’s only a right to first refusal. You consideration
sufficientThere would be forfeiture without need improvements made on the identify the object but you do not fix the
of payment by the lessor. property as a consideration cause or consideration.
In fact, the Court cited an older case. In a similar distinct from price thus
case, should the lessee not exercise the option, sufficient to preserve the That will happen only if and when I decide to sell my property. If and when that
the lessee has to sell the improvements to the option happens, I should first offer it to Acuyong before offering it to other potential buyers.
lessor. Unlike an option, which is a complete offer and what’s left is for the offeree to accept.
That one was considered enough to support the .
option independently of the price of the property Theoretically, can you sue for specific performance based on a right to first refusal?
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It depends. If it’s a right of first refusal, you cannot sue to compel a sale because there Because under Ang Yu, if I’m the grantor, I can withdraw the option even if it is
is no price yet. There is no decision yet on whether to dispose of the property. supported by a consideration distinct from the price, I can only be liable for damages
and no specific performance can compel me.
However, if there was already an offer made to third parties, then you can now Why?
sue to impose the right to first refusal. Because the Court explained in Ang Yu, that, in an option you only reach the
You may compel the old owner to offer the property to you first before offering it to negotiation state of a contract. The perfection stage and Consumation stage are not
third persons. The offer should be of the same terms and conditions. present.
It cannot be like: I’m offering it to you for P20M, you refused. I turned my back, sold it
to him for P18M. When there’s an option, you reach only the negotiation stage. There’s no
There was a violation of the right to first refusal because I did not sell upon the same perfection yet, because there’s no acceptance yet, there’s no exercise.
terms and conditions. So if I offer it to him for P20M, I also have to sell at P20M to
others. So if it is withdrawn during the period, there will only be liability for damages.
But if I offer it to him at P18M, I have to go back to you and tell you that I’m selling it But that’s not a good analysis.
for P18M. And if you decline, then you lose your right to first refusal. Because remember, an option contract is a contract by itself.
So you should have the same remedies in ordinary contract among which there is
Going back to Ang Yu. Ang Yu claimed the right to first refusal but there were specific performance, otherwise, if you have this rule, the option contract will be
rules laid down in Ang Yu which you should remember. useless in certain cases.
Some of them were somehow reversed by Equatorial v. Mayfair. Let’s say your option contract has a penalty clause. A fixed amount will be paid in case
of breach.
There are two kinds of options, right? Remember my example? How much is the gain of the PLDT? P500M right? What if the
Without distinct consideration, and with distinct consideration. penalty is only P100M?
What’s the difference? Then there’s so much to gain.
If it’s without distinct consideration, the grantor of the option can withdraw the option Remember, if there’s a penalty and there is no stipulation to the contrary, there will be
at anytime prior to acceptance even if there’s a fixed period. a liquidation of the liability.
There will be no liability as a general rule, unless there’s an abuse of right (it will be
more of a tort liability). So, in Ang Yu, somehow, the court allowed it. An option with a distinct consideration,
Now, if it is with distinct consideration, the grantor has to respect the option period. the grantor could still withdraw even if prior to the expiration of the contract, and the
Meaning, the grantor has to let the option or offer stay during the option period. liability will only be for damages and there could be no action for specific
But what if the grantor withdraws? Can there be a suit for specific performance? performance.
Let’s assume there is withdrawal of the option. What’s the consequence?
What’s the entitlement of the grantee? What case runs contrary to Ang Yu? Serra is an example of a case that allowed specific
Ang Yu said it will only be a claim for damages and no specific performance. performance with respect to the enforcement of the option. Maybe when the Court
Remember my example of PLDT shares? decided Ang Yu, they forgot about Serra.
If you follow Ang Yu, the option as a risk-mitigating or risk-managing instrument
will be useless.
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THURSDAY 14 APRIL 2016
REVIEW: OFFER However, if there is already an offer being made, meaning the grantor was already
shopping for potential purchaser. let’s say, grantor grants right of first refusal to
grantee involving property covered by TCT 1234.
We discussed the concept of the right to first refusal and an option. So, as this provision stands, let’s say this is in a Contract of Lease.
A grantor identifies a property, meaning the object, but (there is) no cause. This will be triggered only when the grantor decides to sell. Before the grantor
For example, a grantor will grant someone a right to first refusal to purchase a specific decides to sell, there is nothing to enforce.
property stating a price. The option, on the other hand, will contain the object and
the cause or the consideration. Of course this will have a term. That is why in Ang Yu it says there is no right to specific performance with respect to
What is the term? It is the option period. It is the period within which the grantee of the right of first refusal in relation to the conveyance of the property.
the option should decide whether to exercise the option.
However, if there is already an offer, meaning the grantor went to somebody
else and offered the property for x price then the grantee, now, will have a right
REVIEW: ANG YU AND EQUITORIAL CASES to enforce the right of first refusal because by that time, the right of first refusal
has already been activated by the grantor offering to a third party.
ANG YU V. CA We now have the object and the price.
So you have to make a distinction.
The case of Ang Yu involves the right of first refusal but at the same time also has the What are you enforcing?
rules with respect to option. If you are enforcing conveyance prior to the exercise of the right of first refusal, then
Ang Yu said there is no specific performance in a right of first refusal there is no specific performance.
You have to understand what specific performance means in this case. (But) subsequent to the offer, then you can have an enforcement of the right of first
Specific performance means that the grantee can sue to force the grantor to sell. refusal.
If you have the right to first refusal you do not have the right to compel the
grantor to sell. On the other hand, you have an option.
Basically an option is an outstanding offer because if the grantor gives a grantee an
Why? option to buy a property for a specific price, in effect the grantor is setting an offer
Because there is no cause yet! during the option period. At any time, during the option period, the grantee may
There may be an object but there is no offer yet. There is only a right given that accept.
should the grantor decide to sell, the grantee shall have the first right to buy the
property. With respect to option, you have to distinguish if it is without distinct consideration or
Only when the grantee refuses to exercise the option can the grantor go ahead and with distinct consideration.
offer the property to some other party under the same terms and conditions offered When you say distinct consideration, it is consideration distinct from the price
to the grantee. meaning payment of option money.
So Ang Yu explains that in the right of first refusal there is no specific
performance. If it is without distinct consideration, can the grantor withhold the offer anytime?
Yes, but prior to acceptance.
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There will be no liability because it is a right. EQUITORIAL vs. MAYFAIR

Under the law, the grantor can withdraw the option. It is just like extending an offer. Contrast of Ang Yu. When there is a consideration distinct from price, Specific
An offer prior to acceptance, it can be withdrawn and that withdrawal will prevail over Performance available
a late acceptance. There would be no liability for the withdrawal except in the case of
abuse of right. Now let’s go to Equitorial. Carmelo and Mayfair have a contract of lease and in
exchange rental. In the contract, there was a provision of Mayfair having an option to
Now if it is a distinct consideration, the grantor should respect the term, what does it purchase. The contracts provided that Mayfair shall have the option to purchase the
mean? leased premises.
It means the grantor cannot withdraw the option during the option period. Now, during the term of the contract, Carmelo communicated with Mayfair that
So if there is let’s say a 30-day option period, the Carmelo was shopping for a potential buyer but nothing came out of that exchange
grantor has to respect the period He cannot of communication between Carmelo and Mayfair.
An option contract with a
withdraw the offer supported by the After that, Carmelo sold the property to Equitorial.
consideration distinct from
consideration distinct from the price. Why? How did Equitorial come to know of the lease?
price ( such as option money) is
Because it is a separate contract all together Equitorial conducted due diligence among which Equitorial examined the lease
a contract in itself. Grantor
--- you have the option contract and there is a contract and was therefore aware of the option.
must respect the period.
cause for the granting of the option, which is So the question was can Mayfair enforce this one?
the option money. So, it could not be First discussion was, how should you characterize this clause?
withdrawn. Is this an option? It is not.
It is a Right of First Refusal because there is no statement of the consideration
or cause --- the price. There was only the identification of the object, the property
The tricky ruling in Ang Yu was: subject of the option to purchase. So technically this is a Right of First Refusal.
What if the offer was withdrawn during the option period, what happens?
Ang Yu stated that if withdrawn within option period, there is no right (to claim) Now, if it is a Right of First Refusal, what should be the consequence then if Equitorial
for specific performance, only a right to claim for damages. purchases the property well aware of the stipulation in the contract lease?
Now for you to understand that ruling in Ang Yu, you have to go back to the stages of Of course Carmelo will be liable for breach of contract because there was a stipulation
a contract. here. Equitorial is a buyer in bad faith therefore the Court said the sale’s violation of
You have negotiation, perfection, consummation. the right to first refusal was rescissible because the only way that Mayfair could
Remember an option is an offer only. Therefore, Ang Yu was saying if it was an offer, it exercise its right is to rescind the sale so Mayfair can proceed with its right to first
did not reach the perfection stage. There was no contract yet. There was nothing to refusal.
enforce. The premise of that ruling was Equitorial knew full well the right of first refusal
So Ang Yu said if there is a withdrawal of the offer during the agreed upon period, the because Equitorial had the access to the contract of lease.
grantee will only be limited to the recovery of damages.
Here there was a departure from the decision in Ang Yu.
When the right of first refusal was triggered, meaning when Carmelo shopped for a
buyer, Carmelo was duty bound to make the same offer first to Mayfair and only when
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Mayfair declined the offer could Carmelo proceed to Equitorial but what Carmelo did Now, if under Ang Yu, let’s say you have the Grantor (Manny Pangilian) granting Ang
was to go directly to Equitorial and by pass the right to first refusal. an option in exchange there is a payment of option money. Period of option is 90
So (now), Mayfair could enforce the right of first refusal and additionally cause the days. Under Ang Yu, if the price tied to 2,500, the Grantor can cancel the option all
rescission of this sale as a fraud against Mayfair. together and the grantee can go after the Grantor for damages.
Now, for the option, this is fine under the ruling in Equitorial and it is without If we have a penalty clause, that can be for the recovery of the grantee.
consideration.
However in Equitorial, in this case the grantee can sue for specific performance.
Let us assume this was a real option --- there was an object and a price, and Specific performance means that the grantor should maintain the option during the
hypothetically we will assume there is an option and it was within a contract of lease. option period (90 days) for the grantee to decide whether the grantee should exercise
If Carmelo withdrew the option by selling the property to Equitorial, what would be the option.
the remedy available to Mayfair?
Remember under Ang Yu, the remedy of Mayfair would be to claim only for That is why if you look at the explanation in Ang Yu, the option was preparatory to the
damages. contract it fails to grasp that the option contract was a contract altogether subject to
In Equitorial, the Court said, no, there is a right to enforce the option. specific performance.
So let’s say Carmelo withdrew the option with the intent to sell the property to In case of enforcing of an option, it can be limited to forcing the grantor to maintain
Equitorial, what could Mayfair do? the option only during the option period.
Mayfair could sue Carmelo for specific performance to allow the option to stand.
Q: Sir, in the case Equitorial, will Equatorial be liable to damages in Mayfair?
Now in this case, was there a consideration distinct from the price? A: Yes because Equitorial acted in bad faith. So, it will be rescission of sale plus
Let us assume this was an option, was there a consideration distinct from the price? damages.
The Court ruled yes because what we have here was an option embedded in a
contract of lease. So for these two cases, they are both en banc cases.
Therefore if it is embedded under the contract of lease, all undertakings of the Equitorial reversed the ruling in Ang Yu with respect to the withdrawal of an option
lessee (Mayfair) were deemed to constitute the consideration for the option. supported by a distinct consideration.
How do you characterize the ruling?
Let’s say there was an option to buy 1 million shares. This decision with respect to options is characterized as obiter because the case
You have the object and the price. The price is 2,000 pesos per share. Your estimation dealt only with the right of first refusal.
is that it can have the possible high side of 2,500 and a downside 1000 pesos.
Rather than buying the shares immediately, you have a 90 day option period, and you
pay an option money at 100 million (???). ANG YU EQUITORIAL
With an option, you would like to manage your possible risk in this case. If there is a
When a grantor revokes option when there Specific performance is an available
spike in the price, then you exercise your option and you earn Php 500M if the price
is a consideration distinct from price, the remedy when an option is given with a
goes down below 2000 then it might not be wise you just forfeit your option money. remedy of the grantee is only damages and consideration distinct from price. An option
not specific performance. contract is a contract on its own. It is not
preparatory to a contract
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So with respect to option, what is important is to determine whether it is supported To show you that there could also be a wrong decision.
by a consideration distinct from the price. This decision is WRONG.
What is a consideration distinct from the price?
Let’s say if you make an earnest money a down payment that is not an option. If you have Equitorial, there was a portion there wherein the Court said if you have an
That may be a sale. An option money is on top of the price. option and it is embedded in another contract not the same set or not in the option
contract itself, the undertakings of the parties form the consideration for that option.
For example, you have a grantor and you have a grantee.
There is an option to buy. Meaning the lessee would not have made an advance payment or would not
Let’s say to get the option to buy, the price is 10 million pesos and an exercise period have agreed to do the undertakings under the contract if the lessor did not
of 30 days. Now the grantee pays Php 100,000 to get this option. grant the option.
Now you have an option contract. There is a distinct consideration, meaning a So the option was in exchange for the undertakings of the lessee under the
consideration separate from the price. contract of lease.
If the grantee exercises the option, this will be now become the start of the Php So, you have a consideration distinct from the price.
10 million then it is a consideration distinct from the price.
Remember it is a consideration distinct from the price to be paid for purchase of the
property.
BIBLE BAPTIST v. CA So this option is in a contract separate from the sale or from a simple option contract,
Supreme Court decided wrong. Advance rentals should have been seen as then you have a cause distinct from the price.
consideration distinct from price What is the authority for that?
You go back to that case of Serra.
Now let us take the case of Bible Baptist. There is a contract of lease. In the case of Serra, there was a contract of lease.
So, use of property in exchange of rent. There was a clause, an option to purchase, Should there be a failure to exercise the option there would be a forfeiture of the
complete with an object and a price. improvements. The Court said that is consideration by itself. In an earlier case,
Now on top of these, the lessee assumes certain undertakings among of which was to Supreme Court said should the lessee fail to exercise the option, the lessee would be
pay in advance rentals. obliged to sell (?) the improvements.
The purpose of which is to enable the debtor to redeem the property because it was In Equitorial, the Court explained if you have an option in a separate contract,
mortgaged to a bank. So, among undertakings, debtor made an advance payment of meaning separate from the option itself or from sale, each and every obligation
rentals for the redemption of the property. assumed under that contract will form part of the consideration of the option. Of
The issue is was the option supported by a consideration distinct from the price? course if you are on the other side, then you would have to remember this case.
Supreme Court said the option was not supported by a consideration distinct from the Q: How do you determine the abuse of right?
price therefore it could be withdrawn anytime. And the Supreme Court also said that A: The abuse of right is for example a grantor grants you an option and just to spite
this advance payment was not a consideration distinct from the price. you, gives you grave personal insult, and then he withdrew.
It is very difficult, by the way, because it is a right. The burden would be on the other
Why did I assign this case? side to convince the Court that it is not a reasonable exercise of the right. Let’s say
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nobody is buying, nobody is making an offer, nothing happened between you and Meaning to award the contract to the best bid?
then suddenly the grantor claiming that he is withdrawing the option. Again you have to go back to the tenor of the advertisement itself. It was an invitation
to submit bids. There was nothing there that if you submit the best bid, you will be
Why do you have to remember abuse of right? granted the contract.
What is the purpose of Articles 21 and 22? For damages. What the ad stated was “the government reserves the right to reject any bid.”
Yes, but what do you have to bear in mind with Articles 21 and 22? It is the law of last There is no vested right for the bidder to submit the best bid it doesn’t mean you will
resort. If you do not have any other theory, your theory would be an abuse of right. be awarded the contract because the government reserves the right to reject any bid.
That is why it is very rare. It is a tort liability. Would that be fine?
Yes. It is standard to government contracts.
Lets move on. What do you do? Do you go to court?
It will be unlikely that you will win because of that clause. You cannot claim possible
abuse of right.
Art. 1325. Unless it appears otherwise, business advertisements of things What you can do is go after the government officials. You can file a case in the
for sale are not definite offers but mere invitations to make an offer. Ombudsman to claim that there was a favour to another party or somehow prejudiced
another party.
Art. 1326. Advertisements for bidders are simply invitations to make

proposals, and the advertiser is not bound to accept the highest or lowest CONSENT
bidder, unless the contrary appears.
THE FOLLOWING CANNOT ENTER INTO A CONTRACT

Take note of these two provisions, articles 1325 and 1326. ( otherwise it will be a voidable contract)
”Unless it appears otherwise, business advertisements of things for sale are not
definite offers, but mere invitations to make an offer” and “Advertisements for 1. Minors
bidders are simply invitations to make proposals, and the advertiser is not bound to 2. Insane Persons
accept the highest or lowest bidder, unless the contrary appears.” 3. Deaf Mute who cannot write
If you have an object, price and a distinct consideration, then it is not just an invitation 4. Person with impaired mental facilities or legal incapacity ( under the
to make an offer…there is an offer there. influence of drugs or intoxicated)
So, like I said, you have to be careful in making an offer. 5. Under a hypnotic spell; and
6. Those suffering from special disqualifications
PUBLIC ESTATES V. BOLINAO ( Public Bidding)
No vested right for the bidder who submits best bid to get contract
This case of Public Estates Authority, a government agency made an invitation to bid.
The issue was:can the government agency be compelled to accept the bid?
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1. MINORS So if you represent that you are not a minor you cannot backtrack and say you’re a
minor.
This interpretation I think is tricky. Because if its estoppel it assumes that the person
GENERAL RULE
has legal capacity. But you have that ruling.
CONTRACT IS VOIDABLE. ( but there are certain cases when the contract is void.)
For a minor to enter into a contract, they should have 2. INSANE PERSONS
1) the necessary legal representation or
2) a special law to should allow a minor to enter into a contract. Second person would be insane persons.
Unless duly represented by a legal representative or guardian with corresponding
authority, the contract would be voidable.
If a minor wants to enter into a contract, how can he do it?
The presumption is that the person is insane. There is a certification from an institution
Through a duly authorized legal representative.
(that he/she is insane).
Let us say if a minor will sell a property worth Php 1 Million, what is required?
If youre buying a property and it is in the name of a minor, you need to get court
3. DEAF MUTES WHO DO NOT KNOW HOW TO WRITE
approval.
The parents would need court approval to dispose of the property.
Third would be the deaf mute who cannot write ( but this might be dated, what if he
Exception would be if the law allows the minor to purchase necessities (for example,
knows how to sign?).
medicine), the minor should pay for it, it cannot be considered voidable.
Remember the incapacity here is related to the ability to comprehend. But that’s the
rule, deaf mute who cannot write.
Aside from the purchase of necessaries, when you were young, you opened your bank
account. It was authorized by law. Minors at a certain age can own bank accounts.
4.PERSONS WITH IMPAIRED MENTAL FACULTIES
So the general rule is that minors cannot enter into contracts.
(Under the Influence of Drugs or Intoxicated)
The contracts would be voidable. For minors to enter into a valid and forceable
contract, the minor should have the necessary legal representation or a special law
The level of intoxication would have to be determined.
should allow a minor to enter into the contract.
Lets say I'm doing the deal and Im the contracting party and we agreed on all the
terms. So to celebrate before signing, we have bottles and bottles of whatever. So,
Example:
ESTOPPEL we’re all drunk and after that- we sign. Does that mean our contract is voidable?
There was this rare case. A minor entered into a
NO. Because we already agreed.
contract ( but he looked really old). So if you When somebody is now allowed Most likely when we signed the documents were already prepared.
follow the letter of the law, it would be a voidable to backtrack from someones
contract since he's a minor. representations
What is important here is if there is awareness. If they still have the ability to
He cant legally give consent.
comprehend. If its absolutely gone, then thats voidable.
But the Supreme Court said no. He is estopped
from using the defense that he is only a minor.
5. UNDER A HYPNOTIC SPELL
Estoppel: When somebody is not allowed to backtrack from someones
This could actually happen. You’re laughing it now but this actually happens.
representations
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6.THOSE SUFFERING FROM SPECIAL DISQUALIFICATIONS

VICES OF CONSENT
Example: an incompetent under guardianship. MISTAKE

How can he enter into a contract? Court approval. VIOLENCE
Example: Persons Suffering Civil Interdiction UNDUE INFLUENCE
Status: Void FRAUD
Example: Insolvent?
Same thing.
Example: Banks under receivership? I think i mentioned before that for consent to be completely valid, what do you
Voidable as well. need?
The consent should be informed and it should be free or voluntary.
So the general rule is that contracts entered into by these persons ( minors, insane, INFORMED:consenting party should be informed of the facts with the exercise of due
deaf unable to write, intoxicated etc.) is that the contract will only be voidable or dilligence.
valid till annulled. VOLUNTARY: freely given out of his own will
However, there are certain exceptions provided by law or by the court where the
contract will be void.
BURDEN OF PROOF IN PROVING VITIATED CONSENT
Example: Thumbmark baby
So if the baby puts a thumb mark on the contract, is that void or voidable?
If you’re a lawyers lawyer you’ll say voidable. If there is an allegation of a vice of consent, meaning a party says:
But in reality, its VOID. My consent was vitiated by fraud
Theres absolutely no consent. This fraud must be proven. Its not presumed.
GENERAL RULE
VICES OF CONSENT
Who ever alleges vice of consent has the burden of proof to show that there was actual
fraud employed by the other contracting party
Art. 1330. A contract where consent is given through mistake, violence,

intimidation, undue influence or fraud is voidable. EXCEPTION
When the alleging party is illiterate or does not understand the language of the contract
These are the vices of consent. Meaning, the consent should be procured through any (Art 1332)
of these vices and if the fraud/mistake relates to something else, its not a vice of
consent. It can involve another legal issue or remedy.
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That was the allegation.

Art. 1332. When one of the parties is unable to read, or of the contract is in SC: If you have these factors it is not sufficient they will result in the shifting of the
a language not understood by him, and mistake or fraud is alleged, the person burden of proof to the party minded to enforce the contract.
enforcing the contract must show that the terms thereof have been fully The law requires that the one claiming fraud should be illiterate and should not have
explained to the former. understood the contract.
Being of old age does not necessarily mean a party did not understand the
contract.
Example:
Lets say A and B.
Now the other one, the fixing of the thumb mark.
A is the seller, and B is the buyer.
Thats not unusual fixing of a thumb mark does not mean theres something wrong.
A sold the property in exchange of price to B.
Fixing of a thumb mark is still a form of signature it does not mean you cannot write.
B sued A for annulment based on fraud.
If you have this situation, B the suing party has the burden of establishing the fraud.
What you have to understand is if you are confronted with this how do you show there
Lets say A who was an expert represented that the party was suitable for a given
was a valid contract?
purpose and it turned out that it was not suitable at all.
Lets assume the old lady did not understand.

In that case, B will have the burden of establishing fraud. So whoever alleges fraud or
Start with the deed of sale.
who makes an affirmative allegation has the burden of establishing the same.
When you have a deed of sale the format is like this :
1) parties,
However, if lets say there is this claim of fraud and B is either: illiterate or did not
2) terms
understand the language of the contract. So, who will now have the burden?
3) signatories,
The burden now shifts to A.
4) witnesses
If A is minded to enforce the contract, A has to show there was no fraud and show
5) acknowledgements
that B’s consent was informed and voluntary.
The first thing you show is there was consent.
He must show that B totally understood the contract.
The consent was done by the parties, there was a signatures ( which the SC affirmed
in this case)
Second, you have witnesses.  
CASES ON CONSENT
The practice usually is that each party will have a witness, for a good measure you
have someone on your side who could testify or the practice also for each party to
1. YASON v. ARCIAGA (thumb mark) identify each and every page of the document.
Old age does not constitute inability to consent Sometimes lawyers require clients to sign each and every page.
Theres a sale of real estate by an elderly woman. When she died her heirs wanted to Whats one way to show there was actual consent?
annul the sale on the main ground that due to his old age, the affixed thumb mark Ask the witness!
that was proof of his consent cannot be considered as informed and volunta Did the seller confirm the sellers understanding of the terms and conditions?
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If the witness says yes then you have a a good case.

So thats your underlying defense. So it depends on which side you're on. There are other ways to assail. Of course if
you’re just establishing illiteracy that should be easy.
Then you go to the acknoweldgement or the notarization.
The notary will say that the parties appeared before him and they freely and What if you're dealing with illiterates? How do you make sure they understood the
voluntarily entered into this contract and acknowledged the facts before him. contract
The acknowledgement is an afffirmation that they understood the contract.
if you have want to enforce the contract you go to the notary. If its an expensive property, make sure theres legal representation.
There is a presumption that there is regularity when it comes to a notary. If its a simple transaction, you ask the notary to explain the document to that person
In this case the notary appeared and testified and said that its a true contract. you have to let the notary explain to the illiterate.
If you have this then you have a good chance that you would have a valid contract. Or better yet, two forms, one in the language known to the contracting party and one
in english.
2. DE LA CRUZ v. SISON (illiterate) In fact I've done contracts in filipino.
Defense of illiteracy was not sustained because of incompetent lawyer The best scenario is that they have a lawyer to explain everything to them.
S: Is it okay to have separate notarization?

Same situation. JSP: Yes. Thats fine. Example I'm in makati you’re in davao. I sign here have it
The claim was the old lady did not understand the language. notarised then send it to you you sign it there have it notarized. Thats fine
The problem was, during the decision, in the pleading submitted by her person there
was a statement: that she read the document. S: Digital signature valid?
This is the lawyers fault really. SO SC said then theres no literacy because the JSP: Its a question of establishing that the one who affixed in the document is the
document said she read. So there was no fraud. contracting party. If you can do that, its fine.
3. PARAGAS v. HEIRS OF BALACANO ( Liver Cirrhosis)

How do you assail notarisation if you’re form the other side? When fraud is so extensive that it negates consent itself
1) check if they’re really in the PH at that time how? show passport!
2) show the notarisation was done outside jurisdiction This one is what i was telling you earlier.
3) check if the notarised document really exists, go to the national archives or the If its an incapacitated person, its voidable- like fraud.
RTC The court said the party involved was sick at the time.
  Remember in the previous cases, just being sick is not enough o impair your
Have you seen a notarised document? At the end there is a particular. doc no, page comprehension of a transaction. There must be an impairment of the faculties
no, book no, series no. like lack of comprehension or incapacity.
If you get a certification and there is a claim that this is a DoAs, and you go to the If there is impairment its just voidable.
RTC or national archives and it shows actually that its an affidavit, then you can assail In this case the party had an ailment: liver cirrhosis
the notarization for being fraudulent. It will no longer have the presumption of validity.
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This guy had a severe case of cirrhosis of the liver, in fact you have some kind of MISTAKE/ERROR
dementia, in short you’re crazy at that time.
Considering the condition, the SC said if you’re in that situation its impossible MISTAKE/ERROR
for you to understand the contract. You could not have approved the
A wrong conception or understanding of a material fact relating to the contract.
transaction.
If you have that situation, the contract should be void.
Take note of this its a nuance
Art. 1331. In order that mistake may invalidate consent, it should refer to
GENERAL RULE
the substance of the thing which is the object of the contract, or to those
If there is incapacity, it will result only in a voidable conditions which have principally moved one or both parties to enter into the
contract.
NUANCE Mistake as to the identity or qualification of one of the parties will vitiate
consent only when such identity or qualifications have been the principal cause
If fraud is so extensive it could negate the consent itself. It should be characterised as of the contract.
lack of consent not vice of consent A simple mistake of account shall give rise to its correction.
If you have a void contract it is legally non existent. Voidable is valid until annulled. IF you look at the provision, in order that mistake may vitiate consent or invalidate
So if you're on the side of the one assailing, you have a better chance by saying the consent, it must refer to the substance of the thing which is the object of the contract
contract is void. Why? or the conditions which have principally moved the parties to enter into it which is
There’s not prescription for void contracts. You can assail it anytime. the cause.
So why do you have these cases? In other words, the mistake should relate to either or both the cause and the object.
When people die, and they forgot to arrange their documents, sometimes its cheaper
to have a sale than to pay estate tax. Some people what they do, they would prolong So if it relates to other matters then it will not be a vice.
the declaration of death of someone until all the documents were signed. That would Let saY for eXample qualifications of party if its not a principal consideration, or
save them more. Just the trouble of settling the estate after death is difficult. insolvency of party ( unless there is a representation). The qualifications would not
vitiate consent.
What about motive?
Not applicable unless it predetermines cause or consideration ( as we saw in the case
So lets now go to the vices of consent. of UY)
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If you exercised due diligence you would have known.

Art. 1334. Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent. Example:
lets say I'm selling you my property in Ayala Alabang but its not in Ayala Alabang, its
in the gillage.
Mistake of law may also be a vice of consent. By mere ocular exception you should have known that it was outside the village so
For it to be a vice there must be a mutual error as to the legal effect of the contract. there can be no mistake or fraud in that case.
Example: Intended mortgage and not sale If the party could have or should have known by exercise of due diligence then
Parties signed a contract of sale when what they intended was only a mortgage. he cannot ask for annulment based on mistake.
We are assuming that both parties thought it would only be a mortgage but it turned If you have access to the facts and you should have exercised due dilligence, you
out to be sale so you have there mistake vitiating consent. cannot claim fraud.
In that case you can have annulment or reformation of the contract to document the
true agreement of the parties.
VIOLENCE
S:How does mistake of law differ from ignorance of the law ( art 3)?
Mistake of law clearly assumes both parties are ignorant.
What the law requires only is that both of them should have thought they were doing Art. 1335. There is violence when in order to wrest consent, serious or
one thing when they should have been doing another thing. 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
Art. 1333. There is no mistake if the party alleging it knew the doubt, person or property, or upon the person or property of his spouse, descendants
contingency or risk affecting the object of the contract or ascendant, to give his consent.
To determine the degree of the intimidation the age, sex, and condition of the
person shall be one in mind.
Mistake does not vitiate consent if it could have been avoided by the exercise of
A threat to enforce ones claim through competent authority, if the claim is just
due diligence.
or legal, does not vitiate consent.
This is an INEXCUSABLE MISTAKE.
Example: Toyota instead of BMW

I sell you my car. My BMW. for 5.5 million. Go to the parking lot and say okay ill buy. VIOLENCE
then when we sign the contract you say you made a mistake because what you
bought was a toyota. As a vice of consent, it presupposes the use pf physical force in getting consent.
No. You cannot use that as a ground for annulling the contract.
Unless yo don't know how to spell BMW.
Thats an example of inexcusable mistake.
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Strictly speaking, how do you do it?

The only way i can think of is you get the hand of someone, you affix the thumb print.
You cannot use their hand to sign.
If there is infliction of violence to get consent such as beating someone back and blue
thats more of threat and intimidation.
So for violence to be the cause of the consent, the only way i can think of is getting
the hand and affixing the thumb mark.
If you hurt someone, thats more on intimidation.
Intimidation/threat can be psychological or moral or employment of force. Now for

the use of physical force to be intimidation you need to consider the context.
Example: Uy and Bernardo

Lets say Uy, and Bernardo. Bernardo claimed that Uy intimidated Bernardo. Will that
fly? you have to consider the circumstances. Unless Uy is packing heat, then I don't
see how the courts will believe that Uy intimidated Bernardo
What will constitute intimidation?

It should produce a reasonable and well grounded fear.
It assumes that it is unlawful.
That it is imminent. That it could happen soon.
It must be upon the parties person, or property, or the significant other of that person.
As long as the intimidation is done on somebody who could cause the contracting
party to sign, there is vitiation of consent.
So if you see the definition of intimidation, it is unlawful.

So lets say, ill sue you if you do not sign the contract that could not be intimidation
that is an exercise of a right.
It has to be an unlawful act.
Remember. It should be the cause of the consent
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CONTINUATION: VICES OF CONSENT 

Undue influence involves moral coercion, which is different from the other vices of
Last week, we started with vices of consent, the factors that may vitiate the consent of consent because it may be lawful. So in case of an undue influence, a person having
a party into a contract. some kind of control or influence over the other (moral ascendency or dependency
by one party to the other can cause the consent to be given by the dependent party.)
Again, the vices of consent are :
Example
You have to remember that these bad Decades ago, we handled a case. The character was a mother and there was an
VICES OF CONSENT: terms also have factors in committing an adoptive daughter. Daughter has a child who’s a minor. Mother has a lot of
actionable wrong. properties.
a) MISTAKE
So, if you have fraud, mistake, violence,
b) FRAUD
intimidation, and undue influence, these Some of the properties, they were placed in a trust under a bank.
c) VIOLENCE
vices of consent should be the reason What is a trust?
d) INTIMIDATION
given by a party. The properties were placed under an account to be managed by the bank. The
e) UNDUE INFLUENCE
proceeds will be given to the daughter and the child.
After a certain period, ownership would vest also in the daughter and the child.
There must be causation. Meaning, consent was given through the fraud. Mother was old, maybe 70+. The daughter and the child were living abroad and
If there is no connection at all, it must be some other actionable wrong, such as a living off the earnings of the trust aside from her regular work.
claim for damages, reformation of contract but not enough from to actually annul the The mother lived alone, but after a while the mother lived with a monsignor. The
contract based on vitiated consent. (Remember that one! That should be the mother was old and she had spiritual adviser in the person of monsignor, the
connection.) monsignor was the confidant of the mother. The mother slept in the parish residence.
The vice of consent should be the reason for the cause for the parties to consent In short, the mother was like a boarder. Although she had property, she lived in that
to a contract. Now, we started with the mistake, violence, and intimidation. parish establishment. The monsignor provided accommodation to the mother and
gave advice to the mother and spiritual guidance and whatever personal relationship
they had. The monsignor badmouthed the daughter saying, “Your daughter is
UNDUE INFLUENCE useless, not respectful, she should be taking care of you.”
After that, what the monsignor did was to ask the mother to change the
administrator of the trust. It was the monsignor who was made the trustee and
Art. 1337. There is undue influence when a person takes improper the manager of the trustee.
advantage of his power over the will of another, depriving the latter of a
reasonable freedom of choice. The following circumstances shall be That’s an example of undue influence.
considered: the confidential, family, spiritual, and other relations between the Considering the moral ascendency of the monsignor over the mother, the monsignor
parties, or the fact that the person alleged to ave been unduly influenced was was able to get the mother to consent to a contract changing this trust instead of
suffering from mental weakness, or was ignorant from mental weakness, or between the bank and the mother and the monsignor. Worst is that the monsignor
was ignorant or in financial distress became a signatory to all the bank accounts.
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(Did I tell you the origin of pera? This is anecdotal, why we call pera? Because a long
HOW DO YOU CLAIM OR PROVE UNDUE INFLUENCE? long time ago during the Spanish time we had coins. In the coin was Queen Isabella
Show some kind of personal relation (which is lawful), but somehow there is coercion II, her enemies call her “the bitch”, which translates in Spanish as pera (female dog).
of influential or control by one party over the other. That’s why I said normally when So, la pera.
you have undue influence, there would be dependent relations; one person will Another story that is more credible, before there were 2 coins. 5 centimos and 10
be dependent on the other. centimos. In the coin, there was a figure of a lion. Because they were small, they look
like a dog. The Spaniards call the 5 sentimo coins as la pera chica and the 1 with the
bigger dog la pera gorda meaning small bitch big bitch. So, the indios heard la pera
CASE OF UNDUE INFLUENCE chica and la pera gorda, so we now call it pera! )
1. DBP v. CA ( Restructuring Loan Agreement)

Financial distress not indicative of undue inlfuence
FRAUD
The bank extended a loan to individual
borrowers. RESTRUCTURING Art. 1338. There is fraud when, through insides words or machinations of
They [individual borrowers] are supposed one of the contracting parties, the other is induced to enter into a contract
The entire amount due ( principal +
to pay principal, interest, plus charges. interest) of the previous loan would be which, without them he would not have agreed to.
They do not pay, so they entered into a considered the new principal and a new
restructuring agreement 1. payment plan would be agreed upon
They still couldn’t pay after the FRAUD

restructuring. There was another restructuring agreement 2. And under these
Acts involving deception, and faith, malice, some evil design or deceitful scheme. Fraud
agreements, the borrowers issued promissory notes and the promissory notes are
connotes a malicious plan on the part of the perpetrator of the fraud
secured by mortgage of real properties.
The basic claim of borrowers where they were unduly influenced by the bank
because of their financial situation, they were in financial distress.
They could not pay so they entered into this contract, somehow they were saying
because of their dismal financial condition, they could not but enter into this
So, it involves manipulation, concealment of facts, deceiving
restructuring agreement including the mortgage of the property. someone, misleading someone, so as I explain before, fraud is
SC said, financial distress is not an indication of undue influence.
Otherwise, a lot of people will be claiming restructuring because you’re in financial
more of a mental state.
distress. SC said, that’s not a case of undue influence and also there was a threat here
of a suit. SC said, that’s not a kind of thread that would vitiate consent. HOW DO YOU PROVE FRAUD? 
A threat of a suit will be an exercise of a right, therefore it could not qualify as a Show the facts that would allow an ordinary person to infer the scheme.
thread of vitiated consent. So, you could not take the fact in isolation and say that’s fraud.
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You have to take set of facts and based on the set of facts you can infer a fraudulent Example: Causal Fraud
scheme. Let’s say seller is a professional jeweler and made B buy the ring.
Now, when we took this up we were discussing first the concept of fraud as a cause of B thinking that it is really something precious, it had a precious stone.
a breach of an obligation. What we have there? Causal fraud. Dolo causante.
B would not have consented to the contract where it not for the fraud perpetrated by
the seller. This factor of fraud will appear in a number of legal issue or legal context.
KINDS OF FRAUD
You have to know to what matter the fraud relates. Just like in our example, the fraud
CAUSAL FRAUD INCIDENTAL FRAUD related in the performance of an obligation after the parties entered into a valid
( DOLO CAUSANTE ( DOLO INCIDENTE) contract.
Determines or causes the consent. Exists fraud that is not the reason for the party So in the earlier example, what do you have there?
prior to, or simultaneous with the consent to enter into a contract, happens after It’s fraud in performance or incidental fraud, but not causal fraud. The next example,
consent. (fraud in performance) that’s a causal fraud. The reason for the consent was the misrepresentation by the
seller.
Example: Incidental Fraud What then would be the remedy for casual fraud? whats the point.
Let’s say we have a sale, seller & buyer in a deed of sale. When there is causal fraud present, the contract may be considered voidable.
On day 1, seller sold a ring to buyer.
On day 2, buyer paid the price. Buyer paid the price, but seller defaulted. Seller did
not sell. GENERAL RULE FOR FRAUD IN CONSENT
Now instead, seller sold it to X, conveyed the same thing to X. We will now assume A contract is only VOIDABLE due to fraud when it is causal fraud or fraud was employed
this is a fraudulent act. to cause the consent of the other party
What kind of fraud?
Fraud in performance or incidental fraud.
Example: Inability not to pay is fraud
Meaning, the fraud was made after the constitution of the obligation. There’s
You have a seller and a buyer, the parties entered into a contract.
already a contract.
The buyer ffrom the get go was not willing to pay. Meaning he will not pay the price,
Parties agreed on the object and the cause. However, the seller did not perform due
cause the buyer did not have funds to pay.
the fraudulent act of selling the ring to another party.
Will that constitute as a causal fraud? The inability to pay? No it does not. Generally,
What could be the liability of X?
unless you fall under what?
The very least, damages.
(Where are you now in crim? Estafa?)
(It would be different of course if you had say, seller sold the ring to B saying that it
Let's say for example in case of Estafa, generally, there’s no liability in inability to pay
will make you turn green after wearing the ring, and saying the oath “The dark is
but if there is an element of fraud in Estafa, so it may possibly be.
night, the bright is day.”)
Generally, inability to pay or intent not to pay will not constitute fraud, but only
So, the seller sold the ring and told B that, “This is a ring with something valuable
breach. It will be causal fraud if the consent (if the buyer made representation to
and precious”
somehow lead the seller to enter into this contract.)
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Let’s say the liquidity of the buyer made it look like he had sufficient or more than So serious, you have to consider in relation to causation. The fraud must be the
sufficient assets and finances to pay even if he really did not, or some other material reason for the consent of the other party.
representation that convinced the seller to sell the property. Let's say you have 2 parties entering into a contract.
I sell a second hand car to him. I know a number of defects in my secondhand car, I
REQUIREMENTS FOR FRAUD TO VITIATE CONSENT did not disclose, you bought.
Will there now be fraud in that case?
1. It must be employed by a contracting party or someone acting in connivance with or Depends on what? I did not make a positive representation.
to concert with the contracting party Am I duty bound to disclose to him the need to change the brake pads?
2. It must be serious ( when is it serious? when its the cause of getting the consent) Let’s assume I know certain defects. Will that constitute fraud?
3. It must result in damage or injury to the aggrieved party
No.
Why not?
If it is done by a third party, it cannot be fraud vitiating consent. So if it’s secondhand, he can check?
However, it may result in a case of mistake. No. The seller when selling a used car has no obligation to disclose any defect.
Let’s say, for example, a third party made a fraudulent representation without the Aside from the buyer being on the loop, the seller is not duty bound to disclose
involvement of either party, and a party was misled. That could be a basis of mistake. anything.
It’s different for example, if I’m selling shares of the company to the public.
Art. 1342. Misrepresentations by a third person does not vitiate consent
If I sell shares to the public, I am duty bound to disclose information on the shares,
unless such misrepresentation has created a substantial mistake and the same
which is really the regime of law.
is mutual.
Before you could register your shares with Security and Exchange Commissions, you
have to go through a process of disclosure so any lessor buying chairs will be
sufficiently informed on the different aspects of operation of company. In that case, if
Art. 1343. Misrepresentations made in good faith is not fraudulent but may
I am the one selling the shares, I will know the information, I will have liability under
constitute error.
Civil Code and Special Law.
Art. 1344. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties. Art. 1340. The usual exaggerations in trade, when the other party had an
Incidental fraud only obliges the person employing it to pay damages. opportunity to know the facts, are not in themselves fraudulent.
Example: Fraud must be serious

Let’s say, if it’s a misrepresentation or nondisclosure of material fact which would have Example: Exaggetation and sales talk
been readily accessible from the supposed defrauded party, then that cannot be a Let’s say I’m selling a Lamborghini, I am a sales agent and you’re a prospective client,
fraud vitiating consent. I told Acuyong: this is a Lamborghini it flies, it’s so fast it will fly.
Acuyong paid 20 million and drove through skyway and went back to me and said,
” It did not fly! You misled me!”
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Fraud? No! Sales talk. Whether it’s a loan transaction or acquisition purchase sale, sometimes one party will
Aside from the fact that, he should have known that it’s a car incapable of flying. require a legal opinion from the other party.
Exaggeration or sales talk will not qualify as fraud. Let’s say if you're a borrower, you’re a company borrowing from a lender as a
Of course, you have to distinguish here. In that case, why it’s not an act of fraud is condition of the loan will require a legal opinion by borrower’s counsel confirming on
because the access to information of the other party. the representation of the borrower.
The other party by exercising due diligence ought to know or should have known The reason behind that is this one, if there is falsity in the legal opinion then that
that true state of facts like in my example that car, whatever you do it will never fly. will constitute fraud and if you’re the lawyer, why do you ask the lawyer to do that?
Because the representation will go like this, let’s say it’s a law, the counsel’s opinion
would be something like,
Art. 1341. A mere expression of an opinion does not signify fraud, unless “We are group of lawyers, we’re rendering an opinion under supreme laws and we
made by an expert and the other party has relied on the former’s special are making this following statements” but first thing that they do is that they ensure
knowledge that the corporation is valid existing under Philippine laws.
What does that mean? If you’re a counsel, what do you do? Why is there an
Or let’s say, you bought the car and I said, “If you buy this car, you get 50 pogi assumption that if it’s a counsel for opinion then it may be relied upon and if turns out
points.” After driving the car, you went around Rockwell and you did not get any! to be false, it can constitute fraud, because if you’re the lawyer, before making that
You went back to me [saying], “That’s a fraud in representation. You defrauded me statement, what will you do?
and told me I will get 50 pogi points and I get some after driving a ramp.” It cannot The statement is, “The borrower is a duly organized and existing corporation in the
qualify as fraud unless it’s coming from an expert. Philippines.
What do you do?
Let’s say there’s this Joint Venture Project (power plant) between foreign investor and Go to Security and Exchange Commission, check if it’s validly existing corporation, if
a local, let’s assume the foreign investor is from Ethiopia. there is no recognition yet of its corporation documents or registration then you can
Investor came here and the local said we could do this deal, this is allowed under submit that statement sometimes they will even require a corporation is in good
Philippine Law, so the Ethiopia investor said ask your legal counsel to render an standing, where do you get that? Again, you go to SEC that there’s no adverse
opinion on the legality of our transaction, that we could build this plan, we could record, but the SEC will not issue something to say that the corporation is in good
operate it. The Ethiopian would have this percentage of ownership, so the buyer let’s standing.
say rendered an opinion, the law firm rendered an opinion if the opinion turned out
to be false, that’s an example of fraud aside from possible professional liability of the OPINION IN GOOD FAITH
lawyer.
But as I said earlier, that’s difficult, because if you have that kind of transaction, that’s Student: Can an opinion given in good faith become a basis of fraud? 
the usual protocol both parties would have, so there may be negation of that fraud JSP: If the opinion is meant or designed to lead one party to enter into a contract and
because one party should have access to the same information. So that’s the possible the one rendering the opinion knows the opinion is wrong, then that will constitute
defense in that case but the investor ought to know, should have conducted with due fraud.
diligence. (But if it’s an opinion based from a graduate of this class, maybe it’s just a mistake. It
That’s why, be careful when you practice, one thing that you will do is when you may not constitute fraud).
render opinions or transactions.
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If you’re the professional rendering that opinion, you don't want that defense Seller sold a property to B and B supposedly paid the price.
because you’re saying that I’m a lousy professional and I just made a mistake. This is by documentation based on the deed of absolute sale, but the parties did
So, of course the other side would be a possible claim of fraud. not really intend to have a conveyance of the property and for B to be liable to
S for the payment of the price.
The purpose of the transaction is just to warehouse the property with B.
SIMULATED CONTRACTS What do you mean by warehouse?
To place legal title to D and let’s not talk of the reason why, but’s it’s just the purpose
of the parties. As far as they’re concerned, this is a bogus sale (just for show) so the
Art. 1345. Simulation of a contract may be absolute or relative. The former
property will be placed in the name of B for the mean time.
takes place when the parties do not intend to be bound at all; the latter when
That’s an absolute simulation. So B is still owner and everything is just for show.
the parties conceal their true agreement.
This is not a trust agreement.
For example, let’s say creditor going after S, to make sure that creditor cannot get
Art. 1346. An absolutely simulated or fictitious contract is void. A relative anything from S, S sold the property
simulation, when it does not prejudice a third person and is not intended for before litigation to B but just for
any purpose contrary to law, morals good customs, public order or public show. There’s no really payment, but A contract is only absolutely
policy binds the parties to their real agreement. the property was placed under the simulated when there is no
name of B. payment. If there is payment of a
Why is this crucial?
nominal sum it may be considered
There are two kinds of simulated contracts Because if there is payment, it’s not
simulated. It may possibly be what a valid contract (however,
kind of contract in fraud of the rescissible)
ABSOLUTE SIMULATION RELATIVE SIMULATION
creditor?
Parties enter into a contract with Parties intend to be bound, however, Accion pauliana. Rescissble contract.
absolutely no intention to be bound parties do not show real intent in contract
My example is absolutely simulated because the seller sold the property to B to make
STATUS: VOID ( MISSING BOTH CAUSE STATUS: VALID w/ respect to TRUE
AND CONSENT) AGREEMENT ( without prejudice to third
parties claims) ABSOLUTE SIMULATION RESCISSIBLE CONTRACT TO DEFRAUD
CREDITOR
ABSOLUTE SIMULATION NO PAYMENT AND NO INTENTION TO BE NOMINAL SUM IS PAID

Parties enter into a contract of sale without the intention of being bound by the BOUND
contract or without the intention of performing their respective obligations
under the contract. sure that seller would be judgment proof. So, it’s a fraud against the creditor.
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However, there is no payment of the price unlike in our usual case of accion pauliana. Because the debtor wants to place asset beyond the reach of the creditor, so
There’s payment of nominal sum so you have a valid sale. you may just have bogus dispositions and you may difficult assuming the
Here, it’s absolutely or completely simulated. creditor could establish that this is fake disposition.
The creditor will have a hard time finding all of these properties. It will take a lot of
legal proceedings, to get hold of the disposed properties.
RELATIVE SIMULATION So, in this case, the ruling was there was an absolutely simulated contract.
There was no payment. So the statute of the contract is void. If you look at the
It would be the same sale. structure, this is very similar to rescission of contract in the conveyance of the creditor.
Deed of absolute, seller sold the property to B and paid the price. Let’s say the price
stated was 10 million and in reality the real price 50 million. Just to refresh your memory, let’s say:
So, seller sold to buyer property for a certain price under the deed of sale the stated Day 1 there’s a loan. This is Day 3 payable.
price was 10 million. In reality, buyer paid 50 million. This ( disposition to X) was done day 2 after incurring the obligation.
This is an example of relatively simulated contract. Debtor conveyed the only asset of X for a nominal sum.
The parties intend to be bound (meaning this contract is real, there’s We will assume there was connivance between the two. Connivance to ensure that
conveyance there’s payment). creditor could not get hold of this property on due date.
However, the seller the buyer did not want to show their true agreement. So on due date, there’s default. Assets equals zero.
One aspect of their agreement that they wanted to conceal was the real price paid So the remedy?
for the property. Accion pauliania. To rescind this conveyance in fraud of the creditor.
Reason for that? Now here it’s different from the case of absolute simulation. Here there’s payment. If
To evade payment of taxes, because documentary stamp tax, let’s say this is land there’s payment, then it’s a valid contract. You have all the elements. The parties
documentary stamp tax and capital gains tax they’re all based on the price or the consented to the object and the cause (the price to be paid). However, the price was
zonal land whichever. inadequate because of the fraudulent scheme.
So that’s the reason why there’s under declaration of the price. So, creditor could go after this contract and rescind it for the purpose of recovering
So it’s relatively simulated. payment to the extent necessary.
Now, that is different if you read this case of Manila Bank that is different if it is
absolute simulated. If you remove
CASES the cause, meaning there’s no
payment, you will have a void Material difference in rescissible
1. MANILA BANK V. SILVERIO contract. contracts and AS contracts apart
from absence of payment in the
There’s a creditor and debtor. Debtor has a liability, that’s a payable. Now that will spell a big
difference. Why? Because if it is latter is that there is no
So, let’s assume debtor defaulted, the creditor sued.
During litigation, debtor sold a valuable property to X. riscissible, there is a period within prescriptive period to assail an
There was payment of price by X to debtor so just like our earlier example. which to file the action for Absolutely Simulated Contract
Why is this the usual case when we have absolute simulation? rescission. 4 years, from the time
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there is no asset that could be taken by the creditor or whichever maybe urgent So that was proof.
from discovery of this fraudulent conveyance. Meaning, if there was no recollection of the payment, the court believed that
there was no payment.
But there’s a period 4 years from this point when there’s no asset available to pay the SC said therefore no consideration no intent to be bound absolutely simulated.
creditor however if it is void like an absolutely simulated contract, there’s no period to These are the things you can ask because if it’s a notarized document, both parties
file the action. should appear before the notary, you can ask was the party here?
The creditor could file the action to declare the contract void at anytime. Did the party appear before the notary? Was there payment to show a real sale?
Why? Because it’s a void contract. It has no effect at all. It cannot bind other parties. If you ‘re going to do this, what should you do? If you are going to simulate the sale,
Clear? at least make an effort to exchange money.
Let’s say I’ll pay you 5 million but you will return to me to some other account.
Now in this case of Manila Bank, how did This case teaches you what’s absolute simulation and how to go simulating a
they prove the absolute simulation? There was no deed of absolute contract.
Affidavit? What about affidavit? sale registered in the national
Remember I discussed to you about archives, the only proof to Now, a relatively simulated contract is valid unless it prejudices third person or
distinction between a jurat and its for an illicit purpose.
show the existence of the
acknowledgment. Here, somebody An example earlier was the under statement of purchase price in sale of real property,
researched I think. disposition of the properties would that violate the sale?
was an affidavit. I say no.
So it was a deed of absolute sale, it’s a There will be tax liability, possible criminal liability but it would not invalidate the sale.
conveyance of property. Before in an earlier case, what the SC did was rule the other way, “No it was meant to
To register that one you have to first get it reduce tax but did nothing.
notarized and then you pay the taxes, go to pay the registration fees and you go to But in recent cases, what the SC did was to refer them to BIR. And said there was a
register of deeds and register the conveyance. tax evasion here for appropriate action of the BIR. So as I said if there was
nonpayment of the appropriate taxes, that will not nullify sale.
The problem was when they checked, what they saw an affidavit. When they
checked with the national archives, what they got was these particulars refer to
an affidavit, meaning just a foreign statement. 2.HEIRS OF BALITE V. LIM (tax evasion)
understatement of the price 
So, SC said, that’s an indication.
What about the price? So this case was the example we gave earlier. The buyer Lim wanted to evade paying
Here, I think in the witness stand the party was asked, “Do you remember whether capital stamp tax. His agreement with the old dying widow was that in their deed of
you gave 5 million in caseh, in check, or how was it given to you? sale, she would say the price is 150,000. But in another document, a joint affidavit, it
The witness said: “I do not recall.” showed that the agreed price was really 1,000,000. So this is an example of a
SC said, “It’s a huge amount, it’s not you’re supposed to recall unless it’s spare relatively simulated contract. There was an intent to be bound but they concealed
change for you or unless you transact in these amounts regularly.” portions of their true agreement.
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So again you have to distinguish: The brothers sold the property to Woman 2 through Woman 1 knowing full well that
In Relative Simulation, there’s a contract, and as long as the contact does not Woman 2 would use the property as security for a loan to be obtained from the bank.
prejudice 3rd persons or is not unlawful, the contract will be recognized. SC said what’s the status of the sale?
On the other hand if there is Absolute Simulation, the parties did not truly Absolutely or Relatively Simulated?
consent to the elements of the contract, so the contract is non existent due to Absolutely Simulated! Therefore the transaction was void and the reason given was it
the absence of consent. was meant only to provide security for the loan. That was the objective.
Well that was the SC. Who decided this case? Panganiban. Now.. my sense was he
decided this case because he saw this guy with the cross and said “religious guy, I’m
3. CRUZ V. BANCOME FINANCE (brothers) a believer…” remember so he decided in favor of the priest.
Im telling you jurisprudence. The contract was Absolutely Simulated. The purpose
This one is interesting. There were 2 brothers, Cruz 1 and Cruz 2. One was a priest, was only to give it as security. Now lets take the other side. how do we prove that it is
Fr. Cruz. Now, there was this woman, let’s call her… Woman 1. Woman 1 was very a valid contract? - that it’s not simulated.
close to the priest and the brother. Now the brothers own a property. Now there was What would be your proof? what should have been considered?
this Woman 2. Woman 2 wanted to buy the property. She wanted to buy from the Partial Payment
brothers. But the brothers did not want to sell. They would agree only if it was a 2 So you have both elements - the object and the cause. 2 step transaction. Would this
step transaction. Sale first to Woman 1 then sale again to Woman 2. So you have sale indicate simulation? Remember the case of insular? Woman 2 was only a conduit like
1 and then sale 2. in the case of insular. What you have here is 2 contracts. They are both valid.
Was there payment? How about the issue about the purpose being only to serve as security for the loan?
Yes there was payment. Partial payment which ended up with the Cruz brothers in this In fact this should support the claim that there was a valid sale, because before
layered transaction. The purpose of Woman 2 was to get the property so Woman 2 you could mortgage a property, the mortgagor should be the absolute owner.
could borrow from a bank. So the bank would lend her money only if this would be What is an absolute owner?
secured. She needed a real estate mortgage. One who has legal title, meaning registered, and beneficial ownership.
So the transaction went like this: So this should have been in support of a valid sale rather than simulation.
We’re done with consent. Let’s now go to object.

Illustration 1: CRUZ V. BANCOME FINANCE TRANSACTION
CRUZ 1
PROPERTY PROPERTY
WOMAN 1 WOMAN 2 OBJECT
CRUZ 2 (PROPERTY TO THE PRESENTATION. It can either be to give, to do, or not to do.
SECURE LOAN)
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Let’s say I make you a sculpture in exchange for a fee. The sculpture is not yet
REQUISITES OF A VALID OBJECT AS A PRESTATION? existent but the contract can be done. Valid?
Yes.
1. Must be physically and juridically possible ( Art. 1348)
2. Must be determinate or at least determinable ( Art. 1349)
3. Must have pecuniary value- basis for damages ( Art. 1347)
However, there are certain instances wherein the law requires for the validity of
the contract, that the object be existing at the time of the constitution of the
obligation.
OBJECT OF A CONTRACT
Heres an example
Example: Contracts mortgaging future propert invalid
Example: Determinate or at least determinable Lets say you have a lender and a borrower.
Theres this Deed of Sale. Day 1: Loan Contract perfected.
The property’s measurement, location, and identification (via the markers of a santol To secure, REM was needed, so borrower had to get property from X.
and mango tree) were given. Valid?
Is that sufficient? SC said yes because on the face of the contract you see a No because as I said, Mortgagor has to be absolute owner.
description which can be matched with identifiers of the property. You can’t mortgage future property.
You can agree on anything in contracts but you have to know the limits set by
law.
I had this contract recently. It wasn’t a sale. It was an agency contract for one of my
clients. The agent was supposed to buy land on his behalf. The agent forgot address, Example: Future Inheritance not valid object of contract
so he took a picture of the property instead. Valid? You cannot sell future inheritance.
Yes. For cars, what do you need?
The plate number. There was a father and 3 kids.
LTO offices are unusual - they require all the numbers on the car: engine number, Father worth 1 billion.
So each kid was entitled to a 1/3 possible inheritance. Father still alive with no debt.
2 kids wanted to venture into business.
GENERAL RULE They went to X.
Kid 2 will sell his 1/3 shared at at discount. A party may only sell
An object may more may not exist at the time of the contract but it must be capable of
Father is old (like Enrile old) inheritance once succession
existing.
What is the status of this contract?
opens. Contracts selling future
VOID, because it was future inheritance.
chassis number, plate number, etc. It would be a different story if father inheritance are VOID.
dies first.
Does an object have to exist at the time of the perfection of the contract? The moment a person dies, succession
opens.
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CAUSE
1.E. RAZON V. PHILIPPINE PORTS (extension of contract)
Void because unlawful motive predetermines cause
Let’s now go to cause.
ERI had a contract with Philippines ports authority. It was a Port management
contract. In exchange there would be service, and fees would be paid.
CAUSE Now the contract was expiring. This happened during martial law. ERI said we need
an extension. They needed someone to sponsor the extension. They were able to get
PRINCIPAL or ESSENTIAL reason or consideration that leads one party to enter into a
contract. the extension.
However it happened this way. There was the Romualdez nominees, and Razon had
to give them a substantial share of ERI. Then Romualdez, was able to extend the
Cause is used interchangeably with consideration.
contract.
Sometimes cause is a question of perspective.
Question, what is the status of the two contracts?
Lets say you have a sale. There’s a seller selling land and a buyer.
The extension contract? It was a valid contract but void because motive
For the seller, the cause is the money.
predetermined cause.
For the buyer, the cause is the land.
The motive of Romualdez was to enter engaged in business with the government
which at that time, he was prohibited from doing. For Razon on the other hand, the
motive was to secure an extension of the port management contract.
MOTIVE
GENERAL RULE Generally, a motive is not an essential requisite to the validity of a contract. But
Motive is not an element of the contract. That’s the
when the motive predetermines cause, it becomes a material factor in
rule. MOTIVE IS NOT AN ELEMENT determining the validity of the contract.
Let’s say I bought zika infected mosquitos. OF THE CONTRACT, it is The other contract, that between ERI and Romualdez was also void because it
My motive was to infect the mosquitos with zika and personal to the contracting
was contrary to law - graft and corruption.
release them in senate. party, unknown to the other
My purchase of mosquito was valid. It will not be party.
2. UY V. CA ( NHA)
tainted by my motive, unless the other party was
Motive to build houses predetermined cause to acquire land
aware, and then maybe we would be liable for a criminal act.
Or lets say I got to True Value and I buy a meat cleaver because I want to do a
This was the NHA case we tackled earlier. Remember the argument of NHA. The
massacre. Will that be valid? Yes!
cause of the contract was to acquire the land. However, they argued in such a way by
Because that’s my thoughts, my motive. Motive is personal to the party and does
showing the motive predetermined the cause.
not necessarily have to be known by the other contracting party.
What was their motive? To build houses.
True Value wouldn’t know what I would plan to use it for.
When they found out that the land was prone to landslides, they argued that motive
When you say motive, it’s the reason of the party, unknown to the other party.
preceded the cause. A material consideration of buying the land was the viability of
It is not an element, and not the cause of the contract.
the land for housing.
However there are exceptional cases. That’s why in assigned the case of Razon.
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REVIEW: CAUSE So it is void because it absolutely simulated, the parties did not intend to be bound.
This is all for show.
Illustration 2 Remember the reason. What was the reason that debtor conveyed the property.
What do you call that intention to hide the property?
Is it an element of the contract? Motive?

LOAN PROPERTY PROPERTY It’s a motive. As a rule, It’s extraneous to the validity of the contract.
CREDITOR DEBTOR X Y
However, in this example, motive predetermines the cause. X’s motive was to hide
the property. Its what caused him to enter the contract.
So in that case, there is no cause- consistent to the characterization that it is void.
So even if there is some payment here, it is still void because the motive
. predetermines the cause of this contract, it is to place this contract beyond the
reach of the creditor.
Lets say you have a creditor, the creditor sued the debtor
In anticipation of a judgment, for collection
FORM OF CONTRACTS
Debtor conveyed the property to X
then X conveyed to Y. Art. 1356. Contracts shall be obligatory, in whatever form they may have
X made it appear that there was a sale, and there was payment, but in reality, there’s been entered into, provided all the essential requisites for their validity are
none. It’s a bogus payment. present. However, when the law requires that a contract be in some form in
We can assume that Y is privy to this transaction. order that it may be valid or enforceable, or that a contract be proved in a
So in the manner, Y did not pay anything. Although based on the document, there certain way, that requirement is absolute and indispensable. In such cases, the
was payment, but actually there was none. So can creditor go after this contract? right of the parties stated in the following article cannot be exercised.
YES.
What will be the theory of creditor to go after this property? Lets assume the creditor GENERAL RULE
gets a judgment. How should creditor proceed? How should the creditor characterize
CONTRACTS DO NOT REQUIRE A SPECIFIC FORM
this?
ABSOLUTE SIMULATION. Therefore, VOID.
EXCEPTION
You have one theory, give me another. THE LAW REQUIRES A SPECIFIC FORM
Rescission? NO.
If you say rescission, you are acknowledging that the validity of the sale.
This is inconsistent with your theory that the contract is void.
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As a rule, contracts do not require a specific form and is consensual. When the agreement of interest is void due to the lack of the required form, it must be in
parties agree on the object and the cause of the contract at the very least, the parties writing
will have a valid contract. Even without following a specific form.
2.ENFORCEABILITY:
That is the general rule, remember that. When the parties agree on the cause and the
object of the contract, there will be a contract, UNLESS, the law requires a specific Now for enforceability. we’ll take this later on: Statute of frauds, that’s’ article 1403.
form. so you have to know if the law requires a specific form for the validity, Certain contracts must be in writing to be for it to be enforceable. What does that
enforceability, or for proof. mean?
Example 1: Contract of Sale of Real Estate – must be in writing for it to be

LAW MAY REQUIRE A SPECIFIC FORM FOR enforceable
1. Validity
2. Enforceability Let’s say Seller and Buyer verbally agreed to sell real estate, land, so verbal contract
3. Proof of sale and buyer agreed to pay a price.
There was no exchange of prestation. It’s purely executory meaning seller is yet to
convey the property and yet to turn over possession, buyer still has to pay any part
Right now, there’s no formal requirement unless the law specifies. as i said, certain
the price.
forms are needed for validity, enforceability or for proof.
So this contract, as you can see, has all the elements. You have the consent of the
parties, the object and the cause. So you have a valid contract.
1.VALIDITY:
But because its a contract of sale involving land, and its not in writing, under the
statute of frauds it will be valid BUT unenforceable because under the statute of
Example: Donation
frauds, sale of real property, it must be in writing to be enforceable.
Donation has to be in writing. Acceptance must be in writing. Acceptance by the
When we say in writing, it doesn't need to be in a public document. It need not be
donee in the donation must be in writing for the donation to be valid.
notarized. It must just be in writing.
Example: Prenup
You learned this already. Marriage settlement.It must be in writing.
Example 2: Loan Contract with a Real Estate Mortgage – must be registered to be
enforceable against third parties
Example: Agreement as payment of interest.
It must be in writing to be valid. If its not in writing, the agreement of interest will be
Lets say you have a lender and a borrower.
void.
Lender extended a loan, borrower is obliged to pay. this is a loan contract.
Lets sayI agreed to lend you 1M.
To secure payment of the loan, there was a real estate mortgage.
Verbally, we agreed that you will pay interest at the rate of 1% per month. If you
default, I can sue you for collection of the principal but not the interest because the
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The real estate mortgage was in writing but in a private document meaning not Lets say owner and trustee. Owner conveyed property, lets say real estate, this is
notarized and not registered with the relevant registry of deeds. So you have here a land. The only purpose is for trustee to hold legal title, meaning on record, title
contract valid and binding on both parties, enforceable on both parties. should be registered in the name of the trustee.
However, due to a lack of formality, this mortgage contract, not registered, will There was no payment, no exchange. So this is a trust arrangement. the owner
not bind third parties because its the fact of registration that will make the remains the beneficial owner but the trustee has the legal title.
contract binding on third parties. Now, if it’s a verbal agreement, this cannot be proven by parol evidence, meaning by
Remember our discussion of contracts taking effect only between parties. One testimony of witnesses( let’s say the owner, thru trustee or some persons who were
exception is contracts creating real rights. involved in this transaction) because a trust
involving real estate, immovable, cannot
A mortgage will create a real right that is one enforceable against third parties be proven by parol evidence. Express trusts must be in a
if the mortgage is registered. So you have here a mortgage that is valid, binding It must be proved by a written
and enforceable between the parties but not enforceable against third parties except, instrument.
written document. They cannot
even without registration. be proven by parole (oral)
But there is an exception: the mortgage will still be binding on third parties who However, if you were to attempt to prove evidence.
have knowledge of this transaction because knowledge will be tantamount to it as an implied trust, parole evidence may
registration. be admissible, you’ll learn that later on.
So there is a form required for express trust for an immovable. It must be a in a
Example 3: Pledge – notarized to be enforceable on third parties written instrument.
Or it can be a pledge. What’s a pledge?

Its just like when you pawn something, deliver property, personal property to secure Art. 1358. The following must appear in a public document:
an obligation, like pledge jewelry. A pledge if not in the proper form, will not bind 1) Acts and contracts which have for their object the creation, transmission,
third parties. Pledge will be binding on both parties, but will not be enforceable on modification or extinguishment of real rights over immovable property;
third parties. How do you make it enforceable against third parties? It must be in a sales of real property or of an interest therein are governed by article
public document, meaning notarized. Not registered but just notarized. 1403, No.2 and 1405.
2) The cession, repudiation or renunciation of hereditary rights or of those
3.PROOF: of the conjugal partnership of gains
3) The power to administer property, or any other power which has for it s
Now, for Proof. Form required for proof. object an act appearing or which should appear in a public document or
should prejudice a third person
Example 1: Trust agreement regarding immovable has to be in writing to be 4) The cession of actions or rights proceeding from an act appearing in a
considered an express trust public document
All other contracts where the amount involved exceed 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, No2 and 1405.
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There is an enumeration. annulled, and eventually the LGU was taken out of the province, therefore, there’s no
The following must be in a public more need for this, so it’s valid. That’s another story.
instrument.
Article 1358 is not a mandatory
If you look at the provision: The following provision of law. It is only for This one is what you have to understand.
must appear in a public document. MUST. convenience. Failing to So in this case, the Deed of Absolute Sale was being assailed for being only in a
What do you understand by the use of the subscribe to the requirement private instrument.
word must? Is this contract valid? Yes.
Its MANDATORY. Therefore, if you violated
does not make the contract Why?
a mandatory provision of law, what’s the void. Because all requisites.
consequence? You have 3 elements of the contract.
ACT IS VOID because it is contrary to law. Is it enforceable? It involved sale of real property. Answer? Yes, because it’s in
But you have to understand, that that is writing. So it complied with the requirements of the Statute of Frauds.
NOT an example of a law requiring form for validity, enforceability or proof.
That law is only for convenience. How about that article 1358?
It did not comply with the mandate of 1358 stating that the sale of real property must
be in a public document.
CASE In this case the Supreme Court explained that that provision of law is only for
convenience.
1. GONZALEZ v. PEREZ It means that a public document is desirable but not indispensable, it is needed
1358 is not mandatory. Only for convenience to facilitate let’s say proof and form. If you’re going to introduce evidence/document,
there is what you call authentication. You have to establish how the document was
What happened in the case of Gonzales? There was an LGU that sold a property. So executed, and you have to show the signatures of the relevant parties. That’s called
the LGU sold the property to Gonzales, then there’s a bidding, that’s why there was authentication. You just cannot just “this is the document admitted as evidence”. You
an award of the property. So it’s conveyance of property to Gonzales. And then have to lay the basis before introducing the document.
Gonzales sold part to Perez. Now, if it’s a public document, meaning notarized, you don’t have to do that;
Of course, we will assume, there is exchange here of values. So there was a bid, and you just have to introduce “this is a document notarized”, and then you notify it
the LGU awarded it to Gonzales, Gonzales sold part of the property to Perez. and that will be sufficient, because it’s a public document, it’s given greater
credence in court.
The contract was not approved by the provincial government. That’s why the contracts mention in Art. 1358, they are advised to be in a public
This one was in a private instrument, meaning it’s a Deed of Absolute Sale, that was instrument because they will be proven easier in case of a court proceeding, but that
not notarized. Well, ofcourse, this one is not relevant to us, but just for your is not a requirement for validity, enforceability or for proof.
information, in that case, the issue was, what’s the status of that sale, in the absence
of the approval by the provincial government. The LGU then was part of the S: Can it be said that in this case, since it was not in a public document, it was only an
provincial government, forming part of the province. SC said the status is only irregularity?
voidable, so there’s no disapproval or there’s no approval. It’s valid until nullified or
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SP: It’s not even an irregularity because now you this valid and enforceable contract. SP: Just a back date and then you will get a notary. That’s falsification. Well it’s being
It’s valid because you have all the three elements of a contract. It’s enforceable done but that’s not the legal way of doing it. It’s falsification; they’re forging
because it’s in writing, and therefore it’s compliant with the Statute of Frauds. document in effect.
What can the heirs of Perez do, for example? What if you have this situation?
The problem here arose because they both died and the heirs fought, so there was a Now, let’s say you have a seller and a buyer. It’s a sale. The sale was done verbally.
dispute. What could the heirs or successors and interests of Perez do? Seller sold land to buyer for 10M. The contract is purely executory. As we learned
The successors and interests of Perez or Gonzales for that matter could rely on article earlier, this is a purely executory contract ( later on you will learn that theres such
1357, meaning if the contract was not in the proper form, one party can compel thing as partial execution).
the other to execute the proper form. Ordinarily, this contract will be under the Statute of Frauds. If there’s partial execution
of the contract, let’s say there’s partial payment of the price, the Statute of Frauds will
Art. 1357. If the law requires a document or other special form, as int he no longer apply, meaning it will be enforceable because there is already partial
payment. This one is just executory; there’s no partial performance of any of the
acts and contracts enumerated in the following article, the contracting parties
prestations.
may compel each other to observe that form, once the contract has been
Under the Statute of Frauds, this will be unenforceable. The question now is, let’s say
perfected. This right may be exercised simultaneously with the action upon
B wants to enforce the contract.
the contract.
Can B sue S under article 1357?
Article 1357 provides that if court is The remedy under 1357 is only
What does that mean in this case? That the document be notarized. needed, one party can sue the other to available for VALID and
The problem here is notarization, actually. Why is it a problem? compel the other party to execute the ENFORCEABLE contracts. It is
Because they’re already dead. Notarization assumes that the parties appeared before proper form.
not available to remedy a
them. The answer is NO.
So what can be done? Article 1357 is available only if the contract in violation of the
Maybe the heirs of Perez could compel the heirs of Gonzales to make the contract that needs to be formalized is Statute of Frauds
conveyance, and that will be the notarized deed or they could just get a judgment in valid and enforceable.
court, and that will be the basis for the issuance of the deed title.
Let’s say we assume they are both alive, what can Perez do? Compel Gonzales to If form is required for enforceability like this case, you cannot rely on article 1357. The
execute the proper form, meaning acknowledge it before notary public and then contract will be unenforceable still.
allow registration.
Example: 1357 not available remedy for verbal interest agreements
Take note the remedy under Art. 1357. My example earlier, if there is a stipulation of payment of interests verbal, can the
lender compel the borrower to execute the written contract to document the
agreement?
S: How about if they just back date?
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NO, because in agreements regarding the addition of interest, the written form is
required for validity. Article 1357 is premised on the existence of a valid and
enforceable contract. So if the form is required for validity or for enforceability, a
party cannot rely on article 1357.
I’ll just illustrate article 1357.

There’s an owner of property and there’s a buyer. There’s an exchange of email. A
complete offer was made, includes the object and the price.
Owner made a counter offer. Eventually they agreed. There was an agreement of
terms, price, as well as payment and all the necessary stipulations, just by email.
So there’s no formal contract. Let’s say buyer wants to enforce the contract, can buyer
now compel the owner to execute the proper form under article 1357?
Yes, because you have a contract in writing, therefore it’s compliant with the Statute
of Frauds, although the contract is still executory, there’s no partial payment of the
price, there’s no transfer of possession. It’s in writing, the email exchange that’s the
important thing, and this is recognized (sic) rule especially with the Commerce Act.
So if you have a valid contract, meaning you have the 3 requisites of the
contract, and you have an enforceable contract, written form required by the
Statute of Frauds, the buyer can now rely on article 1357, compelling the owner
to execute the written contract.
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REFORMATION Enforceable on the other hand refers to compliance with certain forms or legal
requirements.
So if the contract entered into by the parties is void, for example it has an object
Art. 1359. When, there having been a meeting of the minds of the contrary to law, you cannot reform the agreement because reformation assumes
parties to a contract, their true intention is not expressed in the instrument the existence of a valid and enforceable contract.
purporting to embody the agreement, by reason of mistake, fraud, You cannot reform a void agreement!
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 2. DOCUMENTATION DOES NOT REFLECT THE TRUE AGREEMENT OF THE
expressed. PARTIES
If mistake, fraud, inequitable conduct, or accident has prevented a meeting Example:
of the minds of the parties, the proper remedy is not reformation of the If you have a situation where the parties intended to enter into a contract of sale
instrument but annnulment of the contract. but what was drafted and signed was a mortgage contract then thats an example
of a document that does not reflect the true agreement
REFORMATION 3. REASON FOR FAILURE TO REFLECT TRUE AGREEMENT: FRAUD,

ACCIDENT, MISTAKE, INEQUITABLE CONDUCT
Remedy that a contracting party may resort to in order to make a written
contract conform to the true agreements of the parties.
So if you have reformation, it is a situation where there is a written contract but the
It contemplates a situation wherein the parties enter into a contract but
written contract does not reflect the true agreement due to those factors.
the documentation was faulty. It does not reflect the true intention or
Take note of the causes for the written contract to fail in reflecting the true
agreement of the parties.
agreement.
REQUIREMENTS OF REFORMATION Remember, Fraud and mistake, you encountered this with respect to vices of
consent.
1. PARTIES ENTERED INTO A VALID AND ENFORCEABLE CONTRACT
2. DOCUMENTATION DOES NOT REFLECT THE TRUE AGREEMENT OF In cases when reformation is proper, the fraud or mistake results in the written
PARTIES contract not reflecting the true agreement. It is not the cause for the consent
3. REASON FOR FAILURE TO REFLECT TRUE AGREEMENT: FRAUD, of the parties.
ACCIDENT, MISTAKE, INEQUITABLE CONDUCT If it relates to consent, then it's not reformation. The remedy would be
annulment of the contract.
1. PARTIES ENTERED INTO A VALID AND ENFORCEABLE CONTRACT
To reiterate, when we say valid contract, we are referring to the existence of the
three elements of a contract: Consent, Object and Cause.
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Example: FRAUD However, you made a automatic replacement then you placed there instead of
Somebody prepares a document. The parties only wanted to enter into a real property tax - real land tax, which would not make sense. Maybe that can be a
mortgage. One party, who has a knowledgeable lawyer, prepared a contract of possible case of accident.
sale. Clearly that would be in fraud.
We are assuming that the other party is not in a position to understand the
contract. In this case, the written contract does not reflect the true agreement. If Art. 1367. When one of the parties has brought an action to enforce the
it’s a sale rather than a mortgage. instrument, he cannot subsequently ask for its reformation
Example: Mistake
Works the same way. Remember when we discussed vices of consent, its possible Example Another instance where reformation is proper:
that both parties have a wrong notion of the legal effect of the contract. Again
using the example of Illustration 1, they intended to enter into a mortgage but the Let's say theres a contract between A and B. The true agreement is a mortgage,
document they adopted by mistake was a sale. So you have a case of a possible real estate mortgage. To secure a loan A supposedly mortgaged a property to B
reformation. but the documentation was a sale. It shows A sold to B the property and B paid
the price.
Example: Accident or Inequitable Conduct. So let’s say this is done by one of the parties. Let's say B was the one in charge of
the documentation. A, even with the exercise of due diligence, was not in a
A. Inequitable Conduct position to know of the sale.
An example may be intercalation. So here you have a case for reformation. A will have to sue B to reform the
Let’s say you have a contract. One party or a third party inserts another provision contract in order to make it a real estate mortgage rather than sale.
in the contract for there may be possible criminal liability there, which is Let’s say A sued B and asked for specific performance.
falsification (possibly). Meaning A wants B to apply the payment of the price in payment of this loan
obligation. A cannot claim later on change his mind and say I want reformation
B. Accident because the two theories will be inconsistent.
What can be a source of accident? Autocorrect, Cut and Paste. The moment one party sues for specific it assumes that the contract reflects
Some lousy Lazy lawyers just cut and paste. So if they just do that they can make a the true agreement. So that party cannot backtrack later on and say: “No, I
mistake. So that mistake may be considered as an accident. want reformation because what I want to enforce is not the true agreement.”
Of course, autocorrect would be more prevalent.
Let’s say for example you do a universal find and replace. Sometimes you're not
suppose to replace certain words. Let's say you want to replace through out the
CASES
document the word property, you want to replace with Land. Let’s say its a deed
of sale. So the object you identify as Land.
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1. EMILIO V. RAPAL ( Leased Property) The lessor submitted a sworn statement. SC said that statement was self serving.
Reformation Not Proper: No proof that agreement did not reflect intention of Besides the statement was made by a daughter of the suing party and it started
parties with "as far as I know" so its really not personal knowledge.
It’s not reliable.
There was a lessor and Lesse. Lessor leased property to lease in a rental. So this case of Emilio illustrates to you the hoops that should be jumped
Subsequently, lessee extended a loan to lessor. Of course, there is an obligation through before you could claim a reformation of the contract.
to pay. After which there was a document executed by the parties, a transfer of As I said the greatest hurdle is the existence, normally, of a notarized document.
rights over the property being leased by the lessee. A public document, as we learned from the earlier cases, is given greater
So by virtue of this transfer of rights, the property was conveyed to lessee. Was credence and there is a huge burden of proof on the party assailing the
reformation proper? SC said that reformation was not proper. correctness of the notarized document.
If you look at this case, there is a notarized contract. 2. PCI LEASING v. Trojan ( Financial Leasing)
The RTC and lower court, ruled in favor of the lessor. When Reformation Proper
On appeal to the CA, the CA reversed and said that the contract reflected the true
agreement.
The SC affirmed the CA. From this case you can glimpse the problem when you If you remembered this case, the allegation was the suing party did not
sue for reformation. understand the contract.
Most likely, when you sue for reformation of a contract you will be Take note, again just to reiterate. It’s like the discussion on vitiated consent but
confronted by a notarized document. this one, its failure to understand the contract but relating to the failure of the
If you remember our previous discussion if you are confronted with a notarized written contract to reflect the true agreement. Again, you have to remember to
document you will have there an affirmation, by the notary, that the parties what fraud or mistake relates to.
acknowledged before him the free and voluntary execution of the contract and If it relates to the procurement of consent then we are dealing with vitiated
there will be witnesses in that case. consent. If its with respect to the failure of the written document to reflect the true
So that would be a great burden on somebody suing for reformation. agreement, then its a case of reformation.
You have to show that there was a problem with the notarial process.
In this case, SC said the ones suing for reformation could have asked the notary to
testify but most likely the notary would just firm that the parties appeared before WHEN FRAUD OR MISTAKE IS PRESENT IT IS IMPORTANT TO TAKE
him and they confirmed their understanding. NOTE:
Why?
Because the notary public does not have an incentive to say otherwise. If the IF IT RELATES TO PROCUREMENT IF IT RELATE TO FAILURE OF
notary public would say otherwise there would be possible administrative at the OF CONSENT: WRITTEN DOCUMENT TO REFLECT
very least liability. Like suspension or possibly disbarment. TRUE AGREEMENT:
Aside from that, what was the proof submitted by the Lessor?
ANNULMENT IS PROPER REMEDY REFORMATION IS PROPER
REMEDY
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Now let’s go the PCI, let’s start with the definition of a financial lease. The company undertakes to lease the equipment for a guaranteed period to allow
Let’s say you have a company engaged in manufacturing. The new manufacturing recovery by the lender of the investment.
company will need equipment but manufacturing company will not have cash to The company would, of course, pay rent.
pay upfront all the equipment that the company needs for operations. Normally, in Now in PCI what happened was... you have a company using the equipment.
a transaction the lender will extend a loan. The company will purchase the The company owns certain pieces of equipment.
equipment and then there will be an obligation to pay the loan and to secure So from the start the company owns the equipment; it needs funds for
payment there will be a chattel mortgage. This is a usual financing transaction. operation. Rather than the lender extending a loan.
An alternative to this would be a financial lease. What they did was the company would sell the equipment to the lender and
of course there will be payment of the price.
Illustration 1: FINANCIAL LEASE TRANSACTION
So that’s part of the loan.
Price is actually the loan. There will be a lease of the equipment and in exchange
there will be payment of rent.
Sequence of Events:
PRICE
RENT Day 1: Company owned equipment and asked for a loan. Lender proposed
BORROWER LENDER THIRD PARTY financial lease structure
EQUIPMENT EQUIPMENT Day 2: Company sold equipment to lender and lender would pay the price
Day 3: Lender is now “owner” of equipment. They follow the financial lease
model. Lender rents equipment to company and company pays rent..
.
Clear?
Apparently the company defaulted so the lender wanted to recover possession of

In a financial lease, Lender will purchase the equipment, which will be done
the property by re-pledging, meaning the lender wanted to recover the
pursuant to the agreement of the parties. The company will lease the equipment
equipment supposedly as owner of the equipment because of the sale.
and the company will pay rent.
SO who owns the equipment?
The company on the other hand claimed that this was not the true agreement.
Lender.
The agreement was a loan transaction and the intention was to secure the loan by
The lender will loan the equipment. The agreement may or may not include a
a chattel mortgage of the equipment.
provision allowing the company to purchase the leased equipment.
In this case, it was easy for the SC to say that this was not a valid financial lease.
Why?
So what happened in this case of PCI leasing?
Because if you look at our classic example of a financial lease,
This one is what you call a financial lease. So the lender buys the equipment and
The lender acquires the equipment from other parties. Not from the
leases it to the company.
company.
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Here the lender acquired it from the company. S: Can reformation have damages?
If you have a true financial lease, it should be the company does not have the JSP: Yes, always. You have fraud, inequitable conduct. Possible basis for claim for
equipment so the company goes to the lender and the lender provides the damages.
equipment by way of lease in exchange of
payment of rent. S: Can it be conducted as a sale? As if its a sale and a loan transaction?
The SC said this is more like a loan. Because the lender JSP: No, SC said its not a sale because its a loan transaction with a mortgage. This
The SC said what was the loan component? one is actually a security arrangement.
acquired the property
The Price.
The rent is the payment. from the company and not S: But can it be argued as a sale?
This is an example of a possible case for a third party, it cannot be JSP: Of course, it is the position of the lender there was indeed a sale and it was a
reformation. characterized as a financial financial lease but the SC went to the legal definition of the financial lease. It’s not
What would be the basis of reformatting the acquiring the equipment from the company that would lease the property.
lease.
contract?
Inequitable conduct by the lender. S: So will lender still be able to get the property with the loan?
JSP: The lender would still be able to collect the loan and interest due. In fact,
there was a computation made in the case. The SC added the amounts leased by
In fact, later on you'll learn that aside from characterizing it as a loan with a chattel the lender and the rent paid by the company?
mortgage, it could also be characterized as an implied trust to secure a loan. S: So he can’t get the property?
Later one you'll learn, if there is conveyance of property by way of security, JSP: The lender could! Technically, if it characterized as a chattel mortgage and
meaning to secure payment of a principal obligation, that would be regarded as the company does not pay. The lender can go after the property by way of
an implied trust. foreclosure. Not by recovering possession as owner.
So in this case the company conveyed the property not for the purpose of
transferring absolute ownership but only for securing payment of this loan. Of Ill give you another example.
course the SC later on characterized this as a loan.
There was this one case where there was a government agency and there a good
Questions: contract with a party for a lease contract. The government agency prepared the
S: Can Trojan claim that the entire transaction between them is an absolutely contract. That is why it was very easy for the SC to say there was something wrong
simulated contract? with the contract and it should be reformed. It went like this.
JSP: There is no absolute simulation because you have here an exchange of So you have here a lessor and a lease. If you have a lease contract, there would be
presentation. There was a money changing hands. The lender gave money to the property to be leased to the lessee and there would be payment of rent. Easy,
company and the lender got property. that’s the lease contract.
So it’s not really simulation. They intended to be bound but not by this agreement However, there was a provision in the lease contract, after the expiration of the
but rather by supposedly that loan to be secured by a chattel mortgage. lease the rent would be considered as payment for the whole purchase price.
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So after the contract of lease, there lessor would in effect convey to the From the time the other party does not recognize the true agreement.
lessee for nothing except for the rent paid for the entire duration of the Let’s say the true agreement was mortgage. So from the time the other party
lease. insists that the agreement was a sale, that would be the time you reckon the
How did that happen? The lessee (government agency) was the party that prescriptive period.
prepared the contract. The action accrues as of that day and you have 10 years from that day.
SC said that is an example of inequitable conduct or fraud. So when you have an action for reformation you don't count from the date of the
So here in our example there was a lease contract. contract, you count from the date the other party does not recognized the
Typical lease contract, lessor allows the lease to use the property in exchange for true agreement.
payment of rent. If the other party recognizes the true agreement, then there is no problem. You
The lease prepared the contract but inserted a provision not agreed upon by the will have a possibly relatively simulated contract.
parties. The provision was after the term of the contract the lessee will acquire the But if it does not prejudice the third party then its fine.
property for an amount equal to the rent paid and the rent shall be considered as
payment for the purchase price. S: In relative simulated contract, will either party, if it's not contrary to law or does
The SC said that would be a case for reformation. not prejudice a third person, need to sue the other for reformation?
JSP: No need if the other party is complying why do you have to go through the
Of course, we encountered a case of reformation in the case of Nagatel, the hassle of reforming the contract.
telephone company and the electric company.
In that case the parties entered into an x-deal. Telephones lines for the use of S: So it’s like automatic that they don't have to go to court?
post. SC said reformation was not proper because that was the real deal. The JSP: They don't have to go to court, but for you piece of mind you can ask for re-
telephone company agreed to give a certain number of telephone lines to the documentation but you don't have to go to court
electric company in exchange for the electric company allowing the telephone
company to use the electric post for hanging cable.
So the SC said the contract reflected the true agreement of the parties. However,
what was the case there. It was a case of rebus sic santibus. The performance of INTERPRETATION OF CONTRACTS
the contract being strictly difficult on one parties.
In the end SC decided based on equity.
Let’s say you have a contract. Any contract for that matter.
In a written contract you have party 1 and party 2. You have this object and this
WHEN CAN A PARTY FILE FOR REFORMATION?
cause.
Now, if there is a contract and you are party 1 and you want the contract as it is
10 years.
because the provisions are fine by you and from your perspective these provisions
What is the period? It’s based on a written contract, because you're dealing with a
were negotiated and agreed upon by the parties. Party 2 on the other hand assails
written contract not reflecting on the true agreement of the parties, so the period
a certain provision of the contract saying that there is a need to properly construe
is 10 years. It’s either based on a written contract or based on law.
the application of the provision.
Now, when should you file?
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Lets say it’s a provision on payment of penalties, interests or rather surcharges. So in the end, it really a matter of convincing the court how to look at the
So if you're party 1 what should be your position? contract.
You block the assertion of party 2. If you want to avoid these issues on interpretation, you have to clearly draft the
So party 2 wants an interpretation of the provisions for party 2 to do it party 2 has contract.
to adopt a certain position in the contract if party 1 is resisting the position of That’s why when you draft a contract there is the definition of terms. Just use one
party 2 then party 1 has to adopt another position. term to refer to the same thing!
What should be the position of party 1? Sometime in contracts I don't even use pronouns. If I use seller, I use seller all the
No ambiguity of the contract. time.
Construction applies only when there is ambiguity. This is how you avoid ambiguity. In contracts, you have to define. It’s also a skill,
So if you're for the application of the contract as written you assert that there is no how to put in words certain provisions.
ambiguity so there is no point in applying these rules on interpreting contracts as
provided in the civil code and as provided in the rules of court. Example:
On the other hand, if you're party 2 you're asserting interpretation. How do you say the intent of the parties?
The first thing you have to establish is that there is an ambiguity so you're now In case of payment, it should be a general rule when you're dealing with
calling for the application of the different rules on interpretation or construction. proportion for example.
The payment shall be equal to a certain percentage of the purchase price.
The rules here… these are really useless rules. Why do I say useless? Lets say a sale, the payment shall be equal to the proportion that the price paid
Because for every rule there is a counter rule! bears to the entire purchase price.
Let’s say for example you have a rule. Specific provision shall prevail over a Do you understand? NO
general provision. Unless the general provisions contain a specific clause. If the what does that mean?
general provision is a later provision it can prevail over the specific provision. If you translate it in formulas it just means price paid over total price.
You have to do it. Some people even place examples to avoid ambiguity.
Common signification – what’s the counter to this? You should understand the
language or the words employed in their common signification. The counterpart
you have to understand their technical meaning.
Art. 1378. When it is absolutely impossible to settle doubts by the rules
established in the preceding articles, and the doubts refer to incidental
TWO OPPOSING RULES IN THE INTERPRETATION OF CONTRACTS circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled
1. WORDS AND TERMS USED IN A CONTRACT SHOULD BE USED IN in favour of the greater reciprocity of interests
THEIR GENERAL SIGNIFICATION
2. ON THE OTHER HAND, TERMS SHOULD BE UNDERSTOOD IN THEIR If the doubts are cast upon the principal object o the contract in such a
TECHNICAL SIGNIFICANCE way that it cannot be known what may have been the intention or will of
the parties, the contract shall be null and void.
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RESCISSIBLE CONTRACT
This is important. Remember this provision Article 1378, when you have contracts A valid contract where in the contract causes an economic lesion or
which are gratuitous or onerous you apply these rules when you cannot settle the prejudice that is categorized by law for assailing a contract.
ambiguity.
In a contract, you are giving something in exchange for another (if you are not So what’s wrong with the contract?
getting something, you are not giving up something) so if it a: If its recissible there is no defect with any of the essential elements. It has nothing
1. Gratuitous Contract - interpretation should be in favor or least to do with consent, object or cause. The problem is the contract causes an
transmission of rights economic prejudice or lesion and that economic prejudice or session is
2. Onerous Contract – interpretation should be in favor of the greatest categorized by law as ground for assailing a contract.
reciprocity of interest
Why do you have that rule? Premise is one person will not part with something of Art. 1380. Contracts validly agreed upon may be rescinded in the cases
value without fair exchange. established by law.
That why its gratuitous and there is ambiguity then the rule is least transmission of
rights.
Take note of 1380.

Going back to reformation, you cannot reform simple donations because they're
Not every economic prejudice caused by a contract will render a contract
acts of liberality. If you want to have more then you ask the donor to execute
remissible. The session or economic prejudice should be clearly identified by a
another.
relevant law as rendering the contract rescissible.
If the ambiguity refers to any elements of the contract the object or the
Our classic example, of course, of a contract causing an economic prejudice or
cause, it’s not an issue of reformation. It can be a case of void contract.
lesion is a contract in fraud of creditors. Our usual cause of accion pauliana.
Remember, if you cannot clearly establish the cause or the object then you can
possibly have a void contract.
ACCION PAULIANA
RESCISSIBLE CONTRACTS
The action to rescind a contract where inDebtor, after obtaining a liability
to a creditor, conveys all assets in favour of another party with fraud or
intent to defraud the creditor
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Lets make that table again to distinguish 1191 from 1381 WHAT ARE CONSIDERED RESCISSIBLE CONTRACTS?
You can find these under 1381 and 1382
RESOLUTION RESCISSION
Article 1191 Article 1381 Art. 1381. The following contracts are rescissible:
Principal or Retaliatory remedy – remedy Subsidiary Remedy – before the creditor
of the aggrieved party for a breach can rescind a contract he/she must have 1) those which are entered into by guardians whenever the wards whom
exhausted all remedies and properties of they represent suffer lesion by more than one-fourth of the value of the
the debtor. If there is another remedy, things which are the object thereof;
rescission is not available. 2) Those agreed upon in representation of absentees, if the latter suffer
the lesion stated in the preceding number
Basis: Substantial Breach Basis: Lesion or Economic Prejudice 3) Those undertaken in fraud of creditors when the latter cannot in any
(note: not every economic prejudice will other manner collect the claims due them
render a contract rescissible. A specific
4) Those which refer to things under litigation if they have been entered
law must categorize the economic
into by the defendant without the knowledge and approval of the
prejudice as basis to render a contract
rescissible like Article 1381) litigants or of competent judicial authority
5) All other contracts specially declared by law to be subject to rescission
Effect: Complete Cancellation of the Effect: Rescission as may be necessary
contract for the creditor to obtain payment. If
only a portion of the contract needs to Art. 1382. Payments made in a state of insolvency for obligations to
be rescinded to pay the loan, that whose fulfilment of the debtor could not be compelled at the time they
portion of the contract alone need to be were effected, are also rescissible
rescinded.
Example: Contract of Sale (Contract Example: Creditor extends a loan. On Lets discuss each.
between buyer and seller. Seller should Day 1, debtor conveys his only property
convey. Buyer should pay the price. to X for a nominal sum. (Assume it is a 1. CONTRACT ENTERED INTO BY A GUARDIAN ON BEHALF OF A WARD
Buyer defaulted) fraudulent scheme. The purpose of
OR REPRESENTATIVE OR AN ABSENTEE
debtor is to place the property beyond
the reach of the creditor)
On day 3, Debtor should pay the Example:
creditor but defaulted. Debtor’s assets Let’s say you have contract. Let's not name the contract first, a generic contract.
equal zero (A=0) You have a representative of an absentee, with appropriate authority to represent
Creditor can ask for the rescission of the the absentee and then X.
contract between Debtor and X They entered into a contract.
Mutual Restitution
Statutory basis: Article 1190 (Resolution) and Article 1385 (Rescission)
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The representative on behalf of the absentee will perform certain prestation Now, if you understand the process and you have this, a consummated sale, this
(prestation 1). sale will presuppose court approval.
In exchange X would perform a certain prestation (prestation 2). If there is court approval we will assume that the court somehow weighed all
It’s a contract so you have an exchange of prestation. factors and made the corresponding decision so if there is a court approval
If you look at the provision, the contract should cause the ward or absentee a this will be completely valid.
lesion of more than one-fourth of the value of the thing, which is the object. We will assume that this is really a fair price considering the circumstances.
If you do this in a math formula, it would be like Prestation 1 is less than Prestation So, what contracts are we referring to?
2 by more than 25%. Only contracts not involving disposition.
The issue here now is what contracts do we know refer to these cases? If its disposition the representatives or guardian will need to go to court and get
court approval. Like disposition by a parent of the property of a child or minor, the
Let’s say you have a sale, its a sale of land with a fair market value of P 10 million. parent has to go to court and get approval if the property is worth more than, I
It sold for a price of P 5 million only. So there is a prejudice. Its sold at a 50% think, Php 50,000. So if it is more than 50,000 there must be court approval.
discount so there is an economic prejudice of P 5 million. So, this contract then does not refer to disposition.
Is the contract rescissible? It refers to acts of administrations.
Like what kind of contract?
For this contract to happen normally the Let’s say the representative leases. This can be a lease.
representative or the guardian would be Court approval is The going rate per sq. meter is 1000. This is the market rate for lease and the
appointed by a court in an appropriate necessary when a representative agreed to a lease of 200 per sq. meter.
proceeding and will be given relevant guardian or administrator This will be a rescissible contract.
authority but the court. Clearly, there is a prejudice caused to the absentee or minor in case of a guardian.
Now, for acts of administration, the
in the disposition of a If its a mere act of administration there is no need for court approval.
guardian or representative will not have to ward or absentees If there is court approval for a contract recession will not come into play.
go to court everytime the guardian or property The assumption is that the court took care of the interest of the absentee or
representative, will do an act of the guardian.
administration on the property of the ward
or absentee.
GENERAL RULE
However, if its is a disposition the representative or guardian has to go to Administration contracts entered into by a guardian or an administrator
court and get court approval because without court approval the sale or that clearly prejudice the ward or the absentee are rescissible
disposition shall be void.
EXCEPTION
Of course, there are contrary cases saying it is unenforceable but no- It shall be
Not Rescissible when there is court approval, it is assumed that the court
void.
has already taken into consideration the interest of the ward or the
guardian
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So if you have this situation, you're the representative and you want to be safe you Illustration 2: OBJECTS UNDER LITIGATION
go to court and get court approval if there is a pending case involving the assets
of the absentee or the ward.
It’s not necessary but if you're the representative or guardian your incentive is to LITIGATION
protect yourself because later on you may be held liable for damages for failure to PROPERTY
PLAINTIFF DEFENDANT X
exercise your duties with due diligence. Clear? DURING
LITIGATION
PROPERTY
Of course this is an easy case, in reality the problem would be determining the
basis.
What is the value you are referring to? .
Litigation will center on this because you will have this in the contract.
The amount paid by the other party to the estate of the absentee or the ward but Now, during litigation defendant sold the property to X.
the issue will be how do you compute the prejudice? There’s a sale of the property to X. The sale can be with the consent of both
This will be the source of litigation. parties (B and D agreed to the deposition of the property).
Then you could ask why would a plaintiff agree to the disposition of the property?
Example Difficulty of proving prejudice If the proceeds would be placed in escrow subject to the decision of the court.
Lets make it closer and let’s say 600 when the usual price is 1000. There will be a
lot of argument that will come in. So in this case, its possible. That’s why this cannot be rescissible if there is
Assuming there is no court approval of this transaction if you're the representative, approval of the parties or approval of the courts. This will be completely valid.
you can say well this is the price you will get if you want to lease immediately, if However, if there is no approval by the parties or if there is no court approval this
you can’t wait out 6 months or more maybe you can get the 1000 but if you want is rescissible.
to get money immediately this is the one you can get. Or you can compare So in case plaintiff gets a judgment, he
can get a recession. LIS PENDENS
possible locations or recent transaction or the fluctuating nature of the rentals.
So there would be a dispute with respect to the base from which you will compute Annotation on the title of the
the prejudice caused to the ward or absentee. However, you really won't reach that
property with the relevant
Clear? point. Because normally if you have
registry of deeds that there is on-
litigation, the first thing you do is - you
going litigation over property
2. CONTRACT INVOLVING OBJECTS UNDER LITIGATION ENTERED INTO BY have what you call a lis pendens.
DEFENDANT WITHOUT KNOWLEDGE AND APPROVAL OF THE LITIGANTS
OR OF THE COMPETENT JUDICIAL AUTHORITY.
You annotate on the title of the property with the relevant Registry of Deeds that
Let’s say plaintiff sued defendant. The action is recovery of property. Both there is on-going litigation.
possession and ownership. So plaintiff asserts that plaintiff is the owner of the So, any result of the litigation will bind the property, whoever maybe its owner or
property and is entitled to its use and possession. possessor at the time of the finality of the decision.
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In the meantime, let's say on Day 2, to secure payment of the loan, there was a
Theres also another rule: the property of the litigation will also be subject to the real estate mortgage to X.
decision or orders of the relevant court. But setting those aside, if you have only On Day 2, borrower became insolvent ( assets less than liabilities). Borrower paid
this situation, one alternative is to rescind this sale pursuant to a decision in favor lender on Day 3. Is this rescissible?
of B. Wait lets add.
There was a demand before borrower paid.
S: Sir, what if for example, on Day 1, there is a case for the ownership. Do you think you can answer that one? Is this example rescissible? Why? Loss of
On Day 2, person sells it. the benefit of the period you think? That's based on your notes. This one I upped
On Day 3, other party sues for rescission. a little - so there's a little complication.
On Day 4, the decision on Day 1 is in favor of the person who sold the party. Will Answer: I'll show you how to answer this one. Let's say let's forget about this
what happened on Day 2 will be thrown out? mortgage. If lender on Day 3 demanded payment and borrower paid? You have
compliance under the 1st requirement - payment under the state of insolvency.
JSP: Yes, that will be pre-empted. If let's say ultimately the decision was in favor of What is the 2nd requirement - could not be compelled. There is now a due date.
the defendant in our example, the rescission will be pre-empted in that case The due date is only on Day 5.
because there will be no basis for the plaintiff to sue for rescission. Plaintiff is not However, payment was made on Day 3. Was there compulsion to pay on Day 3?
entitled to get the property. In this case, that provision of law on rescissibility of the payment did not apply
because on Day 3, the obligation is already due.
3. PAYMENTS MADE IN INSOLVENCY So I added this one, there's a real estate mortgage given by X. Will it be
rescissible?
This one is interesting in your notes but maybe not properly presented to you. I If there is a mortgage there is no compulsion. Why?
used to give this as an exam. I no longer repeat it - just to give you a flavor of the Because there is security. Remember if the borrower is in a state of insolvency
kind of exam. but there are securities to ensure compliance, then he does not lose the benefit of
the period.
Remember the provision, Article 1382. Yes, there's a security given unless of course, you have to be careful with that.
Payments made in a state of insolvency for obligations to whose fulfillment the
debtor cannot be compelled at the time they were effected, are rescissible. Unless, there is a stipulation considering this as a default.
If there's no stipulation, it will not be.
So you are dealing here with a debtor paying an obligation which is not yet So, you have to correlate the provision on how the debtor loses the benefit of the
demandable and was made in a state of insolvency. period in this problem.
So, what situation are we dealing with in this provision when there is no
Example compulsion to pay? What do we mean by absence of compulsion to pay?
Let's say you have a lender and a borrower. Same situation: Borrower is insolvent (Assets < Liabilities) but payment to debtor
The borrower is obliged to pay a loan granted by the lender because it's a loan is subject to a suspensive condition.
contract. This was done on Day 1. This is due on Day 5.
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So prior to the occurrence of the suspensive condition, lender made a demand Insolvency Law. So, it may happen that you would be confronted by the special
and let's say the condition has not yet occured. Payment was made on Day 3, law saying that the payment is not only rescissible but void.
upon demand by the lender.
Will the payment be rescissible? INSOLVENCY LAWS (before and now):
In this case, it will be because here there is no compulsion to pay because there is Right now, instead of the Insolvency law, we have the [FRIA] Financial
no fulfillment yet of the condition. Rehabilitation and Insolvency Act. This one is problematic because under the
So the obligation has not yet arisen. FRIA, the payment may be either valid, rescissible or void.
So, the borrower is not obliged to pay the lender. How could that happen?
You have to make that distinction with respect to this provision. Because under the FRIA, if it is paid under the ordinary course of business, it
may be valid. If otherwise, it may either be void or rescissible without the
law saying why should it be rescissible or why it should be void.
DEBTOR IS INSOLVENT AND DEBTOR PAYS CREDITOR: So, you now have to go back to the background rules meaning;
for example, the Civil Code.
OBLIGATION SUBJECT TO A TERM OBLIGATION SUBJECT TO A So, the payment maybe rescissible or void depending on what maybe proven in
SUSPENSIVE CONDITION ( that has the relevant proceedings. So, that's just a word of caution.
not yet occured) Although the law, the Civil Code, provides that the payment will be rescissible if
made under a state of insolvency - practical insolvency, when the debtor is not
PAYMENT IS NOT RESCISSIBLE. PAYMENT RESCISSIBLE. The compelled to pay, it may be rescissible.
The debtor no longer has the suspensive condition has not yet However, under special laws, it may be void not just rescissible.
benefit of the period occurred therefore no obligation.
Let's now go onto the more important rescissible contract
If it's a term, and there is insolvency, there will be acceleration, so there will
be a compulsion to pay. 4. CONTRACT IN FRAUD OF CREDITORS
If there is a suspensive condition, then there will be no compulsion to pay.
Under this provision, it will be rescissibile (1382). REQUIREMENTS

But under the OLD Insolvency Law, if let's say creditor filed an action against
1. Creditor should be a creditor PRIOR to the contract
debtor for insolvency, it's a petition for insolvency of the debtor, the payments
2. Contract should convey property or property rights to the party
made under insolvency would AUTOMATICALLY be VOID, not just rescissible.
3. Third party should not be an innocent purchaser for value
4. Subsequent contract undertaken by debtor should be FRAUDULENT
Because for a debtor to part with property after filing of the petition for
involuntary insolvency, there must be board approval. But that's under the Old
Lets discuss each one by one.
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a sale. On Day 2, there's a loan subsequent (let's say immediately) after the sale.
Illustration 3: CONTRACTS IN FRAUD OF CREDITORS Will that be a possible case of a rescissible contract in fraud of creditors?
Answer: You go by general rules, No, because the creditor has to be a creditor
DAY 3: INSOLVENT prior to the contract sought to be rescinded. If you go by the underlying reason or
DAY 1: LOAN
DAY 3: ONLY policy, that is a possibility.
CREDITOR DEBTOR THIRD PARTY
PROPERTY
NOMIANL SUM 2. The contract should convey property or property rights to a third party.
DAY 5: DUE
D conveyed property to X for a nominal sum. Our illustration complies with this
requirement.
.
3. Third requirement -The third party should not be an innocent purchaser for
value - not a purchaser in good faith and for value.
1. Creditor should be a creditor prior to the contract ought to be rescinded If the purchaser is a purchaser is in good faith, not privy to the intent of the debtor
to evade payment to the creditor, the contract cannot be rescissible. What the
So let's say Day 1, there is a perfected loan contract. 10 Million loan debtor is due creditor can do is just sue for damages.
on Day 5 inclusive of interest and other charges.
For this contract to be rescissible, the first requirement is the creditor should be a 4. Contract should be fraudulent
creditor prior to the contract sought to be rescinded - so this is the conveyance. You have to take this in conjunction with the third requirement. If this guy is an
So let's say sale - it was done on Day 3. On Day 3, debtor sold to X property for a innocent purchaser for value, this contract is not fraudulent. For it to be
nominal sum way off the market value of the property. So, you now comply with fraudulent, you have to show that both parties (D and X) were in cahoots in
the first requirement - the creditor became the creditor prior to this contract (was defrauding the creditor. If X is in good faith and paid good money for the
perfected on Day 3, creditor became creditor on Day 1). property, then there will be no rescissible contract, there will be no fraud.
If the loan contract was done after the contract sought to be rescinded; let's say
Day 5 and payment is due on Day 10, then the creditor will not fulfill the first 5. On due date, there should be no other recourse; there is no other remedy
requirement because the requirement of law is the creditor should be a creditor by the creditor against the debtor.
prior to the contract sought to be rescinded. Let's say on Day 5 (due date), creditor cannot go after any property of A because
Of course, there is a scenario which I think may happen but there is no debtor has nothing. So this one would be crucial.
jurisprudence on the matter. What can be assets that may be proceeded against by the creditor.
Debtor may not have property on hand but he may have receivables.
Question: What if this scheme was hatched precisely in default of the creditor. In that case, creditor cannot go immediately to rescission but will have to exhaust
Meaning, they entered into this contract first and then D borrowed from creditor the remedies or other assets of the debtor by exercising what kind of remedy?
without any asset against which the creditor may proceed. So it's Day 1, you have Accion Subragotoria!
The creditor will exercise the right of the debtor to collet receivables.
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So again, take note of the requisites. 1. DONATION FROM INSOLVENT DEBTOR

First, the rescinding party should be a creditor prior to the contract sought to be Let's say if instead of a sale, our example is a donation.
rescinded. It is presumed to be fraudulent.
The contract conveyed property or property rights of a debtor to a third party.
The third party is not an innocent purchaser for value - meaning a buyer in good 2. DONOR DOES NOT PRESERVE SUFFICIENT PROPERTY TO PAY ALL
faith. DEBTS
The fourth requirement - it is a fraudulent conveyance prejudicing a creditor. It is presumed to be fraudulent.
And fifth, there must be no other legal means to obtain payment. The creditor has
to exhaust all assets of or remedies against the debtor. Clear? Of course in our example, this is the only property of the debtor. So clearly, if the
debtor donates that property to X, he has no more assets. He is insolvent.
Question: Sir, but how can you say its good faith on the part of third party if the Debtor has no more assets to pay the creditor. However, if the donation was made
purchase was for a nominal sum of money? at the time when the debtor,(lets say it was a donation), it was done on Day 3.
Answer: First, how do you prove fraud? Because if you are claiming fraud, who On Day 3, after the donation, debtor still has 100 Million. You cannot characterize
will have the burden? The one who will have the burden will be the creditor - the this as rescissible.
one claiming that this contract or conveyance was in fraud of a creditor.
The first thing that the creditor can do is rely on PRESUMPTIONS. 3. DONATION BY ONEROUS TITLE IF THERE IS JUDGEMENT OR
ATTACHMENT ISSUED AGAINST DEBTOR
Art. 1387. All contracts by virtue of which the debtor alienates property If it is by onerous title on the other hand, it is presumed to be fraudulent if there
by gratuitous title are presumed to have been entered into in fraud of is judgment or attachment issued against D.
creditors, when the donor did not reserve sufficient property to pay all So you have a case, it can be a judgment not necessarily executory on an
debts contracted before the donation. attachment. And take note the case need not relate to the property conveyed. It
Alienations by onerous title are also presumed fraudulent when made by can be any adverse decision against the debtor or an attachment against the
persons against whom some judgment has been rendered in any instance debtor, not necessarily involved in the property conveyed to the third party.
or some writ of attachment has been issued. The decision or attachment
need not refer to the property alienated, and need not have been Question: Sir, if the debtor here conveys his property to 3 different people? Does
obtained by the party seeking the rescission. the creditor have the choice of which to rescind?
In addition to these presumptions, the design to defraud creatures may be Answer: So his question i, instead of conveying the property, it is conveyed to
proved in any other manner recognised by the law of evidence. three parties, X, Y, and Z, at the same time.
Let's say three parcels of land. So, we will assume the conveyance was fraudulent.
SO, X Y and Z were in cahoots with the debtor. The question is: can creditor
There are legal presumptions. You look at Article 1387.
choose against whom to concede?
If you are the rescinding party, you can rely on presumptions.
I will give you the answer and you tell me the reason. YES, why? Why can the
creditor proceed against and choose whom to be sued? You can go after one or a
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combination under what circumstance? What kind of obligation when you can go Question: Sir, how can you make it appear that the property was lost for legal
after any or all? grounds?
SOLIDARY Answer: Well, if you're RCBC maybe. That's not the legal thing. It's one way of
Why will we have a solidary obligation here? Tort, because? Why is there a tort muddling issues.
liability? Let's say for example, D sold property to X. X paid good money for it (fair
Because it's fraud! Remember, because it's fraud then there will be solidary exchange).
liability. So if you have that situation, creditor can go anyone of them. But The property's worth is 100 Million. X paid 100 Million.
take note, only to the EXTENT NECESSARY TO OBTAIN PAYMENT. D squandered it in casino. Will this contract be rescissible?
Of course not, because X paid good money for the property.
So, C cannot go after all of them and receive all of them but only to the extent But let's say they simulated it, X actually paid only 1 Million, but declared
necessary to get payment. payment of 100 Million.
Then, D says the money was lost in casino. Assuming that C can establish them in
Question: What if the alienation relates to different things? They're all fraudulent? the facts, then this will be rescissible. Take note, I said the simulation, the party
Yes, meaning they're separate? only.
Well, then he will still have a choice. Because there's payment of 1 Million. Because if there's no payment, it's
absolutely simulated. This will not be a rescissible contract but will be void.
Question: For example, the donations with X then his assets were still 10 Million.
Then donations to Y assets are now 5 Million, Question: What if the third party was not in bad faith but the debtor has already
then donation to Z, the assets are now 0. sold it.
Which can be rescinded? Answer: I think what's crucial is what was paid by the third party. If there's a fair
Answer: Well, it would be discretion of the creditor (even if the assets were only 0 exchange or equal exchange, I don't even think you even need to deal with good
at the time the donation with Z happened?) faith or bad faith. Because the moment you are paying good money for the
Let's say all donations, so donation was made to X on Day 1 with enough assets to property, you should be in good faith, you're buying it. And if the creditor going
pay off the debt - then this is VALID. There is no presumption there. If the after property, the creditor should have gone after the proceeds paid for the
donation was made at the time the debtor has no sufficient asset to pay creditor. property.
thats when the presumption for rescission arises. So, when it comes to the innocent purchaser for value or buyer in good faith,
what is crucial is really the payment made.
Question: Does rescission only work on fraudulent schemes? If the payment is substantial, and approximates to the fair value of the property
Answer: Well, there are other rescissible contracts, this is one of them. It could be conveyed, that should be good enough.
a conveyance in fraud of the creditor. So it can be the rescission of a contract
entered on behalf of a guardian or a ward. It may or may not be fraudulent. It may Question: What if X paid fair money to the party, but he did it in bad faith?
be rescissible just by the very fact that the ward or abs SP: how did he do it? I'll give you an example.
entee suffered lesion to the extent of more than 1/4 of the value of the property.
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I'm selling a property worth 100 Million. You paid me 100 Million. How do you do GENERAL SCHEME - for example, someone hiding assets for D from creditors
it in bad faith? But if there's a front payment for example, it will be very difficult to making them beyond the reach of creditors.
claim bad faith.
So as I said, if the creditor, the rescinding party will have the burden of CASES ON RESCISSION
establishing fraud characterizing this as a fraudulent conveyance. The rescinding
party can rely on the presumptions.
1.UNION BANK V. ONG
Absent the application of the legal presumption, the creditor will have the
In Union Bank, of course there is a bank. Bank extended a loan to a company
burden of proof of establishing the fraudulent conveyance.
(corporate).
Of course, there is an obligation to pay the loan.
The corporation owned by shareholders (spouses).
BADGES OF FRAUD SURETY UNDERTAKING
To secure the loan among others, there was a
surety undertaking in favor of the bank. If the debtor defaults, the
What can be shown by the creditor as rescinding party to know these factors as surety undertakes the
badges of fraud? So what happened here? obligation to fulfil the
What can be possible indicators of fraud? The shareholders sold a property to a guy named obligation of the debtor.
Jackson (X). The only condition for the
PRICE - Remember our discussion of cause and There was payment of the price. surety to be liable is IF
BADGES OF FRAUD
consideration? The law does not impose a The price was around 10 Million Pesos. The the debtor defaults.
threshold for a valid cause or consideration. 1. PRICE property's fair market value is worth 40 Million
However, if the cause or consideration is 2. RELATIONSHIP Pesos.
inadequate, it can be an indication of something 3. GENERAL SCHEME
under the law. For example, it can be an Now, the corporation was placed under receivership, meaning it's in financial
indication of fraud. In this case, it can be an distress it so could not pay.
indication of absence or simulation. In this case, it's an indication of a fraudulent Take note, this surety, we will assume this was done Day 1.
conveyance. What else can be used as a badge of fraud? So, you have compliance with the first requirement, the bank became a creditor of
the debtor (spouses acting as sureties). The bank became a creditor before the
RELATIONSHIP - let's say personal relationship or professional relationship. conveyance of the property. The corporation went under receivership (Day 3).
Example, X is an accountant lawyer of D working for D for a long time. That can
be considered. Or they are close relatives. The bank, then, would have a recourse under relevant contracts against the
corporation and eventually the surety spouses.
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The bank here, after the receivership sued for rescission of the sale of the property And during the testimony, the witness said, "I could not remember how I paid,
to Jackson. This is Day 4. where I paid."
The question now is - can there be rescission in this case? ( remember the Supreme Court said that's not credible. It's a significant amount you ought to
requirements.) remember.
1. We have compliance with the first requirement. Bank was creditor prior to So, that's a possibility here. Of course, we're dealing here with rescission. In that
disposition of property to X. case, it was absolute simulation.
2. next requirement is that there was a conveyance of property. In this case, there As I have explained when we were tackling that case, you have similarities
was conveyance of property. between absolute simulation and rescissible contracts in fraud of creditors.
Third, was the conveyance fraudulent?
In the course of the proceedings, it was established that there was a discount The difference is it if it's absolutely simulated, it is void and there is no
given. Let's say this is the fair market value and there is a discount. I'd say it's a fair prescriptive period.
discount. That, not withstanding, there was testimony given by a broker that you So, if you look at this situation also, the bank would have to show that it has
have to factor in certain costs that would account for the discount. Let's say broker exhausted all remedies against the assets of the corporation. And even if
fees, taxes, registration fees and other expenses. assuming they hurdled that issue, the next would be the bank should show that
Another badge of fraud used by the bank was financial capacity. other than this asset, the spouses had no other assets to satisfy their liability under
The income tax return does not reflect the purchasing power of a party (Of course the surety undertaking.
that was before Kim Henares). So what the bank did was the shortcut. They went after immediately the
Take note of this, there was an allegation that the spouses did not cede property without establishing that they have no other recourse except to
possession to Jackson (X). rescind the contract of sale. They couldn't rescind.
X did not take possession of the property; rather, they had a lease. Supreme Court
said that it's still consistent. PRESCRIPTION PERIOD OF RESCISSION
Somehow, X was holding the property through the lessees.
So, there was a change of capacity of the previous owners.
From owners, maybe they become lessees. I think what's crucial again is that the Art. 1389. The action to claim rescission must be commenced within
payment made was sufficient (the fair value of the property). four years.
Now, if you're going to litigate this and you want to show that there is fraud. For persons under guardianship and for absentees, the period of four
What will you show? What will you look for? Was there proof of payment here? years shall not begin until the termination of the former’s incapacity, or
It's something that you can check. until the domicile of the latter is known.
For example, let's say - yeah there's payment but you just don't show that there's
no capacity by the buyer to pay.
Usual example. Perfected loan contract Day 1, sale by debtor of asset on Day 2. It
Remember the case of Manila Bank v. Silverio. was registered on Day 2.
One issue there was - was there payment?
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We will now assume the sale was rescissible - it's in fraud of creditors. When WHEN WILL YOU RECKON THE PERIOD TO RESCIND?
should the prescriptive period begin?
These are the dates: CONTRACTS ENTERED INTO BY THE MOMENT ALL FOUR REQUISITES
Day 1 - you have the loan. GUARDIAN OR WARD THAT CAUSE OF ACCION PAULIANA ARE PRESENT
Day 2 - you have the registered sale. ECONOMIC LESION
Day 3 - there's receivership, so it's now due on Day 3.
THE MOMENT THE ABSENTEE
WHEN WILL YOU RECKON THE PERIOD TO RESCIND? REAPPEARS OR WHEN THE THE
CONTRACTS IN FRAUD OF CREDITORS
MINOR REACHES THE AGE OF
If you're dealing with absentees or ward, you just count from the time the MINORITY
absentee appears or with respect to wards, when they have legal capacity.
ABSOLUTE SIMULATIO V. RESCISSION IN UNIONBANK v. ONG
Answer: In a recent case, the Supreme Court had an occasion to clarify this.
Remember the 5 requisites of rescission. In this case of Unionbank v. Ong, there was an alternative that the bank could
So, for the remedy of rescission to arise, all requirements should concur . have done instead of rescission: absolute simulation. They wouldn't have had to
What will be the last element that will happen? pass through the requirement of absence of any other recourse.
You reckon it from the time the creditor exhausted all assets against the Remember, absolutely simulated contracts are void. So theres no prescriptive
debtor. period to assail it.
If i were the bank I would have opted to allege that the contract was absolutely
That's the commencement of the reckoning of the four-year period to rescind simulated.
Because if you say from registration or knowledge, the right of action may not
have yet accrued because the bank will still have to find if there is a property Anyway, as I said, if you compare this with the case of Silverio, you have basically
available other than the property involved in the rescission of the contract. And the same elements or facts that should be established.
that is good to remember when you're dealing with prescription of action or The only difference is that you have to show absence of any payment.
prescriptive period to file an action. The moment there is proof of payment inadequate as it may be, it can show that it
You have to start from the time the right of action accrues. In this case, the time all is a valid contract unless you can show some other way that it is all for show such
elements are present is when prescription runs. as the payment of a nominal sum.
Let's say an action based on a contract. It will not be from the date of the contract
but based from the date of breach. Or in the case of a minor annulling a voidable So, if you're in this situation, I'd go for absolute simulation. Establish fraud.
contract from acquisition of legal capacity. Establish inability of the buyer to pay. You can say there is no consideration and
there is no intention to be bound. It's just to place the property beyond the reach
of the bank.
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So, that's the difference there. You will use the

Instead of Rescission, an
Ill give you another example. same proof but you will establish that the parties
did not intend to be bound. The objective only alternative remedy of the
Example: Absolute Simulation as an alternative when action for Rescission has of the exercise of sale was to place the creditor is to allege that the
prescibed properties beyond the reach of the creditors. contract is absolutely
Let’s say you have a creditor and debtor.
simulated. That way he
Day 1:creditor extended a loan. ( due date: day 5) Question: Wouldn't it make rescission totally
Day 3, there was a sale of property of debtor to X for a nominal sum. useless because you have to go to through so would not be barred by
Day 5, Assets = 0. much for a successful action? prescription
(Of course creditor, after evaluating the case, can establish that there is no fair
exchange here. So clearly, X is not an innocent purchase of value. X will not be
shielded as an innocent purchaser of value.)
Day 5: debtor defaults and creditor sued. Answer: Yes, but sometimes, you could not hurdle the problem. If there's
On April 26 2010, creditor obtained a judgment against debtor but could not payment indeed then you cannot characterize it as absolutely simulated because
execute due to the insolvency or absence of any asset of the debtor. there's a contract (all elements are there).
So, after 6 years, creditor consulted a lawyer. In that case, rescission will be relevant. So only if you're certain, (of course you can
Lawyer says: “You can still execute against this asset and go for rescission”. have alternative theories to be sued - either rescissible or void), depending on
Was this correct? what you can establish in the courts.
No. Rescission has already prescribed ( 4 year period).
What will be the option? Question: Will C have standing to repeal that contract between D and X?
Rescission will not be possible because it already prescribed. Because the right of Answer: No, if it's absolutely simulated, that theory of C, this is still the property
action accrued as of April 26, 2010. of D. So, C is only going after the property of D.
So creditor could no longer rescind this contract even if creditor knew of this So, he is not a stranger to the contract. The contract between D and X is non-
contract only now, which is tricky. existent. C will have the appropriate interest to sue to get the property.
What if the creditor knew of this contract only now?
So most likely, if it's a sale, it is registered. Registration will be before April Question: What's the purpose of a deed of donation when it has a statement that
26. (Reigstration makes it a public document, so somehow, the creditor should says, "Donor has sufficient founds for other credits."
have known about the transaction.) Answer: Well, it's an affirmation that there is a reservation of sufficient assets to
pay liabilities. But, it's an affirmation. It can be a false statement. It can be
What could be an alternative? disproved in an appropriate proceeding. But it doesn't mean it's true.
ABSOLUTE SIMULATION.
To execute against the property, I characterized this as an absolutely simulated Question: In that case, if C later on establishes that the sale was just for a nominal
contract. So you don't have to reckon with this commencement date of sum but it already prescribed. Would that have any relevance?
prescriptive period.
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Answer: Well, if there is a payment of a sum - meaning it is difficult to C. So, that does not apply.
characterize it as absolutely simulated then there's nothing more that he can do. That applies only if you have the situation of contract on behalf of a ward or
He has to go somewhere else and try to recover. an absentee.
In fact, if it's under litigation, the restoration will be between the relevant
parties just like this one.
MUTUAL RESTITUTION
Example: Let’s say X indeed paid a certain sum. X can still go after D in a separate
action. The problem there is it's useless because D has no assets so why will go X
Art. 1385. Rescission creates the obligation to return the things which go after D?
were the object of the contract, together with their fruits, and the price
with its interests; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore. SEQUENTIAL DEBTORS IN ACTION FOR RESCISSION
Neither shall rescission take place when the things which are the objects of
the contract are legally in the possession of third persons who did not act
in bad faith.
ART. 1388 Whoever acquires in bad faith the things alienated in fraud of
In this case, indemnity for damages may be demanded from the person
creditors, shall indemnify the latter for damages suffered by them on account
causing the loss.
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
Now, let's now assume the instance in my example is rescissible. If there is so on successively.
rescission, what will be the consequence?
There can only be rescission if there will be mutual restitution.
What if you have layers of transactions? Let characterize this illustration as
So if you have a contract between on behalf of a ward and another party, there
one entered into to default a creditor.
should be restitution. But, restitution less damages.
So, X sold it to Y who was also privy to this fraudulent scheme.

Then, Y sold to Z, an innocent purchaser for value.
In contracts entered into to defraud creditors, who should restor?
Then, Z sold to N, who was also aware of the fraud perpetuated against C.
If a creditor has no obligation to restore, restoration will only come from D. But,
We have here a fraudulent conveyance in favor of X, who acted in bad faith and
never from C. Otherwise, what if the property is worth 10 Million and there is 5
did not pay a fair amount of the property.
Million paid.
X subsequently sold the property to Y who is also privy to the fraud. And Y
We will assume that they conspired to defraud the creditor. If you follow that rule,
subsequently sold to Z who is an innocent purchaser for value. And Z sold to N
what will happen is in effect, C will just get 5 Million. C will get 10 Million but has
who is aware of the fraud.
to give back X 5 Million. So it's as if you reward X for conspiring with D to defraud
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Illustration 4: SEQUENTIAL DEBTORS IN RESCISSION In this present case, D sold only to X. X sold to Y. But both were privy to
fraudulent scheme. But why would you go to all this trouble because you want it
to make difficult for the creditor to go after the asset. That's why a lot of people
BAD FAITH
(debtors in financial distress) disperse the assets, make several transfers because
CREDITOR DEFENDANT that will be very difficult to recover through litigation. They are solidary liable
LOAN
ONLY X based on fraud but the law says the recovery should be sequential.
ASSET
FINANCIAL REHABILITATION AND INSOLVENCY ACT

Now, again, going back to my mention of the Financial Rehabilitation and
. N Z Y Insolvency Act (FRIA). As I said, this transfer and conveyance under the Old
Insolvency Law, they are void if it's subject to an insolvent debtor. Right now under
BAD FAITH INNOCENT PURCHASER BAD FAITH the FRIA, it may be valid, if it is within the course of business. It may be rescissible
or it may be void depending on how the court will consider the contract.
Can creditor now rescind the sale to X?

Yes, for damages.
C can collect 10M from X. But if X has no asset, can C go after Y?
Yes, C can go after all subsequent transferees who are not innocent
purchasers for value sequentially.
So X first and then Y.
But there will be a cut-off. The moment there is an innocent purchaser for
value, you will stop.
So that will also protect N. Doesn't matter if N is aware because N purchases from
Z who was an innocent purchaser of value.
Take note of that provision that in case there is a need to recover and there
are subsequent transfers, the creditor can go after the transferees
sequentially, assuming they are all in bad faith.
Question: What's the difference with the earlier example?
Answer: This one, the earlier example was D conveying to X, Y and Z at the same
time. So, they are all solidary tortfeasors = solidarily liable.
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REVIEW: RESCISSIBLE CONTRACTS As compared to rescissible contracts, in a voidable contract, there is an issue
with respect to an essential element — CONSENT.
In a voidable contract, there is a problem either with the capacity of one contracting
We’re done with rescissible contracts. party, or the consent of one party.
As you should have known, in rescissible contracts, there’s nothing wrong with the
essential elements of the contract. All the elements of a contract are present.
CONSENT OF ONE PARTY MAY HAVE BEEN VITIATED BY:
The problem in rescissible contracts is it causes lesion or economic prejudice to some
party whether a contracting party or a third party. That lesion is categorized by law as 1. VIOLENCE
a ground to rescind a contract. 2. INTIMIDATION
3. FRAUD
4. MISTAKE
So the defect in a rescissible contract has nothing to do with the essential elements of
a contract, it relates to the prejudice caused to a party, a contracting party or a third
party. And as I said you have to remember that not every economic prejudice or
So these vices of mistake renders the contract
lesion would render a contract rescissible. There must be a corresponding law
voidable.
In voidable contracts,
saying that the economic prejudice renders the contract rescissible. there is defect with regard
So again, in a voidable contract there is defective
What is that law?
consent. The defect arises either from to consent. The party
Of course we have that provision on the Civil Code on Contracts.
incapacity of one contracting party, not both. either does not have the
Because it will be some other defective
Lets go to Voidable Contracts.
contract if both are incapacitated
capacity to legally
(unenforceable). consent or the consent is
REVIEW: INTRO OF VOIDABLE CONTRACTS (1390-1402)
Or there is vitiated consent, and the vice of vitiated.
consent can either be violence, intimidation,
fraud, or mistake.
Art. 1390. The following contracts are voidable or annullable, even though
there may have been no damage to the contracting parties: Again as a reference to our previous discussion on reformation of contract, take note
of these vices of consent. The fraud or mistake, as the term implies, should relate to
(1) Those where one of the parties is incapable of giving consent to a contract; the consent. If it relates to something else, the remedy of the aggrieved party may
(2) Those where the consent is vitiated by mistake, violence, intimidation, be different like, it can be for reformation.
undue influence or fraud. Let’s say the fraud or mistake causes the failure of the written contract to reflect the
true agreement of the parties, then the remedy is reformation, not annulment.
These contracts are binding, unless they are annulled by a proper action in
court. They are susceptible of ratification.
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WHO MAY FILE FOR ANNULMENT Did you watch that one? Spotlight? At the end of the credits I was surprised. They
made a list of those with cases of pedophelia committed by Catholic priests. Included
was, of course, the Philippines. Not publicized but it’s there.
Art. 1397. The action for the annulment of contracts may be instituted by all
who are thereby obliged principally or subsidiarily. However, persons who are So the minor renders a service for the priest for a
capable cannot allege the incapacity of those with whom they contracted; nor
A voidable contract must
fee.
can those who exerted intimidation, violence, or undue influence, or employed What is this contract?
be assailed, by the
fraud, or caused mistake base their action upon these flaws of the contract. This contract is voidable because of legal aggrieved or injured
incapacity. party in the relevant
Now, who can ask for annulment? Take note, it’s voidable meaning it has to be courts. If not assailed ,
First, it should be the aggrieved party. annulled by the relevant court.
An action should be filed before the contract may
the contract is valid until
Who is the aggrieved party?
Remember there are two situations wherein you will have a voidable contract. be annulled. The contract therefore, is valid until annulled
annulled.
SITUATIONS WHEN A VOIDABLE CONTRACT MAY ARISE:
There is a valid contract but voidable due to vitiated consent or legal incapacity of
ONE PARTY WAS VITIATED BY VICES OF one party.
ONE PARTY IS INCAPACITATED
CONSENT In this case, who can file?
( INJURED PARTY)
(INJURED PARTY) Only the minor can file.
The priest cannot file because the priest is, we assume, of legal age and his consent
THE PARTY WHO HAS LEGAL CAPACITY OR WHOSE CONSENT WAS NOT VITIATED OR
WHO CAUSED THE VITIATION OF CONSENT CANNOT ASK FOR ANNULMENT was not vitiated. Maybe only by lust.
No, there’s no such thing here. Only the minor can file. Of course the minor may or
may not file, but the priest cannot file an action and allege the legal incapacity of the
One party is incapacitated or the consent of one party was vitiated by vices of minor. That is what is meant by ‘only the aggrieved party may file.’
consent. The aggrieved party, again, is the incapacitated party or the party whose consent was
In that case, the aggrieved party will be the one who is incapacitated or the one vitiated.
whose consent was vitiated.
The party who has legal capacity or whose consent was not vitiated or who Student: What if the minor knew that he did not have capacity so he was in bad faith?
caused the vitiation of consent cannot ask for annulment. JSP: Doesn’t matter.
Example: Contract between minor and priest Remember there is only an exception. Remember that double whammy case?
So let’s say you have a contract between a minor and a priest.
Minor renders a service for the priest in exchange for a fee. That old case wherein it’s a minor who was held liable based on the contract based on
This contract… of course I can’t say what the service is, it’s a contract! estoppel because he looked so old, he was considered of legal age.
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As I said, that’s exceptional. So a consent if completely valid if it’s freely given; so we do away with the issue of
If you’re a minor, you are not supposed to be bound even by estoppel. But that’s a violation, or intimidation, or undue influence. Or it should be informed; so we do
rare case. Plus the minor would and should know that he is a minor before entering away with the issue of mistake, or fraud.
into the contract.
By the way, what’s the legal age? 18, right? What’s the age of consent? How low is the
age of consent? VICES OF CONSENT ( CONTINUATION- MISTAKE OR FRAUD)
Let us analyze the age of consent. 12.
MISTAKE OR FRAUD
So you cannot enter into a contract, but you can have sex if you’re 12 under our law,
legally. Of course if you are having it with an old man, that may be either seduction.
Now with respect to mistake or fraud, we discussed before that for a party to allege
But if you’re doing it with a 13 year old, it’s fine because our age of consent is 12. 12 I
mistake or fraud as a vice of consent, that party should be in no position to access
think is very young. I don’t know. It’s a dated law in the Revised Penal Code. That’s still
the true state of facts by exercise of due diligence.
statutory rape right? If below 12, automatically that’s rape. So the age of consent is
12. So you cannot enter into a contract if you’re below 18, but you can give your life
If a party has access to the facts by exercising due diligence, but failed to
away as long as you’re over 12!
exercise that due diligence to know the true state of facts, then that party
cannot allege mistake or fraud as a vice of consent.
Who else aside from the party who is incapacitated or whose consent may have been
vitiated? Who else may file?
Of course our ridiculous example is that one where a party is selling a BMW and the
A creditor of the aggrieved party by way of accion subragatoria.
other party bought it by mistake, but it turned out it wasn’t a BMW because it’s
spelled T-o-y-o-t-a, it’s Toyota.
The filing of an annulment of the contract is not limited to a contracting party.
A third party who may have been prejudiced by that contract may file like a
Example: Mistake or Fraud in Sale of Property
creditor who can file an action for subragatoria, meaning for and on behalf of
Let’s say I sold property to Acuyong. Acuyong wanted to live near Rockwell so I told
the aggrieved party.
him I was going to sell him a property in Rockwell. And then it turned out it’s in
backwell. I sold it to him, we had a deed of sale and then he came back to me and
said, “You sold me a property that’s not in Rockwell, it’s in Poblacion. That’s outside
WHO MAY FILE FOR AN ANNULMENT OF A CONTRACT?
Rockwell.” Can that be a basis of annulment based on fraud or mistake?
A CREDITOR OF THE AGGRIEVED PARTY No! I’ll just give you the facts. He’s a law student, he goes to Rockwell, he ought to
INJURED OR INCAPACITATED PARTY know that that property is outside Rockwell.
(ACCION SUBRAGATORIA)
So, he could not allege mistake or fraud in that case because he is in a position to
know by mere exercise of ordinary diligence.
When we deal with consent, we’re dealing with information.
There was a case before, somebody who bought jewellery claimed mistake or fraud.
That party who claimed mistake or fraud was a jeweller-banker. Supreme Court said,
“you’re a jeweller-banker, you should have known the quality of the gem presented to
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you; and as a banker, you should have known that there should have been exercise of Again, the Church sold a 16x2 lot to Pante.
due diligence.” Later on the Church wanted to annul the sale based on a vice of consent - somehow
I think what happened was there was supposed to be a swapping of the item before there’s misrepresentation as to the qualification of Pante.
the sale. You could have checked it right then and there before being delivered. The When may a qualification of a party be relevant or material? When is it a principal
SC in that case prevented a party from claiming mistake or fraud because the party consideration?
ought to know or should have known the true state of facts at the time of the When it is part of the cause.
transaction. So there could be no mistake or fraud. SC said, apparently it was not a consideration.
Of course a tension in cases of mistake or fraud is when you have affirmative What’s important here is that the SC said that the Church could not validly claim that
representations in a contract. That will be a lot trickier. the contract should be annulled because Pante was not occupying the property. And
Yes, there may be no fraud but if there is a representation - let’s say I’m selling the the reason given was, because the property given was very near the Church, the
jewellery and I represent the specifications of the item are as follows. And it turned Church could have readily inspected the property.
out to be different, then the other party need not even allege fraud or mistake, Considering that the Church owned the property, it ought to know that Pante was
there will just be breach of contract. And possibly resolution. never there. As it turned out, this was really for a right of way as an access going to
the property of Pante.
CASES The SC also mentioned that just look at the size, you could not have a house here
(unless it is a SMDC condo). It’s a very small lot for you to use. This is just an
illustration of what I was telling you early on:
1. The Roman Catholic Church v. Pante ( Lot used as pathway)
That for a party to claim fraud or mistake, that party should have no access to
When Due Diligence was Required
the relevant information.
Here, if the Church exercised ordinary diligence, it should have already known
There was a Church, owns
that Pante never occupied the property and this property could not be used as a
property - 2x16, so it’s a 32
residence, it could only be used as a right of way.
sqm. lot, and sold it to Pante.
Later on, the Church claimed SALE My statement was an exaggeration; that 32 sqm. lot could not be used as a residence
that it sold the block to Pante
X CHURCH PANTE because my house was beside a vacant lot before, and the vacant lot was occupied by
on the premise that Pante was 2 1 squatters. How many were they? If I’m not mistaken around 30 families, around 150
an occupant of the property. So
people fit in that lot. Not 16x2, a little bigger, maybe around 250 sqm. but still. So 2
having failed in that supposed
persons for square meter.
re q u i re m e n t , t h e C h u rc h
LOT
wanted to annul and in fact,
sold it to somebody else.
WHEN SHOULD A PARTY FILE FOR AN ACTION FOR ANNULMENT

An issue here was could this be annulled?
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Art. 1392. Ratification extinguishes the action to annul a voidable contract

Art. 1391. The action for annulment shall be brought within four years. This
period shall begin:
In cases of intimidation, violence or undue influence, from the time the defect Art. 1393. Ratification may be effected expressly or tacitly. It is understood
of the consent ceases. that there is a tacit ratification if, with knowledge of the reason which renders
In case of mistake or fraud, from the time of the discovery of the same. 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
And when the action refers to contracts entered into by minors or other to waive his right.
incapacitated persons, from the time the guardianship ceases.
Art. 1394. Ratification may be effected by the guardian of the incapacitated

person.
Is there a period?
4 years.
From when? It depends on the grounds for annulment. If it’s legal incapacity, then Art. 1395. Ratification does not require the conformity of the contracting
from the time the party acquires capacity. If it’s a vice of consent, it depends. If it’s party who has no right to bring the action for annulment.
violence, intimidation, or undue influence; from the time the vice of consent ceases. If
it’s fraud or mistake, from knowledge of the vice of consent.
Art. 1396. Ratification cleanses the contract from all its defects from the
moment it was constituted.
PRESCRIPTION FOR ANNULMENT Because it’s a defect in the consent, it is possible for the aggrieved party to cure the
effect by ratification.
FRAUD/MISTAKE From the time of
knowledge of fraud/
mistake Let’s say an incapacitated party can ratify before acquiring capacity through the
VICE OF appropriate legal guardian or appropriate court proceeding or upon acquiring
4 CONSENT
FROM VIOLENCE/ From the time the capacity then that party can also ratify.
YEAR
WHEN? INTIMIDATION/UNDUE vice ceases On the other hand if you have the vices of consent it can also be done. Of course we
S
INFLUENCE are assuming that ratification, let’s say there’s fraud or mistake, upon learning that
fraud or mistake, ratification can be express or implied.
LEGAL From the time the party the party acquires legal
INCAPACITY capacity
HOW iS THE DEFECT IN VOIDABLE CONTRACTS CURED?
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Express is, let’s say by written agreement wherein the parties will recognize the part of the services. But Manzano was adamant that he would not pay and he also
defect in the contract but nevertheless confirm the complete validity of the would not pay the bonus.
contract. There was litigation and it eventually reached the SC. In effect, the SC was saying,
what Manzano was claiming was an annulment of the contract based on the
Implied ratification is when the aggrieved party receives a benefit from the qualifications of Lazaro. The claim of Manzano was Lazaro did not have the
contract knowing full well the defect in the contract. qualifications as he represented.
It was not much of an issue because, how could he not be qualified when he was able
2. MANZANO V. LAZARO ( Election Manager) to make him win?
Implied ratification when aggrieved party receives a benefit from the contract What you have to learn from this case is, assuming there is a vice of consent here,
there was ratification. Because Manzano reaped the benefits of this contract
because he won. SC said Manzano ratified by accepting the benefits of the
ILLUSTRATION 2: MANZANO V. LAZARO contract.
Student: If he didn’t win, will the case prosper? Because technically he kind of ratified
SERVICES
it also because he continued to accept the services of Lazaro.
MANZANO LAZARO
FEE JSP: Yes! If let’s assume he lost the election, this (bonus) would not be due. By the
mere fact that services were actually rendered. I think he just didn’t want to pay the
3 months- PHP x/month
P200k. What year was this? 1998. Was P200k a big amount? Maybe. But I’m not sure
+bonus=200k (success)
why he didn’t want to pay.
This is a thing you have to learn from as possible future lawyers or ex-lawyers, you
Manzano and Lazaro had a contract that Manzano would pay Lazaro a fee for
have to make a contract like this. Lazaro was somehow lucky, he made a good
campaign services during the elections. Manzano was running for Vice Mayor of
contract. There’s only one requirement for the bonus - that Manzano should win. And
Makati, that was the time when he even campaigned outside of Makati. He was
there was an enumeration of the services to be rendered.
campaigning already in Manila, thought he was campaigning before voters of Makati.
Manzano won.
If you were dissatisfied with the services, why didn’t you complain?
He was supposed to pay Lazaro a fee - x amount per month for 3 months and a bonus
You complained only when it was collection time. So the objection was suspect
of P200k based on success. So they identified a milestone that should Manzano win,
because if you were really dissatisfied, you have to document just to prepare your
he should get a bonus.
ammunition in case of a litigation. If you didn’t like the services you should have told
That’s the only requirement, that there should be success. Manzano won and it’s now
Lazaro from the start.
payment time.
What Manzano did was when Lazaro was collecting, he said he could not give him the
full payment for last month, only half because he still had to account for the campaign
materials used. Lazaro made the accounting and turned over the materials. But
Manzano came up with another issue, that Lazaro should submit a financial report.
Lazaro said it was not part of the deal - preparation of financial statements was not
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3. VILORIA v. CONTINENTAL (Airplane ticket) The SC said the representation of the agent could not be considered a vice of
Burden of proof to show fraud on party alleging consent. It could not have been causal fraud, the reason why the consent was given.
Aside from that, Viloria also had access to the facts.
Viloria got airline tickets from Continental during a vacation abroad. It’s a sale of Viloria only alleged that there was misrepresentation, but he could have readily
ticket. checked if the misrepresentation was true.
The background of the case was, somehow the spouses were stranded in some place
in the US and they wanted to get to another point and they wanted to buy tickets. Finally the SC said Viloria could not ask for annulment because he received the
They went to this agent of Continental and according to the husband, he asked if benefit, in fact he was trying to exchange the tickets, it just so happened that there
Amtrak was fully booked. was a snag (?) when he was doing the exchange - that the tickets were non-
It’s ridiculous, why would you ask the airline guy if Amtrak was fully booked? transferrable. So there was ratification in that case.
He should’ve just gone there.
The claim of Viloria was that the agent created the impression that there were no GENERAL RULE IN PROVING FRAUD
alternative means of transportation other than by flying if they wanted to follow a
certain schedule. They somehow agreed. BURDEN OF PROOF TO SHOW FRAUD EXISTS IS ON THE PARTY ALLEGING THE VICE
Later on, there was a change, an increase in cost because rather than using OF CONSENT
Continental, they had to use another airline, so there was increase in cost. Viloria
changed his mind and this time he went to the train station to check if there were EXCEPTION
available seats. He discovered there were available seats. So he went back and said
When a party is illiterate or could not understand the language of the contact
he wanted a refund. After a lot of discussions, Viloria agreed with Continental that
Viloria would just be granted a right to exchange the tickets for other tickets. Viloria
tried to avail of that right. There were two tickets, one for the husband and one for the Now if you have annulment of the contract, there is a requirement.
wife. Viloria wanted to use both tickets to buy one ticket to the US.
Continental said the condition was the ticket was not transferrable. Again there was a
dispute because Viloria could not get the full use of the issued tickets. So then he
filed a case. MUTUAL RESTITUTION
The issue here with respect to consent was - was there a vice of consent?
Viloria was trying to claim the annulment of the contract. He was asking for a refund.
The claim was based on a vice of consent based on the misrepresentation of the
Art. 1398. An obligation having been annulled, the contracting parties shall
agent. restore to each other the things which have been the subject matter of the
The SC said that if you have an allegation of a vice of consent, the burden of contract, with their fruits, and the price with its interest, except in cases
proof would be on the party alleging the vice of consent. That’s the general rule. provided by law.
In obligations to render service, the value thereof shall be the
What’s the exception? If you have someone who is illiterate or who could not basis for damages
understand the language of the contract and there’s an allegation of fraud.
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Example: Mutual Restitution malicious act of X, then X will no longer be entitled to file because he could not
In this case we have a contract of sale. return the property.
X sold property to Y in exchange for a price. We will assume that X consented to this
contract because of fraud perpetrated by Y resulting in the vitiated consent of X. So in If it is loss through the fraud or fault of X, X could not file an action for annulment
this case who could file the action? X only. Y cannot allege the vitiated consent of X regardless of the fact that X was the aggrieved party.
and file a case for annulment. X can file the action. If there will be an action for
annulment, a consequence and a requirement of annulment is mutual restitution. What if the property was lost not through the fault of X?
In case of an annulment of a contract, Y should return the property to X, X should Let’s say it’s lost through a fortuitous event. What should be the rule?
return the price less damages. My sense is X should be allowed to return the monetary equivalent of the property
If X will file an action for annulment, X should be ready to return the price. If X is and then claim damages against Y - the one who caused the vice of consent.
not ready to return the price, then there could be no action for annulment. But there’s a contrary view - X should bear the loss because at the time of the loss, X
was owner. This is only a voidable contract.
My sense of the possibility of the return of the money is based on the fact that
Art. 1400. Whenever the person obliged by the decree of annulment to
the law does not intend to reward Y by penalizing X for the loss of the thing due
return the thing can not do so because it has been lost through his fault, he
to a fortuitous event.
shall return the fruits received and the value of the thing at the time of the
In that case, there are similar provisions of law that should allow X to return the
loss, with interest from the same date.
monetary equivalent.
Art. 1401. The action for annulment of contracts shall be extinguished when What if instead of a vice of consent you have incapacity.
the thing which is the object thereof is lost through the fraud or fault of the What should be the rule?
person who has a right to institute the proceedings.
Art. 1399. When the defect of the contract consists in the incapacity of one
If the right of action is based upon the incapacity of any one of the contracting
of the parties, the incapacitated person is not obliged to make any restitution
parties, the loss of the thing shall not be an obstacle to the success of the
except insofar as he has been benefited by the thing or price received by him.
action, unless said loss took place through the fraud or fault of the plaintiff.
Let’s say the thing was lost from the fault of X, could X still file an action for
Art. 1402. As long as one of the contracting parties does not restore what in annulment?
virtue of the decree of annulment he is bound to return, the other cannot be Take note, if the aggrieved party is an incapacitated person, that party will be
compelled to comply with what is incumbent upon him. prevented from filing the action, only if that party benefited from the
transaction.
The benefit should be reasonable. If there is a loss of the property, technically, there’s
Example: no benefit. X would still be entitled to file the action. The rule on mutual restitution
The property was with X, for X to successfully file an action for annulment, X should applies only to the extent that the incapacitated party benefited from the
be in a position to return the property. If the property, let’s say, is lost due to a contract.
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If there’s no benefit, the rule on mutual restitution will have no place. The RULES ON APPLYING MUTUAL RESTITUTION TO VOIDABLE CONTRACTS
incapacitated party can file the action regardless of the existence of the object to be
returned or the reason for the loss of the object. VOIDABLE BECAUSE OF VICE OF CONSENT
THING TO BE RETURNED LOST CANNOT ASK FOR ANNULMENT

WITH FAULT/FRAUD OF OF CONTRACT
Art. 1402. As long as one of the contracting parties does not restore what in AGGRIEVED PARTY
virtue of the decree of annulment he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him. THING TO BE RETURNED IS LOST MUST RETURN MONETARY
WITHOUT FAULT OF AGGRIEVED EQUIVALENT TO AFFECT
PARTY ANNULMENT OF CONTRACT
Now what if there’s already a decree of annulment?
VOIDABLE BECAUSE OF INCAPACITY
If there’s judgment, there will be an order directing both parties to return what was
received less damages. Upon annulment of the contract, the parties are bound to
If reasonably benefitted from
comply with the judgment including the mandate on mutual restitution. If one party THING TO BE RETURNED IS LOST WITH thing: NO ANNULMENT
does not restore what is incumbent upon him, then the other party will not be obliged OR WITHOUT FAULT OF INCAPACITATED
to return also. Why? PERSON If no benefit:
Aside from the rule on mutual restitution, because it is a reciprocal obligation. ANNULMENT ALLOWED
What if the thing decreed to be returned is lost due to the fault or fraud of one party?
Then you apply the rule I mentioned earlier. There will just be return of monetary Theres this interesting case.
value with interest from the time of loss, that’s the provision of law. The thing could
not be returned because it was lost through a fault of one party, that party shall return There’s a real estate developer, a realty company that developed several parcels of
the fruits received and the value of the thing at the time of loss, together with interest land as residential lots. In the inventory of the realty company there were four lots.
from that day. The realty company sold one of the lots to X - lot 2, but in reality what was sold was
lot 3. Then there’s payment of the price. It’s a vacant lot.
What if the loss was without the parties’ fault? X did not take possession immediately of the property, several years passed, X went
If it’s due to a fortuitous event, then it will exempt one party from the performance of abroad, and upon return he wanted to get the property. X went to check the property
the obligation. Let’s say the thing sought to be returned by decree was lost through a and he saw lot 2 which had now a house.
fortuitous event, that should exempt the party from further liability. Take note, what the realty company intended from the get go was to sell lot 3,
Of course that party will not be entitled to the thing to be exchanged for the return of but instead sold lot 2, documented it by giving the certificate title of this particular
that thing lost. If the party is the plaintiff, the party may have the option to pay the lot. X wanted to get lot 2, realty company said ‘no I sold to you lot 3.’ But X was
monetary value of the lost property and compel the defendant to return what was insistent.
received. Just like our earlier example, the aggrieved party can return the monetary
value. That’s the alternative.
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Now, realty company wanted to annul the contract based on mistake - that there was UNENFORCEABLE CONTRACTS
a mistake as to the object; so there was vitiated consent because of mistake.
Voidable? Take note: unenforceable contracts do not refer only to contracts covered by the
Statute of Frauds
SC said it was voidable because there was mistake. The realty company erroneously
consented to the contract. It was selling only lot 3 but due to an honest mistake sold Art. 1403. The following contracts are unenforceable, unless they are ratified:
lot 2. SC said that’s totally wrong. 1) Those entered into the name of another person by one who has been given no
If you look at this case, who was at fault? authority or legal representation or who has acted beyond his powers;
The real estate company. The real estate company was in the industry, it ought to 2) Those that do not comply with the Statute of Frauds as set forth in this number. In
know its inventory. It should know what lot it was selling. 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
Between the two of them, the realty company would be in a better position to know
by the party charged, or by his agent; evidence therefore, of the agreement cannot
or identify the object of the contract.
be received without writing, or a secondary evidence of its contents:
If there was a mistake made, it was the fault of the realty company. Therefore, as
a) An agreement that by its terms is not to be performed within a year from the making
the party causing the mistake, the realty company could not file the action thereof;
because it was the author of the cause of the mistake. But that’s the SC.
b) A special promise to answer for the debt default or miscarriage of another
How do we arrive at the same result - that in effect they have to return what was c) An agreement made in consideration of marriage, other than a mutual promise to
received from the other less damages? marry
The SC got the result correctly but the reason was fraud; it said that there should be d) An agreement for the sale of goods, chattels or things in action at a price not less
an annulment based on honest mistake. than 500 pesos, unless the buyer accept and receive part of such goods and chattels,
Take note, honest mistake should not fly because if you’re the author of the 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 i made by
cause of the mistake, you’re not supposed to benefit from your wrong or your
the auctioneer in his sale book, at the time of the sale, of the amount and kind of
negligence.
property sold, terms of sale, price, names of the purchasers and persons on whose
In this case, the SC somehow rewarded the real estate company by saying that they
account the sale is made, it is a sufficient memorandum;
could annul because of an honest mistake. e) An agreement for the leasing for a longer period than one year or for the sale of real
But we want the result arrived at by the SC - that there should be mutual restoration property or of an interest therein
of what was received, and this contract should be set aside. f) A representation as to the credit of a third person
How do we reach that conclusion without violating the rules on contracts?
There was no consent or agreement on the object. 3) Those where both parties are incapable of giving consent to a contract
They did not agree because the company was identifying lot 3, X was agreeing on lot
THREE CATEGORIES OF UNENFORCEABLE CONTRACTS
2, so there was no agreement.
That could have been a better explanation - that there was no agreement therefore 1.NO COMPLIANCE WITH THE PROPER FORM ( STATUTE OF FRAUDS)
you have a void contract and this should be set aside. The real estate company 2.CONTRACTED BY AN UNAUTHORIZED PARTY
should be held liable for damages for the wrong done. 3.BETWEEN 2 INCAPACITATED PARTIES
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1. UNAUTHORIZED CONTRACT
Status: Unenforceable per lower court because the mother entered without authority
from daughter (only half credit from JSP)
Art. 1404. Unauthorised contracts are governed by Art 1317 and the Answer of JSP: void because there is a peculiar requirement – if an immovable
principles of agency in Title X of this Book property is sold by an agent, there must be a Special Power of Attorney (written).
Based on the laws on agency, without written authority, contract is void.
These contracts are entered in the name of another by one who has not been given
legal authority or one that has acted beyond his given authority, there is no proper
representation of the principal GENERAL RULE WHEN IT COMES TO UNAUTHORIZED CONTRACTS
Example: Sale of Property by unauthorized agent

UNAUTHORIZED CONTRACTS ARE UNENFORCEABLE
So theres an owner of a property. X entered int a contract of sale with Y, for a price on
the premise that Y is a representative of the owner. Y didn't have basis that X has
authority. EXCEPTION LAID DOWN IN NIDO V. ALCANDA
This contract is unenforceable against the owner because owner did not consent. The
WHE IMMOVABLE (REAL ESTATE) PROPERTY IS SOLD BY AN AGENT
consent of Y is not the consent of the Owner.
WITHOUT A SPECIAL POWER OF ATTORNEY, THE COTRACT IS VOID.
X may have recourse on Y as an agent who acted without authority and Y may be held
liable for damages.
However, the owner may ratify the contract of sale by ratifying the authority of Y This case shows that the General Rule is: an unauthorized contract is unenforceable,
but by virtue of a special law, it is void. Agency should be in the form of SPA, without
GENERAL RULE which, contract entered by agent is void not just unenforceable.
IF THERE IS NO CONSENT OF PRINCIPAL, THE CONTRACT IS

UNENFOREABLE AGAINST OWNER Ill give you another case.
CASE ( UNAUTHORIZED AGENT) There’s a conjugal property, husband died, they have 3 minor children
Property: Half goes to wife, other half goes to 3 children and wife
1. ALCANTARA VS. NIDO ( Mother as agent of daughter) Wife sold the property upon husband’s death
Special Power of Attorney Requirement
Status: With respect to the share of wife - valid. (half she owns; ¼ of the other half,
There was a mother who has a daughter; daughter has property she owns as heir)
On Day 3, daughter died, mother became administrator This is not future inheritance because succession already opened upon death of
On Day 1 Mother conveyed property to X (through a Deed of Absolute Sale, with husband; by operation of law, ownership vested on the heirs, though there’s no
payment of price) partition and distribution yet.
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This cannot be voidable because there’s no vice of consent Status: Voidable. The demand of the guardian amounted to a ratification of the
Share of children? defective consent of Minor 1, therefore you only have 1 incapacitated party
In 1 case it was held unenforceable because wife is unauthorized (no court order) (Remember we learned that when only one party does not have legal capacity, the
In another case it was held void because of the lack of legal requirement - court contract is voidable)
approval
Answer of JSP: Void because of the lack of the special requirement of court approval COS may be annulled at the instance of Minor 1’s party (as the seller)
[assuming property is worth at least 50k] (this will not appear in the exam per JSP)
( remember the family code? When there are guardians who wish to dispose of
property of their wards that is over 50,000 it needs court approval) III. STATUTE OF FRAUDS (SOF)
As a rule, contracts have no required form, they are generally consensual. The
2. INCAPACITATED PARTIES moment parties agree on the object and cause, you will have a contract, unless the
law provides or requires a specific form for the enforceability, validity, or proof of the
contract.
Art. 1407. In a contract whee both parties are incapable of giving consent,
express or implied ratification by the parent, or guardian, as the case may be, a. Validity – ie. agreement to pay interest shall be in writing otherwise void
of one of the contracting parties shall give the contract the same effect as if b. Proof – ie. establishment of express trust involving immovable may only be proven
only one of them were incapacitated. by written instrument and not through parol evidence
If ratification is made by the parents or guardians, as the case may be, of both c. Enforceability – ie. Statute of Frauds (example of a law requiring a form for
contracting parties, the contract shall be validated from the inception. enforceability)
Example: Minors entering into a contract In a case, Supreme Court somehow slipped and said that SOF is only for convenience
Minor 1 entered into a Contract of Sale with another minor, involving a property for a No. this is wrong. The SOF is for enforceability of a contract.
price What is for convenience?
Status: Unenforceable, either party may recover Art 1358 -must be in a public document or notarised
Remember: the requirement is that both parties are incapacitated. It doesn’t matter if
partial payment has been made. So whats the purpose of the SOF?
Because mortals like you have faulty memory, this is for you to remember and to
What about if we have this case: prevent perpetration of fraud, the law provides that certain contracts be in
Day 1: Minor 1 delivered the property written form as documented proof.
Day 2: the guardian of Minor 1, with appropriate authority, made a demand for Take note: documentation need not be a formal contract, what’s required is there
payment ( it’s now assumed that the guardian could have disposed the property on is some kind of written memorandum or note establishing the contract signed by
behalf of Minor 1) the parties, assuming the contract is sought to be enforced.
The demand was made on the guardian of the other minor.
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Basis of SOF: the story of Alibaba and the 40 Thieves – He forgot the password Clearly there was consent by both parties. That would amount to a proper written
because he did not write it down! note or memorandum, assuming the relevant party could establish authorship
Remember: SOF applies only to executory contracts – the moment a contract because in that case the party could establish all the elements of a valid contract.
enumerated in the SOF is partly executed or partly performed by a party, that
contract will automatically be taken out of the coverage of the SOF.
Example: Through Text
Why? Yes, as long as you can establish authorship
Because of the underlying purpose of the SOF which is to prevent perpetration Email? Yes
of fraud. Tissue paper? Yes
There is no requirement
If you allow a partly executed contract to be covered by SOF, you will actually aid Used? Yes, as long as it’s in written form
someone in defrauding another because the party who has already benefitted from In this whiteboard? Both parties signed, notary of permanence in the
the performance can say, “it’s unenforceable, you cannot go after me and I get to fixed seal and signed, SOF for the enforceability
keep what you pay in the meantime”. YES, because there’s no requirement of of a written contract. As
This defeats the very policy behind the SOF. permanence.
long as it is written down
Contracts enumerated in Art. 1403 (2) should be in writing to be enforceable. So even if it’s eventually erased, it is in writing. and notarized, it is
You could take a picture and present it as considered enforceable
WHAT SHOULD BE IN THE WRITTEN INSTRUMENT? secondary evidence
Minimum should be the Take note: There is no requirement of
1. object; permanence, what is required by law is that it
2. cause; and must be in writing.
3. consent of the party against whom the contract is sought to be enforced.
Question:
Meaning:it should be written by the party against whom the contract is sought
to be enforced. Example: Video recording not enforceable contract
I’m selling to Acuyong real estate, purely executory contract.
Example: Email as Valid Written Instrument No one in this class has a pen and paper but notary is present.
There is an exchange of email between seller and buyer regarding a sale of real
I took a video on my phone, stating my personal particulars and that I’m
property, purely executory.
In the email, it could be gathered that there is a: selling my property to Acuyong and Acuyong is buying it for x amount.
1. definite property We faced the camera, said that we agree to this sale and swore before the
2. definite price to be paid notary public. Somehow the notary public got the seal affixed on the camera
3. other terms of the contract and we both made a thumb sign to show consent.
The next day I changed my mind, I don’t want to sell my property to Acuyong
anymore.
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Can Acuyong compel me to execute the contract in proper form? Example of sufficient form
NO, because it is unenforceable. Acuyong offered to purchase property from me and he made an offer specifying the
Remember: requirement for the action to compel 1 party to execute the proper property and the price
form is the contract should be valid and enforceable I made a note saying, “I accept your offer to purchase my property for x amount” and
gave it to him
Here, we have a valid contract because we agreed on the object and the cause.
Suffice? Yes, even if Acuyong did not sign. He made an offer and I accepted, made a
Do we have an enforceable contract? note and signed. He’s the one enforcing, so by that fact, it could mean that he
No, because it is not in writing. consented to that contract.
Does it matter that it is on camera?

No. The law is dated and it requires that it must be in writing. Case: exchange of snail mail
Of course, Acuyong can say it is written in digital form, 01001. From correspondences, court was able to gather the terms of the contract and said
Still no, what is required is it must be in writing. that there was a valid contract enforceable under SOF
Take note: contracts mentioned in the SOF should be in writing to be enforceable but
2. TORCUATOR VS. BERNABE (Ayala Alabang) that defense of unenforceability may be waived.
SPA not valid written form under the SOF
Example of waiver of defense of unenforceability:
2 documents were involved in this case Let’s say I sold to Acuyong real estate for a price, purely executory, not written, and
There’s a SPA and some kind of a memorandum therefore unenforceable.
Acuyong sued me in court, on the witness stand I testified that we had a conversation
Were those documents sufficient to fulfill the mandate of the SOF that there must be about the terms of the contract (price, etc.) – the only problem is that it’s not written –
a written note or memorandum of the contract? that was my defense, there’s an agreement but it is only verbal
Supreme Court: SPA in this case was not enough and even the memorandum of Enforceable? No, because the relevant party, me in this case, should have raised the
agreement, because the SPA was only an authorization to construct an issue of unenforceability, if parol evidence is used, meaning testimony, and I did not
improvement on the lot. object, there would be a waiver. In effect therefore, there would be an enforceable
There’s no mention of any sale or agreement on the price. contract.
On the other hand, the memorandum was unclear on the terms of the contract
especially on the price as well as the object. Remember: In failing to object parol evidence establishing the contract, defense
Hence, the court said, those documents would not suffice to fulfill the requirement of of unenforceability may be lost, amounting to a waiver.
SOF.
What could be an example of a sufficient documentation?
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3. ORDUNA VS. FUENTEBELLA

SOF doees not apply to partially executed contracts You give maybe 100k or 50k. It should be good enough or if there’s a pen, you write a
check. Better yet, put 1k as partial payment for 60M, sign, and there’s receipt by me.
If you have an unenforceable contract, the contracts listed under SOF must be in Then take a picture of the check and take a video of me receiving it. So aside from
writing. However, the moment that contract is partially executed, it’s taken out of the partial execution you also have documentation. You can also write specifics of the
SOF. agreement on the check.
Take note: SOF does not apply to partially executed contracts. List of contracts under SOF (should all be in writing):
4. ROSENCOR VS. INQUING (reminiscent of Ang Yu and Equatorial) 1. An agreement that by its terms is not to be performed within a year from the
Right of First Refusal not contemplated under SOF: need not be in writing making thereof
- this is an executory contract – performance is made only after a year of
Pursuant to a Contract of Lease, Lessor leased property to Lessee executing the contract.
During the subsistence of lease, Lessor granted Lessee the right of first refusal. ie. undertake to render service a year from today
However, it was verbal. Lessor argues that because the right of first refusal was not in
writing, Lessee cannot enforce it. 2. in consideration of marriage other than mutual promise to marry
So is it enforceable? yes. its not part of the lis under the SOF. That list is exclusive. Not - this is actually a requirement of pre-nup (that it must be in writing)
all dealings with land necessarily have to be in writing; such as an option.
So remember, if its not in the SOF, it is enforceable even if it isn't in writing. 3. A special promise to answer for the debt, default, or miscarriage of another
. - surety or guarantee – an undertaking to pay in case of default of another
(take note of this as this is not in the civil code provisions on surety and
PARTIAL EXECUTION guarantees)
Example: When will performance be considered Partial execution? Example:

Acuyong bought property from Bel-air, he paid 1 peso. Borrower is supposed to pay Lender 10M pursuant to a loan contract
Partial execution? executed on Day 1, which is payable on Day 3, secured by surety, all verbal.
There is no jurisprudence on what is to be considered partial execution. -X made a surety undertaking, during the transaction on Day 1 - X told
Lender, “I will pay the moment Borrower doesn’t pay”, without any
Would payment of Php1 downpayment be sufficient? qualification. The only requirement is that on Day 3, Borrower should not
Maybe from a strictly jurisprudential point of view, it is, because there is partial pay.
payment. But from a policy perspective, it should not be, because otherwise -All done verbally.
fraud can also be committed by Acuyong saying there is partial execution by The loan is valid and enforceable but the surety is not. It must be in writing.
paying Php1.
If you’re Acuyong and you want to take it out of SOF, what should you do?
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4. agreement for the sale of goods, chattels, or things at a price not less than
100 Can it be cured?
– pretty useless Of course,
1. by ratification; or
5. agreement of lease for a period longer than 1 year, or sale of real estate 2. more properly by confirmation; or
property or of an interest therein 3. by waiver, in the case of introduction of parol evidence; or
4. by just executing the proper form.
– if there is already a continuing lease, you just compel the party to execute
the proper form or ask the court to fix a period under the context that the
parties intended a period
6. representation as to the credit of a 3rd person
– a bank is lending to Acuyong. As reference Acuyong gave me. Bank told

me, “can you make a warranty as to the solvency of Acuyong?” I said, “He
owns India and owns lands in Thailand, everything in anywhere of that
religion.” I cannot be held liable if my representation as to his credit turns
out to be wrong because it’s verbal. For me to be held liable, it must be in
writing, at the least, stating that I affirm as to the solvency of Acuyong.
Who can assail an unenforceable contract?
Art. 1408. Unenforceable contracts cannot be assailed by third persons
Only the contracting parties, unlike in voidable where a 3rd party who is prejudiced
can make use of the voidability of the contract - ie. Creditor may annul the contract to
get some payment from debtor as aggrieved party in that contract
Remember: In an unenforceable contract, only the contracting parties can assail

or raise the issue of unenforceability, 3rd party has no right to raise that issue.
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REVIEW: UNENFORCEABLE CONTRACTS So the underlying policy of the SOF. The reason is, or the purpose is to prevent fraud
and preclude injury.
How does it prevent fraud?
Unenforceable contract are valid. What does it mean when you have a valid contract? If there is written documentation of the contract, you don't need to rely on memory
You have a valid contract when you have all the requisites present: consent, cause alone. Also, there is a tendency for one party to perjure himself if its not written down.
and object. The SOF wants to avoid those consequences.
Even if unenforceable contracts have all the requisites present, there is a probem, this
is with respect to authority or capacity. Because of the underlying policy, it does not apply to executed contract. I
We said there were three kinds of unenforceable contracts explained this last time. If you apply the SOF rule to partially executed contracts, that
would promote fraud. One party can just say: oh its not written down you cannot
3 KINDS OF UNENFORCEABLE CONTRACTS enforce it, after he has gained partially from the contract. That cant be.
1. UNAUTHORIZED CONTRACTS The Statute of Frauds only applies to purely executory contracts.
2. WHERE BOTH PARTIES ARE INCAPACITATED
3. NOT IN COMPLIANCE WITH THE STATUTE OF FRAUDS RATIFICATION
If theres a defect int he form, how do you cure it?
1. UNAUTHORIZED CONTRACTS Ratificiation. How? Reduce it into writing, or it can be implied.

For example, when a party receives a benefit under the contract: that can be seen as
We’ve gathered this from Art. 1317. A contract enterd into without authority by one implied ratification. That will also amount to what?
party int he act of another shall be uneforceable. Partial performance.
Another instance is when theres an action based on an unenforceable contract and
We have that in the case of Alcantara. The authorization required from the sale of real one party does not timely object to the presentation of evidence that the contract is
property should be in the form of an SPA. If there is no SPA the contract is not only unenforceable. That amounts to a waiver.
unenforceable but its is void. So take note of that.
COMPLIANCE WITH SOF
2. BOTH PARTIES INCAPACITATED How do you show compliance with the form in 1403?
Example: DoAS signed by the parties with a specific description of the object and?
As i explained last time, it could happen that you can have this kind of contract and in fact you don't need to state the price. Why?
one party ratifies the contract. So from unenforceable, it becomes voidable. Will the contract be valid?
Yes. Because?
3. STATUTE OF FRAUDS CAUSE IS PRESUMED. The existence of a valid and lawful cause i spresumed.
Thats why there are other contracts where they’ll just write “ for value receipt”
The SOF provides the formal requirements for certain contracts. Memorise those.
Those are important. I wont go through them again.
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Take note, contracts under the SOF need not be in a public document. The only Is there a prescriptive period for unenforceable contracts?
requirement of the SOF is it must be in writing. So if its already in writing, its None. Its unenforceable so the period is irrelevant.
enforceable.
At the very least, a “written” contract should comply with the requirements set down Who may assail an unenforceable contract?
in 1403. They may be assailed only by the parties. NOT by third parties.
What will constitute a written note or memorandum?

VOID CONTRACTS
WRITTEN NOTE OR MEMORANDUM
1. It should be subscribed by the party against whom the contract is sought to be Art. 1409. The following contracts are inexistent and void from the
enforced
beginning:
2. It should contain at least the two elements- cause and object
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
Thats why in that case with the Ayala subdivision, both did not comply with the
3) Those whose cause or object did not exist at the time of the transaction
requirements of the SOF.
4) Those whose object is outside the commerce of men
The SPA: there was nothing about a sale
5) Those which contemplate an impossible service
The Memorandum: this was on the transaction and it was ambiguous.
6) Those where the intention of the parties relative to the principal object of
The courts said thats not sufficient.
the contract cant be ascertained;
7) Those expressly prohibited or declared void by law
As long as its written and it contains the requirements, its fine. It doesn't matter if
These contracts cannot be ratified. Neither can the right to set up the
its on a napkin or if its on a piece of toilet paper.
defence of illegality be waived.
Remember, the enumeration under the statute of frauds is EXCLUSIVE.

If its not a contract covered by the SOF and there is no other legal provision relating If you look at the enumeration, there are two kinds of void contracts. One, a contract
to fraud, no need for a written instrument. that lacks the essential element, and the other is contrary to or prohibited by law.
The case of Rosencor explained this. There was a lease contract and a verbal right of
VOID CONTRACTS ARE EITHER:
first refusal. The court said the right of first refusal is valid and enforceable even if it
was only a verbal agreement. 1. Contracts that lack an essential element
The SOF covers only sale of real property not the rights of first refusal or any other 2. Contracts that are contrary to law
transaction not amounting to a sale of real property.
So if its a transaction involving real property, and it doesn't involve a sale, that
will not be covered by the SOF.
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So when you look at the validity of a contract, certain objects in certain contexts make So remember, if its an illegal act that constitutes the contract, the government may
them unlawful. In another context, it will be lawful. You cannot say outright that is confiscate the proceeds. The only time a party can maintain an act based on an
contrary to law or morals. illegal contract is when a party is INNOCENT.
The validity or invalidity of a contract is oftentimes dependent on the context.
CASE
Art. 1410. The action or defines for the declaration of the inexistent of a
contract does not prescribe 1. MENCHAVES V. TEVES (fishpond)
Void because fishponds cannot be alienated. Contrary to law
Menchaves and Teves entered into a lease contract. Menchaves represented himself
There is no prescriptive period to declare a contract void. Its void no matter what you to be the owner of the fishpond. It was stated in the contract that Teves would have
do. You cannot ratify it also. the right to use the property without any disturbance.
The parties can, however, execute a new contract to cure or remedy the defect in the A fishpond is owned by the state. Remember the regalia doctrine?
void contract ( we are assuming it is not contrary to law). Menchaves cannot sell or lease anything he does not own and could not own.
Lets say it only lacks a specific object. Because this contract is contrary to law, its considered void.
Also,you cannot waive the defense of illegality. Its just like when you have a waiver of DEFECTIVE CONTRACTS
a right to prosecute a crime.
RESCISSIBLE VOID VOIDABLE UNENFORCEABLE
You cannot stipulate in your contract “ we are waiving any right based on the illegality
of the contract” That cannot be done. CAUSE lesion or economic lack of essential vitiated consent/ contrary to SOF,
prejudice elements;contrary incapacity unauthorized
to law agent, both minor
Art. 1411. When the nullity proceeds from the illegality of the cause or
object of the contract, and the act constitutes a criminal offense, both parties PRESCRIPTIVE 4 years none 4 years none
being in pari delict, they shall no action against each other and both shall be PERIOD
prosecuted. Moreover, the provisions of the Penal code relative to the

CURE WAIVER EXECUTE NEW RATIFICATION RATIFICATION BY
disposal of effects or instruments of a crime shall be applicable to the things VALID CONTRACT ACCEPTING
or the price of the contract. AGREEMENT,
This rule shall be applicable when only one of the parties is guilty; but the EXPRESS INTENT,
innocent one may claim what he has given, and shall not be found to comply AND FAILURE TO
OBJECT
with his promise.
WHO CAN ANY PERSON ANY PERSON ANY PERSON ONLY THE
OBJECT PARTIES ( NO 3RD
GENERAL RULE PARTY)
A party with unclean hands cannot recover or maintain an action, unless he repudiates the STATUS VALID VOID VALID UNEOFRCEABLE
contract before the purpose could be accomplished
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NATURAL OBLIGATIONS What is important in this case is the one performing must be aware that there is no
legal compulsion to perform and yet the party performs.
In this case, there can be no reversal or recovery.
Art. 1423. Obligations are civil or natural. Civil obligations give a right of
action to compel their performance. Natural obligations, not being based on Lets go to estoppel
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. ESTOPPEL
NATURAL OBLIGATION Art. 1431. Through estoppel, an admission or representation is rendered

A natural obligation does to have a juridical tie. There is no element of telling a party to a conclusive upon the person making it, and cannot be denied or disproved as
natural obligation to perform. That element is specific to a civil obligation against the person relying thereon
These provisions on natural obligations are more of rules of equity. There are some ESTOPPEL It assumed that there is a disparity of information
dated provisions here like 1426 and 1427. There are no more minors between 18-21. between the parties.
One party is bound by his Between the one committing estoppel: who has
The provisions on natural obligations recognise that natural obligations are not representations or actions complete info
enforceable. acted upon by another party. Other party: does not have info and could not
But if there is performance by a party to a natural obligation of the object, there can acquire info even if he exercised due diligence.
be no recovery or reversal of the performance.
Of course there is an assumption that there is full awareness that there is no legal There are two kinds of estoppel
obligation, that there is no juridical tie- no compelling element to mandate.
Example: Art. 1433. Estoppel may be in pais or by deed.

Contract of Sale. Seller sold property day 1 and same day buyer was to pay price but
buyer defaulted 1. ESTOPPEL IN PAIS ( Equitable estoppel)
11 years later, seller made a demand. Can seller demand?
No. Action has already prescribed. This contemplates a situation where a person is bound by certain acts or
representation acted upon another.
However, if B pays well aware of the prescription, B can no longer recover.
This is an example of 1424, payment of a prescribed obligations.
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The provisions are pretty self explanatory, but basically the common thread you have LACHES
to remember is the requirements of estoppel.
In estoppel, a person who made a representation cannot retract the
representation and prejudice someone who acted based on that representation Another principle related to estoppel is latches.
LACHES
REQUIREMENTS OF ESTOPPEL IN PAIS BASED ON JURISPRUDENCE
Failure or neglect for an unreasonable length of time to do that, which should have been
FOR THE PERSON SOUGHT TO BE FOR THE OTHER PARTY done earlier.
ESTOPPED
For the person sought to be estopped 1. Lack of knowledge or means of Basically, you sleep on your rights.
1. There must be conduct amounting to a acquiring the truth of the facts in
false representation, concealment of question
Example:
facts or misrepresentation 2. Good faith when acted on the conduct
Lets say a plaintiff has a case of action against a defendant. they entered into a
2. Intent or representation that the or misrepresentation
conduct shall be acted upon or shall 3. Actions ( acts were on such conduct) contract of loan. Plaintiff lent loan on day one, payment on day two. Then default.
influence the other party. For the 4. Change in that conduct would cause
purpose of leading the other party to prejudice The plaintiff has 10 years to file a case.
act on said representation Laches occurs if the plaintiff acted in such a way to lead the defendant to think
3. The party who makes the that the action would not occur.
representation, is aware of the actual So the plaintiff could be barred from action by laches. How?
facts and has compelte information Upon default by defendant, plaintiff made no demand, no demand letter and no
communication at all was made.
Therefore a party who may be estopped is one who knows the true facts and acted as Somehow, defendant got the message that plaintiff had forgotten about the liability.
if the facts were not so. Laches may apply.
A usual example is this: GENERAL RULE

A sold a computer to B. A said “ Im selling to yo this computer for 100 pesos”
B bought and paid. I did not say anything. I had an obligation to speak up but I did The government cannot be estopped.
not. Thats an example of estoppel.
Because I could have prevented a prejudice to B by saying that A could not sell it
because I own the laptop but I did not. Lets say a government agency made mistake in the implementation of a law and
Failing to act or failing to object to the transaction would lead to estoppel. subsequently a more knowledgeable officer corrected it. Those affected cannot claim
Clear? estoppel because the government cannot be estopped by acts of its agents.
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Even if its erroneous, the government can correct it and no one can claim estoppel in Normally, the truster will place properties with the trustee but the very benefit of the
that case. property will be with the beneficiary trustor.
Example:
Lets say the BIR has been following this procedure for collecting taxes all these years. LEGAL TITLE
Then an SC decision was issued saying the procedure of collection of taxes was Lets say i have a client who wants to set up a corporation. Client doest want to appear
against the law. So the BIR changed its procedure. The change was substantial. on records that he is a stockholder of the corporation. They split owenrship. So the
If we follow the rule on estoppel, can a tax payer affected by the change claim lawyer appears on record as a stockholder but its the client who has beneficial
estoppel? ownership. So on paper, the lawyer owns it. But the actual arrangement is that the client
No. because the state cannot be estopped has beneficial use over the shares.
Lets move on to trusts Example: Ayala Malls

Ayala wants to buy a lot in Pampanga. So what they’ll do is create a corporation
owned by them but it does not say Ayala is a shareholder. So Ayala will ask four
TRUST lawyers to be shareholders or nominees. The legal title will be with them and the
lawyers will execute a declaration of trust.
When we’re dealing with trusts, we’re dealing with the concept of absolute Whats a declaration of trust? : Acknowledgement of the trustees that they hold the
ownership. shares in trust and for the benefit of the trustor-beneficiary
Is this illegal?
No. Unless the identity of the party is an essential consideration of the other party.
ABSOLUTE OWNERSHIP
There are two kinds of trust the express and the implied
LEGAL TITILE + BENEFICIAL OWNESHIP
TWO KINDS OF TRUST
Art. 1440. A person who establishes a trust is called the truster; one in EXPRESS TRUST IMPLIED TRUST
whom confidence is reposed as regards for the benefit of another person is Required to be in writing( but there is no No documentation, characterized by law,
known as the trustee; and the person for whose epbenfit the trust has been required form), cannot be proven by parole and can be proven by parole evidence
created is referred to as the beneficiary evidence
KINDS OF IMPLIED TRUST

Generally, when you have a trust, you have
RESULTING CONSTRUCTIVE
1) trustor
2) trustee Intention to be placed in a trust NO INTENTION to place the tile in
3) beneficiary someone else's name. There is no fiduciary
relation or trust arrangement. It is by
operation flaw to prevent fraud to be
committed
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KINDS OF IMPLIED TRUST
RESULTING CONSTRUCTIVE
Art. :1448, 1449, 1451, 1452, 1453 Art 1450, 1454, 1455, 1456
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RECAP: TRUSTS So that’s the classic trust agreement. So when they enter into a trust agreement or
a trust declaration, then you have an express trust.
If it’s involving immovable, you need a written agreement to have an express
The usual arrangement is trustor beneficiary conveys legal title.
trust because you cannot prove an express trust concerning immovable by
parole evidence ( Art. 1443).
ILLUSTRATION 1: TRUST RELATIONSHIP So you have now the types. You have the 1) express and 2) implied trust.
TRUSTOR TRUSTEE Implied trust you have two – Resulting and Constructive. We explained last time,
LEGAL TITLE in Resulting Trust, this structure is present.
LEGAL TITLE/LEGAL
MAINTAINS BENEFICIAL However the parties do not have a formal agreement but the intention really was
OWNERSHIP
OWNERSHIP to create a trust agreement.
In a constructive trust, it’s the law that create the trust to prevent unjust
enrichment, or prevent iniquitous equation.
Or, another variation So in short, this one ( constructive) does not follow the classic arrangement.
In the classic arrangement, who creates/really funded the acquisition of the
ILLUSTRATION 1: TRUST RELATIONSHIP
property or the ownership? It’s the trustor.
In a constructive trust you don’t see that. In a constructive trust, there is
TRUSTOR TRUSTEE
LEGAL TITLE really no intention to hold property for a trustor/beneficiary.
LEGAL TITLE/LEGAL It’s just a result of a security arrangement or a result of mistake or fraud.
OWNERSHIP
BENEFICIAL So let’s take the examples of implied trust.

OWNERSHIP
Take note, the examples are not exclusive as long as they follow this
structure you can have an implied trust.
Hence as I explained by trust meaning proven by parole evidence. However the
But the common arrangement is like this (referring to first example).
burden will be on the person claiming the existence of an implied trust.
It’s the trustor who is also the beneficiary.
So how do you show?
But this one (referring to second) is when you want to create an estate for the
You have to show the flow of funds, that the funds or the acquisition of the
benefit of your children for example.
property or acquiring ownership was done/made by the trustor/beneficiary.
So when you look at the arrangement, when you have a trust arrangement, it’s
really the intention of the trustor to place legal title in a trustee.
Example: Marcos Regime
The trustee has a fiduciary obligation to the trustor to hold his property pursuant
During the time of Marcos, he had a lot of trustees, but legal ones to front for
to the instruction of the trustor/beneficiary and to manage or handle the property
him. Like the owner of San Miguel, Asia Brewery, etc. but when EDSA Revolution
for the benefit of the trustor/beneficiary.
came nobody wanted to admit. During martial law they would never attempt to
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deny that they were mere trustees because they will be dead the next day. So it So the Court said the trust agreement cannot work that way – cannot be
was a gentleman’s agreement – no documentation. So if you go to the used to make an illegal arrangement legal.
Sandiganbayan cases the Marcoses would claim that they really owned San Questions?
Miguel, some banks, Asia Brewery, etc. So that’s a trust agreement also.
In that case they do not even prove an implied trust. Why? Student: What’s the distinction between a trust and dummy?
Because it would be criminal. Now if you have that arrangement what’s your JP: A dummy arrangement is you have a holding but it’s for an illegal purpose.
incentive if you’re the trustee? Let’s say I have a principal. My principal is a foreigner. I would buy land for him.
Let’s say Mr. Acuyong becomes a cabinet secretary and then he doesn’t want to What I’d do is I’d buy and I’d own properties on his behalf. All the economic
move property in state. So he placed it in your name. benefits would go to him. All actions I would take follow his instructions. I’m the
So in case this comes out, what would be the incentive of the trustee? dummy, meaning it’s a nominee/trustee violating nationalization laws.
Deny and own the property, which is really what happened. Student: It only applies to a foreigner?
Claiming otherwise would expose them to criminal liability. JP: No. My example cabinet member using a dummy. So the dummy could
Of course there were some who ceded assets. I think it was Campos (Unilab). acquire business on behalf of the cabinet member.
They ceded assets so they could go back to the Philippines.
Let’s now take Article 1448
Anyway that’s a trust arrangement. Why am I saying that?
To show you that you cannot have a trust whether express or implied to
shield an otherwise illegal transaction, like what we saw in the case of Tala. Art. 1448. There is an implied trust when property is sold, and the legal
estate is granted to one party but he price is paid by another for the purpose
of having the beneficial interest of the property. The former is the trustee,
CASE 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
1. TALA REALTY V. CA ( Bank Branches) the sale, no trust is implied by law, it being disputably presumed that there is
No trust created to shield illegal transactions a gift in favour of the child
Trust arrangements
In Tala, a bank, under the law, could only
hold the real estate of so much. So what the cannot be used by the Under art. 1448, seller sells property. Buyer pays the price. But title was placed
bank did in Tala was to place it in the name trustee to make otherwise under X.
of someone else, place it in the name of illegal arrangements In this transaction S sold the property and buyer paid the price with the intention
some other company. of acquiring ownership, but somehow the property was titled with the name of X.
legal.
So, it’s a trust arrangement. If you go around You have here an implied trust – Resulting, because there’s really an intention
on the trust arrangement, you’ll see the to create the trust.
owner is still the bank.
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2. OCO v. LIMBARING ( Implied trust to child) Art. 1449. There is also an implied trust when a donation is made to a
Art. 1448 person but it appears that although the legal estate is transmitted to the
donee, he nevertheless is either to have no beneficial interest or only a part
In the case of Oco v. Limbaring, X was a child. If you have this arrangement, take thereof.
note of the qualifying provision of art. 1448: If the person to whom title is
conveyed is a child, legitimate or illegitimate of the buyer paying the price,
then it’s a disputable presumption that there is a donation or a gift in favor You have a donor and donee. There’s a donation of property but this guy will only
of the child. have legal title, will never have the benefit of ownership. This is an implied –
Resulting trust.
GENERAL RULE UNDER 1448

ILLUSTRATION 3: ARTICLE 1449 ( RESULTING)
NO BENEFICIAL
When property is sold and the legal estate is granted to one party but price is paid OWNERSHIP
by another for the purpose of having the beneficial interest of the property: PROPERTY
IMPLIED TRUST IS CREATED DONOR DONEE
IMPLIED, RESULTING TRUST
EXCEPTION LEGAL TITLE
When trustee is child of the the party paying the price, beneficial trust is created.
Art. 1450. If the price of a sale of property is loaned or paid by one person
So general rule, if you have this situation, buyer intended to acquire property buy for the benefit of another and the conveyance is made to the lender or payor
title was placed under X, that would be an implied trust. With X being the trustee. to secure the payment of the debt, a trust arises by operation of law in favour
It’s a resulting trust. of the person to who the money is loaned or for whom it is paid. The latter
However, if X is the child of the buyer, there is a disputable presumption that a gift may redeem the property and compel a conveyorce thereof to him.
was intended.
Who will have the burden of disputing the existence of a donation?
The buyer or someone who may have been prejudiced by the arrangement. There’s a lender who extended a loan to borrower.
The purpose of the loan is to pay the price to seller. So lender extended the loan
to buyer for the purpose of funding buyer’s payment of the price.
ILLUSTRATION 2: ARTICLE 1448 ( RESULTING)
LEGAL TITLE But somehow, the title of the property was placed in the name of the lender.
PROPERTY IF CHILD: So buyer plans to acquire property from seller. To pay the price, buyer borrowed
X DONATION from lender. The lender extended a loan to buyer applied in payment of the price.
SELLER
PRICE BUYER
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ILLUSTRATION 4: ART. 1450: CONSTRUCTIVE Example of cabinet member. Let’s assume it’s legal now.
Mr. Acuyong conveyed property to her because she represented that she will
hold the property on his behalf as trustee.
SELLER There’s no transaction just a verbal agreement – implied trust. Usually that’s the
case. Last time somebody was asking why not annotate?
PRICE Because that will delete the purpose of the trust.
PROPERTY The moment you annotate it on the property, then you now disclose the
principal.
LENDER BORROWER
LOAN ILLUSTRATION 5: ART. 1453: RESULTING
LEGAL TITLE- SECURITY
CONVEYANCE OF LEGAL TITLE
(NO TRANSACTION) TRUSTEE
This is only for security to ensure payment by buyer of the loan obligation to the TRUSTOR
lender. So this is an example of a constructive trust. REPRESENTED THAT HE
WOULD HOLD PROPERTY
ON BEHALF
Student: Whats the difference between this arrangement and financial leasing? AS TRUSTEE
JP: In financial leasing, it’s a legitimate arrangement. So the financing company

will buy equipment from supplier. But the financing company beforehand already
has a contract with manufacturing company for a financial lease. So the Art. 1454. If an absolute conveyance of property is made in order to secure
manufacturing company needs the equipment. the performance of an obligation of the grantor toward the grantee, a trust
The financing company would buy the equipment and lease it to the by virtue of law is established. If the fulfilment of the obligation is offered by
manufacturing company. The manufacturing company will pay rent instead. So the the grantor when it becomes due, he may demand the reconveyance of the
manufacturing company has no ownership interest on the equipment. It is actually property to him.
owned by the financing company.
So there is no trust arrangement. The absolute ownership is with the
financing company. ILLUSTRATION 6: ART. 1454: CONSTRUCTIVE
LOAN
Art. 1453. When property is conveyed to a person in reliance upon his CREDITOR DEBTOR
DoAS (by way of security)
declared intention to hold it for, or transfer it to another for the grantor, there
is an implied trust in favor of the person whose benefit is contemplated
253
SC said this is a pledge. So it’s possible that the SC will say that this is a pledge
Let’s say you have a creditor and debtor. Debtor owes P10M to creditor. but there is a statutory basis for this arrangement – Article 1454.
To secure payment, there is DoAS by the debtor to the creditor of a property, but This is an absolute conveyance. When you say “assignment of shares” this is
there’s a qualification - Only by way of security. actually a sale.
You have here a constructive trust. Absolute but there is a qualification by way of security. Therefore, it could
There’s really no intention to create a trust, just a security arrangement. have been recognized as trust. But as I said, there are cases saying this is a
If it involved real property, this could have been a real estate mortgage if it’s pledge but there is also a case saying this a an implied trust.
documented as a mortgage.
But it is documented as an absolute conveyance meaning title was given to the
creditor, but only by way of security. ILLUSTRATION 7: MANILA BANK v. TEODORO
If it’s documented as a real estate mortgage then it’s a mortgage.
Of course there are cases when the court will say this is naturally a mortgage, just
LOAN
like what you see in the case of:
CREDITOR DEBTOR
Assignmet of Shares of stock by
3.MANILA BANK V. TEODORO (pledge of shares) way of security
Constructive trust by way of pledge
There was an assignment of shares of stock by way of security. ALTERNATIVE:
If you have an alternative arrangement, if you want to secure a loan with shares of
LOAN
stock, you do a pledge.
Let’s say you have a lender who extended a loan to borrower. CREDITOR DEBTOR
PLEDGE (Share)
Borrower has an obligation to pay and as security there will be a pledge of shares.
So the lender will give the loan to the borrower. Borrower will agree to pay the
loan obligations upon the term of the contract and to secure it will pledge shares.
The pledging will involve the certificates covering the share, to be physically
Maybe you’ll ask “why will the creditor go for this?”
transferred to the lender.
Assignment by way of security rather than a pledge.
But the title for registered owner will still remain the borrower.
If you have an assignment you have a different set of rules. If it’s
However, in pledge, there is a physical transfer of the certificates covering
characterized as a trust than the trust rules will apply. If it’s a pledge, then
the pledged shares.
rules of pledge.
If the borrower defaults, the lender can share the shares following the formalities
Several years back, it was taxed differently.
of law.
So in the case of Manila Bank, you have the same arrangement. There’s a loan
arrangement and to secure it, instead of a pledge what was done was an
The assignment by way of security is not subject to documentary stamp tax.
assignment of shares by way of security.
254
So the point of Manila Bank is just to show you that the same arrangement Let’s say you have X who has a property and three heirs (A,B,C).
may be legally characterized differently, either as a pledge or as a trust. X died.
The property is unregistered meaning there’s no proper documentation but X
was owner for a long time, possesses the property.
Art. 1455. When any trustee, guardian or other person holding a fiduciary When X died, A, B and C succeeded X by operation of law. Now you have this
relationship uses trust funds for the purchase of property and causes the divided among the three but still no titling.
conveyance to be made to him or to a third person, a trust is established by So after several years, A and B entered into a partition agreement with sale.
operation of law in favour of the person to whom the funds belong. Meaning A and B divided the property between them and sold it to buyer, D.
So if you look at this example, who are the owners?
This is kind of self explanatory. It should be A, B and C.
When a trustee or guardian who is entrusted with the administration of a truster or So when A and B sold it to D, was the sale valid?
minor’s funds uses the same to buy property and somehow, has caused the The sale is valid with respect to the shares of A and B but not with respect to
property to be registered under his name or some other third party, an implied C.
trust is created by operation of law in favour of the truster or the person who With C’s share, D is a trustee based on an implied trust because D acquired it
owns the funds used to buy the property. either due to fraud or mistake.
Property was conveyed to D without consent of C, one of the owners.
Art. 1456. If property is acquired through mistake or fraud, the person What’s important here is unregistered land.
obtaining it is, by force of law, considered a trustee of an implied trust for the Because if it was registered and it was sold to D by A and B, C will retain the
benefit of the person from whom the property comes. ownership.
ILLUSTRATION 8: ARTICLE 1456 ( CONSTRUCTIVE) 4. AZNAR BROTHERS v. AYING

LEGAL TITLE Prescription of an implied trust
A
In this case, the court explained this provision and this scenario.
X PROPERTY
D D is now the trustee.
PROPERTY: From when do you reckon the period within which C could compel D to
(UNREGISTERED) B reformate?
IMPLIED TRUST Let’s say D registers the sale in his name. D now has a certificate of title. You
reckon the period within which to file the action for reconveyance from date of
C registration.
If there is no registration, it will be from the time C becomes aware of the sale,
assuming C is not in possession.
255
Because if C is in possession it will be incumbent upon D to sue C because how

could C lose ownership, C has possession.
Or D has to repudiate the ownership rights of C. So if there is no registration,
assuming C had no possession, from knowledge of the sale. Art. 1106. By prescription, one acquires ownership and other real rights
That’s why in the case of Aznar, the SC made a distinction between two heirs. through the lapse of time in the manner and under the conditions laid down by
One heir had earlier notice or knowledge and was therefore barred by law.
description. The action was filed beyond the 10-year period. In the same way, rights and actions are lost by prescription.
The other one was timely filed within the 10-year period.
(The period to file the action in this case is 10 years because it’s a based on trust
ACQUISITIVE EXTINCTIVE
therefore an action based on law)
A mode of acquiring ownership A right of action is lost through the lapse
Student: Are time deposits recognized as trust? of time
JP: No. You’re actually the lender. You’re lending money to the bank.
Example Trust Funds: PRESCRIPTION

I’ll give you an example of a trust. When you deal with prescription, you’re dealing with a lapse of time. After a
If you have moneyed parents, you ask your parents to establish a trust for you. certain period, a person may acquire property, or may lose property, or may lose a
Let’s say parent put 50M in a trust in a bank ( JP Morgan). This will be for the right of action.
benefit of child. There will be vesting periods.
Let’s say by 25 the child will receive income. WHO CAN ACQUIRE PROPERTY BY PRESCRIPTION?
By 30 the child will receive 50% of the principal.
By 40 another 50%.
Just to make sure the child doesn’t go penniless. This is a trust. Art. 1107. Persons who are capable of acquiring property or rights by the
JP Morgan will be the trustee managing the asset. It will incest it in a lot of things, other legal modes may acquire the same by means of prescription.
the purpose is to pay the income and the principal to the child following the Minors and other incapacitated persons may acquire property or rights by
instructions of the principal. prescription, either personally or through their parents, guardians or legal
representatives.
So if you have moneyed parents tell them “Why don’t you create a trust for me?”
In fact that’s the one being done by foreign banks several years back. The local
banks were complaining because these private bankers talked to these rich Pretty much anyone. Even minors can acquire because it’s for their benefit.
people in the Philippines and they asked them invest. Usually this is one of the
investment avenues to create a trust for children (by the way there’s a threshold.
For foreign it’s about 5M USD. For locals 5M Php will do).
256
AGAINST WHOM CAN PRESCRIPTION RUN? Prescription can run against anyone who is capacitated or is in a position to
defend himself/herself. And you can be a natural or juridical person. Except,
Art. 1108. Prescription, both acquisitive and extinctive, runs against: prescription does not run against the state.
1) Minors and other incapacitated persons who have parents, guardians or So you cannot sit on for example Rizal Park and stay there for 50 years. You will
other legal representatives; never acquire Rizal Park by occupying it. (We will assume it is untitled land)
2) Absentees who have administrators, either appointed by them before their
disappearance, or appointed by the courts; Of course when you deal with
The exception that excludes
3) Persons living abroad, who have managers or administrators government agencies you have to
4) Juridical persons, except the State and its subdivisions distinguish. Prescription may run state action from prescription
against a government agency is not absolute. If the
Persons who are disqualified from administering their property have a right to performing proprietary functions on government agency is
claim damages from their legal representative whose negligence has been the property. It means it’s used for
performing proprietary
cause of prescription business not for government service.
(business) functions,
Art. 1109. Prescription does not run between husband and wife, even
Like Rizal Park – for public use. Let’s say prescription may set in.
DBP owns unregistered land and then
though there be a separation of property agreed upon in the marriage
somebody possessed the land
settlements or by judicial decree.
adversely in the concept of owner for 50 years, prescription may set in.
Neither does prescription run between parents and children, during the
minority or insanity of the latter, and between guardian and ward during the
There are other instances when prescription will not run like between husband
continuance of the guardianship
and wife, parents and children. I think the policy behind this is it will destroy the
family if you have prescription.
GENERAL RULE: AGAINST WHOM CAN PRESCRIPTION RUN?
Art. 1112. Persons with capacity to alienate property may renounce
ONLY AGAINST PERSONS ( JURIDICAL OR PERSONAL) WHO ARE CAPACITATED OR IN
prescription already obtained but not the right to prescribe int he future.
A POSITION TO DEFEND THEMSELVES AGAINST PRESCRIPTION
Prescription is deemed to have been tacitly renounced when the renunciation
EXCEPTION results from acts which imply the abandonment of the right acquired.
PRESCRIPTION DOES NOT RUN AGAINST THE STATE

Persons with capacity to alienate property may renounce prescription already
obtained, but not the right to prescribe in the future. ( doesn't that sound like that
provision on the waiver of future fraud?)
257
PRESCRIPTION OF OWNERSHIP AND OTHER REAL RIGHTS There was a deed of sale between A and X.
Why was it in good faith?
Not because X paid money but because X purchased the property thinking in
good faith that A was really the owner.
KINDS OF PROPERTY We are assuming that X could not have known the arrangement between X and
REAL PROPERTY PERSONAL PROPERTY principal by exercise of due diligence.
So in this case, X will need to possess the property for 10 years.
lands buildings and other improvements all other things not real property The possession must be continuous and uninterrupted.
attached to the land It doesn’t mean occupying every square-meter of the land. It’s just exercising
control over the property.
ACQUISITIVE PRESCRIPTION
As a requirement of acquisitive prescription, the possessor must possess the
ORDINARY EXTRAORDINARY property in the concept of owner: 1) public, 2) peaceful and 3)uninterrupted.
REAL PROPERTY 10 30 When will there be interruption of possession?

PERSONAL PROPERTY 4 8
Art. 1120. Possession is interrupted for the purposes of prescription,
naturally or civilly.
Example: Unregistered Land

For example, we’re dealing with real property, unregistered land. Possession may be interrupted naturally or civilly.
How can a person acquire property of unregistered land by prescription? What is a natural interruption?
There are 2 ways.
1)Ordinary prescription. Art. 1121. Possession is naturally interrupted when through any cause it
Let’s say the caretaker, A, was acting for the principal in manning an unregistered should cease for more than one year.
land. And A was occupying the property for so many years so A then offered the The old possession is not revived f a new possession should be exercised by the
property for sale to X. same adverse claimant.
X, who never saw anyone else, bought the property.
X, after the sale, possessed the property. Art. 1122. If the natural interruption is for only one year or less, the time
In this case, how many years will X need to possess the property to acquire the elapsed shall be counted in favour of the prescription.
property by prescription?
10 years because in this case X acquired it with just title and in good faith. Let’s say in our example X ceased to possess the land for more than 1 year, that is
X acquired it by just title because he acquired it using one of the modes of a natural interruption.
acquiring ownership which in this case is a sale.
258
In short, X should possess it again for 10 years. If it’s less, then it’s not an Let’s say there is no perfected sale between X and A.
interruption. It would be deemed a new continuation of the old possession. Can A now acquire the property by prescription?
A should repudiate the ownership rights of principal, then possess the property in
What about civil interruption? the concept of owner, public and adverse to everyone.
But as long as A acts for and on behalf of principal, prescription will not run. That’s
Art. 1123. Civil interruption is produced by judicial summons to the why if somebody acts in a capacity that is consistent with the ownership of
possessor another property, prescription will not set in. Let’s say a lessee holding property or
a trustee.
For prescription to kick in, there must be a repudiation of that legal
Civil interruption, on the other hand, is by service of judicial summons.
relationship.
So in this example, if principal sued X for recovery of the property, and the court
issues summons on X, then that will amount to civil interruption.
In this case, if A repudiates the relationship or ownership interests of principal,
Meaning, if let’s say after possession by X of the property for two years, the
how many years will he need?
possession will no longer run depending on the outcome of this case.
30, because there’s no just title.
A did not acquire it using one of the modes of acquiring property (e.g.
Art. 1124. Judicial summons shall be deemed not to have been issued and
possession, donation, sale).
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 PRESCRIPTION CASE
proceeding to lapse
3) IF the possessor should be absolved from the complaint
1. TAN V. RAMIREZ
In all these cases, the period of the interruption shall be counted for the Compromise agreement not one of the ordinary modes of acquiring ownership
prescription
In the case of Tan there is litigation between two parties X and Y.
X sued Y, property dispute. Eventually they settled the case, there was a
However there would be no interruption if principal should withdraw the case or compromise let’s say one party did not pursue it. Let’s say the property ended up
if X wins. going to Y.
The issue was, did Y acquire it by
Student: Does possession mean natural occupancy? What if you built a wall? acquisitive prescription? Registered property can never
JP: As I said, exercising control. But you have to be there somehow. At least Again they are claiming ownership of an be acquired through
somebody on your behalf should be there. Your possession should be adverse. unregistered property. prescription. Only
Take note, in those cases if there is no valid civil interruption. Why do I emphasize it is unregistered?
The period before the interruption will be counted in favor of the possessor.
unregistered property.
Because if it was registered, no one
259
can acquire it by prescription. PRESCRIPTION OF PERSONAL PROPERTY

So in this case, there is a dispute. They settled it.
Under the settlement, Y will get the property. If you’re dealing with personal property, you have shorter period: 4 years for
So, will ordinary prescription kick in? ordinary and 8 years for extraordinary. Again what distinguishes ordinary from
Say C challenges the ownership. extraordinary is – in ordinary prescription, the possessor has just title and in
Can Y now say prescription let’s say 10 years already elapsed? good faith.
No because the compromise in that case is not a mode of acquiring Example:

ownership. A owns a bike. B stole the bike, sold it to C. C possessed it for 5 years. After 5
It was just for the purpose of ending litigation. years A sued C to recover the bike. C said he already acquired it by prescription.
How could Y acquire ownership using this compromise? The question is
They should have stated something in the compromise that said: “How do you characterize the sale?”
“Y recognized the ownership of X, X now cedes his ownership to Y, and now Y is Will C qualify as a fence? If not, then C will have the benefit of prescription.
now the owner.” If C is a fence, then C will never acquire it by prescription because it’s a crime.
Therefore a compromise will be approved by the court.
So aside from ending the litigation, there is a statement in the compromise Let’s say A-possessor in bad faith. Possessing the land without just title and did
whereby Y confirms the previous ownership of X and the conveyance of that not acquire it from anyone.
ownership to Y. Now A possessed it for 27 years.
So in that case, there will be ordinary prescription. A sold it to B.
The problem is that the compromise did not contain clauses of conveyance. How many years will B need to acquire ownership?
3 years.
So the court said that compromise was only for the purpose of ending litigation. The possession of the predecessor will be added to the possession of the
So be careful with that case. successor ( Art. 1138 (1)).
That case was on the premise that the compromise agreement did not But if B will insist he is a good faith possessor that will not make sense because
include terms and conditions that would have involved the recognition of the you will need at least 10 years to acquire property.
ownership of one party and the conveyance of that ownership to the other
party.
Student: Remedy to informal settlers?

JP: Arson.
If they’re squatters, you have to determine if it is untitled land. If it is titled, then
you just have to sue for ejectment.
If it is untitled, you have to sue for ejectment and commence titling of the land.
260
Succession When can you file the action because that is the reckoning point.
A B (Didn’t really understand JSP’s If you have a 10-year period, you have to record it from the time the right of
Bad faith Good faith discussion on this , he called it a action accrues – When there is a violation of a right of a party and that party has a
15years = 5 years counted 5 useless exercise. But what i can cause of action against the violator.
years gather is that when it comes to
  succession, the rational 3:1 Art. 1144. The following actions must be brought within ten years from the time the
A B
between extraordinary and right of action accrues:
Good faith Bad 1) upon a written contract
faith ordinary prescription is an
2) upon an obligation created by law
5 years 1 5 important consideration) 3) upon a judgement
years
A.Upon a written contract

Example there is a contract of sale.
Lender extended a loan to borrower.
EXTINCTIVE PRESCRIPTION Borrower’s obliged to pay on day 2. There’s default on day 2. We will assume
demand was dispensed with between the parties.
How many years will lender have to sue borrower for breach of contract? 10 years
When we deal with extinctive from day 2 – when the right of action accrues.
EXTINCTIVE PRESCRIPTION prescription, what is crucial is:  
B.Upon an obligation created by law
A mode of losing the right to action
When does the right of action accrue? We saw that in the case of Aznar. A,B and C inherited from x, deceased. Only A
and B sold to Y.
Y is owner with respect to A and B’s shares but trustee with respect to C’s share.
This is an implied trust. C will have 10 years, it’s an action based on law.
From where? Either from:
EXTINCTIVE PRESCRIPTIVE PERIODS a) registration or
b) from knowledge if there is no registration.
ACTION TO RECOVER MOVABLES 8 ( subject to acquisition by ordinary
prescription of the possessor) C.Upon a judgment
IMMOVABLE OR REAL PROPERTY 30 ( without prejudice to ordinary If you have a judgment, final and executory, you can sue for execution technically
prescription) within a period of 10 years subject of course to Rules of Court.
MORTGAGE ACTION 10
261
Why is this important? In our example earlier, borrower defaulted in payment to lender on day 1.
We can this this in the case of GF Equity v. Valenzona. Lender will have 10 years to sue right? How will that period be interrupted?
Coach Valenzona sued based on breach of contract. Because it was based on Demand.
breach, Valenzona had 10 years. If you’re not inclined to sue, just send a demand letter before the end of the 10-
If he sued as an employee, his action would already prescribe. year period. Every interruption will revive a new 10-year period.
So if you want a longer period, somehow you fit your theory in any one of
these types of actions. Usually based on a written contractor if there’s no
written contract you characterize it as an obligation created by law. END OF LECTURES.
OTHER PRESCRIPTIVE PERIODS
ORAL CONTRACTS 6
VERBAL CONTRACT FOR THE SALE OF UNENFORCEABLE, TRICK QUESTION

LAND
ALL OTHER ACTIONS NOT FIXED IN 5

THIS CODE OR BY SPECIAL LAWS
Art. 1155. The prescription of actions is interrupted when they are filed before the
court, when there is a written extrajudicial demand by he creditors, and when there is any
written acknowledgement of the debt by the debtor.
Now how you do interrupt prescription of action?
Three ways:
1) written demand
2) action in court
3) written acknowledgement of debt by the debtor
262
( JSP Gave 5 sample exam questions for to discuss and answer, i added the ones - Balance: 60 equal instalments
from hard notes na din so this is 10 questions) - Interest: 6% per annum
Day 2: Buyer paid all amounts due except last 5 instalments.
Day 3: Seller sent a letter notifying buyer that should there be non-payment there
will be rescission of the sale.
1.Owner and contractor enter into a service agreement/ service contract. In the
service contract, the contractor will provide the owner with equipment. Of course, A. Give 2 grounds for the buyer to challenge the rescission.
there will be a payment of a fee. Complete payment should be on or before
March 15th. Both parties know the relevance of this deadine because of the holy 1. There was substantial compliance by the buyer.
week. There is also a provision for penalty. In case of delay, penalties equivalent - 18% threshold for substantial compliance
to the contract price. Is contractor liable to pay the penalty?
2. Extra-judicial resolution cannot be done
A.When will penalty kick in? - It’s a letter
There must be default. - Resolution by default should be done judicially
You have to understand now, was there default? - This is just a codal provision formed into a problem
Yes. Time was of the essence. There was no need for demand because both
parties knew the importance of the period.
3. There was an investor. A French national. Wanted to purchase a Makati lot from
Answer in under 3 sentences: owner. Owner owns a house and lot. Owner suggested that investor and X enter
“Yes because the contractor was in default when he failed to complete the into an agreement whereby investor will pay the price but title will be given to X.
obligation in time. Demand was not necessary because time was of the essence.” So investor will fund the acquisition but title will be placed in the name of X. all
benefits of ownership will be given to investor but the title will be with X.
B. Assuming contractor can complete the project in three days, can the
owner resolve the service agreement? A. What is the agreement?
Yes, because time is of the essence.The slightest breach is substantial breach. Trust. Express Trust.
C. Is He entitled to damages? The investor will purchase the property but title will be placed in the name of X.
No, owner is limited to the penalty of the contract. (Remember, you have to understand the question because sometimes your
correct answer is for the next question.)
2. Day 1: Seller sold land to buyer in exchange of 10 million.

- 2 million down payment upon signing
263
B.What is the status of the agreement? Son affixed borrowers thumb print on a notarized deed of sale.
Void. It is contrary to law. You cannot do by trust that which you cannot do
directly. A. What is the status of the Sale?
Your instinct will tell you voidable because he is incapacitated.
But, remember that case of Paragas wherein there was total incapacity to give
consent.
Totally, consent could not have been given in this case because borrower was in a
4. Day 1: Owner sold only real property to buyer. Buyer is a close friend and coma. Hence it is void for lack of the consent from the borrower.
confidant of the owner. Price was 5 million. 50% discount from 10 million fair
market value.
Owner sold in order to fund a venture. The venture requires an investment of 7.5
million. Because owner was short of funds owner borrowed from lender.
Day 2: Lender extended a load to owner of 2.5 million.
This venture failed. At the time of the sale in Day 1, there was a case filed by Y
against owner. Y was to collect garnishment or funds from the owner.
Day 3: Due date. Assets of owner is zero (A=0)
A. Can lender rescind the sale between owner and buyer?

Yes, you have all the signs of fraud here. You even have a presumption of fraud.
Lender was a creditor subsequent to the sale.
Short answer: Lender was a creditor subsequent to the conveyance of the
property from the sale.
5.Day 1: Borrower owes lender 10 million from a loan.

Day 2: Borrower falls into a coma and is surviving only by life support.
Day 5: Maturity date of the loan.
Borrower has one son, his only heir.
Son anticipated that the borrower will not be able to pay lender on Day 5 in light
of the hospital bills.
Borrower has a house and lot, not the family home. He sold it to Bean, borrower’s
accountant for 15 million at a discount of 20% from fair market value.
264

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OBLIGATIONS AND CONTRACTS

SOURCES 3 CONSIGNATION 115 UNENFORCEABLE CONTRACTS 236

DELAY/DEFAULT 23 CONDONATION OR REMISSION OF 128 NATURAL OBLIGATIONS 245

DIFFERENT KINDS OF OBLIGATIONS 41 PRINCIPLES OF A CONTRACT 153

CONDITIONS 43 TORTIOUS INTERFERENCE 164

RESOLUTION 54 STIPULATION POR ATRUI 166

OBLIGATIONS WITH A PERIOD 62 ELEMENTSOF A CONTRACT 168

ALTERNATIVE OBLIGATIONS 68 CONSENT 168

JOINT AND SOLIDARY OBLIGATIONS 70 OPTION CONTRACTS 172

DIVISIBLE AND IDIVISIBLE 83 VICES OF CONSENT 182

HOW DOES A LAW DEFINE AN OBLIGATION?

Example 2: Agrarian reform laws

IlLLUSTRATION 1: CONTRACT OF SALE AS A RECIPROCAL OBLIGATION DEFAULT LEGAL REMEDIES OF A CREDITOR

What are the elements of contract in this case?

RECAP: WHAT IS AN OBLIGATION?

The reverse is true when it comes to tax exemption. A tax exemption is

ILLUSTRATION 4: BUILDING CODE

Example: ‘Solutio Indebiti’ or Unjust Enrichment

What are the rights of the creditor in this case?

(to be continued next meeting)

REVIEW: ELEMENTS OF AN OBLIGATION ILLUSTRATION 3: PROMISSORY NOTE

Juridical Tie: There’s no contract, but it will be based on tort or quasi-delict

What was peculiar in this case?

If there’s a contract to sell or CTS, there’s retention of ownership.

Consignation. What’s substantial breach?

ILLUSTRATION 6: CAUSAUL FRAUD

Example 2: Doctor/Dentist – Malpractice Why not go after the security guard?

2. MERALCO V. RAMOY (Electricity Line)

Ramoy was a resident of a property owned by National Power Corporation (NPC).

Of course, what's the default rule? The default ! CAR

Is that valid? CASE

Illustration 2: Loan Contract

1.The parties expressly stipulate in the obligation

What do we mean by demand being useless?

MEGAWORLD Was the seller really in default?

GENERAL RULE PRICE

The rule on reciprocal obligations with respect to a party automatically being in

Is the seller in default?

RECIPROCAL OBLIGATIONS done in exchange for the other.

PROPERTY MORA ACCIPIENDI

CASES ON FORTUITOUS EVENTS

1. WHEN THE LAW SO PROVIDES Example: Establishment of a Nuclear Powerplant

2. WHEN STIPULATED BY PARTIES

Example: Insurance Contracts

ASSETS ( BAD FAITH)

Mutual Restitution for Mutual Restitution as

3. GREAT ASIAN V. CA (discounting line)

If you compare a Contract of Sale and a Contract to Sell,

How does an obligation become extinguished in a contract to sell? IMPOSSIBLE CONDITIONS

Example: Legally Impossible Obligations CONSTRUCTIVE FULFILLMENT

GENERAL RULE UNDER 1189

Q: But there was no term?

Q: Why would it negate the juridical tie?

Q: What’s the potestative condition? MIXED CONDITION

But there’s a nuisance there.

Example: Sale of Property

3. DEL CASTILLO V. NAGUIAT

Resolution and Termination. What is the difference?

2. TAN v. CA (Mortgage) On Day 2, Buyer defaulted on payment of installments.

RESOLUTION TERMINATION The Supreme Court was

EFFECT ILLUSTRATION 2: BREACH BY BOTH

SELLER BUYER Under 1192, what contemplated is

So this article contemplates a situation where in both parties committed a breach

Example: ‘Solutio Indebiti’ or Unjust Enrichment 

1. NAGA TELEPHONE V. CA ( TELEPHONE POSTS) 