Civil law by Atty. Anselmo S.

Rodiel IV
OBLICON

Elements of an obligation
1. Active subject
2. Passive subject
3. Prestation
4. Juridical tie

Delay; Judicial and Extrajudicial Demand

Those obliged to deliver/to do incur in delay from the time the obligee judicially or
extrajudicially demands the fulfillment of their obligation.
However, the demand not be necessary: (OLTUR)
1. Obligation/Law express;
2. Nature and the circumstances + designation of the Time + controlling motive
for the establishment of the contract; or
3. When demand would be Useless + rendered it beyond his power to perform.
4. In Reciprocal obligations, from the moment one fulfills his obligation, delay by
other begins. (1169) Demand is NOT necessary.

General Rule:
In reciprocal obligations such as sale, demand is not needed before there can be
delay.
From the moment one fulfills his obligation, the other incurs in delay (breach).
(Solar Harvest v Davao Corrugated Carton, 2010)

Exception:
When different dates for performance of obligation are fixed
Here, the party would incur delay only when the other party demands fulfillment of
the former’s obligation. (Solar Harvest v Davao Corrugated Carton, 2010)

Fortuitous events
Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable. (Art. 1174)

Requisites: (IFIF)
1. The cause is Independent of the will of the obligor;
2. The event could not be Foreseen, or though foreseen, was inevitable;
3. The event rendered it Impossible for the debtor to fulfill his obligation in a
 3.
normal manner; and
4. The debtor must be Free from any participation in the injury to, or aggravation
of, the creditor. (Mondragon Leisure v CA)

COMMENT: The usually important requisites are the 2nd and the 4th. The event
becomes NOT fortuitous because of the absence of either or both requisites.

Carnapping and Robbery, per se, are not fortuitous events. The plaintiff must
prove that the event was solely done by a third person, and the plaintiff was not
negligent (4th requisite). (Co v CA)
1. As example, walking alone during the night in a distressed town does not
comply with the 4th requisite. Hence, the robbery is not a fortuitous event.

A tire blow out and mechanical defect, per se, are not considered as fortuitous
events. There are human factors involved in the situation. (Yobido v CA, 1997)
Hence, the plaintiff must show the existence of all the requisites of fortuitous
event in the tire blow out, i.e., 2nd and 4th requisite may be absent.

Financial crisis is not a fortuitous event. We cannot generalize that the Asian
financial crisis in 1997 was unforeseeable and beyond the control of a business
corporation. A real estate enterprise engaged in the pre-selling of condominium
units is concededly a master in projections on commodities and currency
movements and business risks. Hence, the crisis should have been foreseeable or
avoidable. (Fil-Estate Properties v Go, 2007)

COMMENT: If he cannot prove the existence of all the requisites, the event is not
fortuitous because the burden of proof lies with the plaintiff.

Exceptions:
1. Law
1. Delay (Art. 1165)
2. Debtor promised the same thing to two (2) or more persons who do not
have the same interest (Art. 1165)
3. Possessor in Bad faith (Art. 552)
4. When the obligation to deliver a determinate thing proceeds from a
Criminal offense, unless prior to its loss, the person who should receive it
refused to accept it without justification. (Art. 1268)
2. Stipulation
3. Assumption of risk, i.e, insurance contracts

QUESTION:
1. ABC Co. obtained several loans from X Bank. ABC Co. suffered economic
reverses, failed to settle their obligations, and offered the sale of ABC Co.’s
 1.

remaining assets consisting of machineries. X Bank refused and instead

advised them to sell the same and apply the proceeds of the sale to their
outstanding obligations. ABC Co. tried to sell their assets but since there were
no takers, the assets were reduced to scrap metal and sold to Y Co. under a
Memorandum of Agreement (MOA). However, Y Co. failed to pay. In this
regard, ABC Co. claims that Y Co.’s failure to pay the value of scrap must be
considered as force majeure in the sense that they have, beyond their control,
lost the funds they expected to have received from Y Co. which they would, in
turn, use to pay their own loan obligations to X Bank and that since the latter
was a party to the MOA, their obligations must therefore be deemed
extinguished. However, upon the court's examination of the MOA, it was found
that X Bank was not a party thereto. Decide.
1. ABC Co.’s contention that its obligation is already extinguished on account
of Y Co.’s failure to comply with its own obligation is untenable. To
constitute a fortuitous event, the following elements must concur: (a) the
cause of the unforeseen and unexpected occurrence or of the failure of
the debtor to comply with obligations must be independent of human will;
(b) it must be impossible to foresee the event that constitutes the caso
fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the
occurrence must be such as to render it impossible for the debtor to fulfill
obligations in a normal manner; and, (d) the obligor must be free from any
participation in the aggravation of the injury or loss.
2. While it may be argued that Y Co.’s breach of the MOA was
unforeseen by ABC Co., the same is clearly not "impossible" to
foresee or even an event which is "independent of human will."
Neither has it been shown that said occurrence rendered it impossible
for ABC Co. to pay their loan obligations to X Bank and thus, negates
the former's force majeure theory altogether. In any case, the performance
or breach of the MOA bears no relation to the performance or breach of
the subject loan transactions, they being separate and distinct sources of
obligation. Hence, ABC Co.’s contention is erroneous (Metro Concast Steel
Corporation v. Allied Bank, G.R. No. 177921, December 4, 2013).

Order of remedies of the creditor

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

1. Exhaustion - Pursue the property in possession of the debtor to satisfy his

claims
2. Subrogation - Exercise all the rights and bring all the actions of the debtor
against other persons
 3. Rescission - Impugn the acts which the debtor may have done to defraud him.
(Art .1177)

Art. 1177 and Art. 1303

– 1177 - the action
– 1303 - mere transfer of rights (steps into the shoes)
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Different Kinds of Obligation
Pure and Conditional
Article 1182. When the fulfillment of the condition depends upon the sole will of
the debtor, the conditional obligation shall be void. If it depends upon chance or
upon the will of a third person, the obligation shall take effect in conformity with
the provisions of this Code.
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment. (1119)

ILLUSTRATION:
1. The evidence on record show that the share purchase agreement was not
formally executed because then Minister Roberto Ongpin claimed that the
accounts of defendant Galleon had to be reviewed and cleared up before the
share purchase agreement is signed. While defendant Galleon made its
financial records available to defendant-appellant National Development
Corporation for their review, National Development Corporation never made
any serious effort to review the financial accounts of the defendant Galleon,
hence, effectively preventing the execution of the share purchase agreement.
Consequently, the condition for the running of the period for the payment of
the purchase price of the shares of stocks in defendant Galleon by the
defendant-appellant NDC, i.e., the execution of the Share Purchase
Agreement, was deemed fulfilled as it was the defendant-appellant NDC itself
which prevented it from happening. Under Article 1186 of the Civil Code, a
"condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfilment.” Development Bank of the Philippines v. Sta. Ines Melale Forest
Products Corp., G.R. Nos. 193068 & 193099, February 1, 2017.

Article 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law. (1124)

RABUYA:
1. A purchased a package of equipment from B. The package consist of 3 pieces
of equipment but sold as a package. The price quoted was for a package. For
example, a package for 1 Million. The contract between the parties provides
for the delivery of the 3 pieces of equipment for a consideration of 1 Million.
The party only delivered 1 of the 3. The buyer only paid for what was
delivered, and the buyer issued a stub payment order. Both parties cancelled
the contract, alleging there was breach of contract, on either side. The seller
contended it is divisible because it is capable of partial performance. The
buyer contended that he bought the same as a package, so it is indivisible.
2. QUESTION: Is the obligation is divisible or indivisible?
1. The Court ruled that the contract is indivisible, even though the things
delivered are divisible. Why? Because it is the intention of the parties that
the obligation is not capable of partial performance. Hence, it is
indivisible. (Spouses Lam v Kodak, 2016, Leonen)
3. QUESTION: In that situation, are the parties entitled to recover what he
delivered?
1. Yes.
2. Art. 1191 on resolution/rescission has the effect of MUTUAL
RESTITUTION.
3. Further, when rescission is sought under Article 1191, it need not be
judicially invoked because the power to resolve is implied in reciprocal
obligations. The right to resolve allows an injured party to minimize the
damages he or she may suffer on account of the other party’s failure to
perform what is incumbent upon him or her. When a party fails to comply
with his or her obligation, the other party’s right to resolve the contract is
triggered. The resolution immediately produces legal effects if the
non-performing party DOES NOT QUESTION the resolution. Court
intervention only becomes necessary when the party who allegedly
failed to comply with his or her obligation DISPUTES the resolution of
the contract. Since both parties in this case have exercised their right to
resolve under Article 1191, there is no need for a judicial decree before the
resolution produces effects. (Spouses Lam v Kodak, 2016, Leonen)

Peza v Pilhino, Leonen

1. Liquidated damages under rescinded contract
2. Pilhino won bidding. It must deliver 2 firetrucks. Failed to do so. Peza filed
rescission with liquidated damages.
 3. Does rescission render inefficacious the stipulation of liquidated damages in
the contract?
1. No. Art. 1191 - rescission - “with the payment of damages in either case.”
2. Mutual restitution does not negate liquidated damages. Art. 1191 itself
states that there must be payment of damages in either case.
3. The very same breach that triggers rescission is what makes
damages due.
4. Further, parties can agree on what the damages ought to be.That is the
law between themselves.

Obligations with a Period

Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless
he gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which he
has promised;
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period;
(5) When the debtor attempts to abscond. (1129a)

NOTE: Number 3 is isolated from 1 and 2. only 1 and 2 are related to each other.

Alternative and Facultative Obligations

Article 1199. A person alternatively bound by different prestations shall
completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other
undertaking. (1131)
Article 1200. The right of choice belongs to the debtor, unless it has been
expressly granted to the creditor.
Article 1206. When only one prestation has been agreed upon, but the obligor
may render another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the substitution has
been made, the obligor is liable for the loss of the substitute on account of his
delay, negligence or fraud.

Joint and Solidary Obligations

Article 1209. If the division is impossible, the right of the creditors may be
prejudiced only by their collective acts, and the debt can be enforced only by
proceeding against all the debtors. If one of the latter should be insolvent, the
others shall not be liable for his share. (1139)
Article 1210. The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility. (n)
Article 1212. Each one of the solidary creditors may do whatever may be useful to
the others, but not anything which may be prejudicial to the latter. (1141a)
Article 1215. Novation, compensation, confusion or remission of the debt, made
by any of the solidary creditors or with any of the solidary debtors, shall extinguish
the obligation, without prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as well as he who collects
the debt, shall be liable to the others for the share in the obligation corresponding
to them. (1143)
Article 1219. The remission made by the creditor of the share which affects one
of the solidary debtors does not release the latter from his responsibility towards
the co-debtors, in case the debt had been totally paid by anyone of them before
the remission was effected. (1146a)
Article 1221.
If the thing has been lost or if the prestation has become impossible without the
fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price and the payment of damages and interest, without prejudice
to their action against the guilty or negligent debtor.

Divisible or Indivisible Obligations

Art. 1225. For the purposes of the preceding articles,
1. Obligations to give definite things and
2. Obligations not susceptible of partial performance
shall be deemed to be indivisible.

Article 1224. A joint indivisible obligation gives rise to indemnity for damages
from the time anyone of the debtors does not comply with his undertaking. The
debtors who may have been ready to fulfill their promises shall not contribute to
the indemnity beyond the corresponding portion of the price of the thing or of the
value of the service in which the obligation consists. (1150)

When does liability arise?

A joint indivisible obligation gives rise to indemnity for damages from the time
anyone of the debtors does not comply with his undertaking. (Art. 1224)

How will the obligee proceed?

If the division is impossible, the debt can be enforced only by proceeding against
all the debtors. (Art. 1209)

How will the obligors pay?

The debtors who were ready to fulfill their promises shall not contribute to the
indemnity beyond the corresponding portion of price of thing/value of service.
(Art. 1224)
If one of the latter should be insolvent, the others shall not be liable for his share.
(Art. 1209)

Obligations with a Penal Clause

Article 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code. (1152a)
Article 1227. The debtor cannot exempt himself from the performance of the
obligation by paying the penalty, save in the case where this right has been
expressly reserved for him. Neither can the creditor demand the fulfillment of the
obligation and the satisfaction of the penalty at the same time, unless this right
has been clearly granted him. However, if after the creditor has decided to require
the fulfillment of the obligation, the performance thereof should become
impossible without his fault, the penalty may be enforced. (1153a)
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Extinguishment of Obligation
Payment
Payment made by a third person
The creditor is not bound to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation
to the contrary. (Art. 1236)

Whoever pays for another may demand from the debtor what he has paid, except
that if he paid without the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial to the debtor. (Art. 1236)

Whoever pays on behalf of the debtor without the knowledge or against the will of
the latter, cannot compel the creditor to subrogate him in his rights, such as those
arising from a mortgage, guaranty, or penalty. (Art. 1236)

Payment made to an incapacitated person

Payment to a person who is incapacitated to administer his property shall be valid
if he has kept the thing delivered, or insofar as the payment has been beneficial to
him. (Art. 1241)
Payment made to a third person
Payment made to a third person shall also be valid insofar as it has redounded to
the benefit of the creditor. Such benefit to the creditor need not be proved in the
following cases:
1. If after the payment, the third person acquires the creditor's rights;
2. If the creditor ratifies the payment to the third person;
3. If by the creditor's conduct, the debtor has been led to believe that the third
person had authority to receive the payment. (Art. 1241)
Payment made in good faith to any person in possession of the credit shall release
the debtor. (Art. 1242)

Dation in Payment
Dation in payment, whereby property is alienated to the creditor in satisfaction of
a debt in money, shall be governed by the law of sales. (Art. 1245)

Requisites:
1. There is a Debt in money
2. Property is alienated
3. To Satisfy the debt in money

This is an objective novation, because the object of the contract was changed.
(Art. 1291)
The debt is considered the price, while the property alienated to satisfy the debt is
the thing sold.

Identity of payment
Art. 1244. The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be of the same value as, or more valuable than that
which is due.

Payment using the currency stipulated/legal tender

The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in the currency which is legal tender
in the Philippines. (Art. 1249)
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in the
abeyance. (Art. 1249)

BSP Circular on legal tender for Philippine coins:

1. Up to P1,000 only - for 1-Piso, 5-Piso, and 10-Piso coins; and
2. Up to P100 only - for 1-sentimo, 5-sentimo, 10-sentimo, and 25-sentimo
 2.
coins. (BSP No. 537)

“Only when they have been cashed”

Self-explanatory

“When, though the fault of the creditor, they have been impaired”
This phrase only applies to promissory notes/bills of exchange/mercantile
documents issued by a third person, and not to those issued by the debtor
himself. (Compania General v Molina)

RABUYA:
1. If the payment of the purchase price is an obligation to pay a sum of money,
Art. 1249 applies. Example is contract of sale.
2. If the payment of the purchase price is not an obligation, but merely
incidental to an exercise of a right, Art. 1249 does not apply. Example is
exercise of right of redemption in pacto de retro sale, option contract. In such
case, the issuance of a check is sufficient to preserve the right.
1. NOTE: The remedy in case of refusal to receive the check is NOT
consignation, because the right is not an obligation. Instead, the remedy is
to COMPEL redemption.

NOTE: The requirement of legal tender is only for payment. It is not required for
the “exercise of rights.” Hence, for the exercise of the right of redemption, the
Civil Code provisions on payment do not apply. Instead, what applies is the settled
rule that a mere tender of check is sufficient to compel redemption. (Biana v
Gimenez) The tender of a check is sufficient to compel redemption but is not,
itself, a payment that relieves the redemptioner from his liability to pay the
redemption price. (Fortunado v CA) Hence, in case the check was dishonored, the
redemptioner can still compel redemption, but the other party can demand that
the redemption price be paid.

Application of Payment (112SDA)

1. 1 debtor - “He”
2. 1 creditor - “One and the same creditor”
3. 2 or more debts - “Various debts”
4. Same kind of debts - "Of the same kind”
5. The debts must be Due - “Application shall not be made on debts not yet due”
6. The payment must no cover All of the obligations

Cession of Payment: (122IAA)

1. 1 debtor - “The debtor”
2. 2 or more creditors - “To his creditors”
3. 2 or more debts - “In payment of his debts”
 4. The debtor must be Insolvent
5. He must cede All of his properties to the creditor, so the latter can sell the
same
6. The creditors Accept the cession

Cession compared to Dacion En Pago

1. Ownership - In D, the ownership of the property is transmitted to the creditor.
In C, it is not transmitted. Instead, it must be sold, so the net proceeds can be
applied to the debts.
2. Insolvency - In D, the debtor may or may not be insolvent. In C, the debtor
must be insolvent.
3. All properties - In D, the usual scenario is only a specific property of the
debtor is given to satisfy the debt in money. In C, all of the properties of the
debtor must be ceded to the creditor.
4. Plurality of creditors - In D, there can be 1 or more creditors. In C, there must
be 2 or more creditors.
5. Extent of extinguishment - In D, the rule is there is total extinguishment of the
obligation; In C, the cession shall only release the debtor from the obligation
for the net proceeds of the thing assigned.

COMMENT: The most important is the ownership, i.e., the ownership is

transmitted to the creditor in DATION, but it is not transmitted in CESSION.

Tender and Consignation

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

Requisites: (TDC-RNCN)
1. There is Tender of payment
2. The debt is Due and demandable.
3. The tender is Complete and identical. Otherwise, it is not a valid tender. (Art.
1244 and 1246)
4. Refusal without just cause by the debtor to accept the tender
5. Notice to persons interested
6. Valid Consignation to the court
7. Notification of the consignation to the persons interested

Exception: (AUA-IR-2T)
Consignation ALONE shall produce the same effect in the following cases:
1. When the creditor is Absent or Unknown, or does not Appear at the place of
payment;
2. When he is Incapacitated to receive the payment at the time it is due;
 3. When, without just cause, he Refuses to give a receipt;
4. When 2 or more persons claim the same right to collect;
5. When the Title of the obligation has been lost. (Art. 1256)

QUESTION:
1. Sps. C purchased a parcel of land from Kalikasan Homes, owned/developed by
AFPMBAI, to be paid from the proceeds of the PAG-IBIG loan extended to the
former by the Rural Bank. AFPMBAI executed a Deed of Absolute Sale and
caused the transfer of the land title to Sps. C’s names but the PAG-IBIG loan
facility did not push through. Meanwhile, AFPMBAI made several demands
against the Sps. C to pay the price. The Sps. C are confused as to whom
between the Rural Bank through PDIC or AFPMBAI tender of payment should
be made. Thus, they filed a complaint for consignation of loan payment before
the RTC. Does the complaint filed by the Sps. C against AFPMBAI make out a
case for consignation?
1. Yes. Under Art. 1256 of the Civil Code, the debtor shall be released from
responsibility by the consignation of the thing or sum due, without
need of prior tender of payment, when the creditor is absent or
unknown, or when he is incapacitated to receive the payment at the time it
is due, or when two or more persons claim the same right to collect, or
when the title to the obligation has been lost.
2. The allegations in the complaint present a situation where the creditor is
unknown, or that two or more entities appear to possess the same right to
collect from petitioners.
3. Sps. C are ready to pay the loan in full; however, under the circumstances,
they do not know which of the two should receive full payment of the
purchase price, or to whom tender of payment must validly be made thus
making out a case for consignation (Spouses Cacayorin v. Armed Forces
and Police Mutual Benefit Association, Inc., G.R. No. 171298, April 15,
2013).

Loss of Thing Due

When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole
or in part. (Art. 1267)
When the debt of a thing certain and determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price, whatever
may be the cause for the loss, unless the thing having been offered by him to the
person who should receive it, the latter refused without justification to accept it.
(Art. 1268)

QUESTION:
 1. On August 16, 2000, Iloilo Jar Corporation, as lessor, and respondent
Comglasco Corporation/Aguila Glass, as lessee, entered into a lease contract
for a period of three (3) years or until August 15, 2003 over a portion of a
warehouse building. On December 1, 2001, Comglasco requested for the pre-
termination of the lease effective on the same date. Iloilo Jar, however,
rejected the request on the ground that the pre-termination of the lease
contract was not stipulated therein. Comglasco, raised an affirmative defense,
arguing that by virtue of Article 1267 of the Civil Code (Article 1267), it was
released from its obligation from the lease contract. It explained that the
consideration thereof had become so difficult due to the global and regional
economic crisis that had plagued the economy. Is Comglasco’s act of treating
the lease contract terminated due to the economic circumstances then
prevalent correct?
1. No. Article 1267 applies only to obligations to do and not to
obligations to give. An obligation "to do" includes all kinds of work or
service; while an obligation "to give" is a prestation which consists in
the delivery of a movable or an immovable thing in order to create a
real right, or for the use of the recipient, or for its simple possession, or in
order to return it to its owner. The obligation to pay rentals or deliver the
thing in a contract of lease falls within the prestation "to give".
2. Considering that Comglasco's obligation of paying rent is not an obligation
to do, it could not rightfully invoke Article 1267 of the Civil Code. Even so,
its position is still without merit as financial struggles due to an economic
crisis is not enough reason for the courts to grant reprieve from
contractual obligations (Iloilo Jar Corporation v. Comglasco Corporation,
G.R. No. 219509, January 18, 2017).

Condonation
Condonation or remission is essentially gratuitous, and requires the acceptance by
the obligor. It may be made expressly or impliedly. (Art. 1270)
1. Condonation shall be subject to the rules which govern inofficious donations.
2. Express condonation shall comply with the forms of donation. (Art. 1270)

Express condonation shall comply with the forms of donation.

This means condonation is akin to donation of personal property. Hence, the rules
on form of donations of personal property must be followed.
1. If the value of the debt condoned does not exceed P5,000, there is no need
for the condonation to be in writing.
2. If the value exceeds P5,000, it must be in writing. Otherwise, it is void.

Confusion
Merger in the principal debtor/creditor; Merger in the guarantor
Merger which takes place in the person of the principal debtor or creditor benefits
the guarantors. Confusion which takes place in the person of the guarantor does
not extinguish the obligation. (Art. 1276)

COMMENT: The latter happens when the guarantor/surety pays the principal
creditor. In such case, the obligation is not extinguished.

Compensation
Requisites for legal compensation: (PSDLR)
1. The parties are Principal debtors and creditors of each other
2. Debts be of Sum of money/Same kind and quality
3. Debts are Due and demandable
4. Debts are Liquidated
5. No Retention or controversy has been filed by third persons regarding the
debts.

COMMENT: The usual questions are the first and second requisites.

Creditor assigns the credit to a third person; With/Without the consent/knowledge

of debtor
1. The debtor who has consented to the assignment of rights made by a creditor
in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor,
1. unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation. (Art. 1285)
2. If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones. (Art. 1285)
3. If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same and also later ones until
he had knowledge of the assignment. (Art. 1285)

1. “The debtor who has consented to the assignment of rights by a creditor” -

The debtor cannot set up compensation against the assignee.
○ As quick example, A owed B. B assigned his credit to C, with the consent
of A. Later, B owed A. Can A set up compensation against C? No, because
he consented to the assignment.
○ Another example is, On 2018, A owed B. On 2020, B owed A. On 2021, B
assigned his credit to C, with the consent of A. Can A set up
compensation against C? No, because he consented to the assignment.
The remedy of A is to pay C, and collect from B.
○ “The debtor consented, but he reserved his right to the compensation” -
The debtor can set up compensation against the assignee, since he
 ○

reserved it.
2. “The creditor communicated the cession but the debtor did not consent” -
The debtor can set up compensation of debts previous to the cession, but not
of subsequent ones
○ As quick example, A owed B. B assigned his credit to C. B communicated
to A the assignment but A did not consent thereto. Later, B owed A. Can A
set up compensation against C? No, because he can set up compensation
of debts PREVIOUS to the cession. He cannot set up SUBSEQUENT ones.
Here, B owed A after the assignment of credit to C, so compensation
cannot be set up against C.
◆ Why are subsequent ones not allowed? Because compensation takes
place when two persons, in their own right, are creditors and debtors
of each other. Here, A owed C, while B owed A. Hence, compensation
cannot take place because there are no two persons who are creditors
and debtors of each other.
◆ Why are previous ones allowed? Because compensation takes place
by operation of law, even though the parties are not aware of the
same. Hence, B cannot assign the credit to C, because at the time,
there is no more credit to speak of. As a result, A can set up
compensation against C.
○ On 2019, A owed B. On 2020, B owed A. On 2021, B assigned his credit to
C. B communicated to A the assignment, but A did not consent thereto.
Can A set up compensation against C? Yes because he can set up
compensation of debts PREVIOUS to the cession. Here, B owed A before
the assignment of credit to C, so compensation can be set up against C.
○ Based on the previous example, what if A consented to the assignment? A
can still set up compensation because compensation takes effect by
operation of law, even though the parties are not aware of the same.
Hence, B cannot assign the credit to C, because at the time, there is no
more credit to speak of. As a result, A can set up compensation against C.
3. “The assignment is made without the knowledge of the debtor” - The debtor
can set up compensation for all the credits prior to the knowledge of the
assignment
○ Hence, it can be a debt previous or subsequent to the assignment. As long
as the debtor does not know of the assignment, he can set up the same.
○ As quick example, A owed B. B assigned his credit to C. B did not
communicate to A the assignment. On 2020, B owed A. On 2021, A knew
that the credit was already assigned. Can A set up compensation against
C? Yes, because if the assignment of credit was made without the
knowledge of the debtor, the debtor can set up compensation for all
credits prior the knowledge of the assignment. Here, even if B owed A
after the assignment of credit to C, A can still set up compensation
against C because B owed A prior to the knowledge of the assignment.
 ◆ Why are previous debts and subsequent debts to the assignment
allowed? Because this is a punishment for B and C. They must notify A
before the assignment of credit. Hence, even if the 1st requisite of
legal compensation is lacking, the debtor can still set up
compensation against the creditor-assignor.

COMMENT: In practice, the usual scenario is “without the knowledge of the

debtor” because the creditor does not need the consent of debtor to assign his
credits.

Deposit; Commodatum; Support; Civil liability arising from penal offense

Compensation shall NOT be proper when:
1. One of the debts arises from Depositum or
2. from the obligations of a Depositary or
3. of a bailee in Commodatum. (Art. 1287)
4. Against a creditor who has a claim for Support due by gratuitous title. (Art.
1287)
5. One of the debts consists in civil liability arising from Penal offense. (Art.
1288)

What about bank deposits? There can be compensation because this is governed
by simple loan (mutuum).

Legal Compensation takes effect by operation of law

When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation. (Art.
1290)

QUESTION:
1. ST and TI entered into a Marketing agreement whereby the latter agreed to act
as ST’s exclusive marketing agent by selling advertising spots to business
enterprises on behalf of ST. According to ST, TI breached their agreement by
failing to disclose the names of the entities to which TI sold advertising spots.
ST filed a complaint against TI for Accounting and Damages. ST and TI
entered into a compromise agreement to which they agreed, among others,
that a violation of the compromise agreement would make either party who
violates such liable for P2M per violation. According to ST, TI violated the
compromise agreement by failing to pay its monetary obligations under the
agreement. TI, on the other hand, argued that ST violated the agreement by
failing to withdraw the complaint-in-intervention. Both parties argued that the
other party is liable for P2M liquidated damages. Is there compensation in this
case?
 1. Yes, there is compensation in this case.
2. Under Article 1279 of the New Civil Code, in order that compensation may
be proper, it is necessary that: (1) each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the
other; (2) that both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same quality if
the later has been stated; (3) That the two debts be due; (4) That they be
liquidated and demandable; and (5) that over neither of them there be any
retention or controversy, commenced by third persons and communicated
in due time to the debtor.
3. Article 1281 of the same code further provides that compensation may be
total or partial. When the two debts are of the same amount, there is total
compensation.
4. In this case, considering that the parties are equally liable to each
other in the amount of P2M, the amounts are set off by operation of
law. (Team Image v. Solar Team, G.R. No. 191658, September 13, 2017, J.
Leonen Case)

Novation
Kinds of novation
Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (Art. 1291)

NOTE: #2 and #3 are not opposites. #2 is actually a stepping stone to #3,

assuming that the new debtor was not ready to pay at the time that he substituted
the old debtor.

Novation happens when it is declared in unequivocal terms/every point is

incompatible
It is imperative that novation is declared in unequivocal terms, or that the old and
the new is on every point incompatible with each other. (Art. 1292)

GUIDEPOST: Whether the old obligation can exist in the new obligation. As
stated by the Courtb, the test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.
Here there is neither express nor implied novation (Arco Pulp and Paper Co.,
Inc. v. Lim, G.R. No. 206806, June 25, 2014).

Example: If you decrease the interest rate, novation. if you increase, none. The
same is true for deduction and extension of the payment period.
COMMENT: In case of doubt, there is NO novation, because it is not unequivocal.
It is a mere modification of the contract.

Substitution of the debtor; Payment of the new debtor

Substituting a new debtor may be made without the knowledge or against the will
of the latter, but not without the consent of the creditor. (Art. 1293)

COMMENT:
Substitution - I will pay for him
1236/1237 - I paid for him without his consent.
Subrogation - I paid for him with his consent.

Insolvency of the new debtor; Liability of the original debtor for his insolvency
1. If substitution is without consent of the OLD debtor - insolvency/non-
fulfillment by NEW debtor does not rise to any liability. (Art. 1294)
2. If substitution is PROPOSED by the OLD debtor - the insolvency of NEW
debtor does NOT revive the action UNLESS
1. Already insolvent at the time of novation
2. Publicly known/Known to the old debtor as insolvent (fraud). (Art. 1295)

What if the new obligation is void? What if the old obligation is void?
1. If the new obligation is void, the original one shall subsist. (Art. 1297)
2. If the old obligation is void, the new one shall also be void.(Art. 1298)

Hence, in the second case, the status of the new obligation is immaterial. It is
automatically void because its life depends on a previous void obligation.

Requisites of novation:
1. Previous valid obligation;
2. New valid obligation; and
3. Previous obligation must be Extinguished, i.e., the novation is declared in
unequivocal terms, or the two obligations are in every point incompatible with
each other.

Subrogation of the creditor; Conventional and Legal Subrogation

Subrogation of a third person in the rights of the creditor is either legal or
conventional. (Art. 1300)

Conventional subrogation of a third person requires the consent of the original

parties and of the third person. (Art. 1301)

It is presumed that there is legal subrogation:

1. When a creditor pays another creditor who is preferred, even without the
 1.
debtor's knowledge;
2. When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor;
3. When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion
as to the latter's share. (Art. 1302)

The last two (2) instances in legal subrogation is highly related to Art. 1236 and
1237.
● If the third person is not interested in the fulfillment of the obligation and he
pays against the will or without the knowledge of the debtor, then he is not
subrogated to the rights of the creditor (Art. 1236 and 1237) He only has the
right to demand reimbursement insofar as the payment was beneficial to the
debtor.
● If the third person is not interested in the obligation, but pays with the
approval of the debtor, then there is legal subrogation. (Art. 1302)
● If the third person is interested in the obligation, then there is legal
subrogation, i.e., insurer, guarantor, or surety. (Art. 1302)

Subrogation of creditor v. Assignment of credit

1. In conventional subrogation, the third party pays the obligation of the debtor
to the creditor with the debtor’s consent. As a consequence, the paying third
party steps into the shoes of the original creditor as subrogee of the latter.
(Rodriguez v CA, 1992)
1. In subrogation, there is a NEW obligation. The previous obligation is
extinguished.
2. In subrogation, there are THREE parties.
3. In subrogation, consent of creditor/debtor is essential. Hence, if the
consent was not obtained, there is no novation.
2. An assignment of credit, on the other hand, is the process of transferring the
right of the assignor to the assignee who would then have the right to proceed
against the debtor. It has an effect similar to that of a sale. (Rodriguez v CA,
1992)
1. In assignment of credit, the obligation is NOT extinguished. The credit
assigned to the third person is the existing obligation.
2. In assignment of credit, there are TWO parties. The assignor and the
assignee, wherein the assignee will become the new creditor of the
debtor.
3. In assignment of credit, the assignee acquires all rights of the assignor,
even without the consent of the debtor.
1. Hence, in practice, assignment is usually resorted to.

QUESTION:
 1. D, owner of a business supplying scrap papers, cartons, and other raw
materials, delivered scrap papers to APP Company. D and APP agreed that
APP would either pay D the value of the raw materials or deliver to him their
finished products of equivalent value. D alleged that he received a post-dated
check from APP but when he deposited the check, it was dishonored for being
drawn against a closed account. On the same day, APP and a certain E
executed a memorandum of agreement (MOA) where APP bound themselves
to deliver the finished product to E and his company MCC. Did the MOA
extinguish APP’s obligation to D through novation or did the obligation remain
to be alternative?
1. There was no novation.
2. It is imperative that novation is declared in unequivocal terms, or that the
old and the new is on every point incompatible with each other. (Art. 1292)
3. Further, in novation, the consent of the creditor is necessary.
4. Here, the MOA did not declare in unequivocal terms that it novated the
original contract between D and APP.
5. Further, the MOA is not incompatible with the contract between D and
APP. Actually, the MOA was executed to show that APP exercised the first
option under its contract with D, which is to pay the value of the raw
materials.
6. Lastly, D was not privy to the agreement between APP and E. Thus, there
was no novation of the original contract between D and APP.
7. Instead, the obligation between D and APP remained to be an alternative
obligation. In an alternative obligation, there is more than one object, and
the fulfillment of one is sufficient, determined by the choice of the debtor
who generally has the right of election. The right of election is
extinguished when the party who may exercise that option categorically
and unequivocally makes his or her choice known. In this case, the
contract provides that APP, after receiving the raw materials from D, would
either pay him the price of the raw materials or, in the alternative, deliver
to him the finished products of equivalent value. When APP tendered a
check to respondent in partial payment for the scrap papers, they
exercised their option to pay the price. D’s receipt of the check and his
subsequent act of depositing it constituted his notice of APP’s option to
pay. This choice was also shown by the terms of the MOA, which was
executed on the same day. The MOA declared that the delivery of APP’s
finished products would be to a third person, thereby extinguishing the
option to deliver the finished products of equivalent value to D (Arco Pulp
and Paper Co., Inc. v. Lim, G.R. No. 206806, June 25, 2014, J. Leonen
Case).
_______________________________________________________________________________________
____________________________________________________________________________
Contracts
General Provisions
Obligatory force of contracts
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. (Art. 1159)
The contract must bind both contracting parties. (Art. 1308)

Mutuality of contracts
Its validity or compliance cannot be left to the will of one of them (unilateral). (Art.
1308)

Examples:
1. Potestative condition - fulfillment of condition depends upon the sole will of
the debtor. (Art. 1182)
2. When the bank can adjust the interest rate unilaterally in contract of loan.

COMMENT:
Obligatory force and mutuality are twins.
Since contract is obligatory, its validity or compliance cannot be left to the will of
one of the parties.
Hence, a party cannot unilaterally refuse to perform the contract.

Autonomy of contracts
The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. (Art. 1306)

“Contract of adhesion”
General Rule: It is valid because the party is free to adhere or reject the terms.
(PCIB v CA)

Exception: It is void for being contrary to public policy, when the weaker party is
complete deprived of opportunity to bargain in equal footing. (Sweet Lines v
Teves)

Since the stipulations are solely prepared by one of the parties, the contract shall
be strictly construed against the one who drafted the same. (Geraldez v CA)

Relativity of contracts
Contracts take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. (Art. 1311)

Exceptions to relativity of contracts; Contract takes effect on non-parties

 1. Stipulation pour autrui (Art. 1311)
2. Innocent purchasers or mortgages in good faith (Art. 1312)
3. Tortious interference (Art. 1314)
4. Creditors are protected in cases of contracts intended to defraud them, i.e.,
rescissible contracts (Art. 1313)

Stipulation pour autrui; Requisites

1. There must be a stipulation in favor a third person;
2. The stipulation must be a part, not the whole of the contract;
3. The contracting parties must have clearly and deliberately conferred a favor
upon a third person;
4. The third person communicated his acceptance before its revocation; and
5. Neither party represents the third party,

Tortious interference; Requisites

1. There is a valid contract;
2. Knowledge of the third person on the existence of the contract;
3. A third person induces another to violate his contract (Art. 1314); and
4. Interference of the third person must be without legal justification or
excuse.

“Interference of the third person must be without legal justification”

Case law dictates that interference to further his own business interests is a
legal justification. Hence, he is not liable for tortious interference.

COMMENT: Usually, the interference is with legal justification/excuse, so in the

Bar, the answer is there is no tortious interference.

Essential Requisites of Contract

1. Consent
2. Object
3. Cause

Consent
Consent - meeting of the offer and the acceptance upon the thing and the cause.
The offer must be certain and the acceptance absolute.
A qualified acceptance constitutes a counter-offer. (Art. 1319)

COMMENT: In short, meeting of a CERTAIN offer and an ABSOLUTE acceptance

upon the thing and the cause of the contract.

When does acceptance bind the offeror; Cognition Theory

Acceptance made by letter or telegram does not bind the offerer except from the
time it came to his knowledge. (Art. 1319)

For electronic documents, the reception theory applies, i.e., the acceptance made
by electronic document binds the offerer from the time he received the same.
(Electronic Commerce Act) Hence, mere receipt of text message perfected the
contract, even if the offeror did not read it.

Offer becomes ineffective upon DCII of either party before acceptance is

conveyed
An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed. (Art. 1323)

COMMENT: If the offeree fails to communicate his acceptance to the offeror

before the latter’s death, the offer becomes ineffective.

Business Advertisements
Unless it appears otherwise, business advertisements of things for sale are not
definite offers, but mere invitations to make an offer. (Art. 1325)

Advertisements for bidders

Advertisements for bidders are simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary
appears. (Art. 1326)

Absolute and relative simulation of contract

Absolute->not intend to be bound at all
Relative-> when parties conceal their true agreement (Art. 1345)

Absolute/Fictitious->void
Relative->not prejudice third person/not contrary to law->bind parties to real
agreement. (Art. 1346)

Right of first refusal v. Option contract

1. It is an option if there is already a price fixed in the definite offer. What is
lacking is merely the acceptance of the offer to perfect the contract.
2. In right of first refusal, there is no definite offer. The price, and other terms
and conditions of the contract are to be fixed in a future time.
3. Illustrate: Lease
1. Contract of lease - lessee has first opportunity to buy the property leased
in case the lessor decides to sell the same. This is a right of first refusal.
2. Contract of lease - lessee has option to buy the property leased for P1M
for 2 years from the expiration of lease. This is an option.
4. In option, the period to exercise the option is definite period.
 5. In right of first refusal, the period can be definite or indefinite.
6. In option, to be binding, the option must be supported by a consideration
separate and distinct from the contemplated contract. If there is no
consideration, there is no option contract. However, the offeror must withdraw
the offer before it is accepted by the offeree. In case of failure to do so, and
the offeree communicates the acceptance to the offeror, there is a perfected
contract.
7. In right of first refusal, the right is binding.

QUESTION:
1. BPI issued a pre-approved credit card to R. The cards were used by R and his
wife by regularly charging goods and services on them. R regularly settled
their accounts with BPI at first but started to be delinquent with their payment,
thus, their outstanding balance ballooned to P200,000. BPI sent demand
letters but to no avail. BPI then commenced a complaint for collection of sum
of money. R, however, argued that their liability is only P20,000 and that R did
not consent to the Terms and conditions on their use of the issued credit
cards, specifically those regarding the interest. BPI, on the other hand, argued
that R bound himself to its Terms and Conditions in the credit card packet’s
delivery receipt. Further, their constant use of the card could be considered a
consent. Is there consent in this case?
1. None. There is no consent in this case.
2. When a credit card provider issues a credit card to a pre-approved client,
the usual screening process is dispensed with and the credit card is
issued outright.
3. As such, when issuing a pre-screened or pre-approved credit card,
the credit card provider must prove that its client read and consented
to the terms and conditions governing the credit card. Failure to prove
consent means that the client cannot be bound by the provisions of
the terms and conditions, despite admitted use of the credit card. This is
true even if the client did not deny availing of the credit card by charging
purchases on it.
4. Thus, the credit card client may only be charged with legal interest.
5. The client should not be condemned to pay the interests and charges
provided in the Terms and Conditions on the mere claim of the credit card
provider without any proof of the former’s conformity and acceptance
of the stipulations contained therein. (Yulo v. BPI, G.R. No. 217044,
January 16, 2019, J. Leonen Case)
2. G Inc. received from MRT an invitation to bid for the complete concrete works
of the Podium. G Inc. submitted their bid and won the bid. MRT issued a Letter
of Award and Notice to Proceed to G Inc. which was signed and accepted by
the latter. However, due to restructuring of the project, G Inc. was unable to
proceed with the project as it was suspended. A second notice was given to G
 Inc. based on the redesigned plan which was accepted and signed by G Inc. A
third notice was again issued but was not accepted by G Inc. A fourth notice
was again issued which was qualifiedly accepted by G Inc. MRT treated the
qualified acceptance as a new offer and rejected the same. MRT manifested
its intent to award the project to another company. G Inc. acknowledged
MRT’s intent and notified MRT of its claims for reimbursement for costs,
losses, and charges, and damages it had incurred due to the suspension
orders and the consequences of its award to another. G Inc. filed a notice of
claim before the Construction Industry Arbitration Commission which awarded
to the former monetary claims amounting to P53M. MRT argued that G Inc. is
not entitled to said monetary award as the contract was not perfected. Is MRT
correct that there was no perfection of the contract?
1. No, MRT is not correct. There was a perfected contract.
2. There are 3 stages in a contract: (1) negotiation which refers to the time
the parties agree on its terms and conditions; (2) perfection which occurs
when there is a meeting of the minds of the parties such that there is a
concurrence of offer and acceptance, and all essential elements of the
contract are present; and (3) consummation which covers the period
when the parties perform their obligations in the contract until it is
finished or extinguished.
3. To determine when the contract was perfected, the acceptance of the
offer must be unqualified, unconditional, and made known to the
offeror.
4. Here, there is a perfected contract between MRT and G Inc. MRT has
already awarded the contract to G Inc., and G Inc.’s acceptance of the
award was communicated to MRT before MRT rescinded the contract.
Thus, there is already mutual consent on the object of the contract and its
consideration, and an absolute acceptance of the offer. (Metro Rail Transit
Development Corporation v. Gammon Philippines, Inc., G.R. No. 200401,
January 17, 2018, J. Leonen Case)

CE construction v Araneta center, 2017, Leonen

1. Aci sent invitations to bid on building Gateway. Ce tendered 1.5B. Offered
lowest amount. But araneta did not award it to any bidder even as the validity
of Ce’s 90-day offer lapsed. However, araneta through phone call told Ce to
proceed with excavations
2. Aci delayed in formally awarding the project to Ce. Ce unable to complete
project because of many changes in the project/drawings.
3. Ce served notice to avail of arbitration. Demanding 180M
4. There was never a meeting of minds on the price of P1,540,000,000.00. Thus,
that stipulation could not have been the basis of any obligation.
1. The only thing that ACI has in its favor is its initial delivery of tender
documents to prospective bidders. Everything that transpired after this
1.

delivery militates against ACI's position.

2. By delivering tender documents to bidders, ACI made an offer. By
these documents, it specified its terms and defined the parameters
within which bidders could operate. These tender documents, therefore,
guided the bidders in formulating their own offers to ACI, or, even more
fundamentally, helped them make up their minds if they were even willing
to consider undertaking the proposed project. In responding and
submitting their bids, contractors, including CECON, did not
peremptorily become subservient to ACI's terms. Rather, they made their
own representations as to their own willingness and ability. They
adduced their own counter offers, although these were already tailored
to work within ACI's parameters.
3. These exchanges were in keeping with Article 1326 of the Civil Code:
1. Article 1326. Advertisements for bidders are simply invitations to
make proposals, and the advertiser is not bound to accept the
highest or lowest bidder, unless the contrary appears.
4. The mere occurrence of these exchanges of offers fails to satisfy the
Civil Code's requirement of absolute and unqualified acceptance (by
Araneta Center):
1. Article 1319. Consent is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to constitute
the contract. The offer must be certain and the acceptance absolute.
A qualified acceptance constitutes a counter-offer.
2. Acceptance made by letter or telegram does not bind the offerer
except from the time it came to his knowledge. The contract, in such a
case, is presumed to have been entered into in the place where the
offer was made.
5. Subsequent events do not only show that there was no meeting of minds
on CECON's initial offered contract sum of P1,449,089,174.00 as stated
in its August 30, 2002 bid. They also show that there was never any
meeting of minds on the contract sum at all.
6. In accordance with Article 1321 of the Civil Code, an offeror may fix
the time of acceptance. Thus, CECON's August 30, 2002 offer of
P1,449,089,174.00 "specifically stated that its bid was valid for only
ninety (90) days, or only until 29 November 2002." November 29, 2002
lapsed and ACI failed to manifest its acceptance of CECON's offered
contract sum.
7. It was only sometime after November 29, 2002 that ACI verbally
informed CECON that the contract was being awarded to it. Through a
telephone call on December 7, 2002, ACI informed CECON that it may
commence excavation works. However, there is no indication that an
agreement was reached on the contract sum in any of these
conversations. ACI, CECON, the CIAC Arbitral Tribunal, and the Court of
 Appeals all concede that negotiations persisted.
8. Still without settling on a contract sum, even the object of the
contract was subjected to multiple modifications. Absent a
concurrence of consent and object, no contract was perfected.
9. An office tower atop Part A was included in CECON's scope of works and
the contract sum increased to P1,582,810,525.00. Price fluctuations were
conceded after this and the project cost was again adjusted to
P1,613,615,244.00. Thereafter, CECON agreed to extend a discount and
reduced its offered project cost to P1,540,000,000.00.
10. After all these, ACI demurred on the terms of its own tender documents
and changed the project from one encompassing both design and
construction to one that was limited to construction.
11. Though not pertaining to the object of the contract itself but only to one
(1) of its many facets, ACI also removed from CECON's scope of works
the acquisition of elevators, escalators, chillers, generator sets, indoor
substations, cooling towers, pumps, and tanks. However, much later, ACI
reneged on its own and opted to still obtain pumps, tanks, and cooling
towers through CECON.
12. It is ACI's contention that the offered project cost of P1,540,000,000.00
is what binds the parties because its June 2, 2003 letter indicated
acceptance of this offered amount.
13. This is plain error.
14. CECON was never remiss in impressing upon ACI that the
P1,540,000,000.00 offer was not perpetually availing. Without ACI's
timely acceptance, on December 27, 2002, CECON wrote to ACI
emphasizing that the quoted sum of P1,540,000,000.00 was "based
[only] upon the prices prevailing at December 26, 2002" levels. On
January 8, 2003, CECON notified ACI of further increases in costs and
specifically stated that "[f]urther delay in the acceptance of the revised
offer and release of the down payment may affect the revised lump sum
amount."[140] Finally, on January 21, 2003, CECON wrote again to ACI,
[141]
stating that the contract sum had to be increased to
P1,594,631,418.00. CECON also specifically stated, consistent with
Article 1321 of the Civil Code, that its tender of this adjusted price was
valid only until January 31, 2003, as further price changes may be
forthcoming. CECON also impressed upon ACI that the 400 days allotted
for the completion of the project had to be adjusted.[142]
15. When ACI indicated acceptance, CECON's P1,540,000,000.00 offer had
been superseded. Even CECON's subsequent offer of P1,594,631,418.00
had, by then, lapsed by more than four (4) months. Apparently totally
misinformed, ACI's acceptance letter did not even realize or remotely
reference CECON's most recent P1,594,631,418.00 stipulation but
insisted on the passe offer of P1,540,000,000.00 from the past year.
 16. ACI's supposed acceptance was not an effective, unqualified
acceptance, as contemplated by Article 1319 of the Civil Code. At most,
it was a counter-offer to revert to P1,540,000,000.00.
17. ACI's June 2, 2003 letter stated an undertaking: "This notwithstanding,
formal contract documents embodying these positions will shortly be
prepared and forwarded to you for execution." Through this letter, ACI
not only undertook to deliver documents, it also admitted that the final,
definitive terms between the parties had yet to be articulated in writing.
18. ACI's delivery CECON's review, and both parties' final act of formalizing
their respective consent and affixing their respective signatures would
have established a clear point in which the contract between ACI and
CECON has been perfected. These points, i.e. ACI's delivery, CECON's
review, and parties' formalization, too, would have validated the Court of
Appeals' assertion that all that remained to be done was to apply
unequivocal contractual provisions.
19. ACI would fail on its own undertaking.

Object of Contracts
No contract may be entered into upon future inheritance except in cases expressly
authorized by law. (Art. 1347)

Form of Contracts
1. Contracts shall be obligatory,
2. in WHATEVER form they may have be,
3. provided all the ESSENTIAL requisites for validity are present.
4. However, when the LAW requires that a contract be in some form
5. in order that it may be VALID or ENFORCEABLE, or that a contract be PROVED
in a certain way,
6. that requirement is absolute and indispensable. (Art. 1356)

The following contracts require form for the purpose of their validity:
1. Donation of personal property where the value exceeds P5,000
2. Donation of real property (public instrument)
3. Donation propter nuptias (public instrument if real property; in writing if
personal property)
4. Wills (If Notarial, must be public instrument; If Holographic, must be entirely
handwritten)
_____________________________________________________________________________________
5. Contract of partnership, when real property is contributed (commercial law)
6. Sale of a parcel of land through an agent, the contract of agency must be in
writing
_____________________________________________________________________________________
7. Stipulation limiting the common carrier’s liability for LDD of goods
 7.
(commercial law)
8. Antichresis (commercial law)
9. Sale or transfer of large cattle
10. Personal Property Security Agreement

The following must appear in a public document (to bind third persons):
1. Acts - creation, transmission, modification or extinguishment of real rights
over immovable property;
2. Cession/repudiation of hereditary rights/conjugal partnership of gains;
3. Power to administer property, or
4. Any other power - an act appearing in a public document or which should
appear in one, or should prejudice a third person;
5. Cession of actions/rights proceeding from a public document. (Art. 1358)

Reformation of contracts
1. Meeting of the minds of the parties to a contract,
2. True intention is not expressed in the instrument,
3. By reason of mistake, fraud, inequitable conduct or accident (FAMI),
4. One of the parties may ask for the reformation of the instrument. (Art. 1359)
5. If FAMI prevented a meeting of the minds, the proper remedy is annulment of
the contract. (Art. 1359)

When through the ignorance, lack of skill, negligence or bad faith on the part of
the person drafting the instrument or of the clerk or typist, the instrument does
not express the true intention of the parties, the courts may order that the
instrument be reformed. (Art. 1364)

COMMENT: In this case, it was the BNLI of the third person, i.e., the lawyer/clerk/
instrument, that caused the failure to express the true intention of the parties. In
such case, the court can also order that the instrument be reformed.

No reformation in the following cases

There shall be no reformation in the following cases:
1. Simple donations inter vivos wherein no condition is imposed;
2. Wills;
3. When the real agreement is void. (Art. 1366)

Party who brought an action to enforce the instrument cannot ask for reformation
When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation. (Art. 1367)

The right to file the action belongs to the injured party ONLY or his heirs/assigns
Reformation may be ordered at the instance of either party or his successors in
interest, if the mistake was mutual; otherwise, upon petition of the injured party, or
his heirs and assigns. (Art. 1368)

Reformation of an instrument may be allowed if subsequent and

contemporaneous acts of the parties show that their true intention was not
accurately reflected in the written instrument.
It is not disputed that the parties entered into a contract regarding the
management of Makati Tuscany's common areas. A Master Deed and a Deed of
Transfer were executed to contain all the terms and conditions on the individual
ownership of Makati Tuscany's units and the co-ownership over the common
areas. The question to be resolved is whether the provisions in the Master Deed
and Deed of Transfer over the 98 parking slots, as part of the common areas,
expressed the true intentions of the parties, and if not, whether it was due to
mistake, fraud, inequitable conduct, or accident.
The totality of the undisputed evidence proving the parties' acts is consistent with
the conclusion that the parties never meant to include the 98 parking slots among
the common areas to be transferred to petitioner. The evidence is consistent to
support the view that petitioner was aware of this fact.
From 1977 to 1986, respondent sold 26 of the 98 parking lots now under
contention without protest from petitioner. Petitioner recognized respondent's
ownership of the disputed parking lots on at least two (2) occasions when its
Board of Directors made known its intention to purchase them from respondent.
In its Manifestation Ad Cautelam, petitioner asked to be allowed to file a reply to
respondent's comment to rectify the "erroneous statements of fact and
conclusions of law" contained in it. However, petitioner in its Reply did not
contradict any of the subsequent acts of the parties narrated by respondent,
showing petitioner's repeated acquiescence to respondent's acts of dominion over
the parking slots. Petitioner even adopted this Court's narration of facts in Multi-
Realty Development Corporation where this Court stated that "[e]ight (8) other
parking slots, found on the ground floor of the Makati Tuscany were designated as
guest parking slots, while the remaining 98 were to be retained by Multi-Realty for
sale to unit owners who would want to have additional slots."
Petitioner claims that it was confusion and not bad faith that caused its belated
assertion of ownership over the parking slots. However, the facts show that it was
the intention of the parties all along for Multi-Realty to retain ownership of the 98
parking slots and then sell them to unit owners who wanted additional parking slot
(Makati Tuscany Condominium Corp. v. Multi-Realty Development Corp., G.R.
No. 185530, April 18, 2018, Leonen)

_______________________________________________________________________________________
____________________________________________________________________________
Rescissible Contracts
Only valid contracts can be rescinded
Contracts validly agreed upon may be rescinded in the cases established by law.
(Art. 1380)

COMMENT: Hence, a void contract cannot be rescinded.

When is a contract rescissible?

The following contracts are rescissible:
1. Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one-fourth of the value of the things
which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered into by
the defendant without the knowledge and approval of the litigants or of
competent judicial authority;
5. All other contracts specially declared by law to be subject to rescission. (Art.
1381)
6. Payments made in a state of insolvency for obligations to whose fulfillment the
debtor could not be compelled at the time they were effected, are also
rescissible. (Art. 1382)

“Those contracts entered into by guardians, when the ward suffers lesion by
MORE than one-fourth of the value of the thing”; Same for representatives and
absentees
ILLUSTRATE:
1. A, the guardian, entered into a contract of sale of the ward’s car. The value
of the car is P1M, but the price is only P700,000. What is the status of the
contract? The status of the contract is void. In case of sale of the property of
the ward, there must be a prior court approval. Otherwise, it is void. (Inton v
Quintana)
2. The same is true for sale of real estate.

COMMENT: It seems it is hard to rescind the contract by lesion. The contract can
already be held ineffective due to other reasons, such as being unenforceable or
void.

“Those undertaken in fraud of creditors when the latter cannot in any manner
collect the claims due them”
“Creditors” include a person with a right of first refusal. Hence, a subsequent
contract of sale entered into, in violation of the right of first refusal of another
person, is rescissible because it is in fraud of creditors. Take note, however, that
all the requisites for accion pauliana must be present. If the contract is, thereafter,
rescinded, the grantor may now be directed to comply with his obligation to sell
the property to the grantee under the same terms and conditions that it has
been sold to the third person. (Paranaque Kings Enterprises v CA, 1997)

Other topics for “in fraud of creditors” will be discussed later on.

Rescission of rescissible contracts is a remedy of LAST RESORT

The action for rescission is subsidiary; it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the
same. (Art. 1383)

“No other legal means to obtain reparation for the same”

Hence, if the contract is also voidable, we must apply the provisions of voidable
contracts and NOT rescissible contracts.

What will the effects if the rescissible contract is rescinded

Rescission->obligation to return the things->with the fruits->price->with the
interest
Hence->can be carried out only->he who demands rescission->can return-
>obliged to restore (Art. 1385)

Neither->rescission take place->things->legally in posession->third person not in

bad faith
In this case->indemnity for damages->demanded->person causing the loss (Art.
1385)

Paragraph 1, Art .1385 applies only to rescission on the ground of lesion and not
on the ground of fraud because in the latter, there can be no obligation to restore
since the creditor has not received anything. (Jurado)

Hence, the provisions of rescissible contracts are simple:

1. What are rescissible contracts?
2. Rescission is a remedy of last resort
3. The person who demands rescission must return what he is obliged to
restore(thing+fruits)
4. If the thing is in possession of a third person in good faith, the property cannot
be returned. Instead, indemnity for damages may be demanded from the
person causing the loss

Requisites for lesion:

1. The guardian/absentee entered into a contract in behalf of the ward/absentee
2. The ward/absentee whom they represent suffer lesion by more than one-
 2.
fourth of the value of the things which are the object thereof (more than 1/4 =
1/3 onwards)
3. The creditor has no other legal means to obtain reparation (Art. 1383)
4. The creditor can return the things which were the object of the contract,
together with their fruits (Art. 1385)
5. The action for rescission must be filed within 4 years from the accrual of the
right of action. (Art. 1389)

Requisites for accion pauliana (Art. 1177) or rescission of transfers in fraud of

creditors:
1. The plaintiff asking for rescission has a credit prior to the alienation
2. The debtor made a subsequent alienation/transfer
3. The act of the debtor is in fraud of creditors
4. The creditor has no other legal means to obtain reparation (Art. 1383)
5. The conveyance is not absolutely simulated. Otherwise, it is inexistent
contract. (Manila Banking v Silverio)
6. The action for rescission must be filed within 4 years from the accrual of the
right of action. (Art. 1389)

Presumptions for “in fraud of creditors”

Badges of Fraud
In addition to these presumptions, the design to defraud creditors may be proved
in any other manner recognized by the law of evidence. (Art. 1387)

What are the badges of fraud?

1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has begun and while it is pending
against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he
is insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are
present other of the above circumstances
7. The failure of the vendee to take exclusive possession of all the property.
(China Bank v CA, 2000)

COMMENT: If there is an actual contract + fraud, the remedy is rescission. If there

is NO actual contract + fraud, the remedy is declare it void.
As example:
1. For rescission, the third person(vendee) possessed the land sold by the
debtor.
2. For void, the debtor remained in possession of the land despite selling it to
 2.
third person(vendee).

Third person in bad faith shall also be liable in case the contract is in fraud of
creditors
Whoever acquires in bad faith the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him to return them. (Art.
1388)
If there are two or more alienations, the first acquirer shall be liable first, and so on
successively. (Art. 1388)

4-year prescriptive period to file the action for rescission of rescissible contract
The action to claim rescission must be commenced within four years. (Art. 1389)
For persons under guardianship and for absentees, the period of four years shall
not begin until the termination of the former's incapacity, or until the domicile of
the latter is known. (Art. 1389)

For contracts in fraud of creditors, the period accrues only when the creditor
discovers that he has no other legal remedy for the satisfaction of his claim.
Hence, the following must be present: 1) judgment, 2) issuance of writ of
execution, and 3) failure of the sheriff to enforce and satisfy the judgment.
(Khe Hong Cheng v Chua, 2001)

Rescissible contracts can be assailed by third persons

Why? As stated, the rescissible contract can be rescinded if it was executed in
fraud of creditors. The creditors, in this case, are third persons to the contract
executed.

Rescissible contracts cannot be collaterally attacked

The defect of a rescissible contract cannot be attacked collaterally. (Air France v
CA, 1995) Why? Because this is a subsidiary remedy. It can only be resorted to by
a direct action.

Other contracts specially declared by law to be subject to rescission (lesion)

1. Rescission of a contract of partition (wills and succession) on the ground of
lesion
2. Rescission by vendee when inferior value of the real estate sold exceeds 1/10
of the price agreed upon
3. Rescission by vendee when the lack in area be less than 1/10 of that stated
4. Rescission by vendee when he would not have bought the property had he
known of its smaller area or inferior quality.

Compare Rescission (Art. 1381) and Resolution (Art. 1191)

 Rescission (Art. 1381) Resolution (Art. 1191)
Subsidiary remedy Principal Remedy
Lesion/Fraud Breach of contract
All kinds of obligations Reciprocal obligations/contracts
The obligations/contracts are defective The obligations/contracts are not
defective
It can be availed of by third persons It can be availed of only by the
contracting parties
It prescribes within 4 years It prescribes within 10 years for written
contracts, and 6 years for oral
contracts
If there is lesion/fraud, the court has If there is breach, the court has
no choice but to rescind the contract discretion not to grant the rescission.
Instead, the court can fix the period for
the performance of the obligation
For lesion, if the defendant makes Despite the payment of damages, the
good the damages caused, the contract may still be rescinded.
contract will not be rescinded.
_______________________________________________________________________________________
____________________________________________________________________________
Voidable Contracts

Voidable contracts are binding, unless they are DIRECTLY annulled by a proper
action
These contracts are binding, unless they are annulled by a proper action in court.
(Art. 1390)

Voidable contracts can ONLY be assailed by the contracting parties

The action for the annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily. (Art. 1397)
However, persons who are capable cannot allege the incapacity of those with
whom they contracted; nor can those who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake base their action upon these
flaws of the contract. (Art. 1397)

4-year prescriptive period to file the action for annulment of voidable contract
The action for annulment shall be brought within four years.
This period shall begin:
1. In cases of intimidation, violence or undue influence, from the time the defect
of the consent ceases.
2. In case of mistake or fraud, from the time of the discovery of the same.
 3. And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases. (Art. 1391)

“Mistake”
In order that mistake may invalidate consent, it should refer
1. to the substance of the thing which is the object of the contract, or
2. to those conditions which have principally moved one or both parties to enter
into the contract. (Art. 1331)
3. Mistake as to the identity or qualifications of one of the parties will vitiate
consent only when such identity or qualifications have been the principal
cause of the contract. (Art. 1331)
4. Mutual error as to the legal effect of an agreement when the real purpose of
the parties is frustrated, may vitiate consent. (Art. 1334)

COMMENT: Hence, if only one of the parties committed a mistake, it can only be
mistake of fact. If both parties committed a mistake, it can be mistake of fact or of
law.

“Fraud”; Requisites for Causal Fraud

1. There must insidious words/machinations employed by one of the parties (Art.
1338)
2. It induced the other to enter into contract (Art. 1338)
3. It must be serious (Art. 1344)
4. It must not be employed by both parties (Art. 1344)
5. There must be damage. (Alcasid v CA, 1994)

Requisites for causal fraud:

1. By the party to the contract
2. Inducement
3. Serious
4. Damage/injury

Effect of “as is, where is” basis stipulation in a contract of sale

That stipulation will only be applicable to readily perceptible physical state of the
object of sale.
Not applicable to matters which require specialized scrutiny.

Union Bank advertised a foreclosed condominium unit for sale.

The total area advertised was 95sqm
Foreigner placed a bid, and he won the same. The foreigner inspected the
premises prior to the bidding.
After winning the bid, they entered into a contract to sell.
After 3 years, he fully paid the same.
Later, he decided to renovate the unit.
He discovered that the total area was only 70sqm instead of 95sqm.
Filed an action to annul the contract on the ground of fraud.
Union Bank contends that the 95sqm included the terrace and some common
areas.
May the contract be annulled?

Yes. All 4 requisites were present in the case.

Further, the reliance on the “as is, where is” basis stipulation is not meritorious
because it does not apply to matters which require specialized scrutiny, such as
the total floor area of a condominium unit.

Compare Causal Fraud to Incidental Fraud

In causal fraud, one of the parties induced the other to enter into contract. Hence,
the contract is voidable.
In incidental fraud under Art. 1170, no one is induced to enter into contract.
Instead, fraud was committed in the performance of the obligation. Hence,
incidental fraud only obliges the person employing it to pay damages. (Art. 1344)

Failure to disclose facts, when there is duty to reveal them

Failure to disclose facts, when there is a duty to reveal them, as when the parties
are bound by confidential relations, constitutes fraud. (Art. 1339)

COMMENT: if there is a duty, SILENCE means fraud.

Usual exaggerations in trade

The usual exaggerations in trade, when the other party had an opportunity to
know the facts, are not in themselves fraudulent. (Art. 1340)

Mere expression of opinion

A mere expression of an opinion does not signify fraud, unless made by an expert
and the other party has relied on the former's special knowledge. (Art. 1341)

What if the opinion is made by an expert third party? The contract is not voidable
because a misrepresentation of a third party does not vitiate consent, unless there
is a substantial mutual mistake. (Art. 1342)

“Undue Influence”
Improper advantage+his power over the will of another+deprive reasonable
freedom of choice

COMMENT: In short, black mail.

General Rule; Obligation of both parties to restore the thing received and their
fruits
An obligation having been annulled, the contracting parties shall restore to each
other the things which have been the subject matter of the contract, with their
fruits, and the price with its interest, except in cases provided by law. In
obligations to render service, the value thereof shall be the basis for damages.
(Art. 1398)

As long as one of the contracting parties does not restore what in virtue of the
decree of annulment he is bound to return, the other cannot be compelled to
comply with what is incumbent upon him. (Art. 1402)

Exception; When the defect consists in the incapacity of one of the parties;
Benefited
When the defect of the contract consists in the incapacity of one of the parties,
the incapacitated person is not obliged to make any restitution except insofar as
he has been benefited by the thing or price received by him. (Art. 1399)

In general, the party must return all of the things he received, and their fruits. As
exception, the incapacitated person is only obliged to make a restitution insofar as
he was benefited by the thing received.

Loss of the object of contract

1. Person obliged cannot return the thing because it has been lost through his
fault - The action is not extinguished. He must return the value of the thing
and the fruits. (Art. 1400)
2. Person with a right to institute cannot return the thing because it has been lost
through his fault - The action is extinguished; Same effect for persons
capacitated and incapacitated.
Voidable Unenforceable Rescissible Void
Prescribes within Imprescriptible Prescribes within Imprescriptible
4 years 4 years
Must be direct Can be collateral Must be direct Can be collateral
Raised by parties Raised by parties Raised by third Raised by third
only only person allow person allow
Can be ratified Can be ratified Can be ratified Cannot be ratified
_______________________________________________________________________________________
____________________________________________________________________________
Unenforceable contracts
1. Name of another - No authority/Beyond authority
2. Statute of frauds
3. Both incapacitated to contract
Statute of Frauds; Very easy
● Agreement - not to be performed within a year from the making
● Special promise - answer for the debt of another
● Agreement - consideration of marriage
● Agreement - sale of goods - price is not less than P500
● Agreement - leasing for a period longer than 1 year/sale of real property
● Representation - credit of third person

Three (3) waivers in unenforceable contracts: (RFA)

1. Ratification (Art. 1403)
2. Failure to object to the presentation of oral evidence to prove the contract
(Art. 1405)
3. Acceptance of benefits under them. (Art. 1405) Also called as “partial
performance of the contract.”

Sale of personal property by an agent

1. A sold the car of B without an SPA. What is the status of the contract? It is
unenforceable because it was a contract entered into in the name of another
without authority.
2. A sold the car of B with SPA. The sale is not in writing. What is the status of
the contract? It is unenforceable because of Statues of Frauds, i.e., sale of
goods or chattels which price of not less than P500.

Sale of real estate by an agent

1. The rules are different for the sale of land without SPA. “When a sale of a
piece of land or any interest therein is through an agent, the authority of the
latter shall be in writing; otherwise, the sale shall be void.” (Art. 1874) Hence,
when a land was sold without SPA, the sale is void.
2. If there is SPA, but the contract of sale of real property is not in writing, this is
an unenforceable contract under the Statute of Frauds.

Unenforceable contracts cannot be assailed by third persons

Unenforceable contracts cannot be assailed by third persons. (Art. 1408)

COMMENT: The reason is the defect in the contract only affects the parties, so
only they can assail the same.

No prescription for unenforceable contracts

The law is silent, so it does not prescribe. Further, the mere lapse of time cannot
give efficacy to such contract. The defect cannot be cured except if it is waived.

Collateral attack is allowed

Why? Because the “unenforceability” of contracts is usually raised in defense, i.e.,
You cannot enforce our agreement since it is not in writing. Hence, collateral
attack is allowed.

QUESTION:
1. The property of Y was declared condemned for public use to expand the
Lahug International Airport. On appeal, there was a compromise to stop Y from
pursuing with the appeal, but with an oral assurance that if the purpose would
not be pursued, the property would be resold to him. The public use was not
pursued, hence, there was a demand for the resale of the property, especially
so that it has been converted to a commercial area. However, the Government
contended that it is not bound by the oral assurance that it would be resold,
using the Statute of Frauds as defense, Is the defense proper?
1. No. The Statute of Frauds operates only with respect to executory
contracts, and does not apply to contracts which have been completely
or partially performed. The reason is that, in executory contracts there is
a wide field of fraud because unless they be in writing there is no palpable
evidence of the intention of the contracting parties. However, if the
contract has been totally or partially performed, the exclusion of parol
evidence would promote fraud or bad faith, for it would enable the
defendant to keep the benefits already delivered to him from the
transaction in litigation, and, at the same time evade the obligation,
responsibilities or liabilities assumed or contracted by him thereby. The
oral compromise settlement having been partially performed, the statute
of frauds cannot apply. By reason of such assurance made in their favor, Y
relied on the same by not pursuing their appeal before the Court of
Appeals. (Mactan-Cebu International Airport et al v. Lozada, Sr., et al,
G.R. No. 1776625, February 25, 2010).

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_______________________________________________________________________
Void Contracts
Void and Inexistent Contracts, Compared
1. V - a perfected contract because all the essential requisites are present, but it
is invalid for being contrary to law;
I - one or some of the essential requisites are not present
2. V - it produces effects
I - it does not produce effects
3. V - the principle of in pari delicto applies;
I - the principle of in pari delicto does not apply.

In pari delicto rule for Void and Inexistent Contracts

Void contracts produce legal effects, while Inexistent contracts do not.

ILLUSTRATE:
1. A sold a land which forms part of the public domain to B for P1,000,000. B
knew of the same before the land was sold. Here, all the essential requisites
are present but the sale is contrary to law, so it is void. However, in contracts
where the cause is unlawful or forbidden, and the fault is on the part of both
contracting parties or in pari delicto, neither may recover what he has given by
virtue of the contract. Hence, B cannot recover the P1,000,000 he paid.
2. A sold a land which forms part of the public domain to B for P1,000,000. B
knew of the same before the land was sold. However, B failed to take
possession of the same after the execution of the contract. Here, the sale is
absolutely simulated or fictitious because the parties did not intend to be
bound at all. Since they did not intend to be bound at all, B did not give
anything to A. Hence, the in pari delicto rule does not apply. B cannot recover
anything from A, since he did not pay anything.

Void/Inexistent Contracts cannot be ratified; the defense cannot also be waived

These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived. (Art. 1409)

No prescription for void/inexistent contracts

The action or defense for the declaration of the inexistence of a contract does not
prescribe. (Art. 1410)

Third persons directly affected can invoke the defense of illegality of contract
The defense of illegality of contract is not available to third persons whose
interests are not directly affected. (Art. 1421)

Collateral attack is allowed

Why? Because such contract CANNOT logically exist, so there is no need for a
direct action to set aside the contract. (Rongavilla v CA, 1998)
However, citizenship cannot be collaterally attacked.

In pari delicto rules; For criminal offense; For non-criminal offense

For criminal offense
1. Ilegality of cause
2. Act constitutes criminal offense
1. Both parties being in pari delicto
1. They shall have no action against each other
2. One of the parties is guilty
1. Innocent one may claim what he has given + not bound to comply with
his promise (Art. 1411)
For non-criminal offense:
1. Illegality of cause
2. Not constitute criminal offense
1. Both parties at fault
1. Neither may recover given; Nor demand performance
2. One party at fault
1. One not at fault may demand what he has given + not bound to
comply with his promise. (Art. 1412)

Exceptions to in pari delicto rule:

1. Illegal contract + incapable of giving consent + interest of justice + allow
recovery delivered by the incapacitated person. (Art. 1415)
2. Not illegal per se + merely prohibited + law protection plaintiff + public policy
+ recover what plaintiff paid or delivered

RABUYA:
Defective contracts

If contract is voidable and unenforceable

The contract is unenforceable.
Why?
Rabuya: choose the defect which is graver.
Rabuya: The law on contracts is arranged from the least grave to the most grave.
Rescissible - Voidable - Unenforceable- Void.

Rescissible
Valid. The contract is obligatory unless there is a judgment of rescission. The
defect cannot be used as a defense.

Voidable
Valid. The contract is obligatory unless annulled.

Unenforceable
Valid but not obligatory because it cannot be enforced in court.

In unenforceable contracts , it is purely a matter of defense. It is not a subject

matter of an action. Hence, we do not talk about prescription for unenforceable
contracts.

Void
Void, and not susceptible to ratification.
It can be raised as a claim in an action or as a matter of defense.
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Natural Obligations
1. Civil obligations give a right of action to compel their performance. Based on
positive law.
2. Natural obligations 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. Based on equity and
natural law.

Examples of natural obligations

1. Right to sue + prescribed + obligor voluntarily performs
2. Without knowledge + third person pays + right to demand reimbursement
prescribed + debtor voluntarily reimburses
3. Minor + entered contract + without consent + annulment of contract +
voluntarily returns thing received + notwithstanding no benefit
4. Minor + entered contract + without consent + voluntarily pays/delivers +
obligee spent/consumed in good faith (example, sampaguita vendor)
5. Action to enforce failed + defendant voluntarily performs
6. Heirs + pay debt + exceed value of property received by will/intestacy
7. Will is void for form + Heir + after settlement of debts + pays legacy

Estoppel
Art. 1431. Through estoppel an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon.